Regions Bank v. Herendeen

Filing 16

OPINION AND ORDER: affirming the bankruptcy court's May 22, 2014 order; directing the Clerk to TERMINATE any pending motion and to CLOSE the case. Signed by Judge Steven D. Merryday on 2/25/2015. (BK)

UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF FLORIDA
TAMPA DIVISION
IN RE ABLE BODY TEMPORARY
SERVICES, INC.
____________________________________/

CASE NO. 8:13-bk-6864-CED

REGIONS BANK,
Appellant,
v.

CASE NO. 8:14-cv-1631-T-23
(Consolidated)

CHRISTINE L. HERENDEEN, et al.,
Appellees.
____________________________________/

ORDER
A May 22, 2014 bankruptcy order (Doc. 1-3) approves a settlement agreement
that resolves the claims asserted by Angela Welch (the “individual trustee” for the
bankruptcy estate of Frank M. Mongelluzzi) and by Christine L. Herendeen (the
“corporate trustee” for the bankruptcy estate of several corporate debtors) against
Michael D. Traina; MDT Personnel, LLC; MDT Personnel Contracts, LLC; MDT
Staffing, LLC, (collectively, MDT); and Disaster Recovery Support, LLC; Labor and
Ready Holdings, Inc.; and TrueBlue, Inc., (collectively, TrueBlue). Regions Bank, a
creditor of some of the corporate debtors, appeals (Doc. 9) and argues that the
bankruptcy court wrongly approved the settlement without granting Regions

discovery or an evidentiary hearing. Also, Regions argues that the bankruptcy court
applied the wrong standard for approval of a sale under 11 U.S.C. § 363.
BACKGROUND
Mr. Mongelluzzi owned an interest in each of ten entities, which are the
corporate debtors, designated as the “Able Body Entities.” According to a thirdparty appraisal, the Able Body Entities had a fair market value of $45,028,000 as of
September 2, 2010. In September 2010, Mr. Mongelluzzi sold substantially all the
assets of the Able Body Entities1 to MDT for approximately $46,694,062. As part of
the sale, Mr. Mongelluzzi and MDT entered an asset purchase agreement, a
transition services agreement, consulting agreements, and a letter agreement. The
consulting agreements required Mr. and Mrs. Mongelluzzi to perform consulting
services for MDT and required MDT to pay each a $250,000 annual consulting fee.
The letter agreement required MDT to pay the Mongelluzzis “fifty percent (50%) of
the net sales proceeds resulting from a sale of substantially all of the assets acquired
from the Able Body Entities or the equity interests of MDT . . . .” (Doc. 1-9 at 8)
Soon after the sale, Mr. Mongelluzzi and MDT litigated against each other
claims arising from the sale. MDT obtained temporary restraining orders in both the
bankruptcy court for District of New Jersey and the bankruptcy court for the Eastern
District of Pennsylvania. Meanwhile, in October 2010, MDT — alleging that the

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The sale excluded two of the Able Body Entities — Preferable HQ, LLC, and USL & H
Staffing, LLC. However, the asset purchase agreement granted MDT an option to acquire the assets
of each.

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Mongelluzzis breached — terminated the consulting agreement and the letter
agreement.
In February 2013, TrueBlue purchased from MDT assets for $12 million and,
subject to a post-closing adjustment, excess working capital for $7 million.
Mr. Mongelluzzi alleges that MDT failed to pay fifty percent of the proceeds in
violation of the letter agreement.
Mr. Mongelluzzi and the corporate debtors sought bankruptcy protection in
the Middle District of Florida in February 2011 and May 2013, respectively. MDT
demanded approximately $3.6 million from Mr. Mongelluzzi’s bankruptcy estate and
approximately $800,000 from some of the corporate debtors’ estates.
On May 22, 2014, the bankruptcy court for the Middle District of Florida
approved (Doc. 1-3) an agreement that resolves — for $1.7 million in cash and for a
waiver by MDT of claims worth approximately $4 million — the claims asserted by
Mr. Mongelluzzi and the corporate debtors against MDT and TrueBlue.
DISCUSSION
Regions argues that the bankruptcy court wrongly approved the settlement
without granting Regions discovery, without an evidentiary hearing, and without an
independent, fact-based assessment of the soundness and fairness of the proposed
settlement. Also, Regions argues that the bankruptcy court applied the wrong
standard for approval of the sale under 11 U.S.C. § 363.

