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
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