Filed: May 16, 2007
Latest Update: Mar. 02, 2020
Summary: Opinions of the United 2007 Decisions States Court of Appeals for the Third Circuit 5-16-2007 In Re: WebSci Tech Precedential or Non-Precedential: Non-Precedential Docket No. 06-2226 Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2007 Recommended Citation "In Re: WebSci Tech " (2007). 2007 Decisions. Paper 1099. http://digitalcommons.law.villanova.edu/thirdcircuit_2007/1099 This decision is brought to you for free and open access by the Opinions of the
Summary: Opinions of the United 2007 Decisions States Court of Appeals for the Third Circuit 5-16-2007 In Re: WebSci Tech Precedential or Non-Precedential: Non-Precedential Docket No. 06-2226 Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2007 Recommended Citation "In Re: WebSci Tech " (2007). 2007 Decisions. Paper 1099. http://digitalcommons.law.villanova.edu/thirdcircuit_2007/1099 This decision is brought to you for free and open access by the Opinions of the U..
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Opinions of the United
2007 Decisions States Court of Appeals
for the Third Circuit
5-16-2007
In Re: WebSci Tech
Precedential or Non-Precedential: Non-Precedential
Docket No. 06-2226
Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2007
Recommended Citation
"In Re: WebSci Tech " (2007). 2007 Decisions. Paper 1099.
http://digitalcommons.law.villanova.edu/thirdcircuit_2007/1099
This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova
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NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 06-2226
IN RE: WEBSCI TECHNOLOGIES, INC.,
Debtor
Ramkrishna S. Tare,
Appellant
On Appeal from the United States District Court
for the District of New Jersey
D.C. Civil Action Nos. 03-cv-05444,
04-cv-03657, 04-cv-03658 & 04-cv-03659
(Honorable William H. Walls)
Submitted Pursuant to Third Circuit LAR 34.1(a)
May 11, 2007
Before: SCIRICA, Chief Judge, FUENTES and SMITH, Circuit Judges.
(Filed: May 16, 2007)
OPINION OF THE COURT
PER CURIAM.
Ramkrishna Tare, the former president, chief executive officer and sole
shareholder of WebSci Technologies, Inc. (“WebSci”), appeals from the District Court’s
orders denying his motions to supplement the record and for reconsideration of the denial,
and affirming the Bankruptcy Court’s approval of a settlement between the WebSci estate
and Fleet National Bank (“Fleet”), confirmation of Fleet’s proposed liquidation plan and
related matters. For the reasons that follow, we will affirm.
This case involves Chapter 11 Bankruptcy proceedings voluntarily initiated by
WebSci. In September 2000, WebSci obtained a $5 million line of credit from Fleet’s
predecessor-in-interest, Summit Bank. According to Fleet, by early 2001, the credit line
was drawn down and the loan was in default. In October of that year, Fleet initiated an
action against both WebSci and Tare in the Superior Court of New Jersey, seeking
judgment for the unpaid principal and interest, enforcement of Fleet’s security interest,
and appointment of a receiver. The Superior Court entered partial summary judgment in
favor of Fleet and set a hearing for Monday, July 29, 2002 to determine the amount due.
See Docket No. C-228-01 (N.J. Super. Ct. Ch. Div.). On Friday, July 26, 2002, WebSci
filed a Chapter 11 bankruptcy petition and also initiated an action in the United States
District Court for the District of New Jersey against Fleet’s corporate parent, FleetBoston
Financial Corp (“FleetBoston”). See Civ. No. 02-cv-03598 (D.N.J.). On November 13,
2002, Tare personally filed a pro se complaint against FleetBoston and individual
members of the Board of Directors. See Civ. No. 02-cv-05459 (D.N.J.). The actions,
which alleged that FleetBoston committed various antitrust, RICO, and related violations
in connection with the loan, were consolidated and administratively dismissed pending
completion of the bankruptcy proceedings and related appeals.
On July 28, 2003, the Trustee for the WebSci estate filed a motion for court
approval of a settlement between WebSci and Fleet pursuant to Rule 9019 of the Federal
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Rules of Bankruptcy Procedure. The settlement provided carve-outs from Fleet’s cash
collateral for partial payment of the WebSci estate’s unsecured creditors and full payment
of all professional and administrative fees approved by the Bankruptcy Court. In
exchange, the settlement allowed Fleet’s proof of claim in the amount of $5,908,144.54
and provided Fleet with a release and assignment of all claims that WebSci had asserted
or could have asserted against it, with the exception of those claims which had already
been asserted in the District Court action, and those claims vested in Tare personally. In
support of the motion, the Trustee filed a detailed certification describing his business
decision to settle the claims. Following the Bankruptcy Court’s August 25, 2003 hearing,
the Trustee filed a supplemental certification clarifying which claims were included in the
settlement and which were not. The hearing was continued on September 26, 2003, at
which time the Bankruptcy Court heard further argument from all parties and issued an
oral decision approving the settlement.
