Cabuya Cherokee, SA et al v. Vogt et al
Filing
40
ORDER: The Bankruptcy Court's Order Granting Amended Motion for Partial Summary Judgment and Denying Cross-Motion for Summary Judgment and Memorandum Opinion and Order Denying Motion for Reconsideration of Summary Judgment are reversed for the reasons explained herein. This appeal is remanded to the Bankruptcy Court for further proceedings. The Clerk of Court is directed to close this case and terminate any pending motions as moot. Signed by Judge James S. Moody, Jr on 5/26/2015. (LN)
UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF FLORIDA
TAMPA DIVISION
CABUYA CHEROKEE, SA, CABUYA
DELAWARE, SA, CABUYA FLORIDA,
SA, CABUYA SOLUE, SA, CABUYA
SPRUCE, SA, CABUYA SUWANEE, SA,
CIRCUITO INICIAL CUATRO HAS, SA,
DULCE VERDE TROPICAL DEL
PACIFICO, SA, EL AREA FINAL, SA,
FRENTE VERDE, SA, INMOBILIARIA
CEROS Y UNOS, SA, INVERSIONES
FONDO AZUL DEL PACIFICO, SA,
PLAYA COCOS DE MONTEZUMA, SA,
PLAZA ARENA SOL, SA, TERRENO
JOTA ZETA, SA, VISTA CABUYA JG,
SA, VO Y ZETA TERRENOS, SA,
VESPER BELL, LIMITADA, JERRY
SARBO, AMERICAN TRANSWORLD
CORPORATION and BETH BASHAM,
Appellants,
v.
Case No: 8:13-cv-2942-T-30
JEFFREY DAVID VOGT, JEANETTE
MELANIE VOGT, CHED EDWARD
VOGT and SUSAN K. WOODARD,
Appellees.
ORDER
THIS CAUSE comes before the Court on appeal of the Bankruptcy Court’s Order
Granting Amended Motion for Partial Summary Judgment and Denying Cross-Motion for
Summary Judgment and Memorandum Opinion and Order Denying Motion for
Reconsideration of Summary Judgment (collectively, the “Summary Judgment Order”).
On May 11, 2015, the Court held a hearing on the instant appeal and heard oral argument
from the parties. Upon review, the Court concludes that the Bankruptcy Court erred
when it concluded that the settlement agreement at issue in this appeal was unenforceable
as a matter of law based on insufficient notice to creditors.
The Court has jurisdiction to hear this bankruptcy appeal under 28 U.S.C. §
158(a)(3).1
STANDARD OF REVIEW
The Bankruptcy Court’s summary judgment ruling is reviewed de novo. See In re
Jacks, 642 F.3d 1323, 1328 (11th Cir. 2011). Similarly, issues related to preclusion, such
as the application of res judicata are reviewed de novo. See In re Piper Aircraft Corp.,
244 F.3d 1289, 1295 (11th Cir. 2001).
BACKGROUND
The Summary Judgment Order at issue in this appeal was entered in an adversary
proceeding filed by Appellants (also referred to as the “ATWC Parties”), seeking a
declaratory judgment that a settlement agreement executed in 2009 between the Debtor
(Jeffery David Vogt), his brother, and American Transworld Corporation (“ATWC”) in
an earlier Chapter 11 case was enforceable.
The facts related to the Debtor’s prior Chapter 11 case and the timing of events
surrounding the execution of the settlement agreement, the dismissal of the adversary
proceeding (resolved by the settlement agreement), the entry of the confirmation order,
1
On May 1, 2014, the Court granted Appellants’ leave to appeal (Dkt. 7).
2
and subsequent motions and orders regarding the enforcement of the settlement
agreement are critical to the Court’s conclusion that the creditors in the Chapter 11 case
received adequate notice of the settlement agreement.
As such, due process was
sufficient. The Court will now discuss the relevant background facts.
