In re: Donald H. Grodsky
Filing
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ORDER AND REASONS that the bankruptcy courts order confirming the compromise between the trustee and Lake Villas is AFFIRMED. Signed by Judge Lance M Africk on 10/8/2014.(cms)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA
IN RE: DONALD H. GRODSKY
CIVIL ACTION
No. 14-1341
SECTION I
ORDER AND REASONS
Before the Court is an appeal1 filed by appellants, John T. LaMartina-Howell and Pooter
T, LLC, who are interested parties in the underlying bankruptcy proceeding, from an order2 by
the U.S. Bankruptcy Court approving a compromise between David C. Adler, trustee of the
Chapter 7 bankruptcy estate, and Lake Villas No. II Homeowners Association, Inc. (“Lake
Villas”). For the following reasons, the bankruptcy court’s order is AFFIRMED.
BACKGROUND
The compromise at issue concerns a mortgage note on a condominium unit whose
ownership is in dispute. Appellants contend that they are the true owners of the note, the trustee
contends that the note is part of the bankruptcy estate, and Lake Villas contends that it has a
claim against the property for unpaid condominium fees. The parties are presently litigating in
state court to determine the true ownership of the note, which will in turn affect whether the note
is a part of the bankruptcy estate.
In light of the protracted nature of the state court litigation, “the Trustee and Lake Villas
reached a compromise of the claims existing between the [bankruptcy] Estate and Lake Villas,
1
2
R. Doc. No. 1.
R. Doc. No. 1-2.
subject to [the bankruptcy court’s] approval.”3 Rather than incur the expense of continued
litigation “over an all-or-nothing proposition,”4 the trustee and Lake Villas agreed to split the
proceeds of a foreclosure against the condominium unit, minus certain expenses,5 which the
trustee anticipates will “result in the 100% payment in full of the timely-filed, allowed unsecured
claims in this case.”6 Importantly, the compromise is only binding on the parties “if the Estate is
deemed to be the owner of the Mortgage Note.”7
The trustee filed a motion for approval of the compromise pursuant to Rule 9019 of the
Federal Rules of Bankruptcy Procedure, which appellants opposed. Appellants did not appear at
the hearing on the motion, instead relying on their written opposition, and the bankruptcy court
granted the motion. Appellants assert that such order was entered prematurely because the
bankruptcy estate “owns nothing at this point in time and probably never will.”8 Appellants
assert that the compromise is an attempt to circumvent the state court litigation and that it
“thwarts any efforts on your Appellants’ part to settle this matter amicably.”9
STANDARD OF REVIEW
The trustee’s motion pursuant to Rule 9019 is a core proceeding. See, e.g., 28 U.S.C.
§ 157(b)(2)(A), (K), (O); In re Bradley, No. 06-51740, 2007 WL 1500876, at *3 (Bankr. W.D.
Tex. May 18, 2007); In re Imperial Tooling & Mfg. Inc., 314 B.R. 340, 342 (Bankr. N.D. Tex.
2004). In reviewing the bankruptcy court’s determination of “core” bankruptcy issues, “the
district court is bound to review the bankruptcy court’s decision under the same standards that
3
R. Doc. No. 12-1, ¶ 13.
R. Doc. No. 16, at 10.
5
See R. Doc. No. 12-1, ¶ 13(h)(ii).
6
R. Doc. No. 12-1, ¶ 17.
7
R. Doc. No. 12-1, ¶ 13(d); see also R. Doc. No. 12-1, ¶ 13(c), (e).
8
R. Doc. No. 17, ¶ 8; see also R. Doc. No. 12, ¶ 24.
9
R. Doc. No. 12, ¶ 25.
4
2
[an appellate court applies] to an ordinary district court opinion.” Coston v. Bank of Malvern (In
re Coston), 991 F.2d 257, 261 n.3 (5th Cir. 1993) (citing Griffith v. Oles (In re Hipp, Inc.), 895
F.2d 1503, 1517 (5th Cir. 1990)). “This Court should review the Bankruptcy Court’s approval of
the compromise settlement for abuse of discretion.” Conn. Gen. Life Ins. Co. v. United Cos. Fin.
Corp. (In re Foster Mortg. Corp.), 68 F.3d 914, 917 (5th Cir. 1995) (citing Sandoz v. Bennett (In
re Emerald Oil Co.), 807 F.2d 1234, 1239 (5th Cir. 1987); Rivercity v. Herpel (In re Jackson
Brewing Co.), 624 F.2d 599, 602-03 (5th Cir. 1980)). However, “‘[t]he abuse of discretion
standard includes review to determine that the discretion was not guided by erroneous legal
conclusions.’” Brown Mfg. v. Mims (In re Coastal Plains), 179 F.3d 197, 205 (5th Cir. 1999)
(quoting Koon v. United States, 518 U.S. 81, 100 (1996)).
