Christopher J. Panos, United States Bankruptcy Judge.
Upon consideration of the Motion to Approve Settlement Agreement and Mutual Release (Docket No. 109) (the "Motion") filed by Janice Marsh, the chapter 7 trustee (the "Trustee") of the estate of Grove Instruments, Inc. (the "Debtor" or the "Estate"), pursuant to which she seeks approval of the Settlement Agreement and Mutual Release (Docket No. 108) (the "Settlement Agreement"), the brief filed in support by Arthur Combs ("Combs"),
No party in interest has specifically objected to the economic terms of the Settlement Agreement as it relates to the settlement of claims asserted on behalf of the estate.
The Trustee filed an eleven-count complaint (the "Complaint") in this matter, commencing adversary proceeding no. 16-04011 (the "Adversary Proceeding") and asserting claims against former directors Combs, who also served as the Debtor's CEO, Schorr Berman ("Berman"), Richard Burtt ("Burtt"), Donald Jones ("Jones"), and Robert Pueura ("Pueura") (collectively, the "Settling Parties"), along with Cammett and Mark Fuller,
Combs has filed a proof of claim against the Estate asserting a claim for the Debtor's alleged breach of a severance agreement
All Objecting Parties, with the exception of Sherwood, are plaintiffs in a pending action against Combs in the United States District Court for the Middle District of Florida (Case No. 2:15-cv-00567-JES-MRM) (the "Securities Action") in which they have filed a four-count complaint. In that action, the Objecting Parties have asserted claims against Combs for (i) damages for violations of § 10(b) of the Exchange Act, 15 U.S.C. § 78j(b) and Rule 10b-5 (the "Federal Statutory Fraud Claim"), (ii) damages the conduct of the Debtor under § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a) (the "Federal Statutory Controlling Person Claim"), (iii) rescission of the purchases of the Debtor's securities pursuant to Florida's Securities and Investor Protection Act, Fla. Stat. § 517,301 (the "Florida Statutory Rescission Claim"), and (iv) damages for negligent misrepresentations and omissions (the "Florida Common Law Negligence Claim"). Many of the allegations against Combs appear to arise from representations contained in the Debtor's offering memorandums issued in connection with the sale of its Class B, B-1, B-2 and Convertible Promissory Notes Securities.
Additionally all of the Objecting Parties have filed proofs of claim against the Estate based on various convertible promissory notes and/or stock purchase agreements. Each of the claims of the Securities Plaintiffs indicates that the basis for the claim is "Improper Sale of Securities," attaching copies of the underlying convertible notes and stock purchase agreements, as applicable, which are also the subject of the Securities Action. The Trustee filed an objection to all of the claims of the Securities Plaintiffs, other than Cammett's (Docket No. 157) (the "Claim Objection"). Through the Claim Objection, the Trustee sought to disallow the claims of Jacqueline Strohl (Claim No. 21), Wicka (Claim No. 22), Eric Strohl (Claim No. 23), Heron (Claim No. 24), and Offshack (Claim No. 25) in their entirety and reduce the claims of the Myles Strohl ESBT Trust (Claim No. 26) and Myles J. Strohl (Claim No. 27) to $825,000, respectively. The Trustee asserted all such claims reflected equity interests in the Debtor, not creditor claims. The Securities Plaintiffs, whose claims were objected to, filed a response, adopting the position of the Trustee, see Response of Certain Claimants to the Claim Objection (Docket No. 178), and the Court sustained the Claim Objection as unopposed (Docket No. 180) (the "Claim Objection Order").
The Trustee has reached a resolution with the Settling Parties, a subset of the
The parties agree that there is no controlling precedent established in the First Circuit that would dictate the standard under which the requested bar order should be considered by this Court.
