Cory v. Leasure et al

Filing 11

OPINION by Senior Judge Thomas B. Russell on 03/28/2013. The Bankruptcy Court's order approving the Settlement Agreement in Case No. 10-11377, Docket No. 444, and entry of the Agreed Judgment in adversary proceeding No. 10-1055, Docket No. 49, are hereby AFFIRMED. cc: Counsel, USBC Clerk, Judge Lloyd (CDF)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
BOWLING GREEN DIVISION
CIVIL ACTION NO. 1:12-CV-00060-TBR
(CONSOLIDATED WITH NO. 1:12-CV-00062-TBR)
ROGER L. CORY, et al.

Appellants

v.
ROBERT W. LEASURE, Trustee, et al.

Appellees

OPINION
This is a consolidation of two appeals from the United States Bankruptcy Court
for the Western District of Kentucky (Bankruptcy Court) in relation to the approval of a
settlement agreement (Settlement Agreement) between the bankruptcy trustee and a
group of fifteen plaintiffs collectively referred to as the “Bennett Plaintiffs.” 1 The first
is the appeal of an order approving the Settlement Agreement, and the second is the
appeal of entry of the agreed judgment (Agreed Judgment) provided for in the
Settlement Agreement.
Robert Leasure is the court-appointed Chapter 11 trustee (Trustee) for the
debtors in the bankruptcy proceedings below, Mammoth Resource Partners, Inc. (MRP),
Mammoth Field Services, Inc., and Mammoth Resource, LLC (collectively “Debtors”).
The Appellants are Roger Cory and Daniel Northcutt, who collectively own one-

1

The “Bennett Plaintiffs” include Paul Daniel Bennett; Chris Endersby; Excellent Properties, LLC;
Peniel Enterprises, Inc.; Richard A. Persson; Andrew V. Podray; R&S Ogee Ventures, LLC; Calvin L.
Ryberg; H. Carl Ryberg; Carol Jean Glenn Ryberg; Mark and Christy Siebert; Jeff Wilson; and 2R Ogee
Ventures, LLC.

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hundred percent of the stock of the Debtors. The Appellees are the Trustee and the
Bennett Plaintiffs.
BACKGROUND
On October 2, 2007, the Bennett Plaintiffs filed suit in the United States District
Court for the Western District of Kentucky, Bowling Green Division, styled Paul Daniel
Bennett, et al. v. Mammoth Resource Partners, Inc., et al., No. 1:07-CV-168-JHM
(Bennett Lawsuit 2), against the Debtors, Cory, and eight partnerships 3 managed by
MRP. The Bennett Plaintiffs alleged sixteen causes of action, including violations of
the Securities Act of 1933, violations of the Securities Exchange Act of 1934, violations
of the Kentucky Securities Act, Fraud, Breach of Fiduciary Duty, and Breach of
Contract. The Bennett Plaintiffs also alleged that Cory was a “controlling person” of
other defendants under the Securities Act of 1933 and the Kentucky Securities Act. See
id., Docket No. 1.
On September 8, 2010, the Debtors filed Chapter 11 bankruptcy petitions in the
Bankruptcy Court. 4

After the bankruptcy petitions were filed, the District Court

2

The Appellants refer to this action as the “Bennett Lawsuit.” (Docket No. 8, at 6.) The Appellees
refer to this action as the “Securities Fraud Action.” (Docket No. 9, at 8.) For purposes of this Opinion,
the Court will refer to civil action No. 1:07-CV-168-JHM, which subsequently was referred to the
Bankruptcy Court and docketed as adversary proceeding No. 10-1055, as the “Bennett Lawsuit.”
3

These include Mammoth Discovery Working Interest; Mammoth Reveal, Ltd.; Mammoth Reserve,
Ltd.; Mammoth Opportunity, Ltd.; Mammoth Advantage, Ltd.; Mammoth Prosperity, Ltd.; Mammoth
Exclusive, Ltd.; and Mammoth Conversion, Ltd.
4

The associated case numbers for each Debtor are as follows: MRP, No. 10-11377; Mammoth
Resource, LLC, No. 10-11380; and Mammoth Field Services, Inc., No. 10-11378. On September 9, 2010
these cases were consolidated under MRP’s petition, No. 10-11377, for procedural purposes and joint
administration. In re Mammoth Resource Partners, Inc., No. 10-11377 (Bankr. W.D. Ky.), Docket Nos. 6
& 7.

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referred the Bennett Lawsuit to the Bankruptcy Court on October 28, 2010. Id., Docket
No. 122.

