In re Rosenberg
DECISION
This matter comes before the Court on the motion (the “Motion”) of Isack Rosenberg (“the Debtor”) to enter into a stipulation (the “Proposed Stipulation”) with Capital One, N.A. (“Capital One”), extending the deadline for the closing of a transaction in with the debt owed to Capital One would be purchased at a discount, as set forth in a previously approved stipulation between those parties. The Motion was opposed by Galster Funding, L.L.C., RCG Longview II, L.P., RCGLV Maspeth, LLC, (collectively, “RCG”). Capital One also objects to the approval of the Proposed Stipulation, arguing that the original stipulation expired by its terms and that the manner in which the Debtor seeks to pay the discount amount to Capital One does not comply with thе terms of either stipulation. For the following reasons, the Motion is denied and the Proposed Stipulation is disapproved.
Jurisdiction
This Court has jurisdiction over this core proceeding under 28 U.S.C. §§ 1334(b) and 157(b)(2)(A) and (0), and the Eastern District of New York standing order of reference dated August 28, 1986. This decision constitutes the Court’s findings of fact and conclusions of law to the extent required by Federal Rule of Bankruptcy Procedure 7052.
Background
The following relevant facts are not in dispute.
The Debtor, an individual, commenced this chapter 11 case on July 28, 2009. The Debtor’s assets consist primarily of ownership interests in a number of businesses, including Certified Lumber Corporation and Boro Park Home Center, lumber and hardware businesses, as well as other entities engaged in the development of real estate. One such entity is McCaren Park Mews, LLC (“McCaren”), of which the Debtor owns 50%. McCaren owns an unfinished condominium project in Williams-burg, Brooklyn (the “McCaren Project”). Capital One holds a mortgage and security interest on McCaren’s assets, securing debt in the approximate amount of $50 million (the “McCaren Debt”). The Debt- or and Yitzchok Schwartz, the owner of the other half of the equity interest in McCaren, each have guaranteed the McCaren Debt.
Other creditors of the Debtor include RCG, which individually or collectively hold a security interest in the Debtor’s ownership interest in various entities, including McCaren.
Prior to the filing of this chapter 11 case, Capital One commenced an action in state court to foreclose its mortgage on McCaren’s assets and to rеcover on the guarantees. This action was removed by the Debtor to the District Court, and subsequently referred to this Court on September 3, 2009. In the adversary proceeding, the Debtor and McCaren asserted counterclaims against Capital One, including a claim that Capital One had agreed to
On August 27, 2009, RCG filed a motion to appoint an examiner or, in the alternative, for conversion or dismissal of the Debtor’s bankruptcy case. Thereafter, on November 5, 2009, after the withdrawal of the Debtor’s objections, the Court ordered the appointment of an examiner.
On September 11, 2009, Capital One filed a motion seeking the appointment of a chapter 11 trustee in this case. A trial was scheduled on all of the issues raised by Capital One’s motion for the appointment of a chapter 11 trustee and the Debt- or’s and McCaren’s motions for contеmpt, for injunctive relief, and to enforce the Debtor’s claimed right of first refusal.
A few days prior to the scheduled trial, the Debtor, McCaren and Capital One reported to the Court that they had settled the issues raised by Capital One’s motion and the adversary proceeding, and shortly thereafter the Debtor filed a motion for approval of the settlement agreement dated as of October 22, 2009 (“Original Settlement Agreement”), pursuant to Bankruptcy Rule 9019. RCG objected to the motion.
The Original Settlement Agreement, signed by McCaren, the Debtor and Mr. Schwartz, as well as Capital One, provided that the Debtor has the right to arrange for a third party to purchase the McCaren Debt, at a discount, no later than December 21, 2009.
On November 18, 2009, the Court issued a decision and an order approving the Original Settlement Agreement, from which no appeal was taken.
On Deсember 11, 2009, the Debtor filed the Motion seeking approval of an unsigned stipulation dated December 11, 2009. That Debtor then sought to approve the Proposed Stipulation, extending the closing date for the purchase of the McCaren Debt from December 21, 2009 to March 31, 2010. The stipulation also amended the default provision contained in the Original Settlemеnt Agreement, and
The Proposed Stipulation provides that McCaren shall also file an application to sell the McCaren Project by February 5, 2010, and the McCaren’s failure to timely file the petition or the motion to sell the McCaren Project “shall be considered a contempt of court for the failure to comply with a court order and [McCaren, Schwartz, and the Debtor] shall be subject to sanctions by the Court.” The Proposed Stipulation further provides that Capital one “shаll be permitted to immediately submit to this Court the copies of the [petition and [application [to sell the McCaren Project] and the Court shall deem the [petition and [application filed, and order the immediate appointment of a Chapter 11 trustee for the purpose of conducting the Section 363 sale.”
The Debtor seeks to purchase the McCaren Debt at a discount through the sale of the McCaren Project’s condominium units, which is “admittedly not perhaps by the way that the parties thought of at the time [they entered into the Original Settlement Agreement or the Proposed Stipulation.” (Tr.
Discussion
A bankruptcy court may approve a compromise and settlement pursuant to Federal Rule of Bankruptcy Procedure 9019 if it “is fair, reasonable and adequately based on the facts and circumstances before the court.” In re Hibbard Brown & Co.,
The Second Circuit summarized the factors that a court must consider when deciding whether a settlement falls above or below the lowest point in the range of reasonableness as follows:
(1) the balance between the litigation’s possibility of success and the settlement’s future benefits;
(2) the likelihood of complex and protracted litigation, “with its attendant expense, inconvenience, and delay,” including the difficulty in collecting on the judgment;
(3) “the paramount interests of the creditors,” including each affected class’s relative benefits “and the degree to which creditors either do not object to or affirmatively support the proposed settlement”;
(4) whether other рarties in interest support the settlement;
(5) the “competency and experience of counsel” supporting, and “[t]he experience and knowledge of the bankruptcy court judge” reviewing, the settlement;
(6) “the nature and breadth of releases to be obtained by officers and directors”; and
(7)“the extent to which the settlement is the product of arm’s length bargaining.”