The Debtor and his brother (collectively, the “Vogts”) acquired investment
property in Costa Rica through a variety of Costa Rican companies; they planned on
developing the property into a high-end resort. In 2006, the Vogts entered into a loan
agreement with Jerry Sarbo, a family friend. Under the agreement, Sarbo, using his
corporation ATWC, would provide short-term financing to the Vogts in exchange for the
Vogts providing Sarbo with an investment opportunity in the project. If Sarbo elected not
to invest in the project, the Vogts were obligated to repay Sarbo the money he invested in
the project, with repayment of that loan secured by shares of stock in the Costa Rican
companies.
Ultimately, Sarbo, individually and on behalf of ATWC, as ATWC’s
representative, notified the Vogts that he did not intend on investing in the project and
demanded repayment of the money.
On or about February 27, 2009, the Debtor,
presumably faced with an inability to repay the loan and the potential loss of his interest
in the Costa Rican companies, filed for Chapter 11 bankruptcy.
On May 4, 2009, Sarbo and ATWC filed a proof of claim in the Chapter 11 case
for over $15,000,000, premised on the 2006 loan agreement. In its Proof of Claim,
ATWC asserted that under the 2006 loan agreement, it was owed $9.9 million in
principal, $3.1 million in interest, and $2.1 million in “Advances,” and that Sarbo,
3
individually or as ATWC’s representative, owned Vogt’s shares in several of the Costa
Rican companies.
On August 31, 2009, the Debtor filed an objection to ATWC’s claim.
On
September 3, 2009, the Debtor filed an adversary proceeding seeking to determine the
extent, validity, and priority of ATWC’s and Sarbo’s liens on the Costa Rican companies
or the property owned by those companies.
On September 8, 2009, the Debtor proposed an amended plan. Under the amended
plan, the Debtor remained obligated to pay ATWC’s claim in full by refinancing the debt
using the Costa Rican companies as collateral. The Debtor was also required to pay
ATWC in full by the later of December 31, 2009, or 90 days following the conclusion of
the adversary proceeding that the Debtor filed. If the Debtor failed to refinance by the
deadline, the Debtor proposed to surrender approximately 30-40 percent equity in the
Costa Rican companies to ATWC.
On October 9, 2009, the Debtor filed his second amended plan. The proposed
treatment of ATWC’s claim was the same under the amended plan and the second
amended plan.2 All of the creditors voting on the plan, except ATWC, voted to accept it;
ATWC objected to the proposed plan. Notably, with respect to unsecured creditors, the
original plan, first amended plan, and second amended plan treated them the same: they
were entitled to 50 percent of their allowed unsecured claims together with simple interest
2
The Liquidation Analysis attached to the plan showed that the Costa Rican stock subject
to ATWC’s lien of $15.1 million had a fair market value of $43.4 million, and a liquidation value
of $6.6 million.
4
calculated at three percent per annum made in quarterly payments from the Debtor’s
future income.3
An initial confirmation hearing on the Debtor’s second amended plan and
ATWC’s objection was scheduled for December 2, 2009. At that hearing, which was
noticed to all parties, the Debtor and ATWC informed the Bankruptcy Court that they
were working on settling their dispute under the loan agreement. On December 17, 2009,
the parties returned for a second confirmation hearing. This hearing was also noticed to
all parties. The Debtor and ATWC informed the Bankruptcy Court that they were still
working on a draft settlement agreement.
Two days later, on December 19, 2009, the parties entered into a settlement
agreement, the settlement agreement that is at issue in this case. Under the written
settlement agreement, the Debtor had 90 days to pay ATWC approximately $14 million
in exchange for all of ATWC’s interest in the Costa Rican companies. If the Debtor
failed to pay the settlement amount within 90 days, he relinquished his interest in the
Costa Rican companies to ATWC; in other words, ATWC would receive 100 percent of
the Debtor’s interest in the Costa Rican companies.
3
It is also notable that the claims register and ballots in the Chapter 11 bankruptcy reflect
total unsecured creditors in the approximate amount of $71,539.56, and only one of the unsecured
creditors (with a claim in the approximate amount of $55,238.86) cast a ballot on the plan. And if
any of the secured creditors were to have a portion of their claims become unsecured, that portion
was to be paid in the same manner: 50 percent of their allowed unsecured claims together with
simple interest calculated at three percent per annum made in quarterly payments from the Debtor’s
future income.