The Bankruptcy Court subsequently docketed that case as adversary

proceeding No. 10-1055. Paul Daniel Bennett, et al. v. Mammoth Resource Partners,
Inc., No. 10-1055 (Bankr. W.D. Ky.), Docket No. 1.
On February 17, 2011, the Bennett Plaintiffs moved the Bankruptcy Court to
dismiss the Chapter 11 case or, alternatively, to appoint a Chapter 11 trustee to manage
and operate the Debtors’ affairs. In re Mammoth Resource Partners, Inc., No. 1011377, Docket No. 128. The Bankruptcy Court conducted a hearing over several days
during which the court heard testimony regarding the Debtors’ financial reporting, the
Debtors’ assets and liabilities, Cory and Northcutt’s management of the Debtors, and the
claims asserted in the Bennett Lawsuit. See id., Docket No. 239. On May 27, 2011, the
Bankruptcy Court ordered the appointment of a Chapter 11 trustee to administer the
Debtors’ estates, id., and on June 10, 2011, granted the United States Trustee’s motion
to appoint Leasure as trustee, id., Docket Nos. 243; 245.
During the course of the bankruptcy case, the Bennett Plaintiffs twice moved for
summary judgment in the adversary proceeding before the Bankruptcy Court. See
Bennett, No. 10-1055, Docket Nos. 3; 32. The Bankruptcy Court denied the Bennett
Plaintiffs’ first motion on August 30, 2011. Id., Docket No. 24. Before briefing was
complete on the Bennett Plaintiffs’ second motion for summary judgment, the Bennett
Plaintiffs and the Trustee agreed to the terms of the Settlement Agreement.
On January 26, 2012, the Trustee filed a motion to approve the Settlement
Agreement. In re Mammoth Resource Partners, Inc., No. 10-11377, Docket No. 415.

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The Settlement Agreement resolved the disputes between the Trustee and the Bennett
Plaintiffs as to the allowance and amount of the Bennett Plaintiffs’ claims, whether their
claims would be subordinated, and the Debtors’ estates’ involvement in the Bennett
Lawsuit. See id., Docket No. 415-1. The Settlement Agreement specifically provided
that the Trustee consent to the Agreed Judgment 5 in favor of the Bennett Plaintiffs
against MRP in the Bennett Lawsuit and also that the Bennett Plaintiffs dismiss their
claims against the remaining defendants other than Cory. Id. at 4-5, ¶¶ 2-3.
On January 30, 2012, the Bankruptcy Court set a deadline of February 21, 2012,
for parties to object to the Trustee’s motion to approve the Settlement Agreement. Id.,
Docket No. 417. On February 5, the Trustee and the Bennett Plaintiffs filed a joint
motion to schedule a hearing on the Trustee’s motion for February 27, 2012. Id.,
Docket No. 422. Cory and Northcutt filed a response to the Trustee’s motion on
February 6, objecting to approval of the Settlement Agreement and requesting that if a
hearing was scheduled for February 27 that it “be held for the purpose of scheduling
and other preliminary matters.” Id., Docket No. 423, at 1. Cory and Northcutt tendered
with their response a proposed order that included the language: “IT IS HEREBY
ORDERED that this matter be scheduled for preliminary hearing on . . . .” Id., Docket
No. 423-1, at 1 (emphasis added). The Bankruptcy Court entered Cory and Northcutt’s
proposed order on February 7 setting the hearing for February 27. Cory and Northcutt
then filed their formal objections to the Trustee’s motion to approve the Settlement
Agreement on February 21. Id., Docket No. 430. Cory and Northcutt argued that the
5

The Agreed Judgment is attached as an exhibit to the Settlement Agreement. See In re Mammoth
Resource Partners, Inc., No. 10-11377, Docket No. 415-1, at 9-13.

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Settlement Agreement should not be approved because the Trustee had neither shown
that the proposed settlement was fair and equitable nor that its terms were in the best
interest of the Debtors’ estates. 6 Id. at 2-3.
On February 27, 2012, the Bankruptcy Court held a hearing on the Trustee’s
motion to approve the Settlement Agreement, during which the court heard argument
from Cory and Northcutt, the Trustee, the Bennett Plaintiffs, and the United States
Trustee. The Trustee, the Bennett Plaintiffs, and the United States Trustee each argued
that the court should approve the Settlement Agreement.

Counsel for the Trustee

proffered several grounds why the agreement should be approved: (1) the Bennett
Lawsuit, which involved securities violations against each of the three Debtors, could
be fairly characterized as “complex litigation” such that the estates would likely have to
“engage special counsel with expertise in defending security laws claims”; (2)
defending the Bennett Lawsuit would “result in the incurrence of significant
administrative expenses that may or may not be able to be paid”; (3) counsel for the
Trustee had reviewed the Bennett Plaintiffs’ claims and the defenses asserted by Cory
and Northcutt, and “ha[d] serious concerns about the ultimate outcome of this
litigation,” believing “there [was] a significant chance that [the Bennett Plaintiffs] might
prevail on one or more of those claims”; (4) if the settlement were not approved, “it
would require a significant devotion of time and resources that otherwise could be
6

The Court notes that despite framing their principal argument on appeal as whether the Trustee had
the authority to consent to judgment against a Chapter 11 debtor, (see Docket No. 8, at 5), Appellants did
not raise this issue in either their response to the Trustee’s motion to schedule a hearing on his motion to
approve the Settlement Agreement or in their detailed written objections, see In re Mammoth Resource
Partners, Inc., No. 10-11377, Docket Nos. 423; 430. Rather, Appellants focused their objections entirely
on whether the Settlement Agreement was fair and equitable, and whether the Trustee had shown it to be
fair and equitable and in the best interest of the Debtors’ estates. See id., Docket No. 430.

