Kearney v. Yearout (In re Kearney)

• Decision Date: 04 December 2019
• Docket Number: Bankr. No. 17-12274,BAP No. NM-19-010
• Parties: IN RE VICTOR P. KEARNEY, Debtor. VICTOR P. KEARNEY, Appellant, v. KEVIN YEAROUT, UNSECURED CREDITORS COMMITTEE, UNITED STATES TRUSTEE, and LOUIS ABRUZZO and BENJAMIN ABRUZZO, Trustees of the Mary Pat Abruzzo Kearney Testamentary Trusts B and C, Appellees.
• Court: U.S. Bankruptcy Appellate Panel, Tenth Circuit

IN RE VICTOR P. KEARNEY, Debtor.

VICTOR P. KEARNEY, Appellant, v. KEVIN YEAROUT, UNSECURED CREDITORS COMMITTEE,

UNITED STATES TRUSTEE, and LOUIS ABRUZZO and BENJAMIN ABRUZZO,

Trustees of the Mary Pat Abruzzo Kearney Testamentary Trusts B and C, Appellees.

BAP No. NM-19-010

Bankr. No. 17-12274

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE TENTH CIRCUIT

December 4, 2019

NOT FOR PUBLICATION^*

Chapter 11

OPINION

Appeal from the United States Bankruptcy Court for the District of New Mexico

Before CORNISH, ROMERO, and LOYD,^** Bankruptcy Judges.

LOYD, Bankruptcy Judge.

Chapter 11 debtor Victor Kearney appeals the New Mexico Bankruptcy Court's order confirming the chapter 11 plan of reorganization proposed by the unsecured creditors' committee in his case. Determining the Bankruptcy Court did not err in confirming the plan of reorganization we AFFIRM.

I. Factual Background

Victor Kearney (the "Debtor") married Mary Pat Abruzzo in 1988. Mary Pat's parents developed and ran a ski resort and tramway near Albuquerque, New Mexico. The Abruzzo's operated the ski resort and tramway under a company called Alvarado Realty Company. Mary Pat and her three brothers, Louis, Benny, and Richard Abruzzo managed Alvarado Realty Company since their parents' deaths in 1985.

Mary Pat owned approximately 18.5 percent of Alvarado Realty Company's stock. Mary Pat died in 1997 at the age of 31. Her will set up two testamentary trusts for the benefit of her brothers and the Debtor during his lifetime (the "Trusts"). The Trusts contained a spendthrift provision preventing the Debtor from assigning his interest in the Trusts' assets to creditors. Upon the Debtor's death, the remainder in the Trusts was to be divided between Louis, Benny, and Richard Abruzzo, or their surviving children. Richard died in 2010. Mary Pat's will appointed Louis, Benny (the "Brothers"), and the Debtor as co-trustees of the Trusts.

Over the years, the Trusts distributed approximately $800,000 per year or $16,000,000 total to the Debtor. However, the Debtor and the Brothers did not have a good relationship. Eventually in 2013, the Debtor sued the Brothers for breach offiduciary duty as co-trustees of the Trusts in New Mexico state court. The Debtor alleged the Brothers suppressed Alvarado Realty Company's dividend payments to the Trusts to his detriment as a beneficiary. The Brothers counterclaimed, alleging the Debtor breached his fiduciary duty as a co-trustee and asked the state court to modify the Trusts to appoint a successor trustee to replace the Debtor.

At the conclusion of a trial on the Debtor's claims, the state court denied all of the Debtor's allegations and ordered him to pay the Brothers $510,000 in attorneys' fees and $155,915.60 in costs. The state court also sanctioned the Debtor $100,000, finding he lied under oath, failed to comply with discovery orders, and otherwise acted in a manner amounting to an affront to the entire judicial process.

The state court conducted a separate trial on the Brothers' counterclaims at which it determined the Debtor breached fiduciary duties owed to them as co-trustees and ordered that the Debtor be replaced as a co-trustee of the Trusts. The Debtor filed his chapter 11 bankruptcy petition on September 1, 2017, the day before the state court hearing on the appointment of a trustee to replace the Debtor.

The U.S. Trustee's office appointed an unsecured creditors' committee (the "Committee") on November 22, 2017. The Committee is made up of Brenda Johnson,¹ Nick Tarlson,² and Betty and Clayton White.³ The Bankruptcy Court extended theDebtor's exclusivity period until June 12, 2018. The Debtor filed his third amended plan of reorganization on July 13, 2018. The Debtor then amended his plan of reorganization on August 13, 2018, August 29, 2018, November 16, 2018, and January 22, 2019.

When the Debtor filed his fifth amended plan of reorganization, he sought a further extension of the exclusivity period. The Bankruptcy Court denied the extension of the exclusivity period, opening the door for the Committee to file a competing plan of reorganization. The Committee filed a plan on July 12, 2018 and amended its plan on November 7, 2018. The Debtor proposed his seventh and final plan just nine days before the scheduled hearing on the Debtor's sixth amended plan and the Committee's amended plan.

