Opinion ID: 197801
Heading Depth: 2
Heading Rank: 2

Heading: The UCC Claim Settlement5

Text: 21 Hicks Muse maintains that the bankruptcy court abused its discretion in approving the UCC claim settlement absent an adequate factual foundation for determining the value of the UCC claim because the Trustee never reviewed the thirty cartons of invoices generated by the Bank Group during its collateral liquidation. See supra Section I; see also, e.g., In re Goldstein, 131 B.R. 367, 371 (Bankr.S.D.Ohio 1991) (disapproving settlement because trustee made no thorough review of the underlying documents [a trust and will] and applicable law). 22 The bankruptcy court essentially is expected to  'assess[ ] and balance the value of the claim[s] ... being compromised against the value ... of the compromise proposal.'  Jeffrey v. Desmond, 70 F.3d 183, 185 (1st Cir.1995) (citation omitted). It may consider, among other factors: (1) the probability of success were the claim to be litigated--given the legal and evidentiary obstacles and the expense, inconvenience and delay entailed in its litigation--measured against the more definitive, concrete and immediate benefits attending the proposed settlement, see Kowal, 965 F.2d at 1141 n. 5, 1145 (so-called best interests standard); (2) a reasonable accommodation of the creditors' views regarding the proposed settlement; and (3) the experience and competence of the fiduciary proposing the settlement. See Jeffrey, 70 F.3d at 185; In re Texaco, Inc., 84 B.R. 893, 902 (Bankr.S.D.N.Y.1988) (citing Protective Committee for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 88 S.Ct. 1157, 20 L.Ed.2d 1 (1968)). 23
24 The Trustee identified several reasons for settling the UCC claim for minimal value. 6 First, the estate would face a formidable burden in attempting to demonstrate that the Bank Group liquidated its collateral in a commercially unreasonable manner. Second, Hicks makes too much of the Trustee's decision to forego a costly and time-consuming lapidarian review of every invoice generated during the collateral liquidation, especially since Hicks makes no suggestion that the individual invoices reflect any relevant information other than the price obtained. Ordinarily a UCC § 9-504(3) claimant must show something besides a low price, as by demonstrating that the collateral liquidation was not conducted in a commercially reasonable manner. See Mass. Gen. Laws Ann. ch. 106, § 9-507(2); RTC v. Carr, 13 F.3d 425, 429-30 (1st Cir.1993) (citing Chartrand v. Newton Trust Co., 296 Mass. 317, 5 N.E.2d 421, 423 (1936)); Nadler v. Baybank Merrimack Valley, N.A., 733 F.2d 182, 184 (1st Cir.1984). Thus, absent extraordinary circumstances not present here, mere evidence that the Healthco collateral might have returned more than $50 million in some exquisitely orchestrated liquidation did not offset the substantial burdens and risks which the Trustee would have encountered in litigating the UCC claim. 25 Furthermore, the insistence by Hicks Muse that the Trustee review every invoice in the thirty cartons delivered by the Bank Group is predicated on the mistaken notion that the Trustee or the bankruptcy court was obliged to fix the value of the UCC claim with near mathematical precision before it could be settled. See Kowal, 965 F.2d at 1145 ([A] chapter 7 trustee ... realistically cannot be required to demonstrate to the satisfaction of every individual creditor and the debtor, or to any compelling degree of certitude, that the settlement benefit to the chapter 7 estate and the value of the settled claim comprise a matched set.). Among other practical considerations overlooked under this approach is the reality that many, if not most, claims settled in bankruptcy proceedings are not amenable either to ready or exact valuation in the abstract. In re Energy Coop., 886 F.2d 921, 929 (7th Cir.1989) ( '[A]n exact judicial determination of the values in issue would defeat the purpose of compromising the claim.' ) (citation omitted); In re Lee Way Holding Co., 120 B.R. 881, 897 (Bankr.S.D.Ohio 1990) (noting that settling party need only have [f]amiliarity with a case, its factual patterns, legal theories, and evidence, and need not be so familiar with the case as to be prepared for trial). Thus, th[e] responsibility of the bankruptcy judge, and ours on review, is not to decide the numerous questions of law and fact raised by appellants but rather to canvass the issues and see whether the settlement 'fall[s] below the lowest point in the range of reasonableness.'  Cosoff v. Rodman (In re W.T. Grant Co.), 699 F.2d 599, 608 (2d Cir.1983) (citation omitted); see In re Energy Coop., 886 F.2d at 929. 