The Trustee and Settling Parties advocate that this Court adopt the standards that they characterize have been adopted by the Eleventh Circuit Court of Appeals in Munford and its progeny. See In re Munford, Inc., 97 F.3d 449, 453 (11th Cir. 1996); Apps v. Morrison (In re Superior Homes & Invs.), 521 Fed.Appx. 895, 898 (11th Cir. 2013); Romagosa v. Thomas (In re Van Diepen, P.A.), 236 Fed.Appx. 498, 503 (11th Cir. 2007). They argue that if prosecution of the third-party claims to be enjoined could conceivably have any effect on administration of the bankruptcy estate, the Court has jurisdiction and authority to enter a bar order where it would be "fair and equitable." These parties also find support for their position in rulings of the Second and Seventh Circuit Courts of Appeals. See Lautenberg Found. v. Picard (In re Bernard L. Madoff Inv. Sec.), 512 Fed.Appx. 18, 20 (2d Cir. 2013) (finding § 105(a) should be "construed liberally to enjoin suits that might impede the reorganization process — or, as here, the process of liquidation.... Liberal construction reflects the underlying principle of preserving the debtor's estate for the creditors and funneling claims to one proceeding in the bankruptcy court.... § 105(a) is properly used to enjoin creditors' lawsuits against third parties where the injunction plays an important part in the reorganization plan or where the action to be enjoined will have an immediate adverse economic consequence for the debtor's estate") (internal quotation marks and citations omitted)
The Objecting Parties argue that this Court lacks subject matter jurisdiction or adjudicatory authority to enter the requested bar order and that the precedents cited by the Trustee and Settling Parties are distinguishable and are inconsistent with the approach taken in the First Circuit with respect to consideration of bar orders proposed in chapter 11 plans. See, e.g., Underwriters at Lloyd's, London v. Chancellor Corp. (In re Adley), 333 B.R. 587, 610-11 (Bankr. D. Mass. 2005) (referencing cases within the First Circuit, including Monarch Life Ins. Co. v. Ropes & Gray, 65 F.3d 973, 983-84 (1st Cir. 1995)). The Objecting Parties further argue that, even if this Court has jurisdiction and authority to bar their independent claims against third parties, doing so would be unfair and inequitable. They assert that the resulting prejudice to the Objecting Parties cannot be justified when viewed against the amount of the proposed settlement versus potential available insurance proceeds that might be available to pay both the Trustee's claims and the claims of the Objecting Parties, the limited participation by the Objecting Parties in the proceeds of that settlement, the lack of any support by the affected Objecting Parties for the proposed settlement, and the limited "relatedness" of the independent claims of the Objecting Parties. The Objecting Parties also assert that the Estate, as a claimant against former directors and officers, has no greater rights to the proceeds of insurance coverage obtained by the Debtor than the rights of the Objecting Parties and that possible competition between the Estate and the Objecting Parties for limited assets that may be available to satisfy a judgment cannot support imposition of a bar order or even a temporary stay. See Boles v. Turner (In re Enivid, Inc.), 364 B.R. 139, 157-58 (Bankr. D. Mass. 2007) (no basis to find that "Plan Trustees' claims for breaches of the fiduciary duties of care and loyalty take precedence over the claims and settlements of
"While 11 U.S.C. § 105(a) does grant the bankruptcy court broad powers to issue any order `necessary or appropriate to carry out the provisions of this title', it is an extraordinary exercise of discretion to use that power to stay a third party action not involving the debtor." Enivid, 364 B.R. at 149 (quoting In re G.S.F. Corp., 938 F.2d at 1474 (1st Cir. 1991). Most commonly, bankruptcy courts have considered requests for entry of orders "releasing," "staying," "channeling," or "barring" claims by non-debtor entities against other non-debtor entities in the context of confirmation of chapter 11 plans of reorganization. Whether and under what circumstances Chapter 11 plans and related confirmation orders may provide injunctions or "bar orders" that effectively release claims between third parties over the objection of affected parties is the subject of great debate and conflicting circuit court authority. See 8 COLLIER ON BANKRUPTCY ¶ 1141.02[5] (16th ed. 2017). Courts that "have expressed a willingness to approve the plan provisions in certain circumstances," In re Quincy Med. Ctr., Inc., No. 11-16394, 2011 WL 5592907 (Bankr. D. Mass. Nov. 16, 2011), include the Second, Third, Fourth, Sixth, Seventh, and Eleventh Circuits, see In re Drexel Burnham Lambert Grp., 960 F.2d 285 (2d Cir. 1992); Gilman v. Continental Airlines (In re Continental Airlines), 203 F.3d 203 (3d Cir. 2000); Menard-Sanford (In re A.H. Robins Co.), 880 F.2d 694 (4th Cir. 1989); Class Five Nev. Claimants