Court Opinion

ID: 620390
Source: CourtListenerOpinion
Date Created: 2012-01-06 16:18:03+00
Date Added: 2024-06-11T12:39:29.074481
License: Public Domain

In the

United States Court of Appeals
                For the Seventh Circuit

No. 11-1787

IN RE:

    H OLLY M ARINE T OWING, INCORPORATED ,
                                                                    Debtor.
A PPEAL OF:

    S COULER & C OMPANY.

              Appeal from the United States District Court
         for the Northern District of Illinois, Eastern Division.
            No. 1:10-cv-01204—Virginia M. Kendall, Judge.

   A RGUED S EPTEMBER 22, 2011—D ECIDED JANUARY 6, 2012

  Before B AUER, M ANION and K ANNE, Circuit Judges.
  B AUER, Circuit Judge. The debtor, Holly Marine Towing,
Inc., filed for bankruptcy. The principals of the company
reached a settlement during the bankruptcy proceedings
that divided up funds from the sale of certain property.
As part of that agreement, the company’s bankruptcy
attorneys received a portion of the proceeds as payment
for their services. The bankruptcy court issued an order
approving the settlement. The appellant, Scouler & Com-
2                                               No. 11-1787

pany, LLC, then moved under Federal Rule of Civil
Procedure 59 to amend that order, challenging the
payout to the estate’s bankruptcy attorneys. The bank-
ruptcy court denied the motion. Scouler & Company
appealed to the district court, arguing that the settle-
ment violated the Bankruptcy Code’s rule of priorities
and that it was not in the best interest of the estate. The
district court disagreed, affirming the bankruptcy
court’s order. This appeal followed. Finding no error
on the part of the district court, we affirm.

                   I. BACKGROUND
  Holly Marine Towing, Inc. (“Holly Marine”) was a
Chicago company that owned and operated a tug boat
service on Lake Michigan. The company filed for
Chapter 11 bankruptcy on January 8, 2007, and the bank-
ruptcy court converted the case to a Chapter 7 liquida-
tion bankruptcy the following year. A trustee was ap-
pointed to manage the estate’s assets and pay off creditors.
  During the proceedings, a dispute arose over the sale
of property at 9320 South Ewing Avenue (“Ewing prop-
erty”) in Chicago, the site at which Holly Marine
operated its business. Several competing claims to the
Ewing property surfaced. Glenn Dawson (“Dawson”) and
Holly Headland (“Headland”), Holly Marine’s prin-
cipals, were going through a divorce, and each sought
to establish ownership interests in the property.
Separately, Holly Marine had brought claims against
Dawson for breach of fiduciary duty and usurping corpo-
rate opportunities and sought to have the Ewing prop-
erty declared an asset of the bankruptcy estate.
No. 11-1787                                              3

  The parties reached a settlement that divided up the
$911,620.40 from the sale of the Ewing property. Headland
and Dawson each received 25% ($229,126.09) of the pro-
ceeds while the bankruptcy estate received the other
50% ($458,252.18) through its trustee. Dawson and Head-
land paid Holly Marine’s bankruptcy attorneys, Bauch &
Michaels, LLC (“Bauch”), a total of $65,000 from their
personal share of the proceeds as part of the agreement.
   The appellant, Scouler & Company, LLC (“Scouler”), is
a financial services firm and a creditor of the bankruptcy
estate that provided financial consulting services to
Holly Marine during the Chapter 11 bankruptcy pro-
ceedings. Scouler objected to the $65,000 payout to
Bauch in the settlement agreement, believing that a
portion of those funds should have been distributed to
it and other Chapter 11 creditors. It thus challenged the
bankruptcy court’s order approving the settlement.

                    II. DISCUSSION
  The bankruptcy court issued an order under Bank-
ruptcy Rule 9019(a) approving the settlement entered
into by the trustee, Headland, and Dawson. Scouler
challenged the settlement by seeking to amend the order
through Federal Rule of Civil Procedure 59(e). The
motion under Rule 59 was denied by the bankruptcy
court, and the district court affirmed that denial. Scouler
now reasserts the two primary arguments it made be-
low. First, it argues that the payout to Bauch was an
impermissible bypass of the bankruptcy code’s rule of
priorities, which would have required a pro rata distribu-
4                                                No. 11-1787

tion of Bauch’s $65,000 to all the Chapter 11 administra-
tive creditors. Second, it argues that the settlement agree-
ment was not in the best interests of the estate. Bauch
and the trustee respond that the assets transferred to
Bauch were non-estate assets and so the rule of priorities
should not apply. They also argue that Scouler’s appeal
should be dismissed for lack of standing.
  We will not disturb a bankruptcy court’s approval of
a settlement unless such approval constituted an abuse
of discretion. In re Doctors Hosp. of Hyde Park, Inc., 474
F.3d 421, 426 (7th Cir. 2007). This standard is highly
deferential since the bankruptcy court is in the best posi-
tion to consider the reasonableness of a particular settle-
ment. See id. We review questions of fact for clear error
and questions of law de novo. Id.

