DOUGLAS D. DODD, Bankruptcy Judge.
Chapter 7 trustee Martin A. Schott sued
The compromise will bring the estate $405,000 and terminate pending litigation in federal and state courts.
During a day-long evidentiary hearing on the trustee's motion, the court heard testimony from Betsy Muller, debtor's sister and president and treasurer of Pedicons; Jason MacMorran, a certified public accountant and certified valuation analyst; and Vanessa Claiborne, a certified public accountant and accredited senior appraiser. The debtor also testified and examined the trustee.
The trustee as the moving party bore the burden of proof.
A short account of pre-bankruptcy state court litigation between the debtor and her father, Charles Raborn, is helpful in evaluating the trustee's settlement proposal and the debtor's prolix objection.
Dr. Charles Raborn, a physician, established the KidMed Clinics to provide pediatric medical services to economically disadvantaged families. Each clinic initially had its own Medicaid provider number under which it billed and received reimbursements for services. Betsy Muller testified that in 2005 Dr. Raborn terminated the individual provider numbers for the clinics and consolidated all of the Medicaid and insurance billing through the Pedicons provider number. All of Pedicons income now derives from managing the KidMed pediatric clinics.
Dr. Raborn sold the debtor the Pedicons stock in 2006 but in 2013, sued her in a Louisiana state court to dissolve the stock sale when she failed to pay the purchase price.
Rather than concluding the state court proceedings, time and again Ms. Raborn unsuccessfully has sought to relitigate in the bankruptcy court issues she raised—or could have raised—in the state court prior to its judgment.
Despite the grant of stay relief, no party sought to provoke a hearing in the state court on the debtor's pending motions before this court converted the chapter 11 case to a chapter 7 liquidation nearly one year later.
Not long after his appointment, the trustee sued Charles Raborn in this court to recover the stock lost in the state court judgment pursuant to 11 U.S.C. §548.
During the evidentiary hearing on the trustee's motion to compromise, the trustee testified that the estate has insufficient assets to pay creditors' claims in full. The case record confirms his assertion.
The debtor alone, a lawyer appearing pro se, opposed the proposed settlement.
These objections all are addressed more fully in this opinion.
Not content with objecting, the debtor countered with her own offer for the Pedicons stock and dismissal of litigation. Her proposal also demands that her parents dismiss a state court lawsuit in which they obtained a restraining order against her.
The debtor's standing to object to the compromise is an issue that precedes analysis of the debtor's objections.
The debtor bore the burden of proving her standing
The evidence and record of the main case support a finding that Susan Raborn lacks standing to oppose the settlement because her estate is insolvent.
Proofs of claim totaling $528,127.86 were filed before the bar date and the debtor's schedules reflect nonexempt assets of minimal value available for paying those claims. The trustee also argued in closing that the settlement proceeds will be the only significant asset available to pay claims and costs of administering the case.
The evidence established that the 245 shares of Pedicons stock were worth between $266,228.00 (the value determined by the trustee's expert witness) and $147,000.00 (the value determined by the Settling Parties' expert witness).
The debtor objected to the parties' assigning a value of $207,000 to the stock for settlement purposes but offered no evidence to suggest that it was worth more than any values assigned by either side's expert.
The evidence and case record establish that the prepetition claims against the estate far exceed the assets available to pay those claims. Without the settlement, the debtor's estate has few assets worthy of administration, unless the debtor prevails on her claim of owning the house.
The evidence established that Susan Raborn will not receive anything from the estate. 11 U.S.C. '726(a)(6); see Solomon, below. Thus she lacks standing to object to the settlement.
The chapter 7 debtor's standing aside, the court still must determine whether the proposed settlement is in the best interest of the estate and creditors. Bankruptcy courts may approve a compromise or settlement "only when the settlement is fair and equitable and in the best interest of the estate."
Though it is "unnecessary to conduct a mini-trial to determine the probable outcome of any claims waived in the settlement,"
First, the trustee has sued in this court to set aside a state court judgment dissolving Charles Raborn's sale of Pedicons stock to the debtor. The lawsuit has not progressed beyond initial pleadings so the court has not ruled on the validity of the trustee's claims. Regardless, the Settling Parties represent that they will litigate the trustee's complaint vigorously should the court not approve the proposed settlement. Discounting the possibility that the trustee will not prevail would be unwise but even pursuing the claim to a final, non-appealable judgment in the trustee's favor would take significant time and consume resources. The estate lacks any resources to pay the trustee to litigate the adversary proceeding.
Second, victory for the trustee in his fraudulent transfer lawsuit would yield little more than the settlement amount. The estate would at best obtain a judgment for the stock or for the amount the most optimistic expert valuation assigned to it: $270,000, not considering attorney fees and costs.
All the objections in the debtor's catalog
The debtor contends that the Rooker-Feldman doctrine
Rooker Feldman does not apply because settlement does not revise or alter the state court's ruling: the doctrine does not bar the trustee from pursuing a settlement.
The debtor also argues that her father lacks capacity to settle the trustee's lawsuit
The debtor also argued in court that the trustee's valuation was performed by a certified public accountant whose employment was not approved by the court pursuant to Local Rule 2014-1. The case record discredits that objection.
The trustee moved on November 10, 2016, to employ the firm of Postlethwaite & Netterville,
The debtor next contends that the trustee did not take into account the value of the KidMed clinics in arriving at a value for the Pedicons stock. The evidence disproved her claim.
