Laura K. Grandy, United States Bankruptcy Judge.
This matter is before the Court on Trustee Robert T. Bruegge's ("Trustee's") Application to Compromise the Chapter 7 Debtor's interest in a class action lawsuit and the Debtor's objection thereto. For the reasons discussed below, the Application is denied.
Debtor Alan Presswood ("Debtor") filed a Chapter 7 petition on May 29, 2012 and movant Robert T. Bruegge was appointed Trustee of the bankruptcy estate. At the time that the petition was filed, the Debtor did not schedule or otherwise disclose any pre-petition claims or causes of action in which he may have an interest.
On February 25, 2015, Alan Presswood, D.C., P.C.
On June 25, 2015, the Debtor filed an amended Schedule B with this Court in which he valued his interest in the Pernix litigation at $500. The Court notes that this was the first time that the Debtor disclosed his interest in the pre-petition causes of action against Pernix, despite the fact that the class action suit had been pending for several months. In addition to the amended Schedule B, the Debtor also filed an amended Schedule C in which he claimed a $500 exemption in the Pernix causes of action pursuant to 735 ILCS 5/12-1001(b) (See Doc. # 72).
On September 14, 2015, the Trustee filed the instant Application to Compromise the bankruptcy estate's claims against Pernix. The proposed settlement provides, in pertinent part:
See Application to Compromise Controversy and Settlement Agreement, p.6, ¶ 3-4 (Doc. # 66). Pursuant to the agreement, the Trustee requests in his Application that upon payment of the settlement amount, the Debtor be ordered to dismiss the Pernix litigation with prejudice. Alternatively, the Trustee asks that he be authorized to dismiss the action on the Debtor's behalf if the Debtor fails to do so.
The Application and proposed settlement were served on all creditors and parties in interest. The only objection was raised by the Debtor, who asserts that the proposed settlement amount grossly exceeds the value of the claim. He contends that the cause of action is worth no more than $500, is fully exempt and, therefore,
Upon the filing of a bankruptcy petition, an estate is created that is comprised of, among other things, "all legal or equitable interest of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). These "legal and equitable interests" include any causes of action that belonged to the debtor at the time that the bankruptcy case was filed. Parker v. Wendy's Int'l, Inc., 365 F.3d 1268, 1272 (11th Cir. 2004); In re Ozark Restaurant Equipment Co., Inc., 816 F.2d 1222, 1225 (8th Cir. 1987). Accordingly, "a trustee, as the representative of the bankruptcy estate, is the proper party in interest and is the only party in interest to prosecute causes of action belonging to the estate." Parker, 365 F.3d at 1272. See also Matter of New Era, Inc., 135 F.3d 1206, 1209 (7th Cir. 1998) ("When a debtor has a trustee in bankruptcy ... the trustee has, with immaterial exceptions, the exclusive right to represent the debtor in court."); In re Seven Seas Petroleum, 522 F.3d 575, 584 (5th Cir. 2008) ("If a claim belongs to the estate, then the bankruptcy trustee has exclusive standing to assert it."). This right of representation by the Trustee extends to any interest that the debtor may have in class action litigation. In re Merrill Lynch & Co., Inc. Research Reports Securities Litigation, 375 B.R. 719, 725 (S.D.N.Y 2007). See also Morlan v. Universal Guar. Life Ins. Co., 298 F.3d 609, 616 (7th Cir. 2002) (upon filing Chapter 7 petition, portion of debtor's uncertified class action claim "fell into the estate in bankruptcy").
Because the cause of action belongs to the Trustee, a Chapter 7 debtor only has standing to challenge a proposed settlement of the claim under limited circumstances. The question of whether a party has standing is a threshold inquiry in every federal case. In re Thomas, 469 B.R. 915 (10th Cir. 2012). The doctrine of standing limits federal court authority by requiring the courts to satisfy themselves that a plaintiff has "`alleged such a personal stake in the outcome of the controversy' as to warrant his invocation of federal-court jurisdiction'" Summers v. Earth Island Institute, 555 U.S. 488, 493, 129 S.Ct. 1142, 1149, 173 L.Ed.2d 1 (2009) (quoting Warth v. Seldin, 422 U.S. 490, 500, 95 S.Ct. 2197, 2205, 45 L.Ed.2d 343 (1975)). Standing inquiries invoke both constitutional and prudential considerations. Warth, 422 U.S. at 500, 95 S.Ct. 2197.