The Committee's amended plan provided funding from the Trusts' assets pursuant to the state court's modification of the Trusts. The Committee's plan authorized Alvarado Realty Company⁴ to purchase back shares of the company held by the Trusts for $12,571,799; paid a $3,000,000 distribution of the Trusts' assets to the Debtor, to be turned over to the bankruptcy estate in settlement of all claims held by the estate againstthe Brothers and Alvarado Realty Company; and paid the priority tax claim of the IRS over five years from net income otherwise distributable to the Debtor.⁵

The Bankruptcy Court granted relief from the automatic stay to pursue state court approval of the modification of the Trusts. One day before the state court was to hear the matter, the Debtor removed the action to federal district court for the District of New Mexico, alleging diversity of citizenship. The District of New Mexico transferred the matter back to the Bankruptcy Court, concluding the attempt to remove the matter was a sham litigation tactic. The Bankruptcy Court determined it must abstain from issuing a ruling on modification of the Trusts and remanded the matter back to the state court. The state court approved the modification of the Trusts to allow for the sale of the Trusts' assets to Alvarado Realty Company and the $3,000,000 payment to the bankruptcy estate (the "Trust Modifications").

Upon the sale of the Trusts' assets to Alvarado Realty Company, the Committee's plan provided for the creation of a new trust, the trustee of which would hold and distribute payments to creditors. The Committee's plan provided that priority claims would be paid in full, all collateral encumbered by secured claims would be surrendered, and the unsecured claims would receive a pro rata distribution out of the $3,000,000 payment. Additionally, the Committee's plan provided the Debtor would release anyclaims he held against the Brothers, Alvarado Realty Company, and any other members of the Abruzzo family.

At the confirmation hearing, the Bankruptcy Court refused to allow the Debtor to go forward with his seventh amended plan, concluding creditors did not receive sufficient notice of the plan's amendments because it was filed on January 22, 2019, and the hearing occurred on January 31, 2019. The Committee and objecting creditors Wells Fargo Bank, N.A., the IRS, the New Mexico Taxation and Revenue Department, and US Bank resolved all objections to the Committee's plan by stipulation. The Bankruptcy Court found the Committee's plan was proposed in good faith and was feasible, as the evidence suggested Alvarado Realty Company had sufficient funds and access to credit to complete the $12,600,000 purchase of the Trusts' shares in the company. The Committee members all testified they believed they would receive a higher payout on their claims under the Committee's plan than by any plan proposed by the Debtor. The Bankruptcy Court confirmed the Committee's plan over the Debtor and his ex-wife's objections. The Debtor filed a timely notice of appeal.

II. Jurisdiction & Standards of Review

"With the consent of the parties, this Court has jurisdiction to hear timely-filed appeals from 'final judgments, orders, and decrees' of Bankruptcy Courts within the Tenth Circuit."⁶ An order confirming a chapter 11 plan of reorganization is final for thepurposes of appeal.⁷ Neither party in this case elected for this appeal to be heard by the United States District Court pursuant to 28 U.S.C. § 158(c). Accordingly, this Court has jurisdiction over this appeal.

The Debtor argues the Bankruptcy Court deprived him of due process by denying review of his seventh amended plan and denying discovery related to the Committee's plan. Whether the Bankruptcy Court denied a party of his or her due process rights is a question of law reviewed de novo.⁸ The Debtor also argues the Bankruptcy Court erred in confirming the Committee's plan as it lacked good faith and was not feasible and improperly settled the Debtor's claims against the Brothers. "Good faith for purposes of § 1129(a)(3) is ordinarily a finding of fact that we review for clear error."⁹ A finding of fact is clearly erroneous if "it is without factual support in the record or if, after reviewing all of the evidence, [the court is] left with the definite and firm conviction that a mistakehas been made."¹⁰ Whether a plan is feasible pursuant to § 1129(a)(11) is also a finding of fact reviewed for clear error.¹¹

Approval of a settlement agreement is reviewed for abuse of discretion.¹² The abuse of discretion standard requires the appellate court to give deference to the trial court's "evaluation of the salience and credibility of testimony, affidavits, and other evidence. We will not challenge that evaluation unless it finds no support in the record, deviates from the appropriate legal standard, or follows from a plainly implausible, irrational, or erroneous reading of the record."¹³

III. Analysis

a. Whether the Bankruptcy Court violated the Debtor's due process rights

The Debtor argues the Bankruptcy Court denied him of his due process rights to make an argument and establish a record by (1) denying the Debtor's request to hold a confirmation hearing on his seventh amended plan; and (2) denying the Debtor the opportunity to conduct discovery on his objections to the Committee's plan.

"[D]ue process requires notice and a meaningful opportunity to be heard."¹⁴ Notice must be "reasonably calculated, under all the circumstances, to apprise interestedparties of the pendency of the action and afford them an opportunity to present their objections."¹⁵ The...