v. Dow Corning Corp. (In re Dow Corning Corp.), 280 F.3d 648 (6th Cir. 2002); Airadigm Commc'ns, Inc. v. FCC (In re Airadigm Commc'ns, Inc.), 519 F.3d 640 (7th Cir. 2008); SE Prop. Holdings, LLC v. Seaside Eng'g & Surveying, Inc. (In re Seaside Eng'g & Surveying, Inc.), 780 F.3d 1070 (11th Cir. 2015) (favorably citing Munford, 97 F.3d 449). The "minority view," held by the Fifth, Ninth, and Tenth Circuits, prohibits non-consensual releases on the basis that such releases are prohibited by § 524(e), which provides generally that "discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt." See Bank of N.Y. Trust Co. v. Official Unsecured Creditors' Comm. (In re Pac. Lumber Co.) 584 F.3d 229 (5th Cir. 2009); Resorts Int'l v. Lowenschuss (In re Lowenschuss), 67 F.3d 1394 (9th Cir. 1995), cert. denied, 517 U.S. 1243, 116 S.Ct. 2497, 135 L.Ed.2d 189 (1996); In re W. Real Estate Fund, Inc., 922 F.2d 592 (10th Cir. 1990). Even within circuits that have found third-party releases to be permissible, the circumstances of certain cases have led courts to determine that they lack subject matter jurisdiction, see, e.g., Manville III, 517 F.3d at 68 (district court lacked subject matter jurisdiction to enjoin where "the claims at issue [were] not derivative of [the debtor's] liability, but rather seek to recover directly from [a third party] for its own alleged
The Court of Appeals for the First Circuit has not directly ruled on the issue of third-party releases. See Monarch Life, 65 F.3d at 983-84 ("express[ing] no view" on precedents addressing the propriety of third-party releases nor their applicability to the particular plan at issue, but giving preclusive effect to a final order confirming a plan of reorganization and barring certain claims against third parties). Within the First Circuit, however, bankruptcy courts that have considered bar orders or third-party release provisions have generally determined that, in the context of chapter 11 plans of reorganization, such courts have subject matter jurisdiction to enter such orders, but that such jurisdiction should be exercised with restraint and in extraordinary circumstances. See, e.g., In re Charles St. African Methodist Episcopal Church of Boston, 499 B.R. 66, 100-02 (Bankr. D. Mass. 2013) (holding that the court had both subject matter jurisdiction and authority to enter order releasing third-party claims); Quincy Med. Ctr., Inc., No. 11-16394, 2011 WL 5592907 at *2-4 (holding that the court had subject matter jurisdiction to enter bar order releasing third-party claims, but conditioning entry of such an order on the consent of the affected parties); In re Mahoney Hawkes, LLP, 289 B.R. 285, 297-300 (Bankr. D. Mass. 2002) (recognizing court's authority, but declining to approve after applying factors set forth in In re Master Mortg. Inv. Fund, Inc., 168 B.R. 930, 935 (Bankr. W.D. Mo. 1994))
Where an injunction or "bar order" is proposed in the context of a motion to approve a settlement under Rule 9019 in a
While the analysis of third-party releases and bar orders in the context of Rule 9019 settlements may be different, the Court must consider similar subject matter and adjudicatory authority issues. Compare Munford, 97 F.3d at 454-5 (finding that the bankruptcy court had jurisdiction to settle litigation involving non-debtors and approving bar order prohibiting the non-settling defendants from seeking contribution or indemnification from the settling defendant in order to effectuate settlement)) with Feld v. Zale Corp. (In re Zale Corp.), 62 F.3d 746, 752-54 (5th Cir. 1995) (holding that the bankruptcy court approving settlement lacked jurisdiction to resolve claims between non-debtors) and Papas v. Buchwald Capital Advisors, LLC (In re Greektown Holdings, LLC), 728 F.3d 567, 578 (6th Cir. 2013) (following Zale Corp. and rejecting Munford); see also Healthco Int'l, 136 F.3d at 53 (declining to interpret order approving settlement to preclude contribution claims and noting "considerable question whether the bankruptcy court possessed the power to make a `good faith' finding preempting future contribution claims by nonsettling parties" in the circumstances presented); Manville III, 517 F.3d at 68 (declining to enforce settlement injunction because the court lacked subject matter jurisdiction to enjoin the claims at issue because they were "not derivative of [the debtor's] liability, but rather seek to recover directly from [a third party] for its own alleged misconduct"); In re G.S.F. Corp., 938 F.2d at 1474 ("there must be some effect on the debtor's estate stemming from the action before there is bankruptcy court jurisdiction to enjoin it"); Fisher, 155 F.3d at 882 (stating that trustee could seek temporary injunction of third-party claims if such claims could "affect the amount of property in the bankrupt estate"). Case law regarding the propriety of bar orders in the context of settlement motions is not as well-developed as the law considering similar provisions contained in Chapter 11 plans and is in conflict.