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directed toward liquidation of the assets of the estate”; and (5) that “litigation of these
claims would impose significant delay.” Id. at 5-6. Counsel for the Trustee concluded
by arguing:
This settlement is virtually the same as any settlement that comes
before this Court. It’s a compromise of a disputed claim. It will
avoid the incurrence of significant administrative expenses that
the estate can’t afford. It avoids the risk of an adverse result. It
reduces the potential cut recovery by two-thirds. Simply put, it’s
a good deal for the estate and the creditors. Conversely, if the
estate has to litigate these defenses, it’s not going to add anything
from an asset side to the estate, it will only drain the assets.
Id. at 8-9. The United States Trustee similarly stated: “[W]e believe it’s a contentious,
difficult case. The settlement as [counsel for the Trustee] pointed out, it’s a good deal
for the estate. We think it’s a great deal for the estate and we think the Court should
approve it.” Id. at 37. Also during that hearing, the Bankruptcy Court examined
counsel for the Bennett Plaintiffs on many of the legal and factual issues relative to the
Settlement Agreement.
At the February 27 hearing, Bankruptcy Judge Joan Lloyd acknowledged that
she accidentally signed the proposed order tendered by Cory and Northcutt that
characterized the February 27 hearing as “preliminary”:
The problem is I signed the wrong order. I should have signed the
order that said this was the final hearing. I don’t know why [Cory
and Northcutt] tendered an order that this was a preliminary
hearing. But [they] did and I signed it . . . .
....
I’m going to have to set this for a final hearing because I signed
the wrong order. My fault.

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Two orders were tendered; one was a joint motion. And then
[Cory and Northcutt] tendered a second one. And I don’t know
why I signed the wrong one. But I signed the one that said this
was a preliminary hearing and so this is defective for purposes of
getting to the final merits.
See id. at 41-42. Counsel for Cory and Northcutt proposed March 12 for the final
hearing and told the court he would “prefer not to do it this week” because he wanted to
talk to Cory. Id. at 44-45. Judge Lloyd rejected counsel’s request to schedule the final
hearing farther out, reiterating that Cory had “known about this for a long time,” and
that “nobody knows more about these debtor entities than Mr. Cory so that doesn’t go
too far with me.” Id. at 46. After discussing counsel’s respective scheduling conflicts,
the court set a final hearing for March 2, 2012.
On February 29, Cory and Northcutt filed an expedited motion to continue the
final hearing, id., Docket No. 439, to which the Trustee and Bennett Plaintiffs filed an
objection later that same day, id., Docket No. 440. On March 1, the Bankruptcy Court
denied Cory and Northcutt’s motion for a continuance. Id., Docket No. 441.
At the March 2 hearing, counsel for the Trustee again proffered to the
Bankruptcy Court that he had reviewed the claims and defenses in the Bennett Lawsuit
and “had serious concerns about the outcome of the litigation.” Id., Docket No. 507, at
6. He repeated that the Bennett Lawsuit was complex and would cause the Debtors’
estates to incur significant costs to defend. Id. at 5. Counsel further stated that “[a]
successful defense, best case, would only result in the occurrence of significant
additional administrative expense.” Id. at 6. And he proffered that the Settlement
Agreement was in the interest of the estates, not only because it would “avoid the time,

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expense and risk of this litigation,” but also because the negotiated settlement was at a
discount of twenty-five percent of the amounts claimed. Additionally, he stated that the
settlement was favorable to the estates because only one-third of the claims would be
allowed as general unsecured claims, whereas the remainder would be subordinated to
general unsecured claims—thus, the estates would also avoid the expense of litigating
the subordination issue. Id. at 6-7. Responding to Cory and Northcutt’s assertion that
additional discovery was needed, counsel for the Trustee argued: “Mr. Cory is a party
to the litigation that we’re trying to settle, so he knows as much about this case as
anyone and doesn’t need any such discovery. They haven’t proffered any discovery.”
Id. at 8.
The Trustee also offered sworn testimony at the March 2 hearing. The Trustee
testified that he believed the Settlement Agreement was “beneficial to the creditors and
all the stakeholders of the estate.” Id. at 20. He testified that he estimated the estates
would spend $75,000 to $125,000 concluding the Bennett Lawsuit and that, based on
his counsel’s assessment of the claims and defenses, in his business judgment as trustee
he believed the compromise was beneficial to the estates.

Id. at 24-25, 35.