LAW AND ANALYSIS
Rule 9019 provides, “On motion by the trustee and after notice and a hearing, the court
may approve a compromise or settlement.” “A proposed settlement must be ‘fair and equitable’
and in the best interests of the estate.” The Cadle Co. v. Mims (In re Moore), 608 F.3d 253, 263
(5th Cir. 2010) (citing Am. Can Co. v. Herpel (In re Jackson Brewing Co.), 624 F.2d 605, 608
(5th Cir. 1980)). “Five factors inform the ‘fair and equitable’ analysis: (1) the probability of
success in the litigation, with due consideration for the uncertainty in fact and law; (2) the
complexity and likely duration of the litigation and any attendant expense, inconvenience, and
delay, including the difficulties, if any, to be encountered in the matter of collection; (3) the
paramount interest of the creditors and a proper deference to their respective views; (4) the
extent to which the settlement is truly the product of arm’s-length bargaining and not fraud or
collusion; and (5) all other factors bearing on the wisdom of the compromise.” Id. (citing In re
Foster Mortg. Corp., 68 F.3d at 917-18).
3
The bankruptcy court held a hearing on April 16, 2014, with counsel for the trustee and
for Lake Villas appearing. Counsel for appellants “contacted the Court prior to the Hearing and
advised the Court that they waived their appearance at the Hearing and submitted their filed
Opposition in lieu of an appearance.”10 The trustee’s motion discussed the trustee’s probability
of success in litigation, the near certainty of an appeal, the probability that the settlement would
result in full payment of the unsecured creditors,11 and the arm’s-length negotiation that
precipitated the settlement.12 Appellants’ opposition advised the bankruptcy court of the status of
the ongoing state court litigation, including appellants’ suspensive appeal that stayed the effect of
any state court resolution of the ownership of the property.13 The bankruptcy court found “that
the proposed compromise is fair and equitable and is in the best interest of the estate and its
creditors,” and it granted the motion and overruled the objection “based upon the Court’s review
of the pleadings, the arguments of counsel, and the entire record of this case.”14
Based on the record, this Court does not find that the bankruptcy court abused its
discretion in approving the conditional compromise. As noted above, the first four factors of In
re Moore were explicitly discussed by the trustee in its motion. See id. The final catch-all factor
includes a consideration of the ongoing and unresolved nature of the state court litigation, see id.,
which appellants argued to the bankruptcy court through their opposition.15
10
R. Doc. No. 1-1, at 1.
R. Doc. No. 12-1, ¶¶ 17-18.
12
R. Doc. No. 12-1, ¶ 19.
13
See In re Grodsky, Bankruptcy Case No. 09-13383 (Bankr. E.D. La. Apr. 8, 2014), R. Doc.
No. 75.
14
R. Doc. No. 1-1, at 1.
15
R. Doc. No. 1-1, at 1.
11
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The compromise is expressly conditioned on a determination that the estate is the owner
of the note.16 The bankruptcy court made no finding or determination with respect to the
ownership or disposition of any property. Although appellants claim that the possibility of
settlement of the state litigation has been “thwarted,”17 the trustee and Lake Villas remain free to
pursue or not to pursue settlement with appellants. The compromise simply eliminates the need
for any future litigation between the trustee and Lake Villas, and the trustee anticipates that it
will result in full repayment of the allowed unsecured claims. Accordingly, this Court cannot
find that the bankruptcy court abused its discretion in finding that such compromise is “‘fair and
equitable’ and in the best interests of the estate.” Id.
Appellants cite Stern v. Marshall, 131 S. Ct. 2594 (2011), for the proposition that “all
matters related to your Appellants’ Note in the Bankruptcy Court, including the Order Approving
Compromise, should be continued, stayed, or otherwise postponed pending the determination by
the appropriate state courts as to the ownership of your Appellants’ property.”18 However,
“[c]ourts considering Stern’s reach have uniformly concluded that Stern had little impact on
bankruptcy courts’ authority to enter final orders and judgments on motions to approve a
settlement pursuant to Bankruptcy Rule 9019.” Realan Inv. Partners, LLLP v. Meininger (In re
Land Res., LLC), 505 B.R. 571, 580 (M.D. Fla. 2014) (discussing cases). Moreover, as noted
above, the compromise explicitly states that it is only binding if the bankruptcy estate is
determined to be the owner of the note in the state court litigation.19 Accordingly, because the
bankruptcy court did not purport to decide any state law claims, Stern has no applicability here.
16
R. Doc. No. 1-1, at 2.
R. Doc. No. 12, ¶ 25.
18
R. Doc. No. 12, at 13.
19
R. Doc. No. 1-2, at 2.
17
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The Court notes that the parties’ briefing focuses primarily on issues related to the state
court litigation. As stated, because the compromise is conditioned on the outcome of that
litigation, those issues have no relevance here. The evidence related to the true ownership of the
note and the other areas of dispute between the parties, discussed at length in the briefs to this
Court, have no bearing on the question of whether the bankruptcy court abused its discretion
when it approved the conditional compromise.
CONCLUSION
For the foregoing reasons, the bankruptcy court’s order confirming the compromise
between the trustee and Lake Villas is AFFIRMED.
New Orleans, Louisiana, October 8, 2014.
_______________________________________
LANCE M. AFRICK
UNITED STATES DISTRICT JUDGE
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