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I. Request for an Evidentiary Hearing
Approval of a settlement agreement is within the informed and reasoned
discretion of a bankruptcy court. In re Chira, 567 F.3d 1307, 1310 (11th Cir. 2009).
Regions argues that the bankruptcy court approved the settlement without an
evidentiary hearing and, consequently, without sufficient evidence. Specifically,
Regions claims that “the Bankruptcy Court should not have approved the . . .
Settlement based upon the dearth of factual record before it because the Trustees
failed to meet their burden to produce evidence . . . .” (Doc. 9 at 30)
Under Rule 9019(a), Federal Rules of Bankruptcy Procedure, a bankruptcy
court can approve a settlement “[o]n motion by the trustee and after notice and a
hearing.” However, “an actual evidentiary hearing is not necessarily required.” In re
Laing, 2007 WL 4482263, at *3 (M.D. Fla. Dec. 17, 2007) (Steele, J.); accord In re
Soderstrom, 477 B.R. 249, 252 (Bankr. M.D. Fla. 2012) (Jennemann, J.) (“A court is
not required to decide the merits of each claim or hold a ‘mini trial’ of the underlying
litigation.”); Depoister v. Mary M. Holloway Found., 36 F.3d 582, 586 (7th Cir. 1994)
(Gordon, J.) (“It is clear that Rule 9019(a) itself does not expressly obligate the court
to hold an evidentiary hearing prior to approving a compromise under
Rule 9019(a).”).
Before approval of a settlement, the bankruptcy court must determine that the
settlement does not “fall below the lowest point in the range of reasonableness.” In re

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Martin, 490 F.3d 1272, 1275 (11th Cir. 2007). Whether a settlement falls within the
range of reasonableness depends on:
(a) [t]he probability of success in the litigation; (b) the difficulties, if
any, to be encountered in the matter of collection; (c) the complexity of
the litigation involved, and the expense, inconvenience and delay
necessarily attending it; [and] (d) the paramount interest of the
creditors and a proper deference to their reasonable views in the
premises.

Wallis v. Justice Oaks II, Ltd., 898 F.2d 1544, 1549 (11th Cir. 1990).
On both April 14, 2014, and May 12, 2014, the bankruptcy court held a
hearing (Docs. 1-15, 1-20) under Rule 9019(a). A review of the record, including the
trustees’ verified motion (Doc. 1-9) to approve the settlement and the supplement
(Doc. 1-13) to the motion, confirms that the trustees demonstrated that the settlement
is fair and equitable. See In re Kay, 223 B.R. 816, 819 (Bankr. M.D. Fla. 1998)
(Briskman, J.) (“The Trustee, as proponent of the proposed settlement, has the
burden of establishing that the settlement is fair and equitable and should be
approved by the Court.”). Further, the bankruptcy court apprised itself of the facts
and analyzed the settlement under the Justice Oaks factors before approval.
Regarding the first Justice Oaks factor — the probability of success in the
litigation — the bankruptcy court questioned counsel for the individual trustee about
“difficulties that the Trustee anticipates experiencing in the prosecution of [the]
case,” specifically difficulties as to the letter agreement. (Doc. 1-15 at 49) The
individual trustee’s counsel stated that “one of [the] first hurdles” is establishing that

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MDT wrongfully terminated the letter agreement. (Doc. 1-15 at 49) Next, the
individual trustee’s counsel explained:
[W]e have issues with whether [the letter agreement] is even a valid
contract because of the — we’ve alleged that there may have been an
intent to hinder or delay the creditors. And we thought that . . . was
one issue we would have, is money that should have been paid to the
entities that would have been available to the junior creditors is now
being transformed for perhaps improper motives to a payment being
made to [Mr. and Mrs.] Mongelluzzi pursuant to the so-called sideletter agreement.

