On appeal from the Bankruptcy Court, for Northern District of Illinois Bankruptcy Case No. 09 B 399937
The opinion of the court was delivered by: Elaine E. Bucklo United States District Judge
MEMORANDUM OPINION AND ORDER
In 2008, Equipment Acquisition Resources, Inc. ("EAR") entered into five equipment leases with Alliance Commercial Capital, Inc. ("Alliance"). Alliance subsequently assigned all of its rights, title and interest in the leases and equipment to Republic Bank of Chicago ("Republic Bank"). In 2009, EAR and Republic Bank entered into agreements to modify each of the leases (the "Lease Modifications"). In the Lease Modifications, EAR agreed to pay approximately $4.6 million due under the leases and the parties agreed that EAR would give Republic Bank a blanket security interest in all of EAR's assets. The parties acknowledge that, despite this agreement, the Lease Modifications each contained a typographical error which stated that EAR granted Republic Bank, as Assignee, a security interest in Republic Bank's own assets, rather than EAR's assets. In any event, Republic Bank filed UCC financing statements with the Illinois Secretary of State claiming it had a blanket security interest in EAR's assets.
On October 23, 2009, EAR petitioned the bankruptcy court for relief pursuant to Chapter 11 of the Bankruptcy Code.*fn1 William A. Brandt, Jr. ("Brandt") was appointed Plan Administrator. On December 10, 2009, EAR abandoned its assets and the abandoned equipment was subsequently sold at auction. There is currently an action pending in the Circuit Court of Cook County wherein nearly all of EAR's creditors are engaged in a process to divide the sale proceeds among them. First Premier Capital LLC ("First Premier") is one of EAR's creditors and is a party to the Cook County litigation.
On December 20, 2010, EAR filed an adversary action against VonLehman & Company, Inc. ("VonLehman") and Brian Malthouse, EAR's outside auditors, for accounting malpractice/negligence. EAR had previously agreed to settle its claims against VonLehman and Malthouse through a settlement agreement, but the bankruptcy court denied EAR's request to approve the settlement due to the objections of First Premier and other creditors. Republic Bank had also filed a lawsuit against VonLehman based on representations made by VonLehman to Republic Bank.
On January 7, 2011, EAR filed an adversary proceeding against Republic Bank seeking the avoidance and recovery of an alleged fraudulent transfer, a declaratory judgment rejecting Republic Bank's assertion of a lien over EAR's assets and an injunction against Republic Bank's prosecution of its lawsuit against VonLehman. Brandt subsequently filed an amended complaint, and Republic Bank moved to dismiss all counts of EAR's amended adversary complaint.
On May 25, 2011, Brandt filed a motion to approve a settlement between Republic Bank and the bankruptcy estate. The Settlement Agreement provided that (1) EAR and Republic Bank will continue to prosecute their respective lawsuits against VonLehman but will cooperate with one another in the prosecution; (2) the proceeds of either of those lawsuits (the "VL Proceeds") will be divided up between EAR and Republic Bank; (3) Brandt has no objection to the allowance of Republic Bank's filed Proof of Claim, but Republic Bank waives its claim to post-petition interest and attorney's fees; and (4) the language of the Lease Modifications will be corrected to reflect that EAR granted Republic Bank a blanket lien on EAR's assets, subject to a "Lien Carve-Out." The parties further agreed that the "Lien Carve-Out includes, but is not limited to, any and all claims which EAR and/or Brandt have against (i) the United States of America, Internal Revenue Service; (ii) Rio Properties, Inc., Harrah's Entertainment, Inc., Luxor Hotel and Casino, and Wynn Las Vegas LLC or any other casinos; (iii) governmental or other entities which received restitution payments; and (iv) FTI Consulting Inc." ROA 2-19, p. 8.
First Premier filed objections to the motion to approve the settlement. On July 12, 2011, the Bankruptcy Court granted Brandt's motion over First Premier's objections.
