In re Witt

• Decision Date: 10 May 2012
• Docket Number: No. 11–10609.,11–10609.
• Parties: In the Matter of John Arthur WITT, Debtor.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Indiana

473 B.R. 284

In the Matter of John Arthur WITT, Debtor.

No. 11–10609.

United States Bankruptcy Court,

N.D. Indiana,

Fort Wayne Division.

May 10, 2012.

Eric D. Orr, Berne, IN, for Debtors.

DECISION ON MOTION TO APPROVE SETTLEMENT

ROBERT E. GRANT, Chief Judge.

When the debtor filed his petition for relief under Chapter 7 of the United States Bankruptcy Code he was the owner of property that had previously been used as a gas station in Portland, Indiana. The underground tanks on the property had leaked and, as a consequence, the debtor was involved in litigation with a previous owner, Jay Petroleum, over the responsibility for cleaning up the property and remediating the environmental damage. Both the contaminated property and the claims against Jay Petroleum became property of the bankruptcy estate when the debtor filed bankruptcy. 11 U.S.C. § 541(a).

The trustee has negotiated a settlement of the environmental litigation. Under the terms of the settlement, Jay Petroleum will be responsible for cleaning up the property to the extent that the Indiana Department of Environmental Management issues a no further action letter. In return for access to the property, Jay Petroleum will pay the estate a lump sum of $20,000, together with additional payments of $500 per month and $12,000 per year until the cleanup has been completed. The trustee has filed a motion to approve the settlement and access agreement. Both the debtor and its environmental expert and co-plaintiff in the state court litigation, HydroTech, (who refer to themselves as the Environmental Plaintiffs) have objected and the matter is before the court following trial of the issues raised by the trustee's motion and those objections.

While private parties may settle their disputes on any terms which may be mutually satisfactory, that is not the case in bankruptcy proceedings. In re Chicago Rapid Transit, 196 F.2d 484, 490 (7th Cir.1952). Where a settlement affects the assets of a bankruptcy estate or their distribution, the settlement must be approved by the bankruptcy court. Doing so is a matter committed to the court's discretion. In re Doctors Hospital of Hyde Park, Inc., 474 F.3d 421, 426 (7th Cir.2007). The court should canvas the issues, familiarize itself with the attendant facts and circumstances, and “make a[n] ‘informed and independent judgment’ about the settlement,” In re American Reserve Corp., 841 F.2d 159, 162 (7th Cir.1987), deciding “whether [it] is in the best interests of the estate.” Matter of Energy Cooperative, Inc., 886 F.2d 921, 927 (7th Cir.1989). As the proponent of the settlement, the trustee bears the burden of proving that it is. In re Bell & Beckwith, 93 B.R. 569, 574 (Bankr.N.D.Ohio 1988).

In undertaking its review, the court does not substitute its own judgment for that of the trustee.¹In re Martin, 212 B.R. 316, 319 (8th Cir. BAP 1988). Instead, it should determine whether the trustee adequately investigated the matter and made an informed decision when choosing between the available alternatives, see, In re Del Grosso, 106 B.R. 165, 168–69 (Bankr.N.D.Ill.1989); if so, the court should then decide whether the settlement's terms “fall within the reasonable range of litigation possibilities.” Energy Co-op., 886 F.2d at 929 (quoting In re New York, N.H. & H.R. Co., 632 F.2d 955 (2nd Cir.1980)). If they do, the settlement should be approved. Only if the proposed settlement falls below the lowest point in the range of those possibilities should the court withhold its approval. Energy Co-op., 886 F.2d at 929 (quoting In re W.T. Grant, Co., 699 F.2d 599, 608 (2nd Cir.1983)).

The debtor and HydroTech do not mention this standard or attempt to apply it in their opposition to the trustee's motion. Their argument is that, rather than settling, the trustee should simply abandon both the real estate and the associated environmental claims. So, instead of focusing upon what the trustee is getting for the compromise, and whether that consideration falls below the low end in the reasonable range of litigation possibilities, they advocate for a result in which the estate would get nothing. Under the proposed settlement, the estate will have money in its coffers and property that currently has a negative value because of its environmental contamination would be cleaned up, perhaps becoming marketable. The objectors' preferred alternative is that the trustee should simply abandon everything and be left with nothing at all. In choosing between these alternatives—money in the bank versus an empty sack—it is relatively easy to see where the best interests of the bankruptcy estate lie.

