Official Committee of Unsecured Creditors v. Interforum Holding LLC et al

Filing 15

DECISION AND ORDER Affirming the Decision of the Bankruptcy Court and Dismissing Appeal signed by Judge Charles N Clevert, Jr on 3/20/13. (cc: all counsel)((cef), C. N. Clevert, Jr.)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN

OFFICIAL COMMITTEE OF
UNSECURED CREDITORS
OF RENAISSANT LAFAYETTE LLC,
Appellant,
v.

Case No. 11-C-0172

INTERFORUM HOLDING LLC,
INTERFORUM HOLDINGS-LAFAYETTE LLC,
RENAISSANT LAFAYETTE LLC,
Appellees.

DECISION AND ORDER AFFIRMING THE DECISION
OF THE BANKRUPTCY COURT AND DISMISSING APPEAL
The Official Committee of Unsecured Creditors (“Committee”) appeals the
December 28, 2010, Order Granting Motion to Approve Settlement Agreement Between
Debtor and the Interforum Entities entered by the United States Bankruptcy Court for the
Eastern District of Wisconsin. The Committee has identified two issues on appeal: (1)
whether the bankruptcy court erred in approving the settlement; and (2) whether the
bankruptcy court erred in allowing jurisdiction to be waived or agreed to and in finding that
it had jurisdiction to enter the order pursuant to 28 U.S.C. § 1334. For the reasons set
forth below, the bankruptcy court’s order approving the settlement agreement will be
affirmed and the appeal will be dismissed.
STANDARD OF REVIEW
Federal district courts have jurisdiction over bankruptcy appeals pursuant to
28 U.S.C. § 158(a)(1). On appeal from the bankruptcy court, the district court may affirm,
modify, or reverse a bankruptcy judge's judgment, order, or decree, or remand the case

for further proceedings. Fed. R. Bankr. P. 8013. The reviewing court will not disturb a
bankruptcy court's approval of a settlement unless such approval constituted an abuse of
discretion. In re Holly Marine Towing, Inc., 669 F.3d 796, 799 (7th Cir. 2012). This
standard is highly deferential because the bankruptcy court is in the best position to
consider the reasonableness of a particular settlement. Id. While questions of fact are
reviewed for clear error, legal conclusions are reviewed de novo. Id.; see also In re Smith,
582 F.3d 767, 777 (7th Cir. 2009).
STATEMENT OF FACTS
Renaissant Lafayette LLC is a Wisconsin limited liability company. (Doc. 1-21 at
3.) Interforum Holdings, Inc., was a Class A Member of Renaissant Lafayette LLC, holding
a 12.5% membership interest, and Interforum Holdings-Lafayette LLC (collectively
“Interforum”) was a Class B Member holding a 37.5% membership interest. (Id.) The
remaining 50% interest in Renaissant Lafayette LLC was held by Renaissant Development
Group LLC. (Id.)
By letter dated February 13, 2009, Interforum Holdings-Lafayette LLC informed
Warren Barr, President of Renaissant Development Group LLC, that Interforum HoldingsLafayette LLC elected to cease being a member of Renaissant Lafayette LLC pursuant to
paragraph 5 of the Investment Agreement and demanded the full amount being held in an
escrow account. (Doc. 1-24 at 18.) Exhibits on file indicate that on February 17, 2009, the
proceeds of a certificate of deposit, $535,632.60, were transferred into Renaissant
Lafayette LLC’s checking account and a $500,000 cashier’s check was made payable to
Interforum Holdings-Lafayette LLC. (Doc. 1-26 at 2, 12.)

