CARLA E. CRAIG, Chief Judge.
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 the terms of either stipulation. For the following reasons, the Motion is denied and the Proposed Stipulation is disapproved.
This Court has jurisdiction over this core proceeding under 28 U.S.C. §§ 1334(b) and 157(b)(2)(A) and (O), 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.
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 Williamsburg, 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 Debtor 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 recover 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 Debtor's and McCaren's motions for contempt, 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 December 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 Settlement 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 "shall be permitted to immediately submit to this Court the copies of the [p]etition and [a]pplication [to sell the McCaren Project] and the Court shall deem the [p]etition and [a]pplication 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.
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., 217 B.R. 41, 45 (Bankr.S.D.N.Y. 1998). "As a general matter, settlements or compromises are favored in bankruptcy and, in fact, encouraged," In re Adelphia Commc'ns Corp., 368 B.R. 140, 226 (Bankr. S.D.N.Y.2007), "because they minimize the costs of litigation and further the parties' interest in expediting the administration of a bankruptcy estate," Inv. Exch. Group, LLC v. Colo. Capital Bank (In re 1031 Tax Group, LLC), Case No. 07-11448, Adv. Pro. No. 07-1710, 2007 WL 2455176, at *3 (Bankr.S.D.N.Y. August 23, 2007).
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:
Motorola, Inc. v. Official Comm. of Unsecured Creditors (In re Iridium Operating LLC), 478 F.3d 452, 462 (2d Cir.2007) (alteration in original) (quoting In re WorldCom, Inc., 347 B.R. 123, 137 (Bankr. S.D.N.Y.2006)).
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, 368 B.R. at 226, it is also true that parties cannot enter into a settlement that violates law or public policy, Se. Fed. Power Customers, Inc. v. Geren, 514 F.3d 1316, 1321 (D.C.Cir.2008); Miller Tabak Hirsch & Co. v. Comm'r, 101 F.3d 7, 10 (2d Cir. 1996). It is well established that "[s]ettlements are void against public policy ... if they directly contravene a state or federal statute or policy." In re Smith, 926 F.2d 1027, 1029 (11th Cir.1991); see also Allied Erecting & Dismantling, Co. v. USX Corp., 249 F.3d 191, 196 (3d Cir.2001); EEOC v. Astra USA, Inc., 94 F.3d 738, 744 (1st Cir.1996).
The Proposed Settlement cannot be approved because the default provisions conflict with the Bankruptcy Code. First, the settlement provides that, upon the 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
Commodity Futures Trading Com'n v. Weintraub, 471 U.S. 343, 353, 105 S.Ct. 1986, 85 L.Ed.2d 372 (1985).
A chapter 11 trustee owes a fiduciary duty to the bankruptcy estate, id. at 355, 105 S.Ct. 1986 and cannot be bound by an agreement between the debtor and a creditor that conflicts with the trustee's obligations under the Bankruptcy Code. It is possible that the chapter 11 trustee would determine that the sale of the McCaren Project is not in the estate's best interests, and that, instead, developing the McCaren Project and selling the units to generate income is in the estate's best interests. Approving the Proposed Stipulation requiring a chapter 11 trustee to sell the McCaren Project would place the chapter 11 trustee in the impossible position of deciding between violating a court order, i.e. the court-approved Proposed Stipulation, or violating his fiduciary duties.
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 case 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 violating
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, 559 F.2d 31, 133 n. 297 (D.C.Cir. 1976). While E.D.N.Y. Local Bankruptcy Rule 1073-1(b) provides that "cases involving affiliated or related debtors shall be assigned to the Judge to whom the first such case was assigned," E.D.N.Y. LBR 1073-1(b), making it likely that McCaren's case will be assigned to the same judge, there is no guarantee that such assignment will occur, see E.D.N.Y. LBR 1073-1(c).
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 Proposed 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), 798 F.2d 35, 37 (2d Cir.1986) (class-action settlement); see also Reynolds v. Roberts, 202 F.3d 1303, 1312 (11th Cir.2000) ("Long standing precedent evinces a strong public policy against judicial rewriting of consent decrees."). Given the conclusion that the Proposed Stipulation cannot be approved, the objections of RCG and Capital One are not addressed.
For all these reasons, the Motion is denied and the Proposed Stipulation is not approved. A separate order will issue.