Motorola, Inc. v. Official Comm. of Unsecured Creditors (In re Iridium Operating LLC),
Before applying the Rule 9019 standard, this Court must address a threshold issue: whether this Court has the ability to approve this settlement at all even if the Iridium factors weigh in favor of approval. While it is true that settlements are encouraged, Adelphia,
The Proposed Settlement cannot be approved because the default provisions conflict with the Bankruptcy Code. First, the settlement provides that, upon thе filing of McCaren’s bankruptcy petition, the Court shall “order the immediate appointment of a Chapter 11 trustee for the purpose of conducting the Section 363 sale” of the McCaren Project. Procedurally, this violates Bankruptcy Code § 1104(a), which requires the bankruptcy court to appoint a chapter 11 trustee “after notice and a hearing.” Other parties in interest would have the right to object, and in the event that grounds for the appointment of a
The powers and duties of a bankruptcy trustee are extensive. Upon the commencement of a case in bankruptcy, all corporate property passеs to an estate represented by the trustee. 11 U.S.C. §§ 32B, 541. The trustee is “accountable for all property received,” §§ 704(2), 1106(a)(1), and has the duty to maximize the value of the estate, see § 704(1); In re Washington Group, Inc.,476 F.Supp. 246 , 250 (M.D.N.C.1979), aff'd sub nom. Johnston v. Gilbert,636 F.2d 1213 (4th Cir.1980), cert. denied,452 U.S. 940 ,101 S.Ct. 3084 ,69 L.Ed.2d 954 (1981). He is directed to investigate the debtor’s financial affairs, §§ 704(4), 1106(a)(3), and is empowered to sue officers, directors, and other insiders to recover, on behalf of the estate, fraudulent or preferential transfers of the debtor’s property, §§ 547(b)(4)(B), 548. Subject to court approval, he may use, sell, or lease property of the estate. § 363(b).
Moreover, in reorganization, the trustee has the power to “operate the debtor’s business” unless the court orders otherwise. § 1108. Even in liquidation, the court “may authorize the trustee to operate thе business” for a limited period of time. § 721. In the course of operating the debtor’s business, the trustee “may enter into transactions, including the sale or lease of property of the estate” without court approval. § 363(c)(1).
As even this brief and incomplete list should indicate, the Bankruptcy Code gives the trustee wide-ranging management authority over the debtor.
Commodity Futures Trading Com’n v. Weintraub,
A chapter 11 trustee owes a fiduciary duty to the bankruptcy estate, id. at 355,
Similarly, the Proposed Stipulation provides that if the required commitments and deposit are delivered by February 8, 2010, McCaren’s bankruptcy case, which, pursuant to the stipulation must be filed by February 5, 2010, “will be dismissed and no auction sale under Section 363 will be scheduled.” Section 1112 governs dismissal of chapter 11 cases, and requires “notice and a hearing” before a chapter 11 ease is dismissed. That section also requires the court to determine whether there is “cause” to dismiss the case, and whether dismissal is in the best interests of the estate. 11 U.S.C. § 1112(b)(1). As such, the Debtor, McCaren, Schwartz, and Capital One cannot stipulate that McCaren’s case will be dismissed, thereby violat
Lastly, the Proposed Stipulation provides that McCaren’s bankruptcy case will be assigned to the same judge presiding over the Debtor’s case. The parties cannot stipulate which judge will be assigned McCaren’s bankruptcy case, or engage in similar “ ‘judge shopping,’ a practice which has been for the most part universally condemned.” U.S. v. Haldeman,
For these reasons, the Proposed Stipulation cannot be approved because it contains numerous default provisions that violate the Bankruptcy Code. The provisions cannot simply be ignored as immaterial because they establish the form of relief available to Capital One in the event the Debtor, McCaren, or Schwartz default under the Proposed Stipulation. Moreover, it is clear that these terms are material because they are significantly more detailed, and purport to provide more control of the process to Capital One, than the default provisions contained in the Original Settlement Agreement, indicating that they were specifically renegotiated. This Court cannot strike the offensive provisions and approve the remainder of the Prоposed Stipulation. It is well established that a court “should approve or disapprove a proposed agreement as it is placed before [it] and should not take it upon [itself] to modify [the agreement’s] terms.” Becker v. Warner Commc’ns, Inc. (In re Warner Commc’ns Securities Litigation),
Conclusion
For all these reasons, the Motion is denied and the Proposed Stipulation is not approved. A separate order will issue.
Notes
. The amount of the discount has been disclosed to the Court, and to RCG, and will be disclosed to any party in interest who agrees to keep the information confidential, but has been redacted from the electronically filed copy of the Settlement Agreement at Capital One’s request pursuant to § 107(b) of the Bankruptcy Code.
. The Proposed Stipulation defines "Premises” as 214 North 11th Street, Brooklyn, New York, which has been referred to herein as the McCaren Project.
. The Proposed Stipulation also provided that, by January 15, 2010, McCaren shall provide to Capital One a copy of an executed chapter 11 petition and application to sell the McCaren Project pursuant to § 363.
. Although this release is contained in a subdivision of the default prоvisions, it appears that the release is effective upon the approval of the Proposed Stipulation as consideration for the extension of the closing date, and that the claims are not waived only in the event of default. This interpretation is consistent with the Debtor’s representations. (Tr. 12/16/09 at 5.)
. "Tr.” refers to the transcript of the hearing held on the date specified.