Additionally, counsel for the Bennett Plaintiffs similarly discussed with the Bankruptcy
Court the merits of the Bennett Lawsuit. See id. at 42-43.
At the conclusion of the March 2 hearing, Judge Lloyd issued her decision on
the Trustee’s motion to approve the Settlement Agreement. Id. at 46-51. She began by
finding that, under Fed. R. Bankr. P. 9019, “There has been appropriate notice [and]
opportunity to be heard.” Id. at 46. Judge Lloyd next concluded that “the trustee has

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sustained his burden under the formula set out by the Sixth Circuit.” Id. at 48. Turning
to the merits of the settlement, she found that the Trustee had informed himself of the
claims and defenses in the Bennett Lawsuit and had “determined that that litigation can
and should be settled on the terms negotiated with the Bennett plaintiffs.” Id. Judge
Lloyd stated that evidence had been tendered showing the settlement was reached by
arm’s-length negotiation and that there was no evidence to suggest “this has not been at
arms length and appropriate negotiation and use of the Trustee’s business judgment.”
Id. She concluded, stating: “The Court finds it’s fair and equitable.” Id.
While rendering her decision, Judge Lloyd also addressed the issue raised by
Cory and Northcutt regarding the collateral effect on them had by the Settlement
Agreement and Agreed Judgment. See id. Noting case law from other district courts in
this Circuit, she concluded that the “collateral effect on other entities is not a relevant
basis for this Court to deny approval of the settlement.” Id. Judge Lloyd went on: “If
this Court were governed by what might happen to other non-bankrupt entities that are
part of this estate . . . then a court sitting in bankruptcy could never approve these
settlements, because they always have collateral effect, both positive and negative on
others.” Id. at 49. She acknowledged taking into consideration the conflicting interests
of the parties, Cory and Northcutt’s objection, and the evidence tendered before
concluding that “the overall effect of this is to benefit the estates.” Id. Judge Lloyd
expounded on her reasoning:
Probability of success on the merits, the Court does remember the
testimony from May. You know, it’s hard to forget testimony. . . .
I remember testimony and the Court believes that the probability

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of success on the merits for the estate is quite possibly as best
described as grim.
And in light of that, the Court believes that the trustee has
made an appropriate decision to forgo expenditure of, between
seventy-five and $125,000 in legal fees, which in this Court’s
opinion is probably dead on accurate, probably more on the
nature of $125,000. So the probability of success on the merits in
light of the savings to the estate is overwhelming.
. . . . So for all the reasons stated in the record, the Court has
taken evidence. There has been more than enough notice and
opportunity to be heard. The Court is going to enter an order
approving the settlement.
Id. at 49-50.
The Trustee then filed the proposed Agreed Judgment in the bankruptcy
adversary proceeding on March 7, 2012. Bennett, No. 10-1055, Docket No. 48. And on
March 8, 2012, the Bankruptcy Court entered the Agreed Judgment. Id., Docket No.
49. This appeal followed.
STANDARD OF APPELLATE REVIEW
This Court has jurisdiction to hear this consolidated appeal from the Bankruptcy
Court pursuant to 28 U.S.C. § 158(a)(1).

When hearing an appeal from the final

decision of a bankruptcy court, the district court sits as an appellate court. As an
appellate court, this Court reviews the Bankruptcy Court’s findings of fact for clear
error and its conclusions of law de novo. Nat’l Union Fire Ins. Co. v. VP Bldgs., Inc.,
606 F.3d 835, 837 (6th Cir. 2010); In re Mitan, 573 F.3d 237, 241 (6th Cir. 2009). The
Court reviews the Bankruptcy Court’s approval of a settlement agreement for abuse of
discretion. In re MQVP, 477 F. App’x 310, 312 (6th Cir. 2012). “Abuse of discretion”
is defined as a “definite and firm conviction that the [bankruptcy court] committed a
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clear error of judgment.” In re Hines, 193 F. App’x 391, 393 (6th Cir. 2006) (alteration
in original) (quoting In re M.J. Waterman & Assocs., Inc., 227 F.3d 604, 607-08 (6th
Cir. 2000)). “The question is not how the reviewing court would have ruled, but rather
whether a reasonable person could agree with the bankruptcy court’s decision; if
reasonable persons could differ as to the issue, then there is no abuse of discretion.” Id.
(quoting In re M.J. Waterman, 227 F.3d at 608).
ISSUES ON APPEAL
Appellants present three issues on appeal:
I.

Whether the Trustee had the authority to enter into a settlement agreement on
behalf of the Debtors that included as one of its provisions the entry of an
agreed judgment against one of those Debtors in a pending adversary
proceeding?

II.

Whether the Bankruptcy Court committed error in scheduling the hearing(s) on
the Trustee’s motion to approve the Settlement Agreement by failing to provide
sufficient notice to Appellants?

III.

Whether the Bankruptcy Court properly apprised itself of the facts necessary to
evaluate the proposed Settlement Agreement and made an informed judgment
that the settlement was fair and equitable?

