Jackson Brewing Co., Matter of

• Citation: 624 F.2d 605
• Decision Date: 21 August 1980
• Docket Number: No. 79-1193,79-1193
• Parties: In the Matter of JACKSON BREWING COMPANY, Debtor. AMERICAN CAN COMPANY et al., Appellants, v. William W. HERPEL, as Reorganization Trustee for Jackson Brewing Company, et al., Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 605

624 F.2d 605

6 Bankr.Ct.Dec. 1038

In the Matter of JACKSON BREWING COMPANY, Debtor.

AMERICAN CAN COMPANY et al., Appellants, v. William W. HERPEL, as Reorganization Trustee for Jackson

Brewing Company, et al., Appellees.

No. 79-1193.

United States Court of Appeals, Fifth Circuit.

Aug. 21, 1980.

Jerry A. Brown, New Orleans, La., for Am. Can.

Joseph E. Friend, New Orleans, La., for American Flange, et al.

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

Harry McCall, James P. Farwell, George W. Pigman, New Orleans, La., for Rivercity, etc., French Eighth, etc., Thomas C. Farrell, Jr., Paul A. Nalty and Margaret Perez Barton.

Raymond J. Salassi, Jr., New Orleans, La., for Prudential Ins. Co.

Sidney W. Provensal, Jr., New Orleans, La., for French Eighth.

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:

Here we review the District Court's approval of another compromise involving Jackson Brewing Company. While in the companion case of Rivercity v. Herpel (In re Jackson Brewing Co.), 624 F.2d 599 (5th Cir. 1980), we reviewed the approval of a compromise between the Trustee and American Can (and other creditors) with objections raised by Rivercity, this time we examine a compromise between the Trustee and Rivercity with objections raised by American Can (and other creditors). Like its crony, also decided this day, we affirm.

I.

Jackson Brewing Company ("Jax") was placed in Chapter X reorganization in 1974 on the petition of several of its creditors. Jax's Trustee brought several plenary law suits on behalf of Jax against members of the Rivercity and French Eighth partnerships and against Prudential Insurance Company. Rivercity and French Eighth had identical partners, namely Thomas C. Farrell, Jr., Paul A. Nalty, Margaret A. Perez Barton, and JBC. JBC was owned by James W. Howard, a Chicago promoter, who had acquired all of Jax's stock in 1970 and had immediately commenced depletion of its dowery.

The most important of these suits sought recovery of possession of property sold to French Eighth in 1971 for approximately $451,000, a price apparently well below market value. Two checks totaling that amount were issued. The first check, drawn by French Eighth to the order of Jax for approximately $270,000, was deposited in a Jax checking account. This amount was simultaneously paid out to JBC for which a non-interest bearing note executed by JBC in favor of Jax was given. The second check was drawn by JBC for over $181,000 to French Eighth endorsed without recourse by French Eighth to Jax and then endorsed by Jax to JBC. It was never deposited in a bank. A note for this amount was also executed by JBC in favor of Jax. One and a half years later (on June 27, 1972) these debts owed to Jax were "paid" when considered part of the $14,000,000 dividend declared by Jax to its stockholder, JBC. This sale was contested by the Trustee until the compromise and remains under attack by American Can and other creditors involved in this appeal.

The compromise involved dismissal of all plenary law suits brought by the Trustee against several companies, individuals and one law firm ¹ in return for the receipt of a total of $445,000 in cash and securities. Also Rivercity would withdraw its proof of claim for over $3,500,000 and Prudential Insurance Company would provide certain funds. The creditors ² objected in the District Court, as here, to three primary elements of the compromise: (1) the dismissal of French Eighth in the law suits for only $175,000, (2) the dismissal of certain individual and corporate defendants without consideration, and (3) the withdrawal by Rivercity of its proof of claim without payment of any administrative costs. Although only these three elements of the compromise were opposed, at least two of the creditors ³ refused to sever these elements from the rest of the compromise, rejecting the rest of the compromise if any changes were made. The District Court approved the compromise in its entirety, detailing its reasons in a 33 page opinion, In re Jackson Brewing Co., No. 74-1840 (E.D. La. Sept. 18, 1978), motion to amend opinion and order denied, In re Jackson Brewing Co., No. 74-1840 (E.D. La. Oct. 2, 1978), motion for new trial and/or amendment denied, In re Jackson Brewing Co., No. 74-1840 (E.D. La. Nov. 15, 1978), ⁴ engendering several creditors to appeal. ⁵

II.

