Opinion ID: 792943
Heading Depth: 2
Heading Rank: 1

Heading: The District Court's approval of the settlement under bankruptcy law

Text: 14 A district court has the authority to approve a compromise or settlement on the bankruptcy trustee's motion. Fed. R. Bankr.P. 9019(a). Settlements are favored, but the unique nature of the bankruptcy process means that judges must carefully examine settlements before approving them. See Martin, 91 F.3d at 393; see also Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424, 88 S.Ct. 1157, 20 L.Ed.2d 1 (1968). According to TMT Trailer, settlements must be fair and equitable. 390 U.S. at 424, 88 S.Ct. 1157. The District Court approved the Nutraquest settlement under both the fair and equitable standard and under the Martin test set out more fully below. 15 We have two issues to decide under the bankruptcy portion of this case. Northwestern disputes the Court's use of Martin as the proper test. In any event, Northwestern also claims that the Court incorrectly approved the settlement both under Martin and under the fair and equitable standard of TMT Trailer. 16
17 Martin provided four criteria for a court to consider when faced with a proposed settlement: (1) the probability of success in litigation; (2) the likely difficulties in collection; (3) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; and (4) the paramount interest of the creditors. Martin, 91 F.3d at 393. We followed TMT Trailer in listing these factors, id. (citing TMT Trailer, 390 U.S. at 424-25, 88 S.Ct. 1157), and simply fleshed out its general requirement. 18 Northwestern disputes the use of Martin. Its primary argument is that Martin is only useful when analyzing a settlement of a claim belonging to the debtor, not a claim against the debtor. We disagree. 19 We did not hold in Martin that the factors were only to be used to scrutinize settlements of claims held by the debtor. In fact, Martin itself involved a settlement partially of claims against the debtor. The Martins contracted to sell their house to the Myerses, but the Myerses refused to go through with the purchase. Id. at 391. The Martins, who had been depending on the sale to go through, found themselves in dire financial straits and had to file a Chapter 7 bankruptcy petition. Id. Both parties filed contract suits in state court, the Martins for damages and the Myerses for specific performance. Id. The trustee's proposed settlement provided for the release of both actions. Id. Two other points are worth making here. First, the  Martin  factors have been around for a long time, far longer than Martin itself or even TMT Trailer. Second, there are several cases applying these four factors to settlements of claims against debtors. 20 The Martin Court t[ook its] cue from TMT Trailer, id. at 393, but the origin of the four factors can be traced back to a 1929 Eighth Circuit case. Four considerations were listed in Drexel v. Loomis for scrutinizing a compromise in bankruptcy: (a) The probability of success in the litigation; (b) the difficulties, if any, to be encountered in the matter of collection; (c) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; (d) the paramount interest of the creditors and a proper deference to their reasonable views. . . . 35 F.2d 800, 806 (8th Cir.1929). 21 Moreover, there are many cases that have applied the Drexel — TMT Trailer — Martin factors to settlements involving claims against debtors. See, e.g., Ars Brook, LLC v. Jalbert ( In re Servisense.com, Inc. ), 382 F.3d 68, 70-72 (1st Cir.2004); Rivercity v. Herpel ( In re Jackson Brewing Co. ), 624 F.2d 599, 601-02 (5th Cir.1980); Bache & Co. v. Loeffler ( In re Equity Funding Corp. of Am. ), 519 F.2d 1274, 1275, 1277 (9th Cir.1975); Am. W. Airlines, Inc. v. City of Phoenix ( In re Am. W. Airlines, Inc. ), 214 B.R. 382, 384, 386 (Bankr.D.Ariz.1997); Tindall v. Mavrode ( In re Mavrode ), 205 B.R. 716, 719, 721 (Bankr.D.N.J.1997); Jacobson v. Robert Speece Props., Inc. ( In re Speece ), 159 B.R. 314, 316-17 (Bankr.E.D.Cal.1993). 22
23 Even applying Martin, Northwestern challenges the outcome reached by the District Court. The Court used the fair and equitable rubric as well as the Martin factors to approve the settlement. We examine its findings for an abuse of discretion, at root a deferential standard of review. We do not disturb an exercise of discretion unless there is a definite and firm conviction that the court . . . committed a clear error of judgment in the conclusion it reached upon a weighing of the relevant factors. In re Orthopedic Bone Screw Prods. Liab. Litig., 246 F.3d 315, 320 (3d Cir.2001) (internal quotation marks omitted). Put another way, for us to find an abuse of discretion the District Court's decision must rest on a clearly erroneous finding of fact, an errant conclusion of law or an improper application of law to fact. Id. (internal quotation marks omitted). 24
25 TMT Trailer held that compromises must be `fair and equitable,' just as do the other aspects of reorganizations. 390 U.S. at 424, 88 S.Ct. 1157. Under the fair and equitable standard, we look to the fairness of the settlement to other persons, i.e., the parties who did not settle. See, e.g., id. at 435, 88 S.Ct. 1157; Feld v. Zale Corp. ( In re Zale Corp. ), 62 F.3d 746, 754 (5th Cir.1995). Although Nutraquest points out that Northwestern was the only creditor to object to this settlement, this is merely noteworthy, albeit not conclusive. Rivercity, 624 F.2d at 605; see also In re Boston & Providence R.R. Corp., 673 F.2d 11, 13 (1st Cir.1982) ( per curiam ) ([T]he court must act independently, out of its own initiative, for the benefit of all creditors. This obligation prevails even where the creditors are silent . . . .). 