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On December 11, 2009, Barr signed a resolution as the sole Manager and Member
of Renaissant Lafayette LLC regarding its decision to file a petition under Chapter 11 of
Title 11 of the United States Bankruptcy Code. (Docs. 1-5, 1-21.) Interforum did not sign
the petition. (Id.) Several weeks later, Renaissant Lafayette LLC filed a voluntary petition
for relief under Chapter 11 of Title 11 of the United States Bankruptcy Code. In re
Renaissant Lafayette LLC, Case No. 09-38166 (Doc. 1-5.)
On October 1, 2010, Renaissant Development Group LLC filed a Motion for Entry
of (A) an Order (I) Approving the Sale of Substantially All of the Debtor’s Assets Free and
Clear of Liens, Claims, Encumbrances, and Interests Pursuant to 11 U.S.C. §§ 105(a) and
363; (II) Approving the Assumption and Assignment of Certain Executory Contracts and
Unexpired Leases Pursuant to 11 U.S.C. § 365; and (III) Granting Related Relief; and (B)
an Order (I) Establishing Sale Procedures; (II) Approving Form of Asset Purchase
Agreement; (III) Scheduling a Sale Hearing in Connection with the Sale of the Debtor’s
Assets Pursuant to 11 U.S.C. §§ 105(a), 363, and 365; (IV) Setting Certain Dates and
Deadlines in Connection Therewith; and (V) Granting Related Relief. (“Sales Procedure
Motion”)(Docs. 1-14, 1-16.) As described in the Amended Sale Procedures Motion,
Amalgamated Bank agreed to act as stalking horse bidder in an auction for the Debtor’s
assets with a credit bid of $55,000,000 pursuant to the Asset Purchase Agreement
attached as an exhibit. (Doc. 1-16.)
On October 25, 2010, Interforum filed an Objection and Response to Renaissant
Lafayette LLC’s Motion for Entry of an Order based on a combined 50% interest in
Renaissant Lafayette LLC. (Doc. 1-17 at 1.) Interforum argued that Renaissant Lafayette
LLC failed to list Interforum as Equity Security Holders and that the January 25, 2010,
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State of Financial Affairs erroneously states that Interforum withdrew as members of
Renaissant Lafayette LLC. (Id. at 2.) In addition, Interforum maintained that it had not
received notice of any proceedings during the pendency of the Chapter 11 case and had
not consented to the commencement of the case. (Id.) Interforum further adopted the
Objection and Response of the Unsecured Creditors Committee to the Sale motion, which
focused on the distribution of a carve-out. (Id.)
The October 27, 2010, minutes from the hearing on the Amended Sales Procedure
Motion summarizes Interforum Holdings’ Objection based on the alleged ownership interest
and Renaissant Lafayette LLC’s failure to provide it with notice of the Chapter 11 filing.
(Doc. 1-18 at 2.) In addition, Renaissant Lafayette LLC’s counsel provided the February
13, 2009, letter indicating that Interforum Holdings-Lafayette LLC intended to withdraw as
one of its members.(Id.) While counsel for Interforum Holdings-Lafayette LLC was not
prepared to respond to the letter, he argued that there was no evidence that Interforum
Holdings-Lafayette had been divested of its ownership interest. (Id.) In response, the
bankruptcy court indicated that to the extent that Interforum was claiming that Renaissant
Lafayette LLC needed Interforum’s approval to file the petition or to sell, Interforum must
take up the issues with Renaissant Lafayette LLC. (Id. at 3.)
Another hearing was held on November 8, 2010, regarding the proposed carve-out
and an emergency motion to adjust dates. (Doc. 1-20.) Counsel for Renaissant Lafayette
LLC noted that Interforum had filed an objection to the October 1 motion arguing that it was
a part owner and that the court needed to set a deadline for Interforum to object to the sale
on that ground. (Doc. 1-20 at 3.) Interforum’s counsel stated that Interforum would object