    A. Scouler’s Standing to Challenge the Settlement
  To have standing to challenge a bankruptcy order, the
challenger must be a “person aggrieved” by that order;
in other words, he must demonstrate that he has “ ‘a
pecuniary interest in the outcome of the bankruptcy
proceedings.’ ” In re Resource Tech. Corp., 624 F.3d 376, 382-
83 (7th Cir. 2010) (quoting In re Cult Awareness Network,
Inc., 151 F.3d 605, 607 (7th Cir. 1998)). This requirement
promotes judicial efficiency by ensuring that only those
parties who are “directly and adversely affected” by a
bankruptcy order are able to challenge it. See In re
Fondiller, 707 F.2d 441, 442 (7th Cir. 1983). Whether a
challenger has a pecuniary interest in a bankruptcy
No. 11-1787                                                5

order is a question of fact, and so we review for clear
error. In re Ray, 597 F.3d 871, 875 (7th Cir. 2010) (citation
omitted).
   Bauch and the trustee contend that Scouler has no
pecuniary interest in this matter because the $65,000
payment to Bauch, if disgorged as Scouler requests,
would revert back to Headland and Dawson rather
than to the estate. As part of Headland’s and Dawson’s
personal funds, that amount would be unreachable by
Scouler. If Scouler cannot reach that amount, then it has
no pecuniary interest, they argue. But this is exactly
the aspect of the settlement that Scouler challenges:
the distribution of assets between the estate and its
principals, and whether that distribution was in the
estate’s best interests. No party disputes that Scouler
provided services to the estate during the Chapter 11
proceedings. Indeed, the bankruptcy court approved a
fee application from Scouler, finding the company
was entitled to $24,094.88 for its work. Thus, Scouler
has a clear pecuniary interest in the management of
the estate’s assets. The parties’ arguments over the rea-
sonableness of the settlement and which assets belong
to the estate go to the merits of this dispute. Even
if Scouler’s claims ultimately fail, that does not negate
its demonstrated “pecuniary stake in the manner in
which the estate is liquidated.” See In re Cult Awareness
Network, 151 F.3d at 610. We find no error in the
district court’s determination that Scouler has a
pecuniary interest in the settlement.
6                                                No. 11-1787

    B. The Priority Scheme
  The Bankruptcy Code sets forth a priority scheme
dictating the order in which various creditors’
claims will be satisfied in the course of bankruptcy pro-
ceedings. See, e.g., 11 U.S.C. § 726; 11 U.S.C. § 503; 11
U.S.C. § 507. When a Chapter 11 case is converted to a
Chapter 7 liquidation bankruptcy, Chapter 7 administra-
tive creditors—those who provided administrative
services to the estate during the Chapter 7 proceedings—
hold priority over the Chapter 11 administrative credi-
tors. 11 U.S.C. § 726(b); In re Resource Tech. Corp., 356 B.R.
435, 443 (Bankr. N.D. Ill. 2006). If there are insufficient
funds left to satisfy all Chapter 11 administrative
claims, the leftover value of the estate is distributed to
these Chapter 11 creditors on a pro rata basis. In re
Resource Tech. Corp., 356 B.R. at 448. But such distribu-
tions under the priority scheme apply only to the “prop-
erty of the estate.” 11 U.S.C. § 726(a).
  Scouler’s claim failed, the district court explained,
because the distribution to Bauch involved non-estate
assets. We find no clear error in that determination.
The record reflects a careful consideration by the bank-
ruptcy court of all the competing interests involved in
the sale of the Ewing property. Holly Marine was not
the only party to claim an ownership interest; Headland
and Dawson also had competing claims to that property
which surfaced as part of the marital dissolution. And
the $65,000 payout to Bauch was taken from both
Dawson’s and Headland’s individual $229,126.09
interest in the Ewing property. The bankruptcy court
No. 11-1787                                                7

