SUZANNE H. BAUKNIGHT, Bankruptcy Judge.
Before the Court is the Motion to Compromise, as twice amended (Compromise Motion), filed by W. Grey Steed, Chapter 7 Trustee (Trustee), seeking approval of a compromise and settlement between Debtor's bankruptcy estate and Regina Lambert. Objections have been filed by a number of creditors: Cary M. Franklin; Karen A. Franklin, Ph.D; The Franklin Group, LLC; and Daniel D'All (collectively, the Petitioning Creditors
The evidentiary hearing of this contested matter was held on April 8 and May 9, 2016. The record consists of stipulations of undisputed facts submitted by the parties on April 1, 2016; sixteen exhibits admitted into evidence; and the testimony of four witnesses: Regina Lambert, W. Grey Steed, Dr. Karen Franklin, and Kelly Sweatman. Additionally, pursuant to Rule 201 of the Federal Rules of Evidence, the Court takes judicial notice of all documents of record in this bankruptcy case. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (O).
This bankruptcy case was commenced through the filing of an Involuntary Petition on January 19, 2015, and an Order for Relief was entered on March 6, 2015. It is undisputed that Debtor held herself out to be an investment advisor and that from 2009 or 2010 she induced her clients, many of whom were family or close friends, to fund what they believed were legitimate investments with a brokerage firm when, in fact, Debtor either lost the invested funds in other ventures personal to her, used the funds for personal living expenses, or spent the funds on herself and her family and friends as part of a lavish lifestyle. Debtor pleaded guilty to federal charges in January 2016 and was sentenced on April 4, 2016, to 108 months of imprisonment to be followed by three years of supervised release. See United States v. Stanfill, E.D. Tenn. Docket No. 3:15-cr-00108-001-RLJ-HBG, Docs. 21, 37. Debtor's sentence also included a restitution award of $8,817.434.14. Id., Doc. 37.
Upon notice and hearing on the Petitioning Creditors' motion to appoint a trustee, the Trustee was appointed and continues to serve in that capacity. As part of his duties and investigation into Debtor's affairs, the Trustee discovered that assets had been transferred from Debtor to Regina Lambert, Debtor's life partner/spouse of more than 25 years.
The Trustee and Ms. Lambert's attorney entered into negotiations for a proposal through which Ms. Lambert would repay the bankruptcy estate in settlement of the Trustee's potential fraudulent conveyance claims. After the Trustee filed his initial Motion to Compromise [Doc. 132], the Petitioning Creditors filed a limited objection to the proposed settlement for the purpose of seeking additional information and an examination of Ms. Lambert [Doc. 141],
The parties later agreed to a protective order allowing the Rule 2004 examination along with inspection of financial records and information relative to the proposed settlement. [Doc. 155.] Ms. Lambert's Rule 2004 examination was conducted in November 2015, and on January 22, 2016, the Trustee filed his Amended Motion to Compromise. [Doc. 181.] The Objecting Creditors renewed their objections [Docs. 190, 191], and the Court set the matter for an evidentiary hearing [Doc. 196]. The Trustee continued to negotiate with Ms. Lambert and, on March 31, 2016, submitted a Second Amended Motion to Compromise. [Doc. 205.]
Although no single document of record sets forth in full the proposed terms of the settlement, the parties agreed at the evidentiary hearing to the accuracy of the following recitation of terms as compiled by the Court from the Trustee's motion and two amendments:
To date, there are claims asserted against the estate in excess of $9,700,000.00. The Trustee has received $59,104.28 through the liquidation of Debtor's one-half interest in a partnership and $6,127.14 from the sale of Debtor's office furnishings.
Ms. Lambert testified that she and Debtor have been in a relationship since 1988. In the late 1990s to the early 2000s, Debtor owned an American Express franchise. In about 2004, Debtor set up her own business, Stanfill Wealth Management, to provide financial investment advising. Ms. Lambert testified that she understood that Debtor no longer operated Stanfill Wealth Management as of 2009. Instead, Ms. Lambert understood that Debtor was involved in home building and an Internet start-up business after 2009.
