Hope 7 Monroe Street Ltd. Partnership v. Riaso L.L.C.Hope 7 Monroe Street Ltd. Partnership v. Riaso L.L.C.
MEMORANDUM OPINION
Hope 7 Monroe Street Limited Partnership (“Monroe”) owned property in the District of Columbia that it wished to convert from apartment units to condominiums. A man named Musse Leakemariam brokered a $1.6 million “bridge loan” from RIASO L.L.C. to provide Monroe with temporary financing. Although Leakem-ariam promised to assist Monroe in finding permanent financing before the expiration of the bridge loan’s term, he failed to do so, and Monroe, apparently unable to secure additional financing, defaulted on the loan from RIASO. It subsequently filed for bankruptcy in the United States Bankruptcy Court here, and a trustee was appointed to administer the bankruptcy estate.
Meanwhile, Monroe’s sole limited partners obtained information that led them to believe that Leakemariam, RIASO, and RIASO’s attorney had engaged in fraud and misrepresentation in connection with the bridge loan. They filed suit, individually and on behalf of Monroe, against these three in D.C. Superior Court. As the trustee was responsible for protecting the interests of the bankruptcy estate, he ultimately assumed control of the Superior Court action. He subsequently proposed a settlement in which the estate would sell any and all claims it had against the three defendants to RIASO’s attorney. The Bankruptcy Court approved the sale of the claims for $30,000. In addition, it ordered that Monroe’s property be sold and the proceeds be paid to RIASO to satisfy its outstanding obligation.
After these orders were issued, Monroe believed it discovered additional evidence of fraud in connection with the bridge loan and thus moved to vacate the aforementioned orders. The Bankruptcy Court denied the Motion, and Monroe now appeals that decision. Because this Court finds that the Bankruptcy Court did not err in refusing to vacate its orders under
I. Background
A. Factual Background
For background purposes, the Court will refer to the Superior Court Complaint,
Unbeknownst to Monroe and the Cap-pels, however, Leakemariam was allegedly both the loan broker and the lender. Id. at 35. He had purportedly organized RI-ASO himself on November 16, 2006 — “less than a week before the settlement on the new mortgage loan.” Id. at 35, 37. Monroe and the Cappels did not learn of Leak-emariam’s dual role until August 17, 2009. Id. at 41. For reasons that are not entirely clear, Monroe was unable to repay the bridge loan, leading to its default and the litigation that brings the parties here.
B. Procedural History
After RIASO initiated foreclosure proceedings on the mortgage, id. at 40, Monroe filed a voluntary petition for bankruptcy under Chapter 11 of the Bankruptcy Code. See ECF No. 2 (Docket Sheet for Bankruptcy Petition 09-00273, ECF No. 1, April 2, 2009); see also B.R. at 33. The Bankruptcy Court converted the case to a Chapter 7 action on July 17, 2009, appointing Marc Albert as the trustee. See Bankruptcy Docket Sheet, ECF No. 57. On November 6, 2009, the Cappels filed a separate action against RIASO, Leakemar-iam, and Richard Boddie (RIASO’s attorney) in D.C. Superior Court for breach of fiduciary duty, fraud, and misrepresentation, among other things. B.R. Record at 32-54 (Superior Court Complaint).
On January 15, 2010, the trustee filed a motion in the bankruptcy action to sell the debtor’s property located at 1020 Monroe St., N.W.,
see
Bankruptcy Docket Sheet, ECF No. 68, which the court granted on February 17.
Id.,
ECF No. 83. Debtor, meanwhile, objected to RIASO’s proof of claim, stating that Monroe did not “admit to owing any amount that is the result of the fraudulent inducement to contract and breach of fiduciary duty committed against the debtor.”
See
B.R. at 365 (Memorandum Decision of July 1, 2011, re Debtor’s
Then, on June 10, 2010, the trustee moved to sell the estate’s claims against
On April 12, 2011, Debtor moved pursuant to
II. Legal Standard
A bankruptcy court’s findings of fact are reviewed under a “clearly erroneous” standard.
When a party appeals a bankruptcy court’s approval of a settlement, the reviewing court must apply an “abuse of discretion standard.”