Experts representing the trustee and Settling Parties testified about the value of the Pedicons stock. Both maintained on cross-examination by the debtor that the KidMed clinics have no independent value. The trustee's witness explained that any value associated with the clinics is captured in the cash flows they generate, which he took into account in assigning a value to the Pedicons stock.
The debtor did not introduce any evidence to contradict the two experts. Her objection on this ground is overruled.
The debtor argues that the administrative expense claims filed by her sisters and brother-in-law are invalid. The claims are being withdrawn as part of the settlement, which moots the objection.
The debtor argues, as she did in the state court litigation and many times in many filings in this court, that transfer restrictions in Pedicons' articles of incorporation prohibited the state court from awarding the stock to Charles Raborn.
The articles were not admitted into evidence at the hearing so the court need not address the specific transfer restrictions.
The state court's judgment against Susan Raborn forecloses this objection. The Rooker-Feldman doctrine "forecloses not only straightforward appeals but also more indirect attempts by federal plaintiffs to undermine state court decisions."
Even assuming, without finding, that the articles contained transfer restrictions applicable on the facts of the debtor's dispute with her father, the restrictions are inapplicable to the settlement because Betsy Muller and Karen Rogers, the only two other Pedicons shareholders who could assert the restriction, have agreed to the settlement. "A share transfer restriction may be waived by the corporation, shareholders or other persons. Waiver of a share transfer restriction may occur by . . . consenting to transfers."
Ms. Raborn's penultimate objection
The debtor also protests that the settlement compromises future claims she may not know about with parties she may not know exist. This is without basis as well. The settlement agreement recites that the estate is releasing only claims that existed as of the petition date. The trustee's testimony on cross-examination by the debtor confirmed that he cannot compromise claims that did not exist as of the petition date.
The debtor's objection on this ground is meritless.
The debtor's objection to the trustee's proposed release of the estate's claim to the house in which she resides is unclear, but her questions to the trustee on cross examination suggest that she objects to the settlement's disposing of any claim she may have to the house she resides in.
The trustee proposes to release all parties identified in the settlement document from all the debtor's prepetition claims and causes of action to, and defenses to ownership of, the house in which she lives.
Ms. Raborn's original Schedule A lists the house at 1323 Chippenham Drive in Baton Rouge as her property,
The debtor has acknowledged that the public record reflects that the house belongs to the trust. However, she insists that the house is her property based on Louisiana Civil Code article 1839.
Ms. Raborn's complaint concerning the trustee's release of the estate's claims to the house leaves her on the horns of a dilemma. If the house actually belonged to the debtor at the commencement of her bankruptcy, Bankruptcy Code section 541 would render it property of the estate subject to the trustee's administration. Were those the facts, the trustee testified that he would sell the house, pay the debtor any homestead exemption to which she may be entitled, and use the balance of sales proceeds to pay Ms. Raborn's creditors.
The debtor persists in urging this objection but in the end it is not material to the court's analysis of the wisdom of the settlement. The trustee has concluded that the property does not belong to the bankruptcy estate so relinquishing any claim to it as part of the settlement is reasonable. The debtor's objection is meritless.
The debtor's objection
First, the debtor counters that instead of settling by relinquishing claims to the Pedicons stock, the escrowed Pedicons dividends could be used to pay Dr. Charles Raborn and reacquire the 24.5% interest in Pedicons despite the state trial court judgment. Ms. Raborn cites no law and does not explain how the trustee could accomplish that without prevailing in his fraudulent transfer lawsuit or on appeal of the state court's judgment. Either course is expensive and presents risks to the estate and creditors. Charles Raborn has been adjudicated the owner of the stock and has not made an offer to sell the stock back to his daughter; neither the debtor nor the trustee can compel him to relinquish claim to it without his consent or a final judgment in the trustee's favor in either this or the state appellate courts.
Second, even if the trustee were able to recover the stock, the debtor would have him retain it and use dividends to pay claims and her daughter's medical school tuition.
Finally, the proposal betrays a complete misapprehension of the bankruptcy process. Chapter 7 estates are not meant to linger for years curating property to pay creditors. "Chapter 7 of the Bankruptcy Code is titled 'Liquidation,' and the title fully expresses the purpose of the chapter's provisions. Chapter 7 provides the mechanism for taking control of the property of the debtor, selling it and distributing the proceeds to creditors in accordance with the distribution scheme of the Code. It is the basic recovery provided for by the Bankruptcy Code."
Ms. Raborn's proposal, like the chapter 11 plan she proposed prior to conversion, promises no return for creditors who instead will bear all the risk, experience all the delay and suffer all the adverse consequences of litigation with the Settling Parties absent approval of the compromise.
To summarize, after years of litigation culminating in a loss of her stock in a family medical management company, the debtor filed chapter 11 in the hope of revisiting the state court's judgment. Nearly a year and a half after the bankruptcy commenced, the chapter 7 trustee has succeeded in negotiating at minimal cost a settlement that realizes most of the value the debtor reasonably could have hoped to achieve had she prevailed in that state court litigation, while eliminating the risk of loss to the estate and creditors. The debtor cavils about a compromise that leaves the estate better off than the debtor left it when the court converted the case to a chapter 7 liquidation. Her objections are meritless: indeed, many are frivolous.
The trustee proved that the proposed compromise is fair and equitable and in the best interest of all the creditors. Even assuming the debtor had standing, she offered no evidence suggesting otherwise.