As for Ms. Lambert's background, she had worked as a paralegal for approximately ten years before attending law school, graduating in 2001. After law school, Ms. Lambert engaged in private practice in Knoxville until 2004, when she went to work for Debtor, who was starting Stanfill Wealth Management and needed legal assistance to terminate her American Express franchise agreement. Ms. Lambert continued to work for Debtor — but not Stanfill Wealth Management. Ms. Lambert teaches one course per semester at the University of Tennessee College of Law and five courses per semester at Tusculum College. For the year 2015, Ms. Lambert earned approximately $16,000.00 for teaching.
Ms. Lambert testified that Debtor had been the primary wage earner in their household for their entire relationship. Ms. Lambert stated that her own income from private practice in the approximate amount of $80,000.00 annually had no real impact on the couple's household finances and that their standard of living did not change from approximately 2000 until Debtor's criminal activity came to light in January 2015 as a result of the raid by the Federal Bureau of Investigation. Ms. Lambert testified that she believed Debtor had funded their household with substantial investments and savings after 2009. Although Ms. Lambert understood by the time of the April 2016 hearing that Debtor's illegal activity began in approximately 2008 or 2009, Ms. Lambert unequivocally denied knowing about Debtor's fraudulent activity or participating in it in any way.
Ms. Lambert explained that the Federal Bureau of Investigation seized eleven items of jewelry, of which she owned nine. Seven of the nine pieces had been purchased before 2010, and one of those seven had been purchased in 2009, with a net cost of approximately $15,000.00. Ms. Lambert estimated the cost of all eleven pieces to be approximately $100,000.00, $78,000.00 of which had been spent before 2009. Ms. Lambert testified that she decided not to pursue any claim to the jewelry once she confirmed that victims of Debtor's fraud would receive recovery from the government's sale of the jewelry. The record does not contain any information about when that decision was made in relation to negotiations with the Trustee except that Ms. Lambert testified that she discussed with the Trustee the issue of restoration
The Court's authority to approve or disapprove the Compromise Motion arises from Rule 9019 of the Federal Rules of Bankruptcy Procedure. As a general rule, "[s]ettlements and compromises are favored in bankruptcy as they minimize costly litigation and further parties' interests in expediting the administration of the bankruptcy estate. . . . At the same time, however, it is essential that every important determination in [bankruptcy] proceedings receive the `informed, independent judgment' of the bankruptcy court." In re McInerney, 528 B.R. 684, 687 (Bankr. E.D. Mich. 2014) (quotation marks and citations omitted). Whether a compromise or settlement should be approved balances upon whether it is "both fair and equitable, and in the best interest of the estate." In re High Tech Packaging, Inc., 397 B.R. 369, 671 (Bankr. N.D. Ohio 2008). Such determinations fall within the sound discretion of the bankruptcy court. See In re Nortel Networks, Inc., 522 B.R. 491, 510 (Bankr. D. Del. 2014).
The Court must weigh four factors to assess the fairness and equity of the proposed compromise: "(1) the probability of success in the litigation; (2) the difficulties of collecting any judgment; (3) the complexity of the litigation and the expense, inconvenience, and delay necessarily attending it; and (4) the paramount interest of the creditors and a proper deference to their reasonable views in the premises." In re SCBA Liquidation, Inc., 451 B.R. 747, 769 (Bankr. W.D. Mich. 2011) (citing Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424 (1968)). "When assessing a compromise, courts need not rule upon disputed facts and questions of law, but only canvass the issues." Suter v. Geodert, 396 B.R. 535-548 (D. Nev. 2008) (brackets and citations omitted); see also In re Age Refining, Inc., 801 F.3d 530, 541 (5th Cir. 2015) ("In evaluating a Rule 9019 settlement, a bankruptcy court need not conduct a mini-trial to determine the probable outcome of any claims waived in the settlement. Rather, the bankruptcy court must apprise itself of the relevant facts and law so that it can make an informed and intelligent decision." (brackets and citations omitted)).
"The trustee has the burden to establish that a motion to compromise is appropriate with respect to these considerations." In re High Tech Packaging, 397 B.R. at 372.