The Court will address each in turn.

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DISCUSSION
I.

The Trustee had the authority to enter into the Settlement Agreement that
included as one of its provisions the Agreed Judgment against MRP.
The primary issue on appeal is whether the Bankruptcy Court abused its

discretion by approving the Settlement Agreement proposed by the Trustee. “A trustee
in bankruptcy has the authority to seek a settlement of claims available to the debtor,
but any proposed settlement is subject to the approval of the bankruptcy court, which
enjoys ‘significant discretion.’” In re MQVP, 477 F. App’x at 312 (citing Fed. R.
Bankr. P. 9019; In re Rankin, 438 F. App’x 420, 426 (6th Cir. 2011)). “The very
purpose of such a compromise agreement is to allow the trustee and the creditors to
avoid the expenses and burdens associated with litigating sharply contested and dubious
claims.” Id. (internal quotation marks omitted) (quoting In re Bard, 49 F. App’x 528,
530 (6th Cir. 2002)). “The law favors compromise and not litigation for its own sake.”
In re Fishell, 47 F.3d 1168, 1995 WL 66622, at *2 (6th Cir. 1995) (unpublished table
decision) (quoting In re A&C Props., 784 F.2d 1377, 1380-81 (9th Cir. 1986)); In re
MQVP, 477 F. App’x at 312-13.
Still, when determining whether to approve a settlement agreement, the
bankruptcy court may not “rubber stamp” the agreement or merely rely upon the
trustee’s word that the compromise is reasonable. In re MQVP, 477 F. App’x at 313;
Reynolds v. C.I.R., 861 F.2d 469, 473 (6th Cir. 1988). Instead, “the bankruptcy court is
charged with an affirmative obligation to apprise itself of the underlying facts and to
make an independent judgment as to whether the compromise is fair and equitable.” In
re MQVP, 477 F. App’x at 313 (quoting Reynolds, 861 F.2d at 473). In Protective

Page 12 of 22

Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, the Supreme
Court outlined the general factors a bankruptcy judge should consider in determining
whether a proposed settlement is “fair and equitable.” 390 U.S. 414, 424-25 (1968).
The Sixth Circuit, in In re Bard, 7 summarized how other federal courts had
implemented those guidelines and distilled four distinct factors for bankruptcy courts to
consider:
(1) the probability of success in the litigation;
(2) the difficulties, if any, to be encountered in the matter of collection;
(3) the complexity of the litigation and the expense, inconvenience,
and delay attendant to it; and
(4) the paramount interest of creditors and proper deference to their
reasonable views.
49 F. App’x at 530. However, “[a] bankruptcy judge need not hold a mini-trial or write
an extensive opinion every time [s]he approves or disapproves a settlement. The judge
need only apprise [her]self of the relevant facts and law so that [s]he can make an
informed and intelligent decision, and set out the reasons for [her] decision.” In re
MQVP, 477 F. App’x at 313 (first alteration in original) (quoting In re Fishell, 47 F.3d
1168, 1995 WL 66622, at *3). “The judge may make either written or oral findings;
form is not important, so long as the findings show the reviewing court that the judge
properly exercised [her] discretion.” In re Fishell, 47 F.3d 1168, 1995 WL 66622, at *3
(quoting In re Am. Corp., 841 F.2d 159, 163 (7th Cir. 1987)). Finally, both bankruptcy
and district courts in this Circuit “generally accord some deference to the trustee’s

7

Although In re Bard is an unpublished decision, the Sixth Circuit routinely applies its four-factor
test for considering challenges to proposed settlement agreements in bankruptcy appeals. E.g., In re
MQVP, 477 F. App’x at 313; Lyndon Prop. Ins. Co. v. Katz, 196 F. App’x 383, 387 (6th Cir. 2006); cf.
Bauer v. Commerce Union Bank, 859 F.2d 438, 441 (6th Cir. 1988) (utilizing a three-part test similar to
that later set out in In re Bard ) .