On September 19, 2003, Fleet filed its Plan of Liquidation (“Liquidation Plan”)
and Disclosure Statement. The Disclosure Statement fully described the nature of Tare’s
alleged claims and defenses, informed creditors of the status of the parties’ disputes, and
explained how the WebSci estate would be administered. An Amended Disclosure
Statement was filed on November 5, 2003, and approved by a Bankruptcy Court order
dated December 12, 2003. Tare then filed a motion to reconsider the approval of the
Disclosure Statement, which the Bankruptcy Court denied.
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Fleet followed the filing of its Liquidation Plan with a January 27, 2004
memorandum of law setting forth the reasons why the plan should be confirmed pursuant
to 11 U.S.C. §§ 1123 and 1129. On February 26, 2004 and March 22, 2004, the
Bankruptcy Court conducted a confirmation hearing on the Liquidation Plan. During the
course of the proceedings, Tare moved to strike the evaluation of Precision E-Consulting,
which had been retained to secure and preserve the software on WebSci’s computers,
regarding the market value of the software. He also sought to strike the testimony of the
Trustee, accusing him of having committed perjury and misconduct in his testimony and
seeking sanctions against him. On April 12, 2004, the Bankruptcy Court confirmed the
Liquidation Plan from the bench and, two weeks later, denied Tare’s motions to strike and
for sanctions. The order of confirmation was entered on May 18, 2004.
Tare appealed to the District Court, raising concerns regarding the settlement, the
Liquidation Plan and the Disclosure Statement, among other things. The District Court
held a hearing on December 19, 2005 and affirmed the rulings of the Bankruptcy Court in
an oral opinion on December 20, 2005, followed by a written order dated December 21,
2005. Tare then filed a motion for reconsideration, which was denied on March 31, 2006.
Tare now appeals.
The District Court had appellate jurisdiction under 28 U.S.C. § 158(a) and we have
jurisdiction under 28 U.S.C. § 158(d) and 28 U.S.C. § 1291. “Exercising the same
standard of review as the district court, [w]e review the bankruptcy court’s legal
determinations de novo, its factual findings for clear error and its exercise of discretion
4
for abuse thereof.” Reconstituted Comm. of Unsecured Creditors of the United
Healthcare Sys., Inc., v. State of N.J. Dept. of Labor (In re United Healthcare Sys., Inc.),
396 F.3d 247, 249 (3d Cir. 2005) (internal quotation marks and citations omitted).
Tare first challenges the District Court’s order affirming the Bankruptcy Court’s
approval of a Rule 9019 settlement between Fleet and the WebSci estate, arguing that the
settlement impermissibly pre-approved a plan of liquidation and rendered the rest of the
bankruptcy proceedings irrelevant by transferring to Fleet all of WebSci’s claims and
rights. He further claims that the factors articulated in Myers v. Martin (In re Martin), 91
F.3d 389 (3d Cir. 1996), are not applicable because the settlement falls outside the scope
of Rule 9019, but that if they are applicable, the settlement does not satisfy the Martin
factors due to the transfer of all claims and rights of the estate for no consideration.
We disagree. The settlement plainly falls within the purview of Federal Rule of
Bankruptcy Procedure 9019(a), which provides: “On motion by the trustee and after
notice and a hearing, the court may approve a compromise or settlement. Notice shall be
given to creditors, the United States trustee, the debtor, and indenture trustees as provided
in Rule 2002 and to any other entity as the court may direct.”
The Bankruptcy Court summarized the settlement as follows:
The Trustee in the terms of the settlement stated that he had entered
into the agreement with the bank whereby the debtor’s alleged setoffs and
counterclaims – that is WebSci, the debtor, alleged setoff and counterclaims
would be settled by, among other things, the bank funding a plan of orderly
liquidation and that the bank had agreed to provide sufficient funds to
satisfy all allowed administrative obligations, all allowed priority claims, if
any, and a dividend to unsecured creditors in an amount up to 50 percent of
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the total of allowed claims which would be computed at 25 percent of
allowed claims payable from the proceeds, if any, of disposition of
WebSci’s interest in Ensiva software, and other intellectual property, and 25
percent, but in no event to exceed the sum of $50,000 of the total of allowed
claims payable from the remainder of the liquidation of WebSci’s assets.