Constitutional standing stems from the "case or controversy" requirement of Article III of the Constitution. A plaintiff has Article III standing if and only if
In re GT Automation Group, Inc., 828 F.3d 602, 605 (7th Cir. 2016) (internal citations omitted) (quoting United States v. Windsor, ___ U.S. ___, 133 S.Ct. 2675, 2685-86, 186 L.Ed.2d 808 (2013)). The Debtor asserts that he has Article III
However, while a federal litigant must certainly possess Article III standing, the doctrine of standing in the bankruptcy context also encompasses prudential limitations. Bankruptcy standing, a form of prudential standing, is narrower than Article III standing. In re Cult Awareness Network, Inc., 151 F.3d 605, 607 (7th Cir, 1998).
In re Cult Awareness Network, Inc., 151 F.3d at 607-08 (emphasis added). See also Andreuccetti, 975 F.2d at 417; In re Nangle, 288 B.R. 213, 216 (8th Cir. BAP 2003).
The "pecuniary interest" requirement was adopted in an effort to ensure that bankruptcy cases are processed expeditiously. As the Fourth Circuit explained:
Richman v. First Woman's Bank (Matter of Richman), 104 F.3d 654, 656-57 (4th Cir. 1997). See also In re Ray, 597 F.3d 871, 874 (7th Cir. 2010) (purpose of requiring a bankruptcy party to have a pecuniary interest in the outcome of the case is to prevent unnecessary, protracted litigation).
Here, the Trustee argues that because the Debtor's only interest in the TCPA litigation is the $500 exemption that he has claimed pursuant to 735 ILCS 5/12-1001(b), he has no pecuniary interest in the outcome of the case and, therefore, no standing to challenge the proposed settlement. However, the Trustee's argument is premised on an assumption that the TCPA claim is worth more than the Debtor's claimed exemption. If, as posited by the Debtor on his amended Schedule C, the cause of action is actually worth no more than the claimed exemption, the issue becomes not whether the Debtor has standing to challenge the Trustee's proposed settlement but, rather, whether the Trustee has standing to settle a suit that is not property of the bankruptcy estate. See In re Ball (Ball I), 201 B.R. 204, 208 (Bankr. N.D. Ill. 1996) ("If the full value of the Debtor's interest in the lawsuit has been excluded from the estate by the exemption, the estate has no interest to settle."). Accordingly, it is necessary for the Court to determine the value of the Debtor's interest in the TCPA claim.
In order to assess the value of the cause of action, it is first necessary to have a general understanding of the TCPA and the remedies it provides. The TCPA forbids the use of any telephone facsimile machine, computer, or other device to send an unsolicited advertisement to a telephone facsimile machine. 47 U.S.C. § 227(b)(1)(C). It allows a plaintiff to recover the greater of their actual damages or $500 for each violation. 47 U.S.C. § 227(b)(3)(B). These damages may be trebled if the Court determines that the defendant knowingly or willfully violated the Act. 47 U.S.C. § 227(b)(3). In addition, the TCPA also affords the plaintiff the right to injunctive relief. 47 U.S.C. § 227(b)(3)(A).
While the parties agree that the TCPA claim in this case is based on two allegedly unsolicited facsimile transmissions, the parties have vastly disparate assessments of the claim's value. The Trustee has accepted an offer to settle the TCPA litigation for $10,000. In support of his Application to Compromise Controversy, the Trustee submitted the affidavit of Mark Pfeiffer ("Pfeiffer"), bankruptcy counsel for Pernix, in which he explains the basis for the $10,000 settlement figure. In his affidavit, Pfeiffer avers that if the Debtor were successful on his TCPA claim, he would recover at least $1,000. Affidavit of Mark Pfeiffer at ¶ 31. These damages could be trebled to $3,000 if the Court were to find that the violations were knowing or willful. Id. In addition, the original TCPA complaint asserted claims for both
Conversely, the Debtor contends that the value of the claim is substantially lower than $10,000. He maintains that the cause of action has a value of no more than $500. In support of this value, the Debtor offered the testimony of Noah Wood ("Wood"), a TCPA class action attorney. While conceding that the two "junk faxes" in question could have a value of up to $1,500 a piece, Mr. Wood testified that in his experience, it was unlikely for a plaintiff to actually recover such an amount. He assessed the faxes' fair market value to be no more than $250 each.
Further, the Debtor asserts both through his filings and the testimony of Wood that the proposed settlement offer represents an attempt by Pernix to "buy off" the class representative in order to derail the class action litigation. The Debtor is the only named plaintiff in the class action suit and the statute of limitations has expired. Thus, another putative class member cannot be substituted as the class representative. Further, a bankruptcy trustee is, as a general rule, not a suitable class representative due to conflict of interest concerns. Dechert v. Cadle Co., 333 F.3d 801 (7th Cir. 2003). Therefore, unless the Court finds that TCPA claim is wholly exempt (i.e. has a value of $500 or less), the effect of the Trustee's settlement will be to defeat the class action litigation in its entirety.