(Doc. 1-15 at 50) After further questioning by the bankruptcy court, the individual
trustee’s counsel clarified that these difficulties influence the trustees’ assessment of
both Mr. Mongelluzzi’s and the corporate debtors’ abilities to prevail in the litigation.
(Doc. 1-15 at 50)
Also, the corporate trustee’s counsel presented facts regarding the probability
of success in the litigation. As to the difficulties the trustees might encounter in
prosecuting the fraudulent transfer claims, the corporate trustee’s counsel stated:
We don’t wish to stand here before Your Honor and say the fraudulent
transfer claims are not winnable. We do believe, Your Honor, that it is
in the best interest of the estates to settle those cases based upon the
dollar amount, as set forth in the settlement agreement. . . . Your
Honor is very familiar with the difficulty in proving those claims. . . .
So in determining whether or not to settle these cases, we looked at all
of those issues, all of the documents, and all of the facts surrounding
those issues.

(Doc. 1-15 at 55–56) The corporate trustee’s counsel also explained that the
corporate debtors have “significant claims against numerous solvent targets and [the
corporate trustee’s counsel] intend[s] to vigorously pursue them.” (Doc. 1-15 at 60)
Thus, the corporate trustee’s counsel concluded that the settlement is the “first step”
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to eventually making a “meaningful distribution to creditors” of the corporate
debtors’ estates. (Doc. 1-15 at 60)
Further, at the May 12, 2014 hearing, the bankruptcy court explained that
Michael D. Traina’s testimony at a Rule 2004 Examination “regarding the massive
fraud that was being perpetrated by Mr. and Mrs. Mongelluzzi . . . does not bode
well for success in the litigation on the part of the Trustees in this case.” (Doc. 1-20
at 61) Also, the bankruptcy court acknowledged that the individual trustee’s counsel
estimated the probability of success in the litigation at “[f]ifty-fifty because it’s
anyone’s guess.” (Doc. 1-20 at 61)
The second factor — the difficulty of collection — played an insignificant role
in the bankruptcy court’s analysis. During the April 14, 2014 hearing, the individual
trustee’s counsel stated that “collectability is probably not an issue with respect to
these claims.” (Doc. 1-15 at 39) Also, the bankruptcy court explained that “there’s
security for the payment of the debt.”2 (Doc. 1-15 at 58)
The bankruptcy court gave the “most weight” to the third factor — the
complexity, expense, inconvenience, and delay of the litigation. (Doc. 1-20 at 59) At
the April 14, 2014 hearing, the bankruptcy court concluded that “it could easily be
three, four years, or even longer before the case gets resolved . . . .” (Doc. 1-15
at 101). Further, at the May 12, 2014 hearing the bankruptcy court explained:
2

The bankruptcy court rejected the trustees’ first proposed settlement, which included an
assignment of accounts receivable, due to uncertainty as to the value and collectability of the
settlement. (Doc. 1-15 at 57–58)

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This case will be a very expensive to try. There are a number of
moving parts. There are a lot of issues. As I mentioned in the last
hearing, Mr. and Mrs. Mongelluzzi are likely to be primary witnesses.
Mr. Mongelluzzi is presently in very poor health, as evidenced by
some of his recent court appearances before the Court and on the
telephone. It was obvious that he is not –– that he is not feeling well.
Mr. Steen now advises that they live out of state.