Because the Court holds below that the proposed settlement would not meet the standards that this Court would apply in considering a request for entry of a non-consensual order barring or releasing claims of non-debtor third parties against other non-debtor third parties, the Court is not required to run the considerable gauntlet necessary to determine its subject matter jurisdiction or adjudicatory authority in this instance.
Entry of a bar order would be appropriate over the objection of the parties to be enjoined only after considering
While the settlement amount proposed to be paid to the Estate is substantial, it is not a large percentage of the total claims proposed to be settled when the asserted claims of the Objecting Parties are considered. The claims involved are complicated in that they involve securities claims and duties of officers and directors, but the claims involve a limited number of investors, officers and directors and two suits. The Securities Action involves one defendant. This is not a case where a substantial number of claimants that would be subject to the requested bar order support entry of the order because it gives effect to a global settlement that serves a perceived "common good."
The record is limited, but the parties appear to agree that up to $7 million in insurance coverage may be available pursuant to the D & O Policies to satisfy all or a portion of the claims of the Objecting Parties and the Trustee, although the policies are "wasting," such that available coverage limits have been and will be reduced by defense costs that the insurers are defending under reservations of rights. No substantial evidence has been proffered as to the collectability of a judgment against Combs or any other potential defendant. On the current record, the Court could not find that the claims asserted in the Securities Action fail to state a claim or lack merit. Significant factual disputes appear to be present, and the Securities Action is in the early stages of litigation.
The requested order would operate to bar certain independent claims that the Objecting Parties have asserted against Combs in the Securities Action. While these claims overlap in some ways with the facts and circumstances giving rise to the claims asserted by the Trustee in the Complaint, the claims asserted in the Securities Action arise directly from alleged acts and omissions in connection with solicitation of investors in convertible notes, the proceeds of which were used to pay early investors. The Trustee's claims largely arise from the subsequent use of those funds by the Debtor to pay the early investors and the acts and omissions of officers and directors in approving those payments. In the Complaint, the Trustee has not alleged that the directors or officers breached their duties to the Debtor in connection with solicitation
It does appear that any potential dividend paid to general unsecured creditors in the bankruptcy case could theoretically reduce certain of the Objecting Parties' claims against the Estate on a dollar for dollar basis,
Unquestionably, there is a direct effect on administration of the bankruptcy case in that the proposed settlement is predicated on entry of the bar order and the parties have represented that it is a condition precedent to the estate receiving the Settlement Amount, the Trustee and Settling Parties further assert that the Court should exercise jurisdiction and enter the requested bar order as part of the proposed settlement because a recovery by the Objecting Parties in the Securities Action could reduce or eliminate proceeds of the D & O Policies that might otherwise be available to satisfy the Trustee's claims if she prevails. They contend that defense of the Securities Action will reduce available insurance proceeds because of the "wasting" nature of the policies as defense expenses are incurred. It may also be the case that findings in the Securities Action could impact insurance coverage and indemnification claims that may be asserted in the bankruptcy case.
All of this may prove to be true, but the Court is not convinced that the requested bar order would be an appropriate exercise of its discretion under the facts and circumstances of this case after weighing all of the relevant factors, including the relative benefits and burdens of the requested
For the foregoing reasons set forth and the authorities cited herein, the Motion is DENIED.
Master Mtg., 168 B.R. at 935.