In re West Pointe Props., L.P., 249 B.R. 273, 281 (Bankr. E.D. Tenn. 2000) (quoting Reynolds v. Comm'r, 861 F.2d 469, 473 (6th Cir. 1988)) (citations omitted). "The Court `need not be convinced that the settlement is the best possible compromise. The Court need only conclude that the settlement falls within the reasonable range of litigation possibilities somewhere above the lowest point in the range of reasonableness.'" Nortel Networks, 522 B.R. at 510 (quoting In re Nutritional Sourcing Corp., 398 B.R. 816, 833 (Bankr. D. Del. 2008)). A settlement may be approved over objection unless it "falls below the lowest point in the range of reasonableness." In re Barnwell Cnty. Hosp., 491 B.R. 408, 418 (Bankr. D.S.C. 2013) (citations omitted).
At the evidentiary hearing, the Court expressed its concerns about whether the terms of the Compromise Motion — in particular, the credit against the proposed $100,000.00 minimum payment by Ms. Lambert for property seized by the United States and subject to forfeiture — were fair and equitable and in the best interests of the creditors. Those concerns were not alleviated by the proof introduced; in fact, after assessing the testimony and the credibility of the various witnesses, the Court finds that Trustee has failed to meet his burden to prove that the Compromise Motion is fair and equitable to creditors or that the Compromise Motion is in the best interest of the estate.
Based on the deadlines set for notice by the government and assertion of a claim by any claimant by 18 U.S.C. § 983(a)(1)(A)(i) and (a)(2), the deadline for Ms. Lambert to assert a claim likely would have been no later than the end of May 2015. Although the record is devoid of information about when the Trustee alerted Ms. Lambert about his potential claim against her, Ms. Lambert testified that the Trustee first began discussions with her in the summer of 2015. The specific proposal for Ms. Lambert to waive any right to claim the seized jewelry did not appear as an element of the proposed settlement until January 2016, well after any deadline for raising a claim to the seized jewelry. The Court surmises from all the testimony that Ms. Lambert waived her right to assert a claim to the jewelry well before such became a topic for inclusion in the proposed settlement.
Furthermore, it is impossible to determine at this stage whether and to what extent proceeds from the sale of the forfeited jewelry might be paid to Debtor's victims. Applicable regulations provide that various costs must be paid before it can be determined what amount might be available for victims, including costs incurred by the United States Marshals Service and the Federal Bureau of Investigation incident to the forfeiture, sale, or other disposition of the property, such costs to include but are not limited to storage costs and brokerage and other sales-related costs. See 28 C.F.R. § 9.9.
The personal property to be sold at auction is another area of uncertainty in this proposed settlement because Trial Exhibit 2 does not include the entire universe of personal property to be sold for the benefit of the estate. The sale of the house, which has now progressed to a planned auction, creates another uncertainty with the settlement as proposed because it cannot be known whether any recovery might be realized from the auction.
As for the amount of Ms. Lambert's potential liability to the estate, such is also uncertain. Ms. Lambert did not deny that she received $176,000.00 from the Stanfill Wealth Management account during the relevant time period or that she enjoyed the benefits of various international trips during the relevant time period. In fact, the Trustee and Objecting Creditors stipulated that the "Trustee has identified . . . checks payable to [Ms.] Lambert since the beginning of 2011 totaling an amount not less than $150,000.00 [and that] . . . [D]ebtor provided or gave to [Ms.] Lambert gifts of trips, jewelry, clothing and other support in that same period of time." [Doc. 209, p. 2.] The Objecting Creditors assert that Ms. Lambert also might have received $1,000,000.00 from Debtor as security for Ms. Lambert's future following an alleged separation and reconciliation between Debtor and Ms. Lambert in or about 2012. Finally, Ms. Lambert's sister, Dr. Karen Franklin, questioned whether Ms. Lambert also possesses additional personal property over what she disclosed to the Trustee, including significant other valuable jewelry that Dr. Franklin has seen.