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to the sale on the same grounds and that a week was insufficient time to prepare for a
hearing. (Id.; Doc. 1-37 at 19-26.) After further discussion, the court gave Interforum until
November 19, 2010, to object in writing to the sale on corporate ownership/governance
grounds and set a deadline of Wednesday, November 24, 2010, at noon for any interested
party to file a response. (Doc. 1-20 at 3.) The court also granted the emergency motion
to adjust dates and scheduled a hearing for the approval of the sale for Thursday,
December 23, 2010. (Id.)
On November 19, 2010, Interforum filed a Motion to Dismiss Bankruptcy Petition of
Renaissant Lafayette LLC on the grounds that the Manager was not authorized to file the
Chapter 11 bankruptcy petition on behalf of Renaissant Lafayette LLC. (Doc. 1-21.)
Renaissant Lafayette LLC and Amalgamated Bank objected to Interforum’s arguments that
the bankruptcy must be dismissed. The bankruptcy court scheduled an evidentiary hearing
for December 7, 2010.
On December 7, 2000, just prior to the evidentiary hearing, Renaissant Lafayette
LLC, Amalgamated Bank, and Interforum reached a settlement allowing Interforum
Holdings-Lafayette LLC to retain the $500,000 transfer from a joint instruction certificate
of deposit maintained by Renaissant Lafayette LLC pursuant to an Equity Agreement which
provided that Interforum ceased to be a member of Renaissant Lafayette LLC as of
February 13, 2009. As a result, Interforum had no rights or interest in Renaissant
Lafayette LLC after that date and withdrew its Motion to Dismiss and objection to sale,
among other things. In the Motion to Approve Settlement Agreement Between Debtor and
the Interforum Entities, Renaissant Lafayette LLC stated that it believed that Interforum had
withdrawn as a member of Renaissant Lafayette LLC after receiving the $500,000 in
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February of 2009. (Doc. 1-27 at 2.) In addition, Renaissant Lafayette LLC argued that the
settlement was within the range of reasonableness, citing the cost of continued litigation
which would jeopardize the sale process and delay resolution. Renaissant Lafayette LLC
also cited a significant reduction in legal expenses and the final resolution of all claims.
(Doc. 1-27 at 7.)
The Official Unsecured Creditor’s Committee filed an objection to the Motion to
Approve Settlement Agreement Between the Debtor and the Interforum Entities on
December 20, 2010. (Doc. 1-29.) The Committee argued that there was a “lack of legal
and factual justification for the compromise, specifically for the release of a potential
avoidance claim of $500,000.” (Doc. 1-29 at 1.) Continuing, the Committee asserted that
Renaissant Lafayette LLC had not “made a clear showing that releasing the claim is in the
best interest of the estate.” (Id. at 2.) Notably, the Committee did not join or reference
Interforum’s previously filed Motion to Dismiss or otherwise challenge the jurisdiction of the
bankruptcy court.
Amalgamated Bank, the largest unsecured creditor in the case with $48 million, filed
a response to the objections of the Committee stating that the “probability of avoiding a
$500,000 transfer to the Interforum Entities as a preferential transfer is low” and
mentioning that the monies had been held in escrow on behalf of Interforum since 2007.
(Doc. 1-30 at 2.) Amalgamated Bank further argued that the benefit to the estate achieved
through settlement far outweighed the benefits of any potential avoidance action and its
attendant costs. (Id. at 3.)
The court held a hearing on December 23, 2010, at which time counsel for
Renaissant Lafayette LLC argued that the $500,000 did not belong to Renaissant Lafayette
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LLC or to the estate but to the creditors who had placed it in escrow. (Doc. 1-31 at 2.) As
stated in the minutes:
Counsel for the Committee argued that the motions did not provide a
detailed analysis about whether the funds were or were not in fact property
of the estate. He argued that the Court did not know whether the funds were
retained in a true escrow account, whether they were commingled, or
whether any of the escrow creditors had breached their respective
agreements, such that they were not entitled to return of the funds. He
indicated that he was performing his fiduciary duty as counsel for the Courtappointed Committee for the unsecured creditors, in an attempt to maximize
the assets of the state. He added that the Court should not rush to approve
these motions when the funds had sat untouched for a year.
(Id.) With respect to Interforum, the court commented on Interforum’s motion seeking
dismissal because Renaissant Lafayette LLC did not have the authority to file the Chapter
11 petition. (Id. at 3.) Counsel for Renaissant Lafayette LLC explained that, as part of the
settlement, Interforum would be deemed to have withdrawn from ownership as of February
2009 and that Interforum would not have standing in the Chapter 11 case because all
claims of Interforum would be released. (Id.) Again, counsel for the Committee contended
that the agreement effectively released a preference of $500,000 but did not question the
court’s jurisdiction. (Id. at 4.)
The bankruptcy court granted the Motion to Approve Settlement. (Id.) In its order,
the court found that it had jurisdiction pursuant to 28 U.S.C. § 1334, that it was a core
proceeding pursuant to 28 U.S.C. § 157(b), and that the settlement agreement was fair,
reasonable and in the best interest of the estate and creditors. (Doc. 1-27.)
LEGAL ANALYSIS
The Committee maintains that the bankruptcy court abused its discretion in granting
the Motion to Approve Settlement. Under Bankruptcy Rule 9019(a), the bankruptcy court
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may approve a compromise or settlement “[o]n motion by the trustee and after notice and
a hearing.” In conducting a hearing under Rule 9019(a), the bankruptcy court is to
determine whether the proposed compromise is in the best interests of the bankruptcy
estate, In re Am. Reserve Corp., 841 F.2d 159, 161 (7th Cir.1987). Central to the
bankruptcy judge's determination is a comparison of the settlement's terms with the
litigation's probable costs and probable benefits. Id. Among the factors the bankruptcy
judge should consider in her analysis are the litigation's probability of success, the
litigation's complexity, and the litigation's attendant expense, inconvenience, and delay
(including the possibility that disapproving the settlement will cause wasting of assets).
In re Doctors Hosp. of Hyde Park, Inc., 474 F.3d 421, 426 (7th Cir. 2007)(citing In re Am.
Reserve Corp., 841 F.2d at 161).
The Committee argues that the order at issue involves “the fundamental question
of whether the bankruptcy court ever had jurisdiction to hear any matters before it.” (Doc.
3 at 12.) In making this argument, the Committee appears to be adopting the arguments
that were raised but later withdrawn by Interforum regarding corporate governance.
Notably, these arguments were never adopted or otherwise asserted by the Committee
during the pendency of the proceedings. Rather, the Committee focused on the potential
avoidance claim and the carve-out distribution.