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decision to settle a claim.” In re MQVP, 477 F. App’x at 313 (referencing, e.g., In re
Media Cent., Inc., 190 B.R. 316, 321 (E.D. Tenn. 1994); In re Smithey, 2011 WL
3102308, at *6-7 (Bankr. N.D. Ohio July 25, 2011)); see also Bauer v. Commerce
Union Bank, Clarksville, Tenn., 859 F.2d 438, 441 (6th Cir. 1988).
Appellants argue that the Bankruptcy Court abused its discretion because the
Trustee lacked the authority to enter into the Settlement Agreement that contained as
one of its provisions the Agreed Judgment against MRP. Appellants contend that
although the Trustee had the authority to settle claims against the bankruptcy estate, he
had no authority to consent to a judgment against MRP. Here they distinguish between
paragraphs 1 and 2 of the Settlement Agreement, which provide in relevant part:
1. Each of the Bennett Plaintiffs shall have an allowed claim in a
dollar amount that is seventy-five percent (75%) of the total
amount of their claim with prejudgment interest accruing only
through the petition date against MRP, [Mammoth Field Services,
Inc.], and [Mammoth Resource, LLC] . . . .
....
2. The Trustee shall consent to entry of a judgment in favor of the
Bennett Plaintiffs and against MRP for the sale of unregistered
securities to the Bennett Plaintiffs . . . . Upon entry of an order
approving this Settlement Agreement, the Bennett Plaintiffs shall
file the Agreed Judgment . . . in the Adversary Proceeding.
In re Mammoth Resource Partners, Inc., No. 10-11377, Docket No. 415-1, at 3-4.
Paragraph 1, Appellants reason, pertains to the proper authority of the Trustee to resolve
claims against the bankruptcy estate; however, they maintain that paragraph 2 has
nothing to do with the bankruptcy estate and goes beyond the Trustee’s authority. (See
Docket No. 8, at 13.) Appellants insist that paragraph 2: “does not deal with how the
claimants are treated inside the bankruptcy proceedings, but only how they are treated
outside the bankruptcy proceedings. . . . And in this particular case, paragraph 2 deals
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with how Appellant Cory is treated outside the bankruptcy proceedings. It adds nothing
to the administration of the estate.” (Docket No. 8, at 14.)
The Court is unpersuaded, much as the Bankruptcy Court was, that the Trustee
lacked the authority to enter into the Settlement Agreement, including the provision
providing for an agreed judgment against MRP. It is clear to the Court that Appellants’
principal quarrel with the Trustee consenting to the Agreed Judgment against MRP is
the potential collateral effect on Cory: “The apparent purpose of paragraph 2 is to
enable the Bennett Plaintiffs to recover a $5,962,550.42 judgment against Appellant
Cory.” (Docket No. 8, at 15.) Appellants insist that because MRP, under the terms of
the Settlement Agreement and Agreed Judgment, would consent to judgment making
MRP liable to the Bennett Plaintiffs under Ky. Rev. Stat. § 292.480(1), the Bennett
Plaintiffs would need prove only that Cory was a “control person” under § 292.480(4)
to obtain a judgment against Cory individually. (Docket No. 8, at 15-17.)
The Bankruptcy Court concluded on the record that the potential collateral
effect on Cory (and/or Northcutt) individually was not an appropriate basis to deny
approval of the Settlement Agreement. In re Mammoth Resource Partners, Inc., No.
10-11377, Docket No. 507, at 48-49. The record reflects that the bankruptcy judge
relied in part on Ames v. Rabin, 2011 WL 1630139 (N.D. Ohio Apr. 29, 2011), in
dismissing the potential collateral effect on Appellants. Though not binding on this
Court, Ames’ reasoning does offer some guidance here. In Ames, a bankruptcy trustee
in an adversary proceeding moved for approval of a proposed settlement agreement
among the debtor’s estate and certain directors and officers of the debtor. A creditor of
the debtor objected to the settlement because it believed the terms of the settlement

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might affect its ability to seek contribution from joint tortfeasors. The district court
overruled that objection, finding the creditor’s concern was primarily an objection to
state law, not the settlement agreement. Id. at * 1-2. The court in Ames reasoned that
the creditor was “left in no worse a position now than if the case had proceeded to the
merits and reached a judgment” and, upon concluding that the settlement was fair and
reasonable and in the best interest of the estate, approved the settlement agreement. Id.
at *2-3.
Though neither controlling nor perfectly on point, the Court finds Ames’
reasoning persuasive. Much like the creditor in Ames, Appellants’ argument here is
really an objection to the effect of Kentucky state securities law rather than to the terms
of the Settlement Agreement itself. The Settlement Agreement and Agreed Judgment
put Appellants in no worse position than had the Bennett Plaintiffs succeeded on the
merits against MRP. As Judge Lloyd concluded, “If [the Bankruptcy Court] were
governed by what might happen to other non-bankrupt entities that are part of this
estate . . . then a court sitting in bankruptcy could never approve settlements, because
they always have collateral effect, both positive and negative on others.”

In re

Mammoth Resource Partners, Inc., No. 10-1055, Docket No. 507, at 49. Thus, the
Court concludes that the Bankruptcy Court did not commit a clear error of judgment in
rejecting the potential collateral effect on Appellants as appropriate grounds for denying
approval of the Settlement Agreement.
Moreover, the Court is unpersuaded that, as a general matter, the Trustee
exceeded his authority by consenting to the Agreed Judgment against MRP.