For his part, the Trustee acknowledged that without obtaining and analyzing credit card and other bank and brokerage account statements, all of which would result in significant expense to the estate, he cannot determine the amount of loss as a result of Debtor's fraudulent conveyances to Ms. Lambert. Nonetheless, the Trustee argues that under all the circumstances, the negotiated settlement in its last form (with a minimum payment of $100,000.00 after various possible credits) is in the best interest of the estate and creditors. The Trustee and Ms. Lambert also point out that the Trustee is not precluded by the proposed settlement from pursuing any undisclosed assets. Specifically, the letter agreement dated March 3, 2016, contains the following provision:
[Tr. Exh. 8.]
Notwithstanding the many uncertainties regarding property to be sold and credits to be given, the Court recognizes the minimum payment required from Ms. Lambert as of March 31, 2018. Such payment, however, will depend at that time on Ms. Lambert's ability to pay and another uncertainty that was addressed during the trial of this matter — i.e., whether Ms. Lambert might file bankruptcy to attempt to discharge any liability owed to the estate by settlement or otherwise. Specifically, although the Trustee points to the specter of a bankruptcy filing by Ms. Lambert as a motivating factor for settling the matter now for a negotiated amount, the evidence made clear that Ms. Lambert has not waived her right to file bankruptcy at any time in the future, including when payment of up to $100,000.00 comes due under the proposed settlement in March 2018. Notably, the parties have not included in the negotiated terms any provision that a bankruptcy filing by Ms. Lambert would return the parties to their original postures concerning the Trustee's fraudulent conveyance claims.
The question of whether any liability of Ms. Lambert to this estate could be discharged in her own bankruptcy is also far from certain. Further, the Objecting Creditors challenge whether Ms. Lambert would be entitled in her own bankruptcy filing to exempt her interest in the house or the portion of legal fees that she negotiated to keep in connection with the proposed settlement. Finally, notwithstanding Ms. Lambert's denial of knowledge that her family members and some close friends were investing with Debtor, the Objecting Creditors assert that more investigation is needed to determine what part, if any, that Ms. Lambert played in encouraging or inducing those investments with her spouse.
As stipulated by the Trustee and Objecting Creditors:
[Doc. 209, ¶¶ 5-6.] Additionally, Ms. Lambert acknowledged during her testimony that she received approximately $176,000.00 from Debtor's Stanfill Wealth Management account and that the Trustee could, in fact, bring an adversary proceeding against her to avoid and recover potentially fraudulent transfers.
Fraudulent transfers are avoidable under the Bankruptcy Code:
11 U.S.C. § 548(a)(1).
Tenn. Code Ann. § 66-3-101. Additionally, the Tennessee Fraudulent Transfer Act (TFTA) provides, as to present and future creditors:
Tenn. Code Ann. § 66-3-305. The TFTA also provides, as to present creditors:
Tenn. Code Ann. § 66-3-306(a).
The burden of proving actual or constructive fraud would be on the Trustee; however, there is authority to support a claim that transfers into an account for payment of household expenses with a spouse may be determined to be constructively fraudulent. See, e.g., Hagan v. Goldstein (In re Goldstein), 428 B.R. 733 (Bankr. W.D. Mich. 2010).
In support of the Compromise Motion, the Trustee explained that he has not sought to obtain all bank records, stating that such was impractical because of the associated expense and the time it could take to obtain a judgment. With respect to Ms. Lambert's assets, the Trustee testified that he ran an asset search on her that resulted in no findings and that she has provided him with an inventory of the property that she personally owns and still possesses. The Trustee also testified that although Debtor asserted her rights under the Fifth Amendment and did not answer most questions at her meeting of creditors, the Trustee believed Debtor and Ms. Lambert were candid with him when he questioned them with their attorneys present prior to the meeting of creditors; that Ms. Lambert has cooperated with him and agreed to sell the couple's residence; and that she has agreed to move back into the residence to help maintain it while the Trustee attempts to sell it. The Trustee also cited as a reason for not pursuing litigation the possibility that Ms. Lambert could file for bankruptcy if he obtained a judgment against her and that the judgment could potentially be dischargeable.