explicitly recognized this fact during a January 20, 2010
hearing on Scouler’s Rule 59 motion to amend the bank-
ruptcy settlement:
    How is [the $65,000] going to go back to the estate?
    This was Holly Headland’s funds that went to
    Bauch & Michaels, correct? She made a decision
    that she wanted to give some of the money she
    was going to get in settlement, for whatever reason,
    to Bauch & Michaels.
Because the funds paid to Bauch were never assets of the
estate, the priority scheme simply does not apply. See, e.g.,
In re Columbia Gas Systems, Inc., 997 F.2d 1039, 1059 n.6
(3d Cir. 1993) (noting that if funds “are excluded from
the bankruptcy estate, the priority scheme is not im-
plicated because it only controls how to divide assets
contained in the bankruptcy estate.”); In re Hargis, 887
F.2d 77, 79 (5th Cir. 1989) (holding that the bankruptcy
court had “no authority to order disgorgement of the
funds received . . . which consisted wholly of non-estate
assets.”); In re Tackley Mill, LLC, 386 B.R. 611, 615 (Bankr.
N.D. W. Va. 2008) (explaining that the distribution of non-
estate assets falls outside of the Bankruptcy Code).
Scouler thus cannot have the $65,000 payment disgorged
on these grounds.
  Scouler relies heavily on two cases for most of its argu-
ment: In re Resource Tech. Corp., 356 B.R. 435, 443 (Bankr.
N.D. Ill. 2006), and an unpublished “tentative ruling,”
In re Golden Bear Oil Specialties, No. 01-BK-22467 (Bankr.
C.D. Cal. Nov. 7, 2001). Reliance on these cases is mis-
placed because both involved assets of the estate. Scouler
8                                               No. 11-1787

never clearly articulates how the funds at issue here can
be considered assets of the bankruptcy estate. In Golden
Bear, for example, a committee of creditors agreed to
relinquish legal claims against certain lenders on behalf
of the bankruptcy estate in exchange for funds; the court
found that it was really the estate in this situation that
was providing consideration, and so the estate should
receive the benefit of the bargain. Thus, in that case, the
funds involved in the settlement were estate funds. In
this case, the estate agreed to settle claims against
Dawson, and it certainly provided consideration (relin-
quishing a claim to the Ewing property) in exchange for
the certainty of the settlement value. The money paid to
Bauch is an entirely different matter; that payout was
negotiated after the bankruptcy court had already
allocated the value of the Ewing property among the
estate, Dawson, and Headland. Scouler cannot show
clear error in the lower court’s determination that the
$65,000 actually belonged to Dawson and Headland
rather than to the estate.

    C. The Best Interests of the Estate
  A bankruptcy court may approve a settlement
agreement only if it is in the best interest of the
bankruptcy estate. In re Doctors Hosp. of Hyde Park, Inc.,
474 F.3d 421, 426 (7th Cir. 2007). In making this deter-
mination, the court must weigh the costs and benefits
of litigation versus settlement. Id. If the proposed settle-
ment falls into “the reasonable range of possible litiga-
tion outcomes,” then it will pass the “best interests” test.
Id. (citations omitted).
No. 11-1787                                            9

  We have already noted the bankruptcy court’s careful
consideration of the interests involved in approving
this agreement. There were several competing claims to
the Ewing property. Although Dawson held title, the
estate was suing him for breach of fiduciary duty and
usurpation of corporate opportunity; Headland also
asserted an interest in the property through the marital
dissolution. As the district court noted, one of the
several issues that might have been litigated was
whether the Ewing property was held out as the estate’s
asset or Dawson’s personal asset. See In re Kaiser, 791
F.2d 73, 77 (7th Cir. 1986). If the parties had litigated
that issue, one possible outcome would have been that
the Ewing property went entirely to Dawson and not to
the estate, a much worse outcome for the estate’s credi-
tors. The parties chose to forego the uncertainty
of litigation and settled this dispute in a way that the
bankruptcy court viewed as equitable. The 50% of the
value of the Ewing property that the estate received was
within “the reasonable range of possible litigation out-
comes.” The bankruptcy court did not abuse its discre-
tion in approving this agreement.

                  III. CONCLUSION
  We A FFIRM the decision of the district court upholding
the settlement agreement and denying the appellees’
motion to dismiss for lack of standing.

                          1-6-12