In re Stewart

• Decision Date: 19 July 2019
• Docket Number: Case No. 15-12215-JDL Jointly Administered
• Citation: 603 B.R. 138
• Parties: IN RE: David A. STEWART, Terry P. Stewart, Debtors.
• Court: U.S. Bankruptcy Court — Western District of Oklahoma

603 B.R. 138

IN RE: David A. STEWART, Terry P. Stewart, Debtors.

Case No. 15-12215-JDL Jointly Administered

United States Bankruptcy Court, W.D. Oklahoma.

Signed July 19, 2019

Ruston C. Welch, Welch Law Firm, P.C, Oklahoma City, OK, Jackie L. Hill, Jr., Norman, OK, E.R. March, III, Mobile, AL, for Debtors.

Douglas N. Gould, Oklahoma City, OK, for Trustee.

OPINION AND ORDER ON MOTION TO COMPROMISE

Janice D. Loyd, U.S. Bankruptcy Judge

I. Introduction

Seeking to determine whether three of four pending adversaries should be settled and numerous non-debtor parties be released from possible liability, the Court conducted fourteen (14) days of hearings consuming more than 2,700 pages of trial transcript,¹ reviewed hundreds of exhibits consisting of thousands of pages, and heard the live testimony of seven witnesses (plus four more by deposition) to decide if it should approve the Debtors' and the Trustee's joint motion to compromise controversy. Before the Court for decision is the Second Joint Motion to Approve Compromise and Settlement Agreement² filed jointly by the Trustee, Douglas N. Gould (the "Trustee") and the Debtors, David A. Stewart and Terry P. Stewart (collectively and individually, "Debtor", "Debtors", "Stewart" or "Stewarts") on October 2, 2017 (the "Motion to Compromise") [Doc. 472]; the Statement of Support for Second Motion to Settle filed by Kirkpatrick Bank on October 10, 2017 [Doc. 486]; and SE Property Holdings, LLC's ("SEPH") Opposition to Second Joint Motion to Approve Compromise filed on October 12, 2017 (the "Opposition") [Doc. 487].

The Trustee and the Debtors have reached an agreement for settlement of pending adversary proceedings for fraudulent transfer, equitable subordination (against Kirkpatrick Bank) and for substantive consolidation of numerous non-debtor affiliates of the Debtors. The settlement also calls for the Trustee on behalf of the Debtor estates to release the Debtors and their agents, servants, employees, representatives (excluding attorneys), family members, affiliates, and lenders from any and all claims, exclusive of any claim by creditor SEPH's objecting to the Debtors' discharge or the dischargeability of their debt to SEPH.³ The settlement calls for the payment of $750,000.00 to the Trustee and the Debtor estates. The Trustee and the Debtors, with the support of Kirkpatrick Bank, now seek approval of the settlement agreement pursuant to Fed.R.Bankr.P. 9019.⁴ The Debtors' two largest creditors are SEPH, holding a claim of between $20 to $30 million, and Kirkpatrick Bank, holding a claim in excess of $12 million. No creditor or party in interest, other than SEPH, has filed an objection to the proposed settlement.

The Trustee and the Debtors argue that the proposed settlement should be approved because it is supported by sound business justification and is reasonable. They also argue that litigation of the fraudulent transfer, substantive consolidation and equitable subordination claims would be complex, highly contested, extremely expensive and, with the exception of the fraudulent transfer claim, would likely be unsuccessful. Furthermore, even if successful, litigation would not result in any recovery for the estates given the absence of equity in both the Debtors' property and the property of the non-debtor entities sought to be consolidated.

SEPH argues that the estates have very strong causes of action against non-debtor entities affiliated with the Debtors for both substantive consolidation and fraudulent transfer and a strong case (and a "deep pocket") for its equitable subordination claim against Kirkpatrick Bank. Thus, SEPH believes that the probable outcome of the litigation outweighs the expense (which SEPH points out that it, and not the trustee or estate, has borne the brunt). SEPH argues that the $750,000 settlement figure is coming only from Kirkpatrick Bank from the sale of one oil and gas property owned by non-debtor affiliate Raven Resources, LLC ("Raven"), and that Debtors, family members, affiliates and Kirkpatrick Bank are receiving releases without having parted with any consideration.

To support its belief that a greater recovery than the $750,000 proposed by the settlement could be had, SEPH presented evidence that the non-debtor affiliates had sold approximately $4 million worth of oil and gas assets since the time of the hearings on the Debtors' motion to abandon certain personal property at which Debtors had represented to the Court that there was virtually no value in those assets.⁵ To further bolster its argument that the $750,000 is an unreasonably low settlement figure, SEPH presented expert testimony which valued the equity of the non-debtor affiliated entities at between $2.253 million (orderly liquidation value) and $4.936 million (fair market value).