Underlying both arguments is the

assumption that the court was acting within its jurisdiction. After all, if the petition was
unauthorized or filed improperly, there would be no bankruptcy proceeding and no
occasion to seek recovery of the $500,000 as a preferential transfer, pursuant to 11 U.S.C.
§ 547.

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During the December 23, 2010, hearing on the Motion to Approve Settlement
Agreement, the Committee maintained that it “has no issue with a resolution of this matter,
if they want to withdraw their motion and the like to dismiss” but that the release of the
potential preference claim of $500,000 was “really going beyond the envelope.” (Doc. 1-35
at 40.) The argument focused on the potential preference rather than any jurisdictional
issue. (Id. at 40-46.) Indeed, at page 42 of the transcript, the Committee argued:
The Debtor has asserted to you in open court that they don’t give much
credence, if any, to the claims of [ ] Interforum. The bank has told you that
is also their analysis and tells you in papers that they’re confident that they
can prevail. Well, if that’s the case, Your Honor, then let them prevail and
have this motion dismissed – struck and let’s not give up a $500,000
potential preference claim.
(Doc. 1-35 at 43.) Put simply, on appeal, the arguments advanced by the Committee are
not the arguments it made during the proceedings below. At no time did the Committee
challenge the authority of Renaissant Lafayette LLC to initiate the case.
Moreover, the bankruptcy court concluded unequivocally that it had jurisdiction with
respect to the case and the settlement agreement pursuant to 28 U.S.C. § 1334. (Doc.
1-32 at 1.) Assuming for the sake of argument on appeal that the petition was not properly
authorized, Interforum was the only party objecting to the filing of the Chapter 11 and had
the ability to withdraw its Motion to Dismiss and thereby “ratify” the filing through its
participation in the settlement. Whether the voluntary corporate bankruptcy petition was
properly authorized is a matter of state law that it is not addressed by the Bankruptcy
Code. Price v. Gurney, 324 U.S. 100, 65 S. Ct. 513, 89 L. Ed. 776 (1945).
The Supreme Court in Price held that a federal bankruptcy court has no power to
entertain a voluntary petition for bankruptcy filed on behalf of a corporation by those
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without authority under local law. Id. at 106. Nevertheless, an unauthorized filing of a
voluntary petition in bankruptcy on behalf of a corporation may be ratified in appropriate
circumstances by ensuring conduct of persons with power to have authorized it originally.
Hager v. Gibson, 108 F.3d 35, 40 (4th Cir. 1997). It is well settled that a corporation or
other principal may ratify and thereby render binding upon it the originally unauthorized
acts of its officers or other agents. See, e.g., Lyons v. Menominee Enters., 67 Wis.2d 504,
510, 227 N.W.2d 108, 112 (1975) (a corporation may ratify acts of president and make
those acts just as binding as if the power were formally conferred).
Here, Interforum waited five months after learning about the Chapter 11 before
seeking dismissal. Then, after filing its Motion to Dismiss, Interforum agreed to withdraw
it. Thus, if Interforum was a member of Renaissant Lafayette LLC when the Chapter 11
petition was filed, this constitutes an express ratification of the filing of the petition. See
generally In re Dearborn Process Serv. Inc., 149 B.R. 872, 879 (Bankr. N.D. Ill. 1993)
(finding that approval by the debtor’s current board of directors and acquiescence in the
bankruptcy filing moots any defect that once existed). Hence, on the face of the petition
as to which all members of Renaissant Lafayette LLC supported, the bankruptcy court
could and did find that it had subject matter jurisdiction. Perhaps that is the reason that
counsel for the Committee stated on the record that it did not contest Interforum’s ability
to withdraw the Motion to Dismiss. (Doc. 1-35 at 40.)
Correspondingly, as noted earlier, the settlement agreement executed by
Renaissant Lafayette LLC and Interforum on December 7, 2010, states that Interforum had