(Doc. 1-20 at 59)
In analyzing the fourth factor — the paramount interest of the creditors and a
proper deference to their reasonable views — the bankruptcy court emphasized that
Regions is the only creditor objecting to the settlement. (Doc. 1-20 at 59) Also, the
bankruptcy court explained that “Regions had its own fraudulent transfer lawsuit
pending in Pinellas County since 2010.” (Doc. 1-20 at 59) The trustees argue that
Regions’ action in Pinellas County against MDT Personnel, LLC, centered on “the
very same facts and issues which were the subject of the [settlement].” (Doc. 12 at
11) The bankruptcy court determined, “If Regions had wanted to push the issue,
Regions would have pushed the issue.” (Doc. 1-20 at 59)
Concluding the analysis, the bankruptcy court stated, “So when I look at the
Justice Oaks factors, I think that it’s clear that giving proper and appropriate deference
to the business judgment of the Trustees, that this is a settlement that needs to be
approved.” (Doc. 1-20 at 61) A bankruptcy court is “entitled to give the trustee’s
judgment some deference.” In re Air Safety Int’l, L.C., 336 B.R. 843, 859 (S.D. Fla.
2005) (Gold, J.). The bankruptcy court noted that the parties in this action include
“two independent Chapter 7 Trustees represented by capable counsel” (Doc. 1-20
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at 60) who “have been busy mediating” (Doc. 1-15 at 78) these issues for almost two
years. The bankruptcy court emphasized that “these issues have been percolating for
a long, long time.” (Doc. 1-15 at 79)3
II. Request for Discovery
Regions argues that the bankruptcy court wrongly approved the settlement
without granting Regions’ request for “a limited period for discovery.” (Doc. 9 at 7)
However, as the bankruptcy court explained, “there’s been plenty of time to flesh out
these issues in the nearly two years that settlement discussions have been
pending . . . . [I]f Regions wanted permission from [the bankruptcy court] to do
discovery, Regions could have pursued those rights more diligently.” (Doc. 1-15
at 94)
III. Approval of a Sale Under Section 363
Regions argues (Doc. 9 at 31) that the bankruptcy court erred by failing to
apply the standard of approval for a sale under 11 U.S.C. § 363, which governs the
sale of assets. The parties agree that the settlement includes a sale of assets because
the settlement resolves claims owned by a bankrupt estate. (Doc. 9 at 30; Doc. 12
at 25) The bankruptcy court requested extensive briefing from the trustees and an

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An instructive contrast is In re Laing, 2007 WL 4482263, at *3 (M.D. Fla. Dec. 17, 2007), in
which the bankruptcy court failed to conduct a hearing under Rule 9019(a) and “no transcript [was]
available to ascertain whether the relevant factors were considered on the record.” In re Laing
concludes that “[w]ithout an adequate explanation for the basis of the ruling, the District Court
cannot conduct a meaningful review on appeal, and remand is appropriate.” 2007 WL 4482263,
at *3.

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additional hearing to ensure that the sale satisfies 11 U.S.C. § 363(h), which governs
the sale of assets held by co-owners.
Before a bankruptcy court approves a settlement that constitutes a sale of
assets, the trustee must demonstrate an“articulated business justification or sound
business reasons for the proposed sale.” In re Moore, 608 F.3d 253, 262 (5th Cir.
2010) (Smith, J.); see also In re Schipper, 933 F.2d 513, 515 (7th Cir. 1991) (Potter, J.);
Stephens Indus., Inc. v. McClung, 789 F.2d 386, 390 (6th Cir. 1986) (Kennedy, J.). The
individual trustee’s counsel stated that “the letter agreement is an asset of the estate
that’s owned [by Mr. and Mrs. Mongelluzzi] as tenants by the entirety and there’s
$84.8 million of joint debt in this case.” (Doc. 1-15 at 43) Because the sale of Mr.
and Mrs. Mongelluzzi’s rights under the letter agreement “is an integral component
of the settlement,” MDT and, likely, TrueBlue would not proceed with the settlement
unless the bankruptcy court approved the terms of the sale. (Doc. 1-15 at 44). The
individual trustee’s counsel explained that the settlement was “the best deal under the
circumstances” and that its approval was necessary to resolve the litigation and to
prevent additional administrative expenses. (Doc. 1-15 at 46)
At the April 14, 2014 hearing, Regions, the only creditor that objects to the
approval of the settlement, offered to “take up the litigation” and to “bring the claim
on behalf” of the trustees. (Doc. 1-15 at 89) However, Regions was “not sure” it
could buy the claims for $1.7 million. (Doc. 1-15 at 89) Also, Regions offered no
plan to obtain a better sale price. The trustees have no obligation to “pursue a course
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of litigation which [they do] not believe will prove fruitful.” In re Vazquez, 325 B.R.
30, 38 (Bankr. S.D. Fla. 2005) (Utschig, J.).
CONCLUSION
The bankruptcy court’s May 22, 2014 order (Doc. 1-3) is AFFIRMED. The
clerk is directed to terminate any pending motion and to close this case.
ORDERED in Tampa, Florida, on February 25, 2015.

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