A

bankruptcy trustee is charged with maximizing the estate’s assets and, accordingly,

Page 16 of 22

enjoys broad discretion in administering the bankruptcy estate. This discretion extends
to deciding whether settlement is preferable to litigation. The record shows that the
Trustee thoroughly considered the Bennett Plaintiffs’ claims, the defenses available, the
likelihood of successfully litigating those claims, and the potential cost and benefit to
the estates in deciding the Settlement Agreement was fair and equitable and in the
estates’ best interest. As a part of the arm’s-length negotiations with the Bennett
Plaintiffs, the Trustee determined that consent to the Agreed Judgment was necessary to
realize the cost savings of resolving the disputes between the estates and the Bennett
Plaintiffs, to mitigate the risk of litigating the claims against the estates, and also to
dispose of the Bennett Plaintiffs’ claims against the debtors. As the Bankruptcy Court
recognized:
[The Trustee] in his fiduciary responsibility is charged only with
protecting these estates.
Now, ultimately he does have a fiduciary duty to all
stakeholders, creditors, secured, unsecured stakeholders. But that
duty does not mean that he has to do what they want. Mr. Cory
and Mr. Northcutt lost their opportunity to direct these cases back
in May. And all [the Trustee] has to do is to honor the estate as a
whole and honor his fiduciary duty to the estate as a whole.
Settling a case or a series of cases on terms that he deems on
advice of counsel are advantageous to the overall estate and its
creditors and stakeholders is sufficient for this Court to determine
it’s fair and equitable.
Id. at 49.

Thus, this Court cannot conclude that the Bankruptcy Court erred by

rejecting Appellants’ argument that the Trustee exceeded his authority in consenting to
the Agreed Judgment against MRP.

Page 17 of 22

II.

The Bankruptcy Court did not err in scheduling the hearing on the
Trustee’s motion to approve the Settlement Agreement.
Appellants’ second issue on appeal is whether the Bankruptcy Court committed

error (1) by scheduling the hearing on the motion to approve settlement without
adequate notice and (2) by not granting them a continuance to conduct additional
discovery. Federal Rule of Bankruptcy Procedure 9019 states that “after notice and
hearing, the court may approve a compromise or settlement.” Rule 9019 goes on to
provide that notice shall be given in accordance with Rule 2002, which provides for
twenty-one days’ notice of the hearing on a motion to approve a compromise or
settlement unless the court for cause shown directs otherwise. See Fed. R. Bankr. P.
2002(a)(3). 11 U.S.C. § 102(1)(A) defines the phrase “after notice and a hearing,” for
purposes of Title 11, as “mean[ing] after such notice as is appropriate in the particular
circumstances, and such opportunity for a hearing as is appropriate in the particular
circumstances.” And Rule 9006(c)(1) states that “when an act is required or allowed to
be done at or within a specific time by these rules or by notice given thereunder . . . the
court for cause shown may in its discretion with or without motion or notice order the
period reduced.” Although that Rule proceeds to expressly prohibit the reduction of
time for taking action under an exhaustive list of other rules, it does not prohibit
reduction under either Rule 9019 or Rule 2002(a)(3). See Fed. R. Bankr. P. 9006(c)(2).
Thus, despite that Rule 2002(a)(3) provides for twenty-one days’ notice of a hearing on
a motion to approve settlement, the Court reads that rule in conjunction with 11 U.S.C.
§ 102(1)(A) and Rule 9006(c) as permitting the Bankruptcy Court some degree of

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flexibility in scheduling such a hearing and some discretion in determining whether
notice has been adequately given. 8
Here, the Trustee filed his motion to approve the Settlement Agreement on
January 26, 2012. In re Mammoth Resource Partners, Inc., No. 10-1055, Docket No.
415. The Bankruptcy Court entered a notice setting a deadline for objections twentyone days later on February 21. Id., Docket No. 417. Then on February 5, having been
informed that Cory and Northcutt planned to object to the Settlement Agreement, the
Trustee and the Bennett Plaintiffs filed a joint motion requesting the Bankruptcy Court
schedule a hearing on the motion for February 27. Id., Docket No. 422. The Trustee,
joined by the Bennett Plaintiffs, requested a hearing on February 27 so that the court
could rule on that motion in advance of the hearing on the Trustee’s motion for
substantive consolidation, which was originally scheduled for February 27 but
continued to March 26.

See id.; see also id., Docket Nos. 421; 425.

Cory and

Northcutt objected to setting the hearing on the motion to approve settlement on
February 27, arguing they needed additional time for discovery and requesting that if
the court set a hearing for February 27 it be a preliminary hearing. Id., Docket No. 423.
The Bankruptcy Court ruled on these motions on February 7 and entered an
order scheduling a preliminary hearing on February 27, twenty days later. Id., Docket
No. 427. At the February 27 hearing, Judge Lloyd acknowledged that she accidentally
signed Cory and Northcutt’s proposed order referring to the February 27 hearing as
8

Other courts similarly have read Rule 2002(a)(3)’s notice requirement as neither absolute nor
mandatory. See, e.g., In re Thompson, 965 F.2d 1136, 1140-41 n.5 (1st Cir. 1992); In re Triple E Transp.,
Inc., 169 B.R. 368, 373 (Bankr. E.D. La. 1994); In re Stumpff, 109 B.R. 1014, 1017 (Bankr. E.D. Okla.
1989); In re Glinz, 66 B.R. 88, 91 (D.N.D. 1986); In re Patel, 43 B.R. 500, 503-04 (N.D. Ill. 1984).