On cross examination, however, the Trustee testified that he has not talked to an attorney about representing him in an adversary proceeding against Ms. Lambert on a contingency-fee basis. He also acknowledged that he believes the Federal Bureau of Investigation seized payroll and Stanfill Development records that he has not yet obtained; that he got only two years of records from Fidelity; that he did not obtain any records from WeScore; that he did not obtain any of the American Express records; and that he only got limited bank records from Debtor's Spontivity account even though Ms. Lambert received monies from Spontivity in December 2013, a fact that was confirmed by the testimony of Ms. Sweatman, Ms. Lambert's and Dr. Franklin's niece who worked for Debtor assisting with payroll and running errands for approximately two years until January 2015.
With respect to the residence, the Trustee acknowledged that Ms. Lambert did not originally cooperate with him because she did not agree to a lower listing price and that the estate has been paying the insurance on the residence and is currently losing approximately $1,000.00 monthly to maintain it.
Based on the testimony, the Court is not convinced that it would be cost prohibitive to file an adversary proceeding under the statutes cited above, or that the adversary proceeding would be unnecessarily complex. Because there are still a great number of records that have not yet even been examined, the Court also cannot find that there is a greater or lesser probability of success if an adversary proceeding were to be filed. Indeed, given the stipulations and other testimony at the hearing, it appears that the Trustee is likely to be successful to the extent of at least $150,000.00.
Additionally, Ms. Lambert's threat that she will file for bankruptcy protection if the Trustee obtains a judgment against her is unpersuasive as a basis for approval of this proposed settlement. As the Objecting Creditors argued, in a bankruptcy case, Ms. Lambert would be entitled to keep only exempt property and the rest of her assets would be liquidated; thus, she could potentially fare much worse in a bankruptcy than under the proposed settlement, weighing against her threat that she "absolutely" will file. The Court also notes that absent the specter of Ms. Lambert filing bankruptcy, it appears that she is significantly underemployed. As evidenced by her testimony concerning her earnings in private practice and the fee she earned in the recent, very successful Supreme Court litigation, Ms. Lambert certainly has the ability to practice law and earn appreciably more income than the $16,000.00 annual income she has earned from teaching. Although increased income is as uncertain as most other matters related to the Compromise Motion before the Court, Ms. Lambert's potential, currently untapped earning capacity is a consideration for the Court when analyzing the difficulties of collecting a judgment.
"While the desires of the creditors are not binding, a court `should carefully consider the wishes of the majority of the creditors [as a factor bearing on the wisdom of the compromise]." Connecticut Gen. Life Ins. Co. v. United Cos. Fin. Corp. (Matter of Foster Mortg. Corp.), 68 F.3d 914, 917-18 (5th Cir. 1995) (quoting Davis v. Jackson (In re Transcontinental Energy Corp.), 764 F.2d 1296, 1299 (9th Cir. 1985)). In In re West Pointe Properties, 249 B.R. at 281, Judge Stair noted that the First Circuit's list of factors is similar to the four factors he applied. Notably, the First Circuit described the "so-called `best-interests' standard" as "the probability of success were the claim to be litigated — given the legal and evidentiary obstacles and the expense, inconvenience and delay entailed in its litigation — measured against the more definitive, concrete and immediate benefits attending the proposed settlement." Id. at 281-82 (emphasis added) (quoting Hicks, Muse & Co., Inc. v. Brandt (In re Healthco Int'l, Inc.), 136 F.3d 45, 50 (1st Cir. 1998). The Compromise Motion here does not propose "definitive, concrete, [or] immediate benefits" to the estate and creditors.
Simply, because of the significant uncertainties on both sides of the equation, the Court cannot say that the proposed settlement weighs more favorably for the benefit of the estate than the probability and costs of success in fraudulent conveyance litigation or collection of a judgment against Ms. Lambert. Thus, the Trustee has failed to meet his burden under Rule 9019. For these reasons, the Trustee's Second Amended Motion to Compromise shall be denied. An Order consistent with this Memorandum will be entered.
Tenn. Code Ann. § 66-3-304.
