A bankruptcy court did not abuse its discretion in approving a settlement agreement between a Chapter 11 debtor and its former member in the limited liability company because it was in the best interest of the estate, the U.S. District Court for the Eastern District of Wisconsin held March 20 (Official Committee of Unsecured Creditors of Renaissant Lafayette LLC v. Interforum Holding LLC, E.D. Wis., No. 2:11-cv-00172-CNC, 3/20/13).
Affirming the decision of the bankruptcy court, Judge C.N. Clevert Jr. concluded that there were sufficient reasons for the bankruptcy court to conclude that the settlement agreement was in the best interest of the estate.
According to the court, the settlement did not fall “outside the realm of reasonableness.” The court considered the relevant factors and the cost and time spent on litigation and the potential expense of litigating avoidance claims, and determined that the costs of litigation would total at least $20,000, equal to the amount that would have been recovered for unsecured creditors. The other option, the court said, would be that there would be no recovery to the unsecured creditors. Further, there was the reality of stalling or dismissing the Chapter 11 case. Thus, there were sufficient reasons for the bankruptcy court to conclude that the agreement was in the best interest of the estate.
Subsequently, Barr signed a resolution as the sole manager and member of the debtor regarding its decision to file for Chapter 11 protection. Several weeks later, the debtor filed for Chapter 11 protection.
Renaissant Development Group then filed a motion to approve the sale of substantially all of the debtor's assets free and clear of liens, claims, or encumbrances. Amalgamated Bank agreed to act as stalking horse bidder in an auction for the debtor's assets with a credit bid of $55 million under the asset purchase agreement.
Interforum then filed an objection and response to the debtor's motion for entry of an order based on a combined 50 percent interest in the debtor. According to Interforum, the debtor failed to list Interforum as Equity Security Holders and the Jan. 25, 2010, State of Financial Affairs erroneously stated that Interforum withdrew as members of the debtor. Interforum argued that it had not received notice of any proceedings during the pendency of the Chapter 11 case and had not consented to the commencement of the case.
The debtor contended that the settlement was within the range of reasonableness, citing the cost of continued litigation which would jeopardize the sale process and delay resolution. The debtor also cited a significant reduction in legal expenses and the final resolution of all claims.
Amalgamated Bank, the largest unsecured creditor, filed a response to the objections of the Committee stating that the “probability of avoiding a $500,000 transfer for the Interforum Entities as a preferential transfer is low” and that the monies had been held in escrow on behalf of Interforum since 2007. According to Amalgamated Bank, the benefit to the estate achieved through settlement far outweighed the benefits of any potential avoidance action and its costs.
Under Federal Rules of Bankruptcy Procedure 9019(a), the bankruptcy court may approve a compromise or settlement “[o]n motion by the trustee and after notice and a hearing,” the court explained. The bankruptcy court, the court noted, must determine whether the proposed compromise is in the best interests of the bankruptcy estate. Among the factors the bankruptcy judge should consider in his analysis are the “litigation's probability of success, the litigation's complexity, and the litigation's attendant expense, inconvenience, and delay (including the possibility that disapproving the settlement will cause wasting of assets),” the court said, citing In re Doctors Hospital of Hyde Park Inc.,, 474 F.3d 421 (7th Cir. 2007).
In its arguments on appeal, the Committee focused on the potential avoidance claim and the carve-out distribution. Underlying both arguments was the assumption that the court was acting within its jurisdiction, the court said. At no time did the Committee challenge the authority of the debtor to initiate the case, the court said.
According to the court , the settlement agreement executed by the debtor and Interforum on Dec. 7, 2010, states that Interforum had no interest in the LLC after Feb. 13, 2009. Thus, it follows that the Chapter 11 was filed properly and Interforum did not have standing to challenge it, the court said.
Alternatively, if Interforum prevailed on its motion to dismiss, there would be no recovery available to the unsecured creditors, the court noted. Thus, there were sufficient reasons for the bankruptcy court to conclude that the agreement was in the best interest of the estate.
By Diane Davis
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