5
On January 13, 2010, the Bankruptcy Court held a hearing on the parties’
settlement agreement. At the hearing, a copy of the settlement agreement was provided to
the Bankruptcy Court and a summary of its material terms was discussed.
The
Bankruptcy Court orally dismissed the adversary proceeding with prejudice and reserved
jurisdiction to enforce the settlement agreement in the main Chapter 11 case. The parties
noted, and the Court agreed, that the settlement agreement could be incorporated into the
confirmation order and enforced in that manner.
On January 29, 2010, the Bankruptcy Court entered an “Order Dismissing
Adversary Proceeding with Prejudice and Court Retention of Jurisdiction to Enforce
Settlement Agreement.” The order noted that a copy of the settlement agreement had
been provided to the Bankruptcy Court. It concluded that the adversary proceeding was
dismissed with prejudice. It specifically stated that: “The Court shall enforce the terms
and provisions of the Settlement Agreement in the general case.” (emphasis added).
Finally, it stated: “The retention of jurisdiction by the Court to enforce the terms and
provisions of the Settlement Agreement shall be incorporated in the Confirmation Order.”
(Dkt. 11-59).
Subsequently, the parties had some disputes regarding the enforcement of the
settlement agreement.
These disputes were discussed in the Chapter 11 case at a
February 10, 2010 hearing and a March 9, 2010 hearing. At the March 9, 2010 hearing,
ATWC sought enforcement of the settlement agreement for the first time.
6
The
Bankruptcy Court noted that it would enter an order “supplementing the order approving
the settlement agreement” regarding the dispute. (Dkt. 11-44 at 18:5-9).
On March 11, 2010, the Bankruptcy Court entered its ruling in the Chapter 11 case
from the March 9, 2010 hearing in an order titled “Supplemental Order Enforcing
Settlement Agreement.” The order stated, in relevant part:
Pursuant to the Order Dismissing Adversary Proceeding With
Prejudice and Court Retention of Jurisdiction to Enforce Settlement
Agreement entered January 29, 2010 in Adversary No. 8:09-ap00637-MGW, the Court retained jurisdiction in the chapter 11 case
to enforce settlement.
The Court reviewed the Settlement
Agreement and Mutual General Release and heard the arguments of
counsel . . . Additionally, the Court is familiar with the case and
issues from prior status conferences regarding the Settlement
Agreement.
(Dkt. 11-20). The order then enforced certain terms of the settlement agreement. See id.
On March 24, 2010, the Bankruptcy Court entered its written Order Approving
Disclosure Statement and Confirming Debtors’ Plan of Reorganization that confirmed the
Chapter 11 Plan (the “Confirmation Order”). With respect to ATWC’s objection to the
Second Amended Plan, paragraph 7.c) of the Confirmation Order stated that the objection
was “overruled as moot” based upon the “Agreement of the parties.” With respect to the
“Agreement of the parties,” paragraph 8 stated “[t]hat all causes of action and objections
to claim or objections to plan or disclosure statement between the Debtor and American
Transworld Corporation, a creditor, have been settled pursuant to terms of the Settlement
Agreement in the adversary proceeding number 8:09-ap-637, and that this Court retains
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jurisdiction to enforce the terms of the Settlement Agreement.” (Dkt. 11-21) (emphasis
added).
On March 25, 2010, one day after the Confirmation Order was entered, ATWC
filed an “Emergency Motion For Order Determining Debtor In Default Under Settlement
Agreement . . .” A copy of the settlement agreement was attached to the motion as
Exhibit A. In the motion, ATWC requested enforcement of the settlement agreement for
a second time. (Dkt. 11-22). Notably, all creditors received notice of the motion and
attached settlement agreement, and notice of hearing.
On April 1, 2010, a hearing was held on ATWC’s motion. At the hearing, the
Bankruptcy Court acknowledged the settlement agreement and noted that it was
“comprehensive,” “of record,” and “approved by the Court.” (Dkt. 11-42 at 55:9-12).