See In re Chira,
III. Analysis
Debtor’s Motion to vacate the Bankruptcy Court’s orders relied on
A.
the following criteria must be met: (1) the evidence must have been in existence at the time of trial; (2) the evidence must be such that it was not and could not by the exercise of due diligence have been discovered in time to present it in the original proceeding; (3) the evidence must not be merely cumulative or impeaching; and (4) the evidence must be admissible and credible, and of such a material and controlling nature as will probably change the outcome.
Lans v. Gateway 2000, Inc.,
According to Appellant, the new evidence presented to the Bankruptcy Court in its
The Bankruptcy Court denied Debtor’s 60(b)(2) Motion based on two of the Rule’s requirements: that the evidence be outcome determinative and that it not be previously discoverable by the exercise of due diligence. Although the court’s opinion initially stated that the evidence presented would not have changed the outcome of any of the three orders, it proceeded to analyze only the order approving settlement under this prong. Its due-diligence analysis, however, applies to all three orders. This Court, correspondingly, will review only the order approving settlement under the outcome-determinative prong and all three under the due-diligence prong.
1. Not Outcome Determinative
The Bankruptcy Court rejected Debtor’s 60(b)(2) argument with respect to approval of the settlement primarily because the “new evidence” offered would not have produced a different result. It held that the evidence presented by Debtor “does not constitute ‘newly discovered evidence’ ... because it is not ‘of such a material
In order to determine whether the Bankruptcy Court erred in finding that the evidence would not have altered the outcome, the Court must first examine the standard the Bankruptcy Judge was required to apply to the underlying motion. The sale of the claims was a proposed settlement.
See
B.R. at 194 (Trustee’s Motion to Sell Claims at 4);
see also
Appellant’s Br. at 11; Appellee’s Br. at 16. The judge’s responsibility, therefore, was “not to decide the numerous questions of law and fact raised ... but rather to canvass the issues and see whether the settlement
fall[s] below the lowest point in the range of reasonableness.’
”
Cosoff v. Rodman (In re W.T. Grant Co.),
Before approving the settlement here, the judge held a hearing at which the trustee testified. The trustee explained that he believed selling the claims was in the best interest of the estate because of the uncertainty of damages and the costs associated with continued litigation. See B.R. at 372-73 (Mem. Dee. at 10-11) (citing Trans. 6/30/2010 Hrg., at 20-21, 26). With respect to the former, the trustee stated that even if the estate were to prevail on the fraud claims, he had serious concerns about its ability to recover damages. Mem. Dec. at 11 (citing Trans. 6/30/2010 Hrg., at 26, 68). At the time the Debtor was originally seeking refinancing, its principal had been imprisoned, and it was “doubtful” that it “could have obtained a better refinancing than the one that it did obtain.” Id. (quoting Trans. 6/30/2010 Hrg., at 68). In light of this, even if the litigation were ultimately successful, it held little promise of bestowing financial benefit on the estate. Id. This is because the measure of damages would be the difference between a loan obtained with a conflict-free broker and the one brokered by Leakemariam. The trustee had good reason to think this amount would be negligible.
Not only were the prospects of gain dim, but the downside of litigating the case was substantial and sure. The trustee testified that the estate “ ‘didn’t have the resources to spend a year litigating a fraud case.’ ” Id. (quoting Trans. 6/30/2010 Hrg., at 20-21). While Appellant contends that the estate’s litigation was being handled on a contingency-fee basis, see Appellant Br. at 9, it does not cite any evidence in the bankruptcy record to support this. Litigating the claims through trial, moreover, would only delay distributions to the estate’s creditors — -as the unresolved claims were the only thing standing between the estate’s beneficiaries and their money. Mem. Dec. at 11-12 (citing Trans. 6/30/2010 Hrg., at 21, 67-68).
The trustee was not in the dark about the suspicious circumstances surrounding the loan when he sought the Bankruptcy Court’s approval for the settlement. At the hearing regarding approval, the trustee testified that he was aware that the
The new evidence, the Bankruptcy Court determined, would not have changed this outcome. Such a ruling is clearly not an abuse of discretion or clearly erroneous. Even if the evidence presented in Debtor’s Motion to Vacate were to increase the estate’s likelihood of prevailing in its Superior Court case — and it very well might — -it does not undermine the trustee’s rationale for selling the claims or the Bankruptcy Court’s rationale for approving the settlement. The concerns about proving the amount of damages and bearing the costs of litigation and delay are unaffected by Debtor’s “new evidence,” and, consequently, the court’s reasons remain valid even assuming Debtor were to prove liability. See B.R. at 375 (Mem. Dec. at 13). (“At best, the new evidence is pertinent to an evaluation of the ‘probability of success in litigation’ factor, a factor that did not predominate in the trustee’s reasons for settling or this court’s reasons for approving the settlement.”).
