Opinion ID: 791875
Heading Depth: 2
Heading Rank: 3

Heading: Delays in the Adversary Proceeding

Text: 10 Between August 2000, when Juno commenced the declaratory action, and September 2003, when the bankruptcy court approved settlement, the adversary proceeding stalled, essentially because Juno repeatedly represented to the bankruptcy court that settlement was imminent and because the court openly supported settlement rather than litigation. From the beginning, Smart World's efforts to prosecute its own claims and to engage in discovery were frustrated. 11 In October 2000, Smart World applied to the bankruptcy court for retention of special litigation counsel on a contingency basis. Juno opposed the application and instead asked the court for a standstill agreement, which would allow settlement negotiations to proceed. The court granted Juno's request, giving the parties until November 8, 2000 to come to an agreement. With the acquiescence of Smart World's creditors, Juno deliberately excluded Smart World from the ensuing negotiations. 12 When the parties failed to settle by November 2000, litigation resumed, and the bankruptcy court approved Smart World's request to retain litigation counsel on a contingency basis. Soon after, Smart World filed its answer and counterclaims 7 and commenced discovery. In the meantime, Juno continued to negotiate settlement with Smart World's creditors, without Smart World's participation. Smart World's lawyers had just begun reviewing documents produced by Juno in January 2001 when, according to Smart World, Juno's lawyers told Smart World that a settlement had been reached and immediately terminated all further discovery. 13 On February 7, 2001, the bankruptcy court held a hearing on the purported settlement at which Smart World's principal creditor, WorldCom, characterized the settlement as a confidential agreement between Juno and WorldCom: 14 I think we need to be fair here. World Com [and Juno] started settlement discussions just with themselves in early December. [Counsel for Juno] had previously uniformly taken the position that [Smart World] has no economic stake and he didn't want to include [Smart World] in any settlement negotiations. WorldCom's lawyer further asserted: 15 We don't have a fiduciary duty to anyone else and we don't want to have that handle put upon us. . . . [W]e were not motivated by the merits of the claims. We were motivated by what we see as a deteriorating situation both in this case and at Juno, and we felt a settlement that we could get paid upon quickly was better than nothing. That was our motivating factor. We didn't need discovery because of the way we approached it. Other people may need confirmatory discovery, but that was not our approach to this matter. 16 Juno's earlier claim that a settlement had been reached proved to be inaccurate; however, promising the bankruptcy court that settlement was imminent, Juno requested another standstill of the [adversary] litigation, to allow negotiations to continue and to avoid further discovery by Smart World. When the court indicated its intention to grant a thirty-day stay, Smart World argued that the case could not settle . . . without discovery, to which the court responded that it would allow discovery as to the settlement proposal only, but not [as it pertains to] the adversary [proceeding]. The court also expressed its strong preference for settlement and its deep reluctance to allow the adversary suit to continue. 17 The thirty-day standstill stretched into months. In October 2001, nearly eight months later, with no settlement reached, Smart World moved to recommence prosecution of the adversary proceeding. Juno opposed the motion. The bankruptcy court repeatedly adjourned the motion. 18 Five months later, on March 26, 2002, the bankruptcy court held a hearing at which it summarily denied Smart World's motion to recommence the adversary proceeding. The bankruptcy judge's explanation was that I have been on the bench about 17 years, [and] I know when we should have a settlement and when we should have a litigation. Relying on the assurances of counsel for Juno and the creditors that a settlement would soon be reached, the bankruptcy court agreed to one more adjournment until June 2002. The court stated unequivocally that if no settlement was reached by June, it would turn [Smart World's counsel] loose to conduct discovery and litigate the adversary claims. 19 Despite this pronouncement, June came and went, and the standstill continued. In September 2002, nineteen months after the bankruptcy court had first stayed the adversary proceeding, the parties again informed the court that settlement had not been achieved. Nevertheless, the court once more rejected Smart World's efforts to recommence the adversary proceeding. Stating that Smart World really does not have a pecuniary interest, the bankruptcy court dismissed Smart World's assertion that, if it won the adversary case on the merits, there would be value for all Creditors. The bankruptcy court also paid scant attention to evidence suggesting that WorldCom might have been pursuing a quick and easy settlement with Juno, under which it would receive the bulk of the settlement payment, for reasons antithetical to interests of the estate. 8 Instead, the bankruptcy court adjourned the case yet again, until October 23, 2002, calling it a date etched in granite, meaning that if settlement were not reached, the court would definitely allow Smart World to recommence the adversary proceeding. 20 When that date arrived, however, and the parties still had not settled, the bankruptcy court lost its strong resolve. Instead, the bankruptcy court ordered mediation, which proved unsuccessful.