26 The District Court found that the settlement was fair and equitable for three reasons. First, Wheeler's failure to file a proof of claim against Nutraquest is irrelevant; that failure may simply reflect Wheeler's perceived weakness of his claims against Nutraquest. Wheeler's noncreditor status does not negate the possibility that this settlement could have achieved benefits for the bankruptcy estate. The $25,000 in cash and the $25,000 unsecured claim are not per se unfair to Nutraquest's creditors. 27 Second, the Court found that Northwestern would not be significantly prejudiced by the settlement because it would retain all of its defenses in the Wheeler suit. Northwestern can still argue proximate cause, it can still argue contributory negligence, and it likely can get a setoff of at least $75,000 from the settlement. Northwestern may be barred by statute from seeking contribution, but that does not mean that it has lost the Wheeler suit. 28 Third, the Court found that the settlement is not unfair because that is not what affects Northwestern's rights to contribution. Its injury stems instead from the Illinois Contribution Act, which post-settlement cuts off its contribution rights. And this effect is only potential, because if Northwestern loses the Wheeler suit for reasons unrelated to the ephedra issue, it would have few (if any) contribution rights against the settling defendants. 29 In this context, we cannot decide that the District Court abused its discretion in finding the settlement fair and equitable. 30
31 The parties agree that the second factor (ease of collection) is not relevant here, so we only discuss three of the four Martin factors. 32 Northwestern argues that the District Court failed to consider the probability-of-success-in-litigation factor. Northwestern contends that the likelihood of success would have been zero, because Wheeler would not have been able to reassert his previously dismissed claims against the settling defendants under the Illinois statute of limitations. While the Court did not devote a full section in its opinion to this factor (as it did for two of the other factors), it said elsewhere that Wheeler's decision not to pursue claims against the Settling Defendants may reflect weaknesses in [his] claims and little likelihood of success on the merits. In re Nutraquest, Inc., Civ. No. 03-5869(GEB), mem. op. at 7 (D.N.J. Nov. 17, 2004). 33 Northwestern asserts also that the complexity-expense-and-delay factor does not apply; that there is no litigation to discuss; and that Northwestern's defense in Wheeler's action against it will still involve discovery concerning Nutraquest's manufacture and sale of ephedra products, thus leading nonetheless to expense and inconvenience for Nutraquest. It is axiomatic that settlement will almost always reduce the complexity and inconvenience of litigation. See, e.g., TMT Trailer, 390 U.S. at 434, 88 S.Ct. 1157 (Litigation and delay are always the alternative to settlement, and whether that alternative is worth pursuing necessarily depends upon a reasoned judgment as to the probable outcome of litigation.). Because Wheeler appeared to have a low probability of success, the Court easily could have found that Nutraquest's escaping via settlement a complex defense of a weak case was a good move (although the Court did not make this statement explicit). The balancing of the complexity and delay of litigation with the benefits of settlement is related to the likelihood of success in that litigation. See id. In this regard, it is simply good judgment — thus the opposite of an abuse of discretion — to conclude that the discovery Nutraquest faces from Northwestern will be less inconvenient and expensive than defending Wheeler's suit against it. 34 For the last factor, Northwestern argues that the settlement was not in the creditors' interest. The Court held that the insignificant disadvantages to Northwestern, the only objecting creditor, did not outweigh the benefits to the estate. Northwestern cites to a bankruptcy court case from Florida, In re Covington Props., Inc., 255 B.R. 77 (Bankr.N.D.Fla.2000), to suggest that this settlement cannot be approved. In Covington the Talley family, insiders who held over 90% of the debtor's secured debt, sought to settle with the debtor. This settlement would have resolved not only all claims held by the debtor but also all claims held by the debtor's creditors against the Talley family. The only other creditors were the McAlisters — noninsiders — and they had filed a separate lawsuit in state court against members of the Talley family. Because the members of the Talley family were the major creditors of the estate, they stood to recoup most of their settlement payments, so the settlement was designed simply to cut off the McAlisters' state-court claims. Id. at 79. The Court held this settlement not fair and equitable, and disapproved the settlement agreement. Id. at 79-80. 35 The result in Covington is easily distinguishable from the situation here. Covington involved a group of insiders using their powers to insulate themselves from litigation outside the bankruptcy context by the only (and noninsider) creditors of the estate. Here, on the other hand, Nutraquest is but one of a handful of potential defendants who settled with Wheeler. Although Northwestern is a possible creditor of Nutraquest, this settlement had nothing to do with insulating Nutraquest insiders from claims of its creditors. Nutraquest had, at the time of its Chapter 11 filing, 52 cases pending against it. Northwestern was simply a plaintiff in one of those cases for contribution, and Illinois law bars it from getting contribution from Nutraquest once Nutraquest settles with Wheeler. The harms present in the Covington case are not present here. 4 36