The proper analysis for valuing claims was set forth by the Seventh Circuit in In re Polis, 217 F.3d 899 (7th Cir.2000). In that case the debtor, after filing her Chapter 7 petition, learned that she held a possible cause of action under the Truth in Lending Act (TILA) and the Illinois Consumer Protection statute against Getaways, a travel service provider. The debtor claimed a $900 exemption in the cause of action and valued it at $0. In addition to claiming an exemption in the TILA claim, the debtor filed a class action lawsuit against Getaways in which she was the first and only named plaintiff.
The day after the class action complaint was filed, the debtor received a discharge and one week later, her case was closed. Shortly thereafter both the trustee and Getaways moved to reopen the case, asserting that the cause of action was worth more than $900 and, therefore, had been improperly exempted.
The Polis Court began its discussion by noting that pursuant to § 522(a)(2) of the Bankruptcy Code, the term "value" for exemption purposes means "fair market value" of the property sought to be exempted "on the date the petition for bankruptcy was filed, unless the debtor's estate acquires the property later." Id. at 902, citing 11 U.S.C. § 522(a)(2). According to the Court, the "fair market value" of a
Id. at 903. See also Matter of Xonics Photochemical, Inc., 841 F.2d 198, 200 (7th Cir. 1988) (courts must take into account the contingent value of assets when considering their value).
Before starting its analysis, the Court notes that there were evidentiary irregularities in this case that made it difficult to fully evaluate the claim. As indicated above, the Trustee offered the affidavit of Pfeiffer in support of the proposed settlement. Although Pfeiffer was present at the hearing December 2, 2015 and the Trustee initially offered to have him testify in greater detail as to the averments in the affidavit, the Trustee chose to "stand on the affidavit" after Debtor's counsel represented that he had no objection to it.
At a subsequent hearing on March 15, 2016, the Debtor, with leave of Court, offered both his own testimony and that of Wood.
Turning to the evidence in this case, Pfeiffer asserts in his affidavit that if the Debtor's TCPA case were successful, the Debtor would recover at least $1,000, which represents the maximum statutory recovery available for the violations at issue.
Finally, Pfeiffer states in his affidavit that the proposed settlement includes a release of the request for injunctive relief in the TCPA case. Specifically, he states that "[t]he threat of injunctive relief pose[s] a potentially significant and disruptive risk that is difficult to quantify but certainly exposes Pernix to risk of injury far in excess of the $10,000 settlement payment." Affidavit at ¶ 35. The Court does not find this averment credible. There is no explanation as to how the avoidance of an injunction as to this individual Debtor could possibly have a value in excess of $10,000.
Conversely, Wood, an attorney with extensive TCPA litigation experience, testified that the $250 per facsimile value ascribed by the Debtor was reasonable in the context of individual TCPA claims.
Further, the Court has serious concerns that the settlement offer in this case is merely an attempt to decapitate the putative class and thwart the class action litigation. On its face, the settlement agreement purports to settle only the estate's claims against Pernix and not those of any putative class members, to the extent that they exist. However, the practical effect of the settlement is actually dismissal of the class action suit in its entirety. The Debtor is, at present, the sole class member. If his claim is dismissed, there is no other class representative to step into his shoes and, because the statute of limitations has expired, the action cannot subsequently be refiled by another putative class member.
It is well established that a class action defendant cannot "buy off" a class representative where a motion for class certification has been made but not ruled upon. "Otherwise, the defendant could delay the action indefinitely by paying off each class representative in succession." Primax Recoveries, Inc. v. Sevilla, 324 F.3d 544, 546-47 (7th Cir. 2003). See also Alpern v. UtiliCorp. United, Inc., 84 F.3d 1525, 1539 (8th Cir. 1996) (defendant cannot "buy off" class representatives until class certification has been "properly denied" on the merits in order to "protect[] a class representative's responsibilities to putative class members from being terminated by a defendant's attempts to pay off the representative's claims"). As the Seventh Circuit recently stated in Chapman v. First Index, Inc., 796 F.3d 783, 787 (7th Cir. 2015), in class action cases "[s]ettlement proposals designed to decapitate the class upset the incentive structure of the litigation by separating the representative's interests from those of other class members." Id.
Because of these concerns, settlement offers related to class action claims must be carefully scrutinized. For instance, in Polis, the Court explained that while a rejected settlement offer is normally good evidence of a claim's minimum value, this is often not the case in the context of class action litigation. It observed:
Id. at 904.
In the instant case, the Debtor is the only named plaintiff and the statute of limitations has expired. By offering to settle the estate's claim for $10,000, which is over three times more than the highest possible recovery under the relevant sections of the TCPA and twenty times the
Because the Court finds that the Debtor's whole interest in the TCPA claim has been exempted, it is excluded from the bankruptcy estate and beyond the reach of the Trustee.
SEE WRITTEN ORDER