7 26 The evidence on sale-price insufficiency was highly suspect as well. The original complaint valued the UCC claim at $99 million or more (i.e., $149 million minimum asset value, less $50 million in sale proceeds generated to date). The Trustee quite reasonably attributed its overestimation to aggressive pleading typical of plaintiffs generally at early stages in the proceedings. Moreover, it is often a practical necessity for fiduciaries and claimants in bankruptcy proceedings to utilize the inflated asset values listed in the debtor's schedules as a main source for their valuation estimates prior to any opportunity to conduct discovery, see Fed. R. Bankr.P. 7026 (discovery) & 7015 (permitting post-discovery amendments to complaints in adversary proceedings). See Associates Commercial Corp. v. A & A Transp., Inc. (In re A & A Transp., Inc.), 10 B.R. 867, 868-69 (Bankr.D.Mass.1981) ([A]lthough the Debtor signs the schedules under oath, the values listed therein are only reasonable estimates, and very often the person charged with preparing the schedules has little or no knowledge about the value of certain types of property listed therein.). Fairly early on, in fact, the Trustee uncovered evidence that the $149 million valuation estimate was grossly excessive. 27 At a hearing conducted during the chapter 11 proceedings, Healthco personnel pegged the likely collateral liquidation value at between $33 and 66 million, which quite accurately presaged the $50-60 million ultimately generated in sale proceeds. See In re Tennessee Chem. Co., 143 B.R. 468, 475 (Bankr.E.D.Tenn.1992) ([T]he usual assumption [is] that going concern value is greater than forced sale, liquidation, or salvage value.). Furthermore, for some time Healthco had utilized a deficient inventory control system which may well have caused gross overstatements in its 1993 inventories. 28 Yet more importantly, however, Healthco was the largest distributor of dental supplies in the United States, with extensive worldwide markets. Its huge market share and the necessity that its inventories virtually be dumped on the market reasonably could be expected to cause significantly depressed prices. Moreover, many Healthco accounts receivable were in serious dispute and unlikely to attract substantial offers from third parties. See, e.g., Brown v. Riley & Power Mgt., Inc. (In re Omni Mech. Contractors, Inc.), 114 B.R. 518, 522 (Bankr.E.D.Tenn.1990) (The value of accounts receivable may be discounted for uncollectible and disputed debts.). Hicks Muse cites no record evidence which would undermine these considerations. 8 29 Finally, the Trustee reasonably concluded that even if the sale proceeds obtained by the Bank Group were shown to have been low, it was most unlikely that it could have been demonstrated that the collateral liquidation had been conducted in a commercially unreasonable manner, given that it had begun in 1993 on terms and conditions approved by the bankruptcy court. Although close bankruptcy court oversight did not necessarily rule out a claim that the Bank Group unilaterally and unreasonably exceeded or disregarded the terms and conditions of the collateral liquidation, Hicks Muse cites no record evidence that the Bank Group did so. Accordingly, we conclude that the best interests factor favored the settlement.
30 The unsecured creditors committee strongly supported the proposed settlement, as did the overwhelming majority of individual unsecured creditors. See Lee Way Holding Co., 120 B.R. at 904 (noting importance of creditors committee support for settlement). The only objections came from some noncreditors and nonsettling creditors who were codefendants in the adversary proceeding. Hicks Muse counters that creditors committee support for the original settlement proposal must be discounted because the settlement underwent modification before gaining bankruptcy court approval. Be that as it may, there is no indication that any creditor withdrew its consent based on the de minimis modifications subsequently made by the bankruptcy court, none of which detracted from the overall reasonableness of the compromise.
31 Other than by implication, through reliance on the Trustee's reasonable decision not to review the thirty cartons of individual invoices, see supra Section II.B.1., Hicks Muse has not questioned the Trustee's professional competence or experience. Absent such a challenge, this factor provided further support for the settlement. See Hill v. Burdick (In re Moorehead Corp.), 208 B.R. 87, 89 (1st Cir. BAP 1997). 32 We therefore conclude that Hicks Muse has not demonstrated a manifest abuse of discretion by the bankruptcy court.