In reviewing the terms of the settlement, the Bankruptcy Court deferred to the Trustee’s
conclusion that, even if WebSci’s state court claims had merit, the quantum of damages
they would garner would at no time exceed the principal amount due to Fleet, which at
that time was in excess of $5 million. The Court concluded that the Trustee had properly
exercised his business judgment in concluding that the settlement would be in the best
interest of the estate in light of his conclusions that the litigation claims would require a
substantial investment of time and energy by the Trustee, that the estate did not have
sufficient funds to support the litigation, and that without the settlement, it is unlikely the
creditors would receive any dividend, or at last not as much as they would receive with
the settlement.
This Court has endorsed the use of settlement in administering a bankruptcy estate,
noting that “it is an unusual case in which there is not some litigation that is settled
between the representative of the estate and an adverse party.” In re Martin, 91 F.3d at
393. We review the Bankruptcy Court’s approval of a settlement for abuse of discretion,
considering whether and how the Bankruptcy Court balanced four criteria: “(1) the
probability of success in litigation; (2) the likely difficulties in collection; (3) the
complexity of the litigation involved, and the expense, inconvenience and delay
necessarily attending it; and (4) the paramount interest of the creditors.” Id.; see also In
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re Nutraquest, Inc., 434 F.3d 639, 644 (3d Cir. 2006). The Bankruptcy Court plainly
considered all of these factors in reaching its decision, and concluded that settlement of
the estate’s claims against Fleet was in the best interests of the estate. We cannot
conclude that this was an abuse of its discretion.
Tare next argues that the Bankruptcy Court erred in concluding that the Trustee
had not violated its order permitting the Trustee to retain Precision E-Consulting
(“Precision”) only for the purpose of securing WebSci’s intellectual property and not for
the purpose of providing an expert opinion on its value and/or marketability. Tare relies
heavily on the fact that at the January 27, 2004 hearing on the Trustee’s motion to retain
Precision, the Bankruptcy Court stated: “what’s before the Court is the request to secure
and preserve all proprietary information, intellectual property maintained on the computer
system prior to the auction sale. . . . not valuation or assessing marketability and not
marketing the intellectual property except by further application . . . .” A reading of the
entire transcript, however, reveals that the Bankruptcy Court was concerned with issues
of compensation for services rendered by Precision and not with its qualifications to
perform services outside of the scope of the Court’s order. We agree with the Bankruptcy
Court that this is not a ground for striking the report from being introduced into evidence,
but rather, if anything, might be relevant to the ability of Precision to be compensated for
those services which exceeded the scope of the order.
Tare’s next argument is related to the cancellation of his WebSci shares. In the
context of his Chapter 7 personal bankruptcy proceedings, the Bankruptcy Court entered
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an order approving the abandonment by the Trustee of his interest in 100% of the WebSci
capital stock, despite an offer by Fleet to pay $25,000 to Tare’s estate in exchange for
those shares. In its Liquidation Plan in WebSci’s Chapter 11 proceedings, Fleet proposed
that Tare, as the sole WebSci equity holder, would receive no distribution under the Plan,
and that all outstanding capital stock of WebSci would be extinguished and deemed
cancelled. Tare argued to the Bankruptcy Court, and argues again on appeal, that the
Court’s order in his Chapter 7 proceedings should have precluded the cancellation of his
shares in the context of the Chapter 11 proceedings under the principles of res judicata.
In reviewing Fleet’s proposed liquidation plan, the Bankruptcy Court noted that
while extinguishment of capital stock is not required as a part of a liquidation plan, it is
permitted so long as it is deemed to be fair and equitable and proposed in good faith. See
11 U.S.C. §§ 1129(a)(3), (b)(2). After considering Tare’s objections, the Court held that
the cancellation of WebSci’s shares under the plan was appropriate in light of the absolute
priority rule, that it did not contravene the plain language of the Rule 9019 settlement,
that it was proposed in good faith, and that it was not barred by the Court’s prior order in
Tare’s Chapter 7 proceedings. We agree with the Bankruptcy Court’s analysis,
particularly in light of the absolute priority rule, which requires that senior classes receive
full compensation for their claims before other classes can participate. Because Tare, as a
shareholder, would have been junior to all other claimants, he could not have retained the
stock or any rights arising from its ownership. See 11 U.S.C. § 1129(b)(2)(B)(ii);
Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 202 (1988); In re Resorts Int’l, 145
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B.R. 412, 483 (Bankr. D.N.J. 1990) (explaining that implicit in the absolute priority rule
is that stockholders cannot participate in a reorganization plan unless it is established that
the debtor is insolvent).