The objectors' arguments regarding abandonment take several different forms. All of them overlook the Supreme Court's decision in Midlantic Nat. Bank v. New Jersey Dept. of Environmental Protection, 474 U.S. 494, 106 S.Ct. 755, 88 L.Ed.2d 859 (1986). There the Court held that a bankruptcy trustee's ability to abandon environmentally contaminated property is not unrestricted; instead, if it has the resources to do so, the trustee has some type of obligation to protect the public from the dangers the property presents, even if doing so yields no benefit to the estate. Midlantic Nat. Bank, 474 U.S. at 497–500, 507, 106 S.Ct. at 757–758, 762.See also, Matter of Environmental Waste Control, Inc., 125 B.R. 546, 550 (N.D.Ind.1991). In light of these limitations, the trustee's decision to settle the environmental litigation in a way that not only provides for the clean-up of the contaminated property but also contributes money to the bankruptcy estate is completely consistent with the obligations imposed by Midlantic.

The debtor and HydroTech make a number of arguments either as to why the property has already been abandoned or why the trustee is obligated to do so. None of them have any merit. The first is that the debtor claimed the property as exempt, and when that exemption was not objected to within the time required, the contaminated property was excluded from the bankruptcy estate. As an initial matter this argument misconstrues the effect of a claimed exemption. A successful exemption does not really remove property from the bankruptcy estate.² Instead, it allocates the value of the property in which the exemption was claimed between the debtor and the bankruptcy estate. In re Bartlett, 326 B.R. 436, 440–41 (Bankr.N.D.Ind.2005) (“the primary purpose of exemptions is to allocate property (or the value of property) between the debtor and the estate”). See also, Schwab v. Reilly, ––– U.S. ––––, 130 S.Ct. 2652, 2657, 177 L.Ed.2d 234 (2010) (trustee may sell exempted property to recover value in excess of claimed exemption). To the extent of the claimed exemption, the value of the exempted property is available only to the debtor and is not liable for the claims of most creditors. 11 U.S.C. § 522(c). Yet, the property in which the exemption was claimed remains property of the estate and, if it has value in excess of the claimed exemption, it may be sold by the trustee so that its excess value can be made available for creditors. Schwab, ––– U.S. ––––, 130 S.Ct. 2652;In re Salzer, 180 B.R. 523, 529–30 (Bankr.N.D.Ind.1993). See also, In re Hyman, 967 F.2d 1316 (9th Cir.1992). More than just claiming an exemption is required before the property in which the exemption was claimed passes out of the bankruptcy estate or is insulated from administration by the trustee.³Salzer, 180 B.R. at 529. (“If a debtor wants to completely insulate property in which it has claimed an exemption from administration by the bankruptcy trustee, it should file a motion to abandon the asset.”).

Objectors are not only wrong about the effect of a claimed exemption, they are also wrong about the exemption that the debtor has claimed in this case. Exemptions in bankruptcy are not automatic. They exist only as a result of an affirmative declaration by the debtor. See,11 U.S.C. § 522; Fed. R. Bankr.P. Rule 4003(a). The debtor makes this declaration on Schedule C—Property Claimed as Exempt—where it is to describe the property, specify the legal basis for the exemption, state the value of the claimed exemption and the value of the property in which the exemption is being claimed. As for the property in question, the debtor's Schedule C, filed on March 4, 2011, states as follows:

Property: Shop at 611 S. Meridian, Portland, Ind.

Law providing exemption: I.C. 34–55–10–2(c)(2)

Value of claimed exemption: 0.00

Current value of property: 25,000

The objectors argue that when the trustee did not object to this claim within the time required, it had the effect of completely exempting the entire property, leaving nothing for the trustee. The argument is based upon their interpretation of I.C. 34–55–10–2(c)(2), which is Indiana's exemption for nonresidential real estate and tangible property. This particular sub-paragraph reads: “Other real estate or tangible personal property of eight thousand dollars ($8,000).” Because the statute does not say something like “interest in,” they claim this particular Indiana exemption applies to the real estate itself and operates to exempt the entire property so long as it is worth no more than $8,000.⁴ This argument is wrong both as a matter of statutory construction and federal bankruptcy law.

Basic principles of statutory construction require that words be read in context; not in isolation, divorced from the context in which they appear. Roberts v. Sea–Land Services, Inc., ––– U.S. ––––, 132 S.Ct. 1350, 1357, 182 L.Ed.2d 341 (2012) (quoting Davis v. Michigan Dept. of Treasury, 489 U.S. 803, 809, 109 S.Ct. 1500, 103 L.Ed.2d 891 (1989); U.S. v. Webber, 536 F.3d 584, 593–94 (7th Cir.2008); Hatcher v. State, 762 N.E.2d 170, 172 (Ind.Ct.App.2002)). The objectors' argument ignores this elementary rule. The title of the section in which the claimed exemption appears is: “Amount of Exemption.” I.C. 34–55–10–2 (LexisNexis 2012). Paragraph (b) then states: “The...