Brown v. Harris

Filing 12

ORDER affirming bankruptcy court; denying Appellant's Motion to Supplement the Record 9 as moot. Ordered by Judge Clay D. Land on 08/09/2011. (jbo) ***

IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF GEORGIA
ATHENS DIVISION
MARTIN L. BROWN,

*

Appellant,

*

vs.

*

ERNEST V. HARRIS, Trustee,

*

CASE NO. 3:11-CV-25 (CDL)

Appellee.

*

IN RE: BRADFORD GEORGE BROWN,
Debtor.

*
*

O R D E R
Appellant Martin L. Brown appeals the bankruptcy court’s
approval

of

the

Chapter

7

Trustee’s

Motion

to

Compromise

Controversy resolving Adversary Proceeding No. 07-3007.1

The

adversary proceeding was filed by the Trustee to determine the
amount of the Internal Revenue Service’s (“IRS”) claim in the
Chapter 7 bankruptcy case of Appellant’s brother, Bradford G.
Brown (“Debtor”).

For the following reasons, the Court affirms

the bankruptcy court’s approval of the compromise.2

1

Debtor Bradford Brown did not appeal the bankruptcy court’s order.
He is not a party to this appeal. Appellant Martin L. Brown is not a
debtor in the bankruptcy case, but claims standing based on an
agreement that he has an interest in all of his brother’s assets. The
Appellee concedes that Appellant had standing to oppose the motion to
compromise controversy because a successful result could conceivably
result in a distribution to the Debtor.

2

Also pending before the Court is Appellant’s Motion to Supplement the
Record (ECF No. 9).
Appellant seeks to supplement the appellate

STANDARD OF REVIEW
The district court, in reviewing a decision of a bankruptcy
court, functions as an appellate court.

See Williams v. EMC

Mortg. Corp. (In re Williams), 216 F.3d 1295, 1296 (11th Cir.
2000) (per curiam); see also Reider v. Fed. Deposit Ins. Corp.
(In re Reider), 31 F.3d 1102, 1104 (11th Cir. 1994).

On an

appeal from a bankruptcy court, district courts “may affirm,
modify,
decree
Fed.

or
or

R.

reverse
remand

Bankr.

a

with

P.

bankruptcy

judge’s

instructions

8013.

The

for

Court

judgment,
further

reviews

order,

or

proceedings.”

the

bankruptcy

court’s approval of a settlement agreement under an abuse of
discretion standard.
Cir. 2009).

In re Chira, 567 F.3d 1307, 1311 (11th

Under an abuse of discretion standard, the Court

will affirm the approval of the settlement agreement unless it
finds

that

the

bankruptcy

court

“has

made

a

clear

judgment, or has applied the wrong legal standard.”

error

of

Robinson v.

Tyson Foods, Inc., 595 F.3d 1269, 1273 (11th Cir. 2010).
FACTUAL BACKGROUND
Debtor was convicted of criminal tax evasion for the years
1994 and 1995.
award

of

As part of his sentence, this Court entered an

restitution

against

him

for

over

$3

million.

In

record with the following documents: ECF Nos. 743, 749, 776, 780, 781,
784, 790, and 808 in Bankruptcy Case No. 05-30144-JPS. The Court has
reviewed those documents.
Because they do not change the outcome of
this appeal, Appellant’s Motion to Supplement the Record (ECF No. 9)
is denied as moot.

2

January 2005, Debtor filed a Chapter 11 bankruptcy case, which
was subsequently converted to Chapter 7.
of

claim

in

that

case

for

The IRS filed a proof

$3,660,954.66

in

unpaid

taxes,

penalties, and interest for the tax years 1994 through 2003.

In

February 2007, the Chapter 7 Trustee filed Adversary Proceeding
No. 07-3007 to determine the amount of the IRS’s claim and the
extent and validity of its secured claim.

After over three

years of investigation and negotiation, the Trustee and the IRS
reached a settlement to resolve the controversy, and the Trustee
filed a motion to compromise the controversy in October 2010.
Under the compromise, the IRS’s original $3,660,954.66 claim was
reduced by $1,244,865.00 to $2,416,088.00, of which $454,155.00
was treated as an allowed secured claim and $1,961,933.00 was
treated as an allowed unsecured claim.3
The United States Bankruptcy Court for the Middle District
of

Georgia

held

a

hearing

on

the

controversy on December 7, 2010.

motion

to

compromise

the

Appellant attended the hearing

and objected to the settlement for two reasons.4

First, despite

3

Debtor’s tax liabilities for the years 1998 through 2001 were treated
as secured claims under the compromise due to the recording of tax
liens against Debtor’s real property which was sold by the Trustee.
Appellee Br. Ex. A, Mot. to Compromise Controversy ¶ 3, ECF No. 8-1.

