Jackson Brewing Co., Matter of

• Decision Date: 21 August 1980
• Docket Number: Nos. 78-2246,78-2118,s. 78-2246
• Citation: 624 F.2d 599
• Parties: In the Matter of JACKSON BREWING COMPANY, Debtor. RIVERCITY, a Louisiana Partnership, Appellant, v. William W. HERPEL, as Reorganization Trustee for Jackson Brewing Company, American Can Company, and Hibernia National Bank in New Orleans as Trustee for the Estate of Edgar B. Fontaine, Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 599

624 F.2d 599

6 Bankr.Ct.Dec. 1034

In the Matter of JACKSON BREWING COMPANY, Debtor.

RIVERCITY, a Louisiana Partnership, Appellant, v. William W. HERPEL, as Reorganization Trustee for Jackson

Brewing Company, American Can Company, and

Hibernia National Bank in New Orleans as

Trustee for the Estate of

Edgar B. Fontaine, Appellees.

Nos. 78-2246, 78-2118.

United States Court of Appeals, Fifth Circuit.

Aug. 21, 1980.

Chaffe, McCall, Phillips, Toler & Sarpy, George W. Pigman, Harry McCall, Jr., James P. Farwell, New Orleans, La., for appellant.

Charles M. Lanier, Harry A. Rosenberg, New Orleans, La., for appellees.

Peter J. Butler, Gayle A. Reynolds, New Orleans, La., for Herpel.

Monroe & Lemann, Jerry A. Brown, New Orleans, La., for American Can Co.

Dodge, Friend, Wilson & Spedale, Joseph E. Friend, New Orleans, La., for Federal Paper Board.

Appeals from the United States District Court for the Eastern District of Louisiana.

Before BROWN, GEWIN and TJOFLAT, Circuit Judges.

JOHN R. BROWN, Circuit Judge:

This is an appeal of the approval of a compromise in a corporate reorganization involving Jackson Brewing Company. Here the compromise is between the Trustee and American Can (and other creditors), with challenges hurled by Rivercity. (See companion appeal in American Can v. Herpel (In re Jackson Brewing Co.), 624 F.2d 605 (5th Cir. 1980) involving a compromise between the Trustee and Rivercity, with challenges hurled by American Can (and other creditors)). In this case we hold that the District Court did not abuse its discretion in approving the compromise and affirm.

I.

In 1974 Jackson Brewing Co. ("Jax") was placed in reorganization on the petition of several of its creditors. Jax's difficulties harken back to 1970 when all of its stock was acquired for $11,235,000 by James W. Howard. Howard, a Chicago promoter, acquired the stock in the name of a new corporation, JBC. Howard immediately began to deplete the company of its assets. The evidence suggests that he withdrew over $14,000,000 over one and one-half years through two partnerships in which JBC was a partner, Rivercity and French Eighth.

Jax owned two very valuable parcels of real estate in New Orleans. The larger parcel is involved in this compromise and its appeal, while the smaller one is the subject of the companion case, American Can v. Herpel (In re Jackson Brewing Co.), 624 F.2d 605 (5th Cir. 1980).

In 1971 Jax (then wholly owned by JBC) granted Rivercity a five year option to purchase certain land. Rivercity was to give written notice of its intention to exercise its option between January 1 and 31, 1975 with the purchase price at $2,700,000. When, after Jax was put into reorganization, Rivercity attempted to exercise the option, the Trustee requested and received the authority to reject the option as an executory contract. The District Court approved the rejection and we affirmed. Rivercity v. Herpel (In re Jackson Brewing Co.), 567 F.2d 618 (5th Cir. 1978).

Meanwhile American Can obtained a substantial interest in Jax. When Jax encountered financial difficulties American Can extended credit to Jax. Jax also borrowed substantially from Whitney National Bank of New Orleans, securing the loans with stock pledges and security interests in Jax's assets. American Can then bought the Whitney loans and acquired the pledged stock to improve its position as a creditor. American Can then exercised its rights as a pledgee and in June of 1974 became the sole stockholder and secured creditor of Jax.

When Jax went into reorganization American Can filed a proof of claim as a secured creditor in an amount exceeding $10,000,000. The Trustee and American Can worked out a compromise (after Rivercity's option was cancelled) with the following basic elements:

1. American Can would cancel $5,500,000 of its secured debt in exchange for a deed to the Riverside property,

2. The Trustee would dismiss his objection with prejudice to American Can's proof of claim as secured creditor,

3. American Can would subordinate its claim to the $1,000,000 in cash held by the Trustee (all the funds in Jax's treasury) and to certain other monies and claims,

4. The Trustee from the funds (see 3) would pay all administrative expenses and ad valorem taxes on the property, and

5. The Trustee would pay all monthly rents on the property through the end of that month. ¹

In re Jackson Brewing Co., No. 74-1840 (E.D.La. May 1, 1978) (order authorizing compromise of claim).

The compromise was supported by all the parties except Rivercity. Despite Rivercity's objection, the District Court approved the compromise setting out its reasons in a thorough and thoughtful opinion. In re Jackson Brewing Co., No. 74-1840 (E.D.La. July 18, 1978). Rivercity appeals. ²

II.