Next Tare alleges that the Bankruptcy Court relied on an erroneous liquidation
analysis in determining the value of the estate; specifically, in not including his legal
claims against Fleet as assets of the estate, and in assigning no value to WebSci’s
intellectual property or its overseas offices. First Tare claims that “it is undisputed that
[the Trustee] had valued just the claims against Fleet to have a value of up to the claims
asserted by Fleet against the estate (approx. $5 Million).” This statement misrepresents
the Trustee’s testimony, which was that he did not believe that the estate recovery would
exceed its debt of over $5 million to Fleet. In any event, this testimony was in reference
to those claims which were settled pursuant to the Rule 9019 settlement, and accordingly,
would not come into play in the liquidation analysis.
With respect to the valuation of the intellectual property, the Bankruptcy Court
relied on the expert report of Precision E-Consulting, which Tare cites favorably in his
brief. According to the report, WebSci’s product would require a significant investment
of time and money (between $1-2 million) to make it marketable and would require “at
least twice as much to take the product to market.” Because neither Tare nor the Trustee
had been able to find a buyer for the software, and because it could not be marketed in its
current state, the Liquidation Plan assigned no value to the software. With respect to the
value of the overseas offices, the Bankruptcy Court found that because no documentation
9
or verification of the existence or contents of these offices had been presented to the
Court, it was appropriate for Fleet not to assign a monetary value to these offices. Based
on the evidence presented to the Bankruptcy Court, we cannot conclude that its findings
were clearly erroneous, nor can we overturn its valuation of the estate.
In addition to his appeal of the Bankruptcy Court’s rulings, Tare also challenges
the District Court’s denial of his motions to supplement the record and for reconsideration
of the denial. In September 2005, nine months after briefing in the appeal closed, Tare
filed a motion in the District Court to supplement the record on appeal, making various
allegations of fraud and concealment regarding the former Chapter 7 Trustee appointed in
Tare’s personal bankruptcy case, the Chapter 11 Trustee appointed in WebSci’s
bankruptcy case, and the Chapter 11 Trustee’s attorney. The District Court held that it
could not consider new evidence that was not part of the factual record before the
Bankruptcy Court. See Fed. R. Bankr. P. 8006 (“The record on appeal shall include the
items so designated by the parties, the notice of appeal, the judgment, order, or decree
appealed from, and any opinion, findings of fact, and conclusions of law of the court.”).
The Court further held that, because Appellant was unable to demonstrate that the
evidence he sought to supplement the record with could not have been discovered during
the bankruptcy proceedings, it could not grant his motion to supplement the record. See
Bohus v. Beloff, 950 F.2d 919, 930 (3d Cir. 1991) (applying “newly discovered
evidence” standard of Rule 60(b)(2)).
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Tare alleges that the District Court erred in ignoring the conflicts raised in his
motion to supplement the record and in holding that Tare had not exercised due diligence
in discovering the conflicts. For the latter point, he relies on Burtch v. Gantz (In re
Mushroom Transp. Co.), 382 F.3d 325 (3d Cir. 2004), for the proposition that he could
not have been expected to discover these conflicts given their fraudulent concealment by
fiduciaries. He further argues that, in reviewing his motion for reconsideration, the
District Court for the first time considered the merits of all of the concealed conflicts
without separating the newly discovered conflicts from those presented earlier. Neither
of these arguments is availing. Our decision in Mushroom relied in part on the fact that
the lawyer-client relationship “entails such a presumptive level of trust in the fiduciary by
the principal that it may take a ‘smoking gun’ to excite searching inquiry on the
principal’s part into its fiduciary’s
behavior.” 382 F.3d at 343. The record amply reflects
that no such relationship existed between Tare and the Trustee. Furthermore, Tare avers
that he discovered the alleged conflicts by reviewing publicly available dockets and court
filings. There is no reason these conflicts could not have been discovered during the
pendency of the Bankruptcy Court proceedings. See
Bohus, 950 F.2d at 930. With
respect to his criticism of the District Court’s analysis of his claims of conflict, the
District Court clearly concluded that, with respect to those conflicts, which were
presented to the Bankruptcy Court, Tare had not demonstrated that they were conflicts
barred under the Bankruptcy Rules, and with respect to those that were not raised in the
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Bankruptcy Court, Tare could not raise them for the first time on appeal. We find no
error in the District Court’s treatment of these claims.1
Having considered all of the arguments raised by Tare in his lengthy appeal and
reply briefs, we conclude that neither the Bankruptcy Court nor the District Court erred,
and accordingly, we will affirm.
1
We note that Tare previously sought removal of the Chapter 11 Trustee, alleging that
he suffered from various actual and potential conflicts of interest. We affirmed the
District Court’s affirmance of the Bankruptcy Court’s denial of Tare’s motion on
November 18, 2003. See C.A. No. 03-1887 (3d Cir. 2003).
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