In any event, “a settlement does not fall below the range of reasonableness just because it might have been successfully litigated.” B.R. at 376 (Mem. Dec. at 14);
see also In re Teltronics Servs., Inc.,
2. Lack of Due Diligence
The Bankruptcy Court also found that Debtor’s 60(b)(2) argument failed with respect to all three orders for the independent reason that the evidence Debtor presented “could have been discovered ‘by the exercise of due diligence’ prior to the relevant hearings: the hearing on the debtor’s objection to RIASO’s proof of claim on May 25, 2010, [which ultimately resulted in the order directing payment of proceeds to RIASO,] or the [settlement] approval hearing on June 30, 2010.” B.R. at 376 (Mem. Dec. at 14). Debtor, by its own admission, was aware of Leakemariam’s involvement in RIASO no later than August 17, 2009.
See
B.R. at 364 (Mem. Dec. at 2) (quoting
Appellant nevertheless argues that the trustee prevented it from investigating by refusing to abandon its Superior Court claims. In other words, Appellant contends it could not conduct discovery as long as the Superior Court case belonged to the bankruptcy estate. Such an argument, however, is simply too little too late. First, as Appellee points out, “[T]his basis for relief was never presented to the bankruptcy court.” Appellee’s Br. at 9. On appeal, this Court can only evaluate the Bankruptcy Judge’s decision based on the record that was before him at the time of his ruling. Since this argument was not raised by Debtor in its
B.
To obtain relief from a final order under
Appellant contends that the evidence it offered in connection with its
With respect to “actual prejudice,” it is clear from the Bankruptcy Court’s ruling on Debtor’s 60(b) Motion that this new information would not have affected its decision to issue the orders. In its decision, the Bankruptcy Court stated that “[t]he debtor ha[d] yet to demonstrate how the new evidence would strengthen its objection to RIASO’s proof of claim or its fraud claim against RIASO.” B.R. at 376 (Mem. Dec. at 14 n.2). In light of this statement, Appellant cannot prove&emdash;let alone clearly and convincingly&emdash;that the court would not have approved the proof of claim and ordered payment to RIASO even if it had known the information alleged in Debtor’s 60(b) Motion. Nor can it prove that the “new evidence” would have dissuaded the court from approving the settlement, as its approval “was not contingent on the availability of the source of funds or ownership information.” B.R. at 378 (Mem. Dec. at 16). As the Bankruptcy Court stated, “[E]ven if RIASO did withhold [that] information from the court,” the outcome of the settlement order would not have been different. Id. Such a ruling is not erroneous.
RIASO’s failure to disclose the information eventually obtained by Debtor, moreover, did not prevent Monroe from fully and fairly presenting its case. Had RIA-SO been more forthcoming about the circumstances surrounding the refinancing, it certainly would have reduced the investigative burden on Debtor. RIASO’s silence did not, however, prevent Appellant from discovering the evidence it ultimately laid out in its Motion to Vacate. As the Court previously noted, Appellant was aware of Leakemariam’s dual role well before the hearings on the approval of the settlement and RIASO’s proof of claim. It was thus alerted to the suspicious nature of the transaction and could have taken steps to uncover the information it ultimately presented to the court. The court could thus alternatively have found that no clear and convincing evidence had been advanced to demonstrate any prevention of the presentation of Appellant’s case.
C.
Under
As already discussed, Appellant was on notice of suspicious circumstances surrounding the loan transaction. Had it investigated, it likely would have uncovered the “new evidence” and presented it to the court in a timely manner. This lack of diligence alone prevents Appellant from obtaining relief under
IV. Conclusion
For the foregoing reasons, the Court will issue a contemporaneous Order affirming the Bankruptcy Court’s denial of Debt- or’s
Notes
. A D.C. nonprofit corporation called Hope 7, Inc. was the general partner of Monroe but ceased performing its general-partner func-lions in 2006 before the loan was finalized. Its corporate charter was revoked in 2007. See B.R. at 33.