Opinion ID: 433447
Heading Depth: 2
Heading Rank: 1

Heading: characterization of the sharing agreement

Text: 27 The Adams Group and Reavis & McGrath argue that the Sharing Agreement is a de facto plan for the liquidating reorganization of FTC, approved without compliance with the requirements of the Bankruptcy Code. 8 They assert that the Agreement contemplates the transfer of all the assets of the estate of FTC and its subsidiaries to third parties, followed by distribution of the liquidated proceeds of certain assets to specified parties. They also point out that the Agreement contains provisions designed to marshal, consolidate, administer, and distribute all of the FTC assets; contains voting procedures for certain groups of FTC claimants; provides for assignment of duties with respect to the continued prosecution and settlement of certain outstanding claims against FTC; and establishes bank accounts for the payment of certain fees and expenses and for the allocation of proceeds of recoveries against FTC to creditors and security holders. 28 We think the Sharing Agreement is more like a compromise or settlement than a plan of reorganization. The main thrust of the Agreement is to conclude the parties' controversy as to (1) whether the entire Escrow Fund is properly includible in the bankruptcy estate, subject to the claims of FTC's general creditors, who, under 11 U.S.C. Sec. 510(b), would have priority over the claims of security holders, or (2) whether no part of the Escrow Fund became property of the estate, but rather belonged entirely to the June 1982 purchasers by virtue of a constructive trust. The parties compromised by agreeing that part of the Escrow Fund would go to the bankruptcy estate and part would go to the security holders. 9 The bankruptcy case will proceed according to regular bankruptcy procedure. 29 The Sharing Agreement also provides for a second level of allocation, between the bankruptcy estate (Fund A) and a fund (Fund B) available only to Participating Creditors, i.e., creditors who are not also defendants or potential defendants in FTC-related litigation. Part of Fund B contains recoveries from sources other than FTC's assets or the Escrow Fund, property which would not have been included in the bankruptcy estate in any event. While it is true that Fund B will also contain recoveries on any claims that FTC might have against its officers, directors, accountants, lawyers, and underwriters, we do not believe that this provision alone destroys the essential nature of the Sharing Agreement as a compromise or settlement. 30 It is also of some relevance that, although the bankruptcy case was brought under Chapter 11, the ultimate outcome of this litigation will be the liquidation of FTC, not its continued operation as a reorganized business. 31 A corporate reorganization is a continuing business affair requiring close supervision and affecting many interested parties. The success or failure of a reorganization may hinge upon the very compromise at issue. A liquidation bankruptcy is a terminal affair. The bankrupt's financial affairs are beyond repair. Liquidation is to be accomplished as rapidly as possible consistent with obtaining the best possible realization upon the available assets and without undue waste by needless or fruitless litigation. 32 In re Blair, 538 F.2d 849, 852 (8th Cir.1976) (footnote omitted). The Adams Group and Reavis & McGrath, to the extent that they are creditors, are concerned not with ensuring the future profitable conduct of the business, but with the size of the bankrupt's estate and how it is to be divided. Thus, if the Sharing Agreement is in some sense a reorganization, it is not a typical one. The Adams Group presented their arguments on these points to Judge Weiner at the hearing held on June 27, 1983. While Reavis & McGrath did not receive notice of the hearing, the arguments that they make here were presented by other parties in attendance. Neither appellant explains why the procedural provisions of Chapter 11 regarding the formulation and approval of a plan would have afforded them significantly greater benefits than those they received. See also In re Ericson, 6 B.R. 1002 (D.C.D.Minn.1980). 33 In re Braniff Airways, Inc., 700 F.2d 935 (5th Cir.1983), cited by the appellants, is inapposite. Unlike the case before us, Braniff involved the question whether an agreement to transfer assets of the bankrupt was invalid under the use, sale, or lease provision of 11 U.S.C. Sec. 363(b). Moreover, the Sharing Agreement, unlike the Braniff agreement does not dictate the terms of any future reorganization plan, since the assets of the bankruptcy estate will be distributed in the normal course of the bankruptcy proceeding; it does not require any claimant to vote in favor of any future reorganization plan; and the only release of claims involved is the class plaintiffs' release of their own claims against FTC's estate. 34 For these reasons, we hold that the Sharing Agreement is not invalid as a plan of reorganization approved in violation of the Bankruptcy Code, but rather is to be judged according to the principles governing approval of settlements and compromises.