The Bankruptcy Court then discussed some of the settlement agreement’s material
provisions. And noted that: “The settlement agreement also provided, and importantly - and this was a matter that was stressed by both parties many times over the last four
months, that this Court would have exclusive jurisdiction over any disputes arising
between the parties in connection with the settlement.” Id. at 56:5-10). Ultimately, the
Bankruptcy Court enforced the settlement agreement for a second time, stating at the
hearing: “ . . . I will determine that the Debtor was not able to fund and that, secondly, I
do have exclusive jurisdiction over all disputes between the parties and the arbitration
should not have been filed, and should be undone, that the debtor no longer has any claim
to the entrusted assets that were put into the trust, that the stock certificates and other
8
documents need to be endorsed and this settlement agreement needs to be enforced
according to its terms.” Id. at 61:1-8.
On April 2, 2010, the Bankruptcy Court entered its ruling from the April 1, 2010
hearing with its written “Order Determining Debtor In Default Under Settlement
Agreement And That American Transworld Corporation Is Entitled To Immediate
Turnover Of Entrusted Assets . . .” (Dkt. 11-24). All creditors received notice of this
order.
On April 12, 2010, the Debtor filed a Notice of Appeal of the Bankruptcy Court’s
April 2, 2010 Order. On April 26, 2010, the Debtor withdrew his Notice of Appeal.
Subsequently, ATWC filed a third motion for enforcement of the settlement
agreement. A hearing on that motion took place on May 12, 2010, and the Court entered
an order on May 21, 2010, enforcing the settlement agreement for a third time. All
creditors received the third motion, notice of hearing, and May 21, 2010 enforcement
order.
On May 21, 2010, the Bankruptcy Court also entered an order dismissing the
Chapter 11 case.
All creditors received the dismissal order.
The order retained
jurisdiction “for the limited purpose of enforcing the Debtor’s compliance with prior
orders of this Court . . .” (Dkt. 11-37).
A few months later, the Debtor filed for Chapter 7 Bankruptcy. ATWC initiated
an adversary proceeding seeking a declaration that the Bankruptcy Court’s Confirmation
Order in the Chapter 11 case and the order dismissing the Debtor’s adversary proceeding
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in the Chapter 11 case were final orders for which the time to appeal had expired. The
Trustee responded by filing a counterclaim seeking a declaration that the 2009 settlement
agreement was either void or voidable. Each party moved for summary judgment. The
Bankruptcy Court ultimately concluded that the settlement agreement was unenforceable.
DISCUSSION
The Bankruptcy Court’s Memorandum Opinion and Order Denying Motion For
Reconsideration Of Summary Judgment aptly noted that the parties’ summary judgment
motions required the Bankruptcy Court to balance two fundamental principles: due
process and finality of confirmation orders. The Bankruptcy Court concluded that due
process “won” because “there was nothing in the plan or confirmation order that gave
creditors notice of the terms of the parties’ compromise” and “none of the creditors in this
case were given notice of the proposed settlement.” The Bankruptcy Court also noted
that it “never actually approved the settlement agreement” and “the terms of the parties’
settlement are not contained anywhere in the record in the previous chapter 11 case.” The
Bankruptcy Court concluded that the creditors were denied due process because they
were not given “notice of the compromise and an opportunity to object to it.” (Dkt. 113). As such, the settlement agreement was unenforceable as a matter of law. Based on
the record outlined herein, the Court reverses that decision.
“Due process requires notice reasonably calculated, under all the circumstances, to
apprise interested parties of the pendency of the action and afford them an opportunity to
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present their objections.” United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 272
(2010) (internal quotations omitted). The creditors in this appeal received such notice.
Specifically, the record reflects that, in the Chapter 11 case, the settlement
agreement was referenced and discussed at multiple hearings, in multiple motions, and in
the Bankruptcy Court’s own enforcement orders issued prior to the entry of the
Confirmation Order. As outlined in more detail above, the fact that the parties were
planning on entering into a settlement agreement was discussed at hearings on December
2, 2009, and December 17, 2009. Disputes regarding the enforcement of the already
executed settlement agreement were discussed at hearings on February 10, 2010, and
March 9, 2010. At the March 9, 2010 hearing, the Bankruptcy Court noted that the
settlement agreement had already been approved; the Bankruptcy Court planned on
entering an order “supplementing the order approving the settlement agreement.” On
March 11, 2010, the Bankruptcy Court did just that - it entered an order enforcing the
settlement agreement. The creditors in the Chapter 11 case received notice of all of these
events. Thus, they had actual notice of the settlement agreement prior to the entry of the
Confirmation Order. And they certainly had notice that was sufficient to apprise them of
the pendency of the settlement agreement and afford them an opportunity to present any
objection to the settlement agreement.