4

Debtor was not present at the hearing because he was incarcerated.
Notice of Appeal from Bankruptcy Ct. Attach. 4, Hearing Tr. 136:3-4,
195:25-196:13, ECF No. 1-4. The bankruptcy court noted that Debtor’s
objections to the settlement were mirrored by Appellant’s objections
presented at the hearing. Id. at 136:4-6, 196:13-14.

3

Debtor’s

criminal

conviction

for

tax

evasion,

Appellant

continued to maintain that Debtor owed no taxes for the years
1994 and 1995.

Notice of Appeal from Bankruptcy Ct. Attach. 4,

Hearing Tr. 53:24-54:8, ECF No. 1-4 [hereinafter Hearing Tr.].
Second, Appellant maintained that the IRS levied $10.6 million
in insurance payments that were intended for Debtor, and that
any tax liability was paid pursuant to those levies.
54:9-56:9.
that

he

Appellant based his latter contention on IRS records

obtained

pursuant

(“FOIA”) request.
Willingham

Id. at

to

a

Freedom

of

Information

Act

At the hearing, however, IRS Agent Tammy

testified

that

the

IRS

documents

that

Appellant

received pursuant to his FOIA request “just reflect payments
that

Dr.

[Bradford]

during 1993 and 1994.

Brown

or

Brown

Medical

Center

In no way[] do[] [the documents] relate

to any type of levy . . . that the IRS received.”
10.

received

Id. at 93:7-

Appellant produced no other evidence to substantiate his

contention that the IRS levied funds intended for Debtor.
At the end of the hearing, the bankruptcy court determined
that

the

proposed

settlement

fell

“in

the

reasonableness,” and approved the settlement.

.

.

.

range

of

Id. at 202:3-7.

DISCUSSION
Bankruptcy Rule 9019(a) provides that “[o]n motion by the
trustee and after notice and a hearing, the court may approve a
compromise or settlement.”

Fed. R. Bankr. P. 9019(a).

4

When a

bankruptcy

court

decides

whether

to

approve

a

proposed

settlement, the court must consider: “(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.”

In re Justice Oaks II, Ltd., 898 F.2d

1544, 1549 (11th Cir. 1990); accord In re Chira, 567 F.3d at
1312.
the

“A bankruptcy court is not obligated to actually rule on

merits

of

the

various

claims

succeeding on those claims.’”5

‘only

the

probability

of

In re Van Diepen, P.A., 236 F.

App’x 498, 503 (11th Cir. 2007) (quoting In re Justice Oaks, 898
F.2d at 1549).

“Courts consider these factors to determine the

fairness,

reasonableness[,]

settlement

agreement.”

In

and
re

adequacy
Chira,

567

of
F.3d

a
at

proposed
1312-13

(internal quotation marks omitted).

5

“The [Protective Comm. for Indep. Stockholders of TMT Trailer Ferry,
Inc. v. Anderson, 390 U.S. 414 (1968)] rule does not require the
bankruptcy judge to hold a full evidentiary hearing or even a ‘minitrial’ before a compromise can be approved.” Collier on Bankruptcy ¶
9019.02 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.).
“Otherwise, there would be no point in compromising; the parties might
as well go ahead and try the case.” Id. “Instead, the obligation of
the court is to canvass the issues and see whether the settlement
falls below the lowest point in the range of reasonableness.”
Id.
(internal quotation marks omitted).

5

Appellant

frames

the

issues

on

appeal

as:

(1)

whether

“[t]he true tax liability of Debtor for tax years 1994 and 1995
was zero;” and (2) whether “[t]he amount of money extracted from
Debtor

for

years

1993

forward

extraction

was

Appellant Br. 1, ECF No. 6.

approximately $10.6 million.”

via

levy

But

as explained above, the bankruptcy court was not required to
decide those factual issues to approve the motion to compromise.
So the issue for this Court to decide on appeal is whether the
bankruptcy

court

compromise.
under the

abused

its

discretion

in

approving

the

For the following reasons, the Court finds that
Justice Oaks

factors the bankruptcy court did not

abuse its discretion in approving the compromise.
First, the bankruptcy court found that the possibility of
further reducing Debtor’s tax liability at trial was minimal.
Hearing
supported

Tr.
by

201:7-10.
the

The

Trustee’s

bankruptcy
testimony

court’s

that

if

finding
the

was

adversary

proceeding went to trial, he would be unable to prove some of
the

deductions

that

the

IRS

had

allowed

pursuant

compromise, thereby increasing Debtor’s tax liability.
126:7-128:19.