Pursuant to Rules 7052 and 9014, the below constitutes the Court's Findings of Fact, and Conclusions of Law upon which is based the exercise of its discretion for this decision.

II. Jurisdiction

The Court has jurisdiction to hear and determine this contested matter pursuant to 28 U.S.C. §§ 157(b)(2)(O) and 1334 and the General Order of Reference entered in this District, LCvR 81.4(a). This is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (O). Venue is proper under 28 U.S.C. § 1409. The Court has jurisdiction to enter a final order and judgment upon the Second Joint Motion to Approve Compromise and Settlement Agreement before the Court.

III. Background

On September 30, 2014, SEPH filed Involuntary Petitions for Relief under Chapter 7 of the United States Bankruptcy Code against the Stewarts in the United States District Court for the Southern District of Alabama, Southern Division. On March 18, 2015, the Alabama Bankruptcy Court entered orders for relief under Chapter 7 of the Bankruptcy Code. On June 12, 2015, the Alabama Bankruptcy Court granted the Stewarts' motion to transfer the bankruptcy cases to this Court. On July 21, 2015, the Stewart cases were jointly administratively, but not substantively, consolidated by this Court [Doc. 137].⁶

Because consideration of the present Motion to Compromise necessarily takes into consideration (1) the determination of the value of the bankruptcy estate which would result from substantive consolidation with non-debtor entities, and (2) an adversary proceeding to recover alleged fraudulent transfers to some of those non-debtor entities, it is important to revisit issues litigated in four days of hearings nearly 3 years ago. On November 3, 2015, the Stewarts filed their Motion for Order Directing Trustee to Abandon Personal Property (the "Motion to Abandon") [Doc. 214], by which they sought to have the Trustee abandon all of the Stewarts' units or membership interests in three (3) limited liability companies, namely: Raven, Oklamiss Investments, LLC ("Oklamiss"), and Shimmering Sands Development Company, LLC ("Shimmering Sands"). The Stewarts asserted that each of them, David and Terry, currently held a 1% interest in Oklamiss which in turn owned a 99% interest in Raven. Mr. Stewart owned the other 1% interest in Raven, and a 50% interest in Shimmering Sands. The Stewarts asserted that they had conveyed their respective interests in Oklamiss to their three adult children by assignment dated in October 2011, nearly 3 years before the filing of the Involuntary Bankruptcy Petition by SEPH.⁷ The Stewarts also alleged that notwithstanding their lack of, or de minimis , ownership of those non-debtors, those entities were subject to such debt that there was no equity in the non-debtor entities which would inure to the benefit of the Stewarts' bankruptcy estates. Therefore, the Stewarts argued that any interest they held was of such inconsequential value of, or burdensome to, the estates that it should be abandoned.

The Trustee and SEPH objected to Stewarts' Motion to Abandon [Docs. 220 & 221]. The Trustee's and SEPH's position was that the Stewarts' disposition of their interests in the numerous limited liability companies were extremely complicated with the Debtors having interests in over thirty-three (33) limited liability companies, some active, some inactive; assets in multiple states, including some potential British Petroleum claims associated with the offshore oil spill in the Gulf of Mexico in 2005 and various pieces of litigation pending in multiple states. Discovery early in the bankruptcy produced over 16,000 pages of documents from the Debtors alone and over 4,000 pages from another creditor. The transfers of the Stewarts' interests raised serious questions as to whether the same constituted avoidable fraudulent transfers under §§ 544 and 548, and that there had not been sufficient time to properly evaluate the nature of the Stewarts' interests in the non-debtor entities.

After conducting an evidentiary hearing on Stewarts' Motion to Abandon certain property, which lasted four days, comprised 814 pages of transcript, included the testimony of five witnesses and allowed into evidence sixty-seven (67) exhibits,⁸ the Court denied the motion on the grounds that the Stewarts had not brought forth sufficient evidence to establish that their membership interests in the various LLCs in question were of inconsequential value or burdensome to the estate. [Docs. 328 & 353].⁹ The Court also agreed with the Trustee that it was not convinced that the Debtors had introduced evidence of a full evaluation of the Stewarts' oil and gas properties, in particular those of Raven [Doc. 353, Tr. 25-26], and the denial of the motion would afford the Trustee the necessary time to conduct his investigation of Stewarts' affairs with regard to numerous transactions and entities, including the non-debtors. As of this date none of the Debtors' membership interests in the affiliated LLCs have been abandoned. Among the terms of the proposed settlement would be the abandonment, in return for compensation, of all non-exempt property of the Stewart estates, including the...