Leblanc v. Salem

• Decision Date: 05 April 2000
• Docket Number: No. 99-1865,99-1865
• Citation: 212 F.3d 632
• Parties: (1st Cir. 2000) IN RE MAILMAN STEAM CARPET CLEANING CORP., DEBTOR. GARY R. LEBLANC, APPELLANT, V. RICHARD P. SALEM, TRUSTEE, ETC., APPELLEE. Heard
• Court: U.S. Court of Appeals — First Circuit

Page 632

212 F.3d 632 (1st Cir. 2000)

IN RE MAILMAN STEAM CARPET CLEANING CORP., DEBTOR.

GARY R. LEBLANC, APPELLANT,

V.

RICHARD P. SALEM, TRUSTEE, ETC., APPELLEE.

No. 99-1865

United States Court of Appeals For the First Circuit

Heard April 5, 2000

Decided May 16, 2000

Gary R. LeBlanc, pro se ipso, for appellant. Richard P. Salem, pro se ipso, for appellee.

Before Selya, Circuit Judge, Bownes, Senior Circuit Judge, and Boudin, Circuit Judge.

Selya, Circuit Judge.

This appeal requires us to revisit the final resting place of Mailman Steam Carpet Cleaning Corp. (the debtor). An earlier opinion of this court adumbrates the relevant background, see LeBlanc v. Salem (In re Mailman Steam Carpet Cleaning Corp.), 196 F.3d 1, 2-4 (1st Cir. 1999) (Mailman I), and an abbreviated version, borrowing heavily from the original, suffices here. ¹

In October 1990, the debtor, represented by Attorney Gary R. LeBlanc, won a verdict in excess of $450,000 against Alfred C. Lizotte in an environmental suit. An appeal ensued. Betimes, the debtor attached a parcel of commercial real estate (upon which Al's Service Station, a corporation controlled by Lizotte, operated a Gulf station) in an effort to secure the judgment.

Before collecting any sums from Lizotte, the debtor slid into bankruptcy. See 11 U.S.C. §§ 701-766 (1994 & Supp. 1999). The Lizotte judgment thus became a principal asset of the bankruptcy estate and LeBlanc, who had been engaged under a contingent fee arrangement, became a creditor. On September 18, 1995, the trustee in bankruptcy, Richard P. Salem, notified the court and creditors of his intention to compromise the judgment for $100,000. LeBlanc, qua creditor, objected.

The bankruptcy court held a hearing during which Salem introduced an appraisal that estimated the fair market value of the property, including the fixtures and equipment associated with Al's Service Station (the Corporation), at $390,000, and then assigned $175,000 of this total to the "[l]and, buildings and installations" owned personally by Lizotte (and, thus, subject to the attachment). The appraiser also pointed out that the real estate was encumbered by a prior first mortgage that secured nearly $100,000 in debt. LeBlanc asserted that the real estate was worth much more than the estimate but offered no concrete evidentiary support for a different valuation. No other creditor objected to the anticipated settlement.

In the end, the bankruptcy court approved the proposal, subject to the following condition:

If the gas station is sold within two years from [October 19, 1995], the trustee may move for revocation of this approval. Depending on the facts of the sale, the court will then either confirm or revoke its approval.

The court denied LeBlanc's subsequent motion to alter or amend and ordered Salem to deliver an executed discharge of the lien, to be held in escrow pending payment of $100,000 to the bankruptcy estate.

Approximately seven months later, Lizotte and the Corporation sold the real property and the business assets of the Corporation for an aggregate price of $560,000. Lizotte maintained that the business assets represented most of the value; thus, he proposed to satisfy the first mortgage, remit $100,000 to Salem to complete the settlement, and pay the remaining net proceeds to the Corporation's creditors (the largest of which apparently was Gulf Oil or its distributor, New England Petroleum). Contending that this allocation was a sham and would fraudulently divert $360,000 from Lizotte's creditors (including the debtor), LeBlanc moved to compel Salem to seek revocation of the order conditionally approving the settlement. The bankruptcy court granted LeBlanc permission under Fed. R. Bankr. P. 2004 to examine Lizotte, Gulf, and the Corporation, limited, however, to information concerning the terms of the sale and to whom the proceeds had gone. ²

The permitted discovery moved at a snail's pace. Finally, the depositions concluded and Salem sought leave to abandon the reserved right to seek revocation of the settlement. LeBlanc - and LeBlanc alone - opposed abandonment. At a hearing held on April 15, 1998, LeBlanc recounted his version of the pertinent facts and the conclusions that he had drawn from his investigation. See Mailman I, 196 F.3d at 3-4 (describing LeBlanc's contentions). Apparently unimpressed, the bankruptcy court overruled his objection and authorized Salem to surrender the right to seek revocation.

