In re Petersburg Regency LLC
540 B.R. 508
Bankr. D.N.J.2015Background
- Petersburg Regency, LLC (Debtor) won a $10,230,626.64 arbitration award for hurricane damage; that award is the estate’s sole significant asset.
- Multiple secured creditors (principal claimants: Burt and Ittleson) hold liens/assignments that, in aggregate, exceed the arbitration award by millions.
- Creditors (the Settling Creditors, representing all non‑insider claims) negotiated a global settlement to allocate the award among them (with a $150,000 carve‑out for administrative claims) and sought approval plus dismissal (a structured dismissal).
- The Debtor and its principals (the Harmons), who are insiders and would receive nothing under the settlement, opposed and proposed a competing liquidating Chapter 11 plan and an adversary action challenging creditors’ liens (including usury and other defenses).
- After evidentiary hearings, the Court concluded (1) the settlement/structured dismissal is supported by all non‑insider creditors, (2) the Debtor’s litigation challenges to major creditor claims were unlikely to succeed, and (3) dismissal with approval of the settlement was appropriate and in creditors’ best interests.
Issues
| Issue | Plaintiff's Argument (Debtor/Harmons) | Defendant's Argument (Settling Creditors) | Held |
|---|---|---|---|
| Whether court should approve the creditor settlement and authorize a structured dismissal distributing arbitration proceeds | Debtor: settlement is improper; distribution must await confirmation of a Chapter 11 liquidating plan so insiders (Harmons) may receive a distribution | Creditors: unanimous support for settlement; reorganization and Chapter 7 conversion are unrealistic; structured dismissal is authorized and is best alternative | Court approved the settlement, authorized structured dismissal under Rule 9019 and § 349(b); dismissal granted with prejudice |
| Whether Debtor is judicially estopped from arguing bankruptcy serves a valid purpose after taking contrary positions in Virginia proceedings | Debtor: current Chapter 11 filing is bona fide and serves bankruptcy purposes | Creditors: Debtor previously argued involuntary bankruptcy in Virginia was futile because secured claims exceed award; allowing the opposite position would be unfair | Court applied judicial estoppel — Debtor barred from asserting a contrary position that would delay settlement and benefit insiders |
| Validity and enforceability of Burt’s loan participation/recovery rights (including usury defense) | Debtor/Harmon: Burt’s claim is usurious or greatly overstated; much of advances were not owed by Debtor | Burt: parties repeatedly reaffirmed Burt’s priority lien and releases; agreements (notes, amendments, reaffirmations, supplemental agreement) establish enforceable secured claim | Court found Burt’s contractual agreements and releases enforceable; usury defense unlikely to succeed; Burt’s secured claim upheld as highly likely valid |
| Validity and extent of Ittleson’s lien and the discounted payoff argument | Debtor/Harmons: initial CIT UCC lapsed and Ittleson’s security interest impaired; Forbearance discounted payoff ($2M) extended by conduct/equitable estoppel | Ittleson: security interest valid (Deed of Trust and later UCC filing); payoff deadline was not extended in writing; debtor breached forbearance conditions | Court held Ittleson’s security interest was valid and perfected; challenges to amount and extension very unlikely to succeed; equitable doctrines inapplicable |
Key Cases Cited
- In re Jevic, 787 F.3d 173 (3d Cir. 2015) (upheld structured dismissal under rare circumstances where settlement was the least bad alternative)
- In re SPM Mfg. Corp., 984 F.2d 1305 (1st Cir. 1993) (approved creditor settlement and dismissal where secured claim exceeded assets and committee negotiated sharing)
- In re Martin, 91 F.3d 389 (3d Cir. 1996) (bankruptcy‑settlement standard: consider probability of success, collection difficulties, complexity/expense/delay, and creditors’ interests)
- Oneida Motor Freight v. United Jersey Bank, 848 F.2d 414 (3d Cir. 1988) (doctrine of judicial estoppel in bankruptcy context)
- New Hampshire v. Maine, 532 U.S. 742 (2001) (factors informing application of judicial estoppel)
- In re SubMicron Sys. Corp., 432 F.3d 448 (3d Cir. 2006) (bankruptcy court’s equitable authority to recharacterize or subordinate insider claims)