First Premier now appeals the bankruptcy court's decision to grant the motion to approve the settlement. The first issue I must address is the proper standard of review I must employ. Brandt and Republic Bank assert that the applicable standard of review is abuse of discretion. In re Doctors Hospital of Hyde Park, 474 F.3d 421, 426 (7th Cir. 2007) (a bankruptcy court's approval of a settlement is reviewed "deferentially, for abuse of discretion"). Under this type of review, factual findings are reviewed for clear error and legal conclusions are reviewed de novo. Id. Conversely, although acknowledging that this is, in fact, an appeal from the approval of a settlement, First Premier argues that a de novo standard is appropriate here. In a rather creative argument, First Premier argues that the bankruptcy judge, in approving the settlement, effectively awarded Republic Bank an allowed secured claim. Thus, according to First Premier's logic, this appeal actually flows from the bankruptcy court's denial of First Premier's objection to Republic Bank's claim under Federal Rule of Bankruptcy Procedure 3007(a).
Despite First Premier's attempt at artful advocacy, I do not agree that this action is an appeal from the denial of a claim objection. First Premier could have filed on objection to Republic Bank's claim, but chose not to. As discussed more fully below, I reject First Premier's assertion that the bankruptcy judge "allowed a secured claim," as the record reflects that the judge did not rule on any legal issues relating to the reformation of the Lease Modifications. Instead, he properly ruled on a motion to approve a settlement. Thus, this appeal cannot be characterized as an objection to a "claim." Because this is an appeal of the bankruptcy court's approval of a settlement, the applicable standard of review is abuse of discretion. Doctors Hospital, 474 F.3d at 426. An abuse of discretion occurs when a court's decision "is premised on an incorrect legal principle or a clearly erroneous factual finding, or when the record contains no evidence on which the court rationally could have relied." In re Airadigm Comm., Inc., 616 F.3d 642, 652 (7th Cir. 2010).
The paramount question in approving a bankruptcy settlement is whether the compromise is in the best interests of the estate. Doctors Hospital, 474 F.3d at 426. "The linchpin of the 'best interests of the estate' test is a comparison of the value of the settlement with the probable costs and benefits of litigating." Id. (citing In re Energy Coop., 886 F.2d 921, 927-29 (7th Cir. 1989)). Factors that the court should consider are the litigation's probability of success, complexity, expense, inconvenience, and delay, "including the possibility that disapproving the settlement will cause wasting of assets." Id. (quoting In re Am. Reserve, 841 F.2d 159, 161 (7th Cir. 1987)). "As part of this test, the value of the settlement must be reasonably equivalent to the value of the claims surrendered. This reasonable equivalence standard is met if the settlement falls within the reasonable range of possible litigation outcomes." Id. In conducting such an analysis, "a precise determination of likely outcomes is not required, since 'an exact judicial determination of the values in issue would defeat the purpose of compromising the claim.'" In re Telesphere Communications, Inc., 179 B.R. 544, 553 (Bankr. N.D. Ill. 1994) (quoting In re Energy Coop., 886 F.2d at 927). Further, when the bankruptcy court has a thorough understanding of the case, reviewing courts should show deference. "If the decision demonstrates a command of the case, we will not engage in second-guessing; the bankruptcy court is in a better position to 'consider the equities and reasonableness of a particular compromise.'" Doctors Hospital, 474 F.3d at 426 (quoting In re Am. Reserve, 841 F.2d at 162).
First Premier argues that the bankruptcy court "erred by purporting to refuse to rule on the question of law of whether the Modification Agreements could be reformed." Appellant's Br. at 23. First Premier acknowledges that the bankruptcy judge maintained that he was not conclusively ruling on the issue of whether the Lease Modifications could be reformed, but instead concluded that reformation was "possible." The bankruptcy judge stated:
The objections raised . . . are predicated on essentially reducing Republic Bank's claim to virtually completely unsecured status. That appears to be less than likely.
I do think reformation would be possible. And, in fact, that was one of the things, I think, sought from the pleadings in the case under the Illinois law cited by the bank ...