Even if the Court assumes that notice was inadequate prior to the Confirmation
Order, the March 24, 2010 Confirmation Order specifically referenced the settlement
agreement and stated that ATWC’s objection was moot based upon the parties’
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“Agreement.” The Confirmation Order also noted that the Bankruptcy Court retained
jurisdiction to enforce the settlement agreement’s terms.
Like the prior filings, the
Confirmation Order provided adequate notice of the settlement agreement to the other
creditors. Simply put, they were sufficiently apprised of the settlement agreement and
had an opportunity to object to the Confirmation Order.
And even if the Court assumes that the March 24, 2010 Confirmation Order was
insufficient notice, the very next day, on March 25, 2010, ATWC filed its emergency
enforcement motion and attached the settlement agreement to the motion. This provided
the creditors with actual notice of the settlement agreement’s terms. And this notice was
provided well before the expiration of the creditors’ appellate rights to object to the
Confirmation Order or to any procedural defect regarding the approval of, notice of, and
enforcement of the settlement agreement.
At the April 1, 2010 hearing, the Bankruptcy Court noted that the settlement
agreement was “of record” and “approved by the Court.” The time to object to the
Confirmation Order or any procedural deficiency related to the approval of, notice of, and
enforcement of the settlement agreement had still not expired.
As outlined above, subsequent filings regarding the settlement agreement occurred
and the Bankruptcy Court ultimately found the Debtor in default of the settlement
agreement and ordered the transfer of the stock to ATWC. At no time did the creditors
object to the settlement agreement or the Bankruptcy Court’s enforcement of it.
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In sum, it is incredible to accept Appellees’ argument in this case that the creditors
in the Chapter 11 case did not receive adequate notice of the settlement agreement. The
creditors could have requested a copy of the settlement agreement at any time prior to the
entry of the Confirmation Order, they could have participated at any of the hearings
where the terms of the settlement agreement were discussed, they could have objected to
the Confirmation Order or to any of the Bankruptcy Court’s subsequent enforcement
orders; however, they chose not to take any action with respect to the settlement
agreement. These events manifest that due process was provided to the creditors. As
such, the Bankruptcy Court erred when it granted Appellees’ motion for summary
judgment and deemed the settlement agreement unenforceable based on a lack of due
process.4
This brings the Court to the other fundamental principle that the Bankruptcy Court
acknowledged: finality of confirmation orders. A bankruptcy court’s confirmation order
that is final and no longer subject to appeal becomes “res judicata to the parties and those
in privity with them.” Travelers Indem. Co. v. Bailey, 557 U.S. 137, 152 (2009). Any
deprivation contained in the Confirmation Order, including the Bankruptcy Court’s
failure to comply with the notice required by Rule 2002, could have been the subject of
an objection or motion with the Bankruptcy Court and a subsequent appeal from any
4
Any argument that the settlement agreement was never approved is without merit. The
record outlined herein demonstrates that the Bankruptcy Court recognized that the settlement
agreement had been approved in the Chapter 11 case. And the parties never argued in the Chapter
11 case that the settlement agreement had not been approved. To the contrary, they and the
Bankruptcy Court acted under the assumption that it had been approved because the settlement
agreement was enforced against the Debtor at least three times.
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adverse ruling. The record is clear that the creditors slept on these appellate rights; res
judicata prevents them from asserting any objection at this late juncture. The Bankruptcy
Court acknowledged this at the hearing on the parties’ motions for summary judgment:
“And I think that sets the boundaries of this res judicata finality and strength of the
confirmation order, is if you put it in the plan, or even in the confirmation order, and the
creditors are sitting back and they let the ship go out of the harbor and they don’t object,
they’re going to be bound on what they could have raised - - they raised or they could
have raised or did raise.” (Dkt. 11-98 at 11-12).