And

despite

numerous

opportunities

to

to

the

Id. at
produce

evidence of additional deductions or tax payments, Debtor and
Appellant produced none.6

Id. at 127:24-128:2.

6

Therefore, the

Even the proposed compromise provided that “[i]f the debtor
challenges the compromise with credible, admissible evidence that he

6

Court agrees with the bankruptcy court’s conclusion that it is
unlikely
trial.

Debtor’s

tax

liability

would

be

further

reduced

at

Accordingly, the first Justice Oaks factor supports the

bankruptcy court’s decision to approve the compromise agreement.
Second, the bankruptcy court found that a trial in the
adversary proceeding would be a “Herculean task” that would take
“an enormous amount of time” and “would cost a fortune.”7
199:5,

199:17,

201:18.

The

bankruptcy

court’s

Id. at

finding

was

supported by evidence that a trial in the adversary proceeding
would

involve

numerous

subpoenaed

witnesses,

several

days

in

court, and a large volume of documents canvassing the ten years
of disputed taxes.8
any

trial

would

Id. at 126:12-128:11, 198:18-199:10.

also

be

hampered

by

Debtor’s

refusal

And
to

is entitled to deductions beyond those that constitute the compromised
amounts . . . , the United States will adjust the corrected taxable
income and tax liability accordingly.”
Appellee Br. Ex. A, Mot. to
Compromise Controversy, Attach., Letter from IRS to Trustee Harris 2,
Oct. 13, 2010, ECF No. 8-1.
7

As the bankruptcy court recognized, the second Justice Oaks factor is
irrelevant because “collection difficulties for the Trustee are not an
issue.” In re Chira, 567 F.3d at 1313.

8

To the extent Appellant contends that the bankruptcy court erred in
failing to adequately consider the “six books”—a ten inch-thick
collection of copied checks, bank statements, deposits, and other
documents compiled by Appellant—the Court disagrees.
The record
reveals that the bankruptcy court admitted the “six books” despite
serious concerns regarding their authenticity and relevance. Hearing
Tr. 154:18-155:11.
And after reviewing the “six books,” the Court
determined that given their volume and nature, they would add
considerably to the length, complexity, and cost of a trial.
Id. at
198:13-199:18.
Therefore,
the
bankruptcy
court
appropriately
considered the “six books” under the Justice Oaks factors.

7

cooperate in the investigation of his tax liability.
122:3-9, 124:13-15, 127:24-128:3.
with

the

bankruptcy

court’s

Id. at

Therefore, the Court agrees

conclusion

that

the

compromise

avoids complex litigation that would cause the bankruptcy estate
and its creditors additional expense, delay, and inconvenience.
Accordingly, the second Justice Oaks factor also supports the
bankruptcy court’s decision to approve the compromise agreement.
Finally,

the

bankruptcy

court

found

that

the

proposed

compromise was in the best interest of the creditors.9
201:19-202:2.
unsecured

Id. at

The Trustee estimated that under the compromise,

creditors

would

approximately $25,000.

receive

a

distribution

of

Id. at 129:3-6; Appellee Br. Ex. A, Mot.

to Compromise Controversy ¶ 4, ECF No. 8-1.

Alternatively, the

Trustee admitted that if the adversary proceeding went to trial,
he would be unable to prove some of the deductions that the IRS
had allowed under the compromise.

Hearing Tr. 126:7-128:19.

So

proceeding to trial would likely increase Debtor’s tax liability
and therefore decrease the distribution to unsecured creditors.
And

the

additional

expense

associated

with

litigation

further diminish the distribution to unsecured creditors.
at 128:3-15.

would
Id.

Under these circumstances, the Court agrees with

the bankruptcy court’s conclusion that the compromise is in the
9

No creditors objected to the motion to compromise.
135:15-18.

8

Hearing Tr.

best interest of the creditors.
that

the

final

Justice

Oaks

Accordingly, the Court finds

factor

supports

the

bankruptcy

court’s decision to approve the compromise agreement.
CONCLUSION
For the foregoing reasons, the Court finds that each of the
relevant Justice Oaks factors supports the bankruptcy court’s
approval
resolving

of

2003.

the

settlement

Debtor’s

tax

between

liability

the

for

Trustee

tax

years

and
1994

the

IRS

through

Therefore, the Court finds that the bankruptcy court did

not abuse its discretion in approving the Trustee’s motion to
compromise.
court’s

order

Accordingly,
approving

the
the

Court
Chapter

affirms
7

the

Trustee’s

bankruptcy
Motion

to

Compromise Controversy.
IT IS SO ORDERED, this 9th day of August, 2011.
S/Clay D. Land
CLAY D. LAND
UNITED STATES DISTRICT JUDGE

9