Section 27 of the Bankruptcy Act, ³ in conjunction with § 187, ⁴ authorize a Trustee, with the Court's approval, to compromise claims arising in the administration of an estate in Chapter X reorganizations. 6 Part 2 Collier On Bankruptcy P 8.07 (14th ed. 1978); Daniel Hamm Drayage Co. v. Willson, 178 F.2d 633 (8th Cir. 1949).

To assure a proper compromise the bankruptcy judge, must be apprised of all the necessary facts for an intelligent, objective and educated evaluation. He must compare the "terms of the compromise with the likely rewards of litigation." Protective Committee for Independent Stockholders of TMT Trailer Ferry, Inc. v. Anderson ("TMT Trailer"), 390 U.S. 414, 425, 88 S.Ct. 1157, 1163, 20 L.Ed.2d 1, 10 (1968). He must evaluate and set forth in a comprehensible fashion:

(1) The probability of success in the litigation, with due consideration for the uncertainty in fact and law,

(2) The complexity and likely duration of the litigation and any attendant expense, inconvenience and delay, and

(3) All other factors bearing on the wisdom of the compromise.

Id. at 424-25, 88 S.Ct. at 1163, 20 L.Ed.2d at 9-10. See also American Employers' Insurance Co. v. King Resources Co., 556 F.2d 471 (10th Cir. 1977) (detailing a 10 factor test employed by the Court); Drexel v. Loomis, 35 F.2d 800, 806 (8th Cir. 1929) (listing the factors as "(a) The probability of success in the litigation; (b) the difficulties, if any, to be encountered in the matter of collection; (c) the complexity of litigation involved, and the expense, inconvenience and delay necessarily attending it; (d) the paramount interest of the creditors and a proper deference to their reasonable views in the premises."); Ashbach v. Kirtley, 289 F.2d 159 (8th Cir. 1961) (following the factors in Drexel v. Loomis, supra ); 2A Collier On Bankruptcy P 27.04 (14th ed. 1978).

The duty of an appellate court, then, in reviewing a District Court's approval of a compromise, is to assure that this compromise is truly "fair and equitable" and "in the best interest of the estate." TMT Trailer, 390 U.S. at 424, 88 S.Ct. at 1163, 20 L.Ed.2d at 9. We must remember that compromises are "a normal part of the process of reorganization," Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 130, 60 S.Ct. 1, 14, 84 L.Ed. 110, 128 (1939), quoted in TMT Trailer, 390 U.S. at 424, 88 S.Ct. at 1163, 20 L.Ed.2d at 9, oftentimes desirable and wise methods of bringing to a close proceedings otherwise lengthy, complicated and costly. Florida Trailer and Equipment Co. v. Deal, 284 F.2d 567, 571 (5th Cir. 1960).

Nonetheless we may not and do not retry the controversy de novo nor rejudge matters for the trial judge. Rather, stated simply, and with comforting familiarity, the approval of a compromise is addressed to the sound discretion of the District Court whose judgment will not be disturbed except for an abuse of discretion. Florida Trailer and Equipment Co. v. Deal, 284 F.2d at 571; Ashbach v. Kirtley, supra; Daniel Hamm Drayage Co. v. Willson, 178 F.2d at 635-36; Fernow v. Gubser, 136 F.2d 971, 972 (10th Cir. 1943); Hair v. Byars (In re Summerville Cotton Mills), 92 F.2d 684 (5th Cir. 1937). See also Jones Financial Corp. v. Ray (In re Atlas Sewing Centers, Inc.), 384 F.2d 66, 83 (5th Cir. 1967) (refusing to disturb the delicate judgment of a District Court where record fully supports settlement of litigation in bankruptcy proceeding). With these principles before us, we review the American Can compromise.

III.

Rivercity, versed in the applicable law, makes three basic arguments which it says reveal an abuse of the District Court's discretion.

First, Rivercity claims that the compromise on its face fails to confer any benefits of significance on the Jax estate or its creditors. More specifically, Rivercity says the unsecured claims are not yet allowable, nor is it definitively proven that American Can has a secured claim on funds in the estate's treasury, nor does the Trustee surrender anything which is not otherwise required by paying administrative expenses, ad valorem taxes or rents due. These arguments prove little, if anything. On its face, the compromise appears to be just what its label implies a compromise with the Trustee giving up property in exchange for American Can giving up its alleged secured claim to money from the Trustee.

Boiled down, the compromise consists of the following. ⁵ The Trustee gives up real estate and pays administrative expenses and ad valorem taxes while American Can gives up its substantial proof of claim with a legitimate basis for asserting secured status and subordinates its substantial unsecured claim both then totaling approximately $10,000,000 ($8,500,000 claim plus $1,500,000 interest). The Trustee receives the cancellation of $5,500,000 of American Can's potentially estate-consuming, and at least arguably secured, debt and the subordination of American Can's unsecured claim to all present treasury funds (approximately $1,000,000), to certain funds generated in the future, and up to $350,000 so that other creditors may receive 60% or (for those who already received 20%) 40% of their claims while American Can receives real...