The Supreme Court’s decision in Espinosa is instructive on this point.
In
Espinosa, the debtor proposed a plan that provided he would repay the principal on his
student loans and the accrued interest on the loan would be discharged. See id. at 264.
The proposed plan was served on the student loan creditor, who filed a proof of claim that
included both the principal and the accrued interest. See id. at 265. There were no
objections to the plan and the bankruptcy court confirmed the plan without holding an
adversary proceeding or making a finding of undue hardship. See id. The student loan
creditor did not object to the confirmed plan. See id.
Several years later, the debtor completed the payments on his student loan
principal and the bankruptcy court discharged the student loan interest. See id. at 266.
The student loan creditor challenged the confirmed plan under Fed. R. Civ. P. 60(b)(4).
See id. The student loan creditor argued, in relevant part, that the debtor failed to file an
adversary proceeding pursuant to Bankruptcy Rule 7001(6), the bankruptcy court failed to
14
conduct an adversary hearing, and, as such, the bankruptcy court never made an “undue
hardship ruling” required under the applicable bankruptcy rules. See id.
The Supreme Court noted that the bankruptcy court’s order confirming the
debtor’s plan was a final judgment from which the creditor did not appeal. See id. at 269.
After determining, like the Court has in this appeal, that due process was sufficient, the
Supreme Court held: “Given the Code’s clear and self-executing requirement for an
undue hardship determination, the Bankruptcy Court’s failure to find undue hardship
before confirming [the debtor’s] plan was a legal error .... But the order remains
enforceable and binding on [the creditor] because [the creditor] had notice of the error
and failed to object or timely appeal.” Id. at 275.
The Supreme Court also noted that the debtor’s failure to serve the creditor with a
summons and complaint deprived the creditor of a procedural right. See id. at 272. But
this procedural error did not void the plan because the creditor could have timely objected
to this deprivation and appealed from an adverse ruling on its objection. See id.
Similarly, to the extent that the Bankruptcy Court or the parties committed
procedural errors in the Chapter 11 case, the creditors, like the creditor in Espinosa, were
on notice and could have objected to any errors and appealed any adverse rulings.
Finally, it is important to note that the creditors’ failure to object to the settlement
agreement and failure to object to the Bankruptcy Court’s enforcement order holding the
Debtor in default is unsurprising. The treatment of the unsecured creditors remained the
same throughout the Chapter 11 case - they were to receive 50 percent of their allowed
15
unsecured claims made in quarterly payments from the Debtor’s future income. And only
one unsecured creditor voted. The settlement agreement did not deprive the unsecured
creditors of any interest because the treatment of them (Classes 17 and 18) did not have
any connection to the Costa Rican companies that were the subject of the settlement
agreement. According to the projections attached to the plan, the Debtor had more than
sufficient income from other sources to make the small quarterly payments to unsecured
creditors.5 Thus, although the Court concludes that due process was sufficient, the Court
also concludes that there could never have been a due process violation because the
creditors did not have a legal interest in the treatment of the Costa Rican companies.
CONCLUSION
The Court concludes that the Bankruptcy Court approved the settlement agreement
and the creditors in the Chapter 11 case received adequate notice of the settlement
agreement as a matter of law.
It is therefore ORDERED AND ADJUDGED that:
1.
The Bankruptcy Court’s Order Granting Amended Motion for Partial
Summary Judgment and Denying Cross-Motion for Summary Judgment
and Memorandum Opinion and Order Denying Motion for Reconsideration
of Summary Judgment are reversed for the reasons explained herein.
2.
This appeal is remanded to the Bankruptcy Court for further proceedings.
5
Through the Debtor’s Liquidation Analysis, creditors were on notice that the Costa Rican
stock was potentially worth substantially less than ATWC’s lien ($6.6 million v. $15.1 million).
16
3.
The Clerk of Court is directed to close this case and terminate any pending
motions as moot.
DONE and ORDERED in Tampa, Florida on May 26, 2015.
Copies furnished to:
Bankruptcy Judge Michael Williamson
Bankruptcy Clerk of Court
Counsel/Parties of Record
S:\Even\2013\13-cv-2942 bk appeal-order-final.wpd
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