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no interest in the LLC after February 13, 2009. It follows that the Chapter 11 was filed
properly and Interforum did not have standing to challenge it.
Turning to the Committee’s argument regarding the bankruptcy court’s failure to
undertake a comprehensive analysis of all relevant factors, the court is satisfied that all
appropriate factors were considered. The Committee has asserted that the bankruptcy
court failed to address that (1) Renaissant Lafayette LLC made a transfer of $500,000 to
an insider within the time period prior to the bankruptcy filing which may give rise to an
avoidance action (2) that Renaissant Lafayette LLC did not make full disclosure as to the
viability of litigation or make any estimate as to its costs and (3) that there was no showing
that releasing the potential preference of $500,000 is in the best interest of the estate.
To the contrary, the bankruptcy court discussed these factors on the record during
the December 23, 2010, hearing.

The court first rejected any assertion that the

compromise was a way of “tossing away the potential to recover a $500,000 preference,
if in fact it – it was a preference, in spite of the fact that there is no possibility that
Interforum could possibly prevail on any of its claims.” (Doc. 1-35 at 66.) The court then
discussed Renaissant Lafayette LLC’s arguments regarding the investigation that was
conducted regarding whether the $500,000 transfer constituted a preference or fraudulent
conveyance. (Id. at 67.) After acknowledging that the Interforum motion could have
potentially brought the case to a “screeching halt,” the court found the settlement did not
fall “outside of the realm of reasonableness.” (Id. at 68.)
As part of this analysis, the court considered the cost and time spent on the litigation
and the potential expense of litigating Interforum’s claims.

(Id.)

Moreover, in

acknowledging the Committee’s concerns regarding a possible $500,000 claim, the court
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weighed the costs of litigating that claim and the reality of the distribution scheme outlined
by the attorneys. (Id. at 69.) Amalgamated Bank, which joined the settlement, would
receive 96% of any proceeds whereas the remaining unsecured creditors would only
recover 4%. (Id. at 48-49.) If $500,000 were recovered, that would translate into $20,000
for unsecured creditors other than Amalgamated Bank. (Id.) It is reasonable to assume
that if the settlement was not permitted and the Motion to Dismiss was litigated and denied,
the costs of litigation would total at least $20,000. Alternatively, if Interforum prevailed on
its Motion to Dismiss, there would be no recovery available to the unsecured creditors.
Finally, as the court noted, there was the reality of stalling or dismissing the Chapter 11
case. (Id.) As stated in the Order, there were sufficient reasons for the bankruptcy court
to conclude that the agreement was in the best interest of the estate. (Doc. I-32 at 1.)
Hence, on this record, there was no abuse of discretion by the bankruptcy court respecting
the settlement agreement at issue. Now, therefore,
IT IS ORDERED that the December 28, 2010, Order Granting Motion to Approve
Settlement Agreement Between Debtor and the Interforum Entities is affirmed.
IT IS FURTHER ORDERED that this appeal is dismissed.
Dated at Milwaukee, Wisconsin, this 20th day of March, 2013.
BY THE COURT
/s/ C.N. Clevert, Jr.
C.N. CLEVERT, JR.
U.S. DISTRICT JUDGE

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