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“preliminary.” See id., Docket No. 506, at 41-42. Counsel for Cory and Northcutt
proposed March 12 for a final hearing but requested that the final hearing be scheduled
even farther out because he wanted to talk to Cory. Id. at 44-45. Judge Lloyd rejected
that request, reasoning that Cory had “known about this for a long time,” and that
“nobody knows more about these debtor entities than Mr. Cory.” Id. at 46. The court
also took into consideration the pending deadline to object to consolidation and the fact
that the Bennett Plaintiffs’ objection to consolidation would be resolved by the terms of
the Settlement Agreement. Id. at 43.
The Bankruptcy Court also considered and addressed Cory and Northcutt’s
argument that additional discovery was needed regarding the exchange of offers of
compromise between the Trustee and the Bennett Plaintiffs and the advice the Trustee
received from counsel relative to the merits of the Bennett Plaintiffs’ claims. Cory and
Northcutt also requested the opportunity to depose the Trustee about the settlement
negotiations. The Bankruptcy Court effectively dismissed these arguments, advising
Cory and Northcutt that they could file a motion under Fed. R. Bankr. P. 2004 but that
inquiry into the settlement negotiations and advice of counsel was prohibited under
both the Federal Rules of Evidence and the Bankruptcy Rules. See id. at 47-48. (Judge
Lloyd further noted that if Cory and Northcutt were unable to depose the Trustee before
the March 2 hearing, they would nonetheless be able to examine him under oath at that
hearing. Id. at 57.)
After that hearing was held on February 27, Cory and Northcutt filed an
expedited motion on February 29 to continue the final hearing scheduled for March 2.

Page 20 of 22

Id., Docket No. 439. On March 1, the Bankruptcy Court denied Cory and Northcutt’s
motion for a continuance. Id., Docket No. 441.
Based on its review of the record and proceedings below, this Court is satisfied
that the Bankruptcy Court showed good cause for scheduling the preliminary hearing
twenty days after the entry of its scheduling order (a mere one day less than provided in
Rule 2002) and for scheduling the final hearing four days thereafter. The February 27
hearing was held twenty-eight days after the court entered its notice for objections to
the Trustee’s motion to approve the Settlement Agreement. Judge Lloyd dealt with
Cory and Northcutt’s contentions that additional time was needed for discovery 9 and
also expressly determined multiple times on the record that there had been adequate
notice and an opportunity to be heard. Id., Docket No. 507, at 46, 49. Thus, the Court
concludes that Rule 2002(a)(3)’s notice and opportunity-to-be-heard requirements were
fulfilled and that the Bankruptcy Court showed good cause for reducing the notice
period.
III.

The Bankruptcy Court properly apprised itself of the facts necessary to
evaluate the proposed Settlement Agreement and made an informed
judgment that the settlement was fair and equitable.
Appellants’ final argument challenges the Bankruptcy Court as failing to apprise

itself of the underlying facts and failing to make an independent judgment whether the
Settlement Agreement was fair and equitable. (Docket No. 8, at 19.) Appellants base
this argument on two contentions: (1) that the Trustee put forward no evidence why the
9

Notably, despite requesting additional time to depose the Trustee and being advised by Judge Lloyd
that they could file a Rule 2004 motion, Appellants did not file such a motion nor proffered any
discovery. See id., Docket No. 507, at 8.

Page 21 of 22

Debtors’ estates would benefit from the Settlement Agreement, and (2) that the Trustee
had not “appraised [sic] himself of the underlying facts, but was relying solely on the
advice of counsel.” (Docket No. 8, at 19.) Both of these arguments are belied by the
record below.
The Court’s review of the Bankruptcy Court’s proceedings on February 27 and
March 2, 2012, unquestionably shows that both the Trustee and the Bankruptcy Court
were well informed of the facts relative to the Bennett Lawsuit and the proposed
settlement.

The transcripts of those proceedings also show that the Trustee

demonstrated to the court why the Settlement Agreement was beneficial to the estates.
Finally, the record clearly reflects that the Bankruptcy Court properly apprised itself of
the facts necessary to evaluate the settlement and made an informed and independent
judgment that the proposed compromise was fair and equitable, thereby complying with
this Circuit’s standard for approving such a settlement agreement. See In re Bard, 49 F.
App’x at 530. Therefore, the Court concludes that the Bankruptcy Court did not err in
this regard.
CONCLUSION
For these reasons, the Bankruptcy Court’s order approving the Settlement
Agreement in Case No. 10-11377, Docket No. 444, and entry of the Agreed Judgment
in adversary proceeding No. 10-1055, Docket No. 49, are hereby AFFIRMED.
Date:

cc:

March 28, 2013

Counsel

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