As we explained in Rivercity v. Herpel (In re Jackson Brewing Co.), 624 F.2d 599 (5th Cir. 1980), § 27 of the Bankruptcy Act, in conjunction with § 187, authorize the Trustee, with the approval of the District Court, to compromise claims arising in the administration of an estate in Chapter X reorganizations. 11 U.S.C.A. §§ 50, 587; 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). The District Court must review the particular facts and circumstances with adequate detail and explanation to determine:

(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.

Protective Committee for Independent Stockholders of TMT Trailer Ferry, Inc. v. Anderson ("TMT Trailer" ), 390 U.S. 414, 424-25, 88 S.Ct. 1157, 1163, 20 L.Ed.2d 1, 9-10 (1968). 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) (articulating 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 ); 2A Collier on Bankruptcy P 27.04 (14th ed. 1978).

Then, on appeal an appellate court, keeping in mind that compromises are accepted, Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 130, 60 S.Ct. 1, 14, 84 L.Ed. 110, 128 (1939); TMT Trailer, 390 U.S. at 424, 88 S.Ct. at 1163, 20 L.Ed.2d at 9, and may be beneficial, Florida Trailer and Equipment Co. v. Deal, 284 F.2d 567, 571 (5th Cir. 1960), must ensure that the compromise is fair, 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. The Supreme Court has explained that review on appeal must be grounded in clear support in the record, coupled with sound analysis by the District Court. As the Court has explained, "it is essential . . . that a reviewing court have some basis for distinguishing between well-reasoned conclusions arrived at after a comprehensive consideration of all relevant factors, and mere boilerplate approval phrased in appropriate language but unsupported by evaluation of the facts or analysis of the law." TMT Trailer, 390 U.S. at 434, 88 S.Ct. at 1168, 20 L.Ed.2d at 15. In TMT Trailer, the District Court and this Court had approved a compromise as part of a plan of reorganization. The Supreme Court reversed on the ground that the record did not adequately demonstrate the factual or legal factors involved:

Here there is no explanation of how the strengths and weaknesses of the debtor's causes of action were evaluated or upon what grounds it was concluded that a settlement which allowed the creditor's claims in major part was 'fair and equitable.' Although we are told that the alternative to settlement was 'extensive litigation at heavy expense' and 'unnecessary delay,' there is no evidence that this conclusion was based upon an educated estimate of the complexity, expense, and likely duration of the litigation. Litigation and delay are always the alternative to settlement, and whether that alternative is worth pursuing necessarily depends upon a reasoned judgment as to the probable outcome of litigation.

The record before us leaves us completely uninformed as to whether the trial court ever evaluated the merits of the causes of actions held by the debtor, the prospects and problems of litigating those claims, or the fairness of the terms of compromise. More than this, the record is devoid of facts which would have permitted a reasoned judgment that the claims of action should be settled in this fashion.

390 U.S. at 434, 440-41, 88 S.Ct. at 1171, 1172, 20 L.Ed.2d at 15, 18. With these instructions, on remand the District Court assigned the case to a special master who held hearings resulting in 4,000 pages of testimony and several hundred exhibits. The Court then approved the compromise and we affirmed. TMT Trailer Ferry, Inc. v. Kirkland, 471 F.2d 10 (5th Cir. 1972). Hence, there must be a substantial factual basis for the approval of a compromise, but when there is such a basis with articulate findings and conclusions, an appellate court may not reverse absent some other abuse by the District Court of its discretion. See Florida Trailer and Equipment Co. v. Deal, 284 F.2d at 571; Ashbach v. Kirtley, 289 F.2d 159 (8th Cir. 1961); 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). And, the District Court may not be reversed as to any finding of fact unless it is unsupported by the record, or clearly erroneous, F.R.Civ.P. 52; Benjamin v. Diamond (In re Mobile Steel Co.), 563 F.2d 692, 704 (5th Cir. 1977); Katz v. Weil (...