LeBlanc appealed both this order and a collateral order dealing with the allowance of his claim. ³ After some skirmishing -including a remand for further findings - the district court upheld both determinations. See In re Mailman Steam Carpet Cleaning, Civ. No. 99-40083-EFH (D. Mass. June 25, 1999) (Mailman II). LeBlanc then prosecuted this appeal. In it, he presses two assignments of error.

The Abandonment Order

The appellant first solicits our intervention in respect to the order approving abandonment of the right to seek revocation of the settlement. As the appellant acknowledges, the standard of review is abuse of discretion. See Prebor v. Collins (In re I Don't Trust), 143 F.3d 1, 3 (1st Cir. 1998). The abuse of discretion rubric is not hard and fast. See 1 Steven Alan Childress & Martha S. Davis, Federal Standards of Review § 4.21, at 4-131 to - 139 (3d ed. 1999). Here, we apply it against the background understanding that "[c]ompromises are favored in bankruptcy." Hicks, Muse & Co. v. Brandt (In re Healthco Int'l, Inc.), 136 F.3d 45, 50 n.5 (1st Cir. 1998) (quoting 9 Collier on Bankruptcy ¶¶ 9019.01, at 9019-2 (15th ed. 1995)).

A chapter 7 trustee is entrusted to marshal an estate's assets and liabilities, and proceed in settling its accounts on whatever grounds he, in his informed discretion, believes will net the maximum return for the creditors (on whose behalf he toils). When augmentation of an asset involves protracted investigation or potentially costly litigation, with no guarantee as to the outcome, the trustee must tread cautiously - and an inquiring court must accord him wide latitude should he conclude that the game is not worth the candle. See, e.g., id. at 50-52. After all, "a chapter 7 trustee is required to reach an informed judgment, after diligent investigation, as to whether it would be prudent to eliminate the inherent risks, delays and expense of prolonged litigation in an uncertain cause." Kowal v. Malkemus (In re Thompson), 965 F.2d 1136, 1145 (1st Cir. 1992).

These principles are dispositive here. LeBlanc mounts a claim of fraud - a claim that, after earnest investigation, he cannot substantiate. In order to probe the claim more thoroughly, the trustee would have to deplete the estate's (already slim) assets in exploring what might well prove to be a dry hole. Given the known facts, a decision to go no further seems easily defensible.

Lizotte is now in bankruptcy, with no visible assets apart from the real estate which is at issue in this proceeding. The sale to Peterborough Oil reportedly was contingent on the payment of roughly $200,000 to Gulf Oil/New England Petroleum, and a further payment of $60,000 for a covenant not to compete. The mortgage - a priority lien -had a balance of nearly $100,000. Backing these sums out of the sales price left only $200,000 on the table - some of which obviously would have to be devoted to closing costs, taxes, attorneys' fees, and the like. Under those circumstances, accepting a $100,000 settlement rather than either frustrating the sale (by attempting to block the $200,000 payment) or prolonging the squabble about how to allocate the sales price between real property and business assets does not appear unreasonable. Trustees must take care not to throw good money after bad, and, on this somewhat opaque record, Salem's inclination to embrace the settlement is a choice which appears deserving of some deference.

Nor was Salem's position rubber-stamped. The bankruptcy court conducted no fewer than four hearings to scrutinize the appellant's claims. Upon considering all the available evidence, the court elected, as its discretion fully allowed, to accept the trustee's recommendation. The situation thus is reminiscent of In re Thompson, in which we wrote:

[T]he baseline for appellants' opposition to the proposed settlement rests in their readiness to second-guess the informed judgment of the chapter 7 trustee, as well as the discretionary determination of the bankruptcy court, that continued litigation would not result in a net benefit to the chapter 7 estate. . . . The important policy favoring efficient bankruptcy administration normally will warrant judicial recognition that the chapter 7 trustee, . . . rather than . . . an individual creditor, is the more appropriate arbiter of the "best interests" of the chapter 7 estate.

965 F.2d at 1145 (citations omitted).

The district court also reviewed the facts. In an abundance of caution, it remanded for further findings and ultimately affirmed the decision of the bankruptcy court. See Mailman II, slip op. at 3. The court stated that "the record simply does not reflect that the land owned by Lizotte and secured by the real estate attachment was valued at more than the $200,000 [originally] estimated by the independent real estate appraiser." Id. It then noted that the appellant had neither introduced any contrary expert testimony nor proffered any hard evidence "that Lizotte [had] manipulated the valuation of his real estate." Id. Consequently, the district court concluded that the bankruptcy court had not abused its discretion. See id.

We appreciate that, notwithstanding the district court's imprimatur, we must independently review the bankruptcy court's determination. See Palmacci v. Umpierrez, 121 F.3d 781, 785 (1st Cir. 1997). But that review should not occur in a vacuum. In this instance, the decision whether to seek revocation of the settlement has been poked, prodded, and probed at...