Court Opinion

ID: 9694718
Source: CourtListenerOpinion
Date Created: 2023-08-25 17:52:44.549063+00
Date Added: 2024-06-11T18:20:04.836361
License: Public Domain

RUSSELL, Bankruptcy Judge,
dissenting.
I respectfully dissent.
This is a very troubling case, carefully orchestrated by both the debtor and the Stelzer Trust to conceal material facts and to force a compromise based upon the false premise that only a relatively small amount of money was at issue, i.e., $4,524.
I would REVERSE and hold that the bankruptcy court abused its discretion and erroneously applied the factors set forth in *426In re Woodson, 839 F.2d 610 (9th Cir.1988) to the proposed settlement because neither the court nor the Trustee had the basic documents from which either the nature of the debtor’s interest in the UPS stock or the value of that interest could be determined. The documents were deliberately withheld despite the Rule 2004 order requiring production of the documents.
I believe that it is inappropriate to consider “the success in the litigation” Woodson element until the entire Trust document is disclosed to the Trustee.6 Without such disclosure, it is pure speculation to discuss the rights of the various parties. In fact, considering the conduct of the debtor and the Stelzer Trust, I have a serious question whether there are other relevant documents which have been concealed which would shed more light on the debtor’s rights under the Trust.
I totally disagree with the unsupported conclusion of the majority “that the litigation could be complex.” Indeed, with full disclosure by the debtor and the Trust, determination of the parties’ rights would be a question of law. A mere two hours was estimated for trial.
VALUATION ISSUE
The importance of the valuation issue has been underestimated by both the trial court and the majority. Both the debtor and the Trustee succeeded in convincing the trial court that because the maximum benefit to the estate was $4,524, a settlement of $2,000 to the estate was very reasonable and should be approved. This faulty assumption colored the entire proceeding to the disadvantage of both the Trustee and the appellants. Without the full disclosure of the Trust documents, it was impossible to determine the value of the debtor’s stock interest. The appellants presented evidence that a similar investment in UPS stock increased in value from $10,000 in 1978 to $300,000 by 1992.
This faulty assumption of the value of the stock led. the court to pressure the Trustee to settle the litigation. In response to a statement by the debtor’s counsel at the June 10 hearing that they settled at the court’s suggestions, the court responded, “I thought it was a good idea at the time because, look, here, we’ve got three lawyers running up some money on it.”
Without the complete Trust document, the Trustee relied upon Mr. Rutkowski’s (the Oregon attorney for the trustee of the Trust) letter of September 12, 1995, which stated, “The net result is that UPS shares with a total value at the date of distribution to, or on behalf of, Ms. Schmitt will be $4,524.” Mr. Rutkowski also stated in this letter that “it is my interpretation of the controlling Trust Document that the date of distribution value will be used.”
The appellants’ counsel argued that the value of the stock was not certain, particularly when the Trust documents were redacted: “This is stock that has increased tremendously in value over the years, and so consequently the valuation date of the gift of stock becomes an extremely material piece of in-formation_ The key issue ... is the valuation date, and if the lawyer’s [Rutkowski] letter is to be relied upon, this court ought to be aware that what we are relying upon is his interpretation without the Trustee’s attorney having the opportunity to interpret the same document.”
To illustrate the potential value of the stock, the appellants’ $10,000.00 investment in UPS stock from the same source in 1978 resulted in an increase in value to $300,000.00 by 1992.
The appellants had offered to purchase the Trustee’s position for more than the $2,000 offered in the settlement. The debtor’s attorney objected to the offer made by the creditors to pay more than $2,000 and to step into the Trustee’s position, by minimizing the potential value of the debtor’s interest in the Trust, stating: “This is not a bidding war over a lot of assets. This is merely a good faith settlement on the debtor’s part to end this over two-year bankruptcy, and there are not a million dollars worth of assets in the estate.... ” I see no justification for the court’s failure to accept the higher offer by *427the appellants. If in fact, the value of the UPS stock is over $100,000, then the creditors of the bankruptcy estate had a right to a “bidding war over a lot of assets.”
PROCEDURAL BACKGROUND
A brief review of the procedural background of the ease will shed light on the carefully orchestrated efforts by the debtor and the Seltzer Trust to conceal material facts. These material facts concerned more than merely the value of the stock as stated by the majority. Rather, the concealment of the material facts went to the heart of the bankruptcy estates’ rights under the Trust.
The debtor filed a chapter 7 petition on February 11, 1994. The debtor filed her schedules and statement of financial affairs, but failed to list her contingent beneficial interest in United Parcel Service stock, nor did she disclose that information in her amended schedules. Even when the debtor allegedly discovered her interest in the UPS stock, she did not amend her schedules to reflect the interest.
The UPS stock was described in an inter vivos trust established by the debtor’s uncle, Eugene Stelzer. Initially, the debtor listed alleged assets of nearly $1,400,000.00, consisting primarily of claims against others, including the appellants. The debtor amended those schedules to evidence a reduction of those claims by $750,000.00. The claims against the debtor were purchased by the appellants for $2,000.00 after objection, notice and hearing.-
On June 10, 1995, the Trustee discovered the existence of the debtor’s interest in the Stelzer Trust and was granted a Rule 2004 examination to examine the relevant documents of the Stelzer Trust, -to which the trustee of the Stelzer Trust Elizabeth En-right responded by providing four “whited-out” pages of a 1993 amendment to the Stel-zer Trust in lieu of the complete document.
The incomplete amendment to the Trust stated that upon the death of one of the Trust settlors, the debtor, niece of settlor Eugene Stelzer, was to receive “United Parcel Service shares of a value of $10,000.” It was stipulated that Eugene Stelzer, the first of the settlors to pass away, died on December 4, 1994, more than six months after the debtor filed her bankruptcy.
On September 14, 1995, the Trustee commenced an adversary proceeding against Elizabeth Enright, as trustee of the Stelzer Trust, and the debtor, seeking a judgment in favor of the Trustee and against Enright, to determine that the debtor’s interest in the Trust was property of the bankruptcy estate pursuant to § 541 and that any and all distributions due to the debtor would be distributed to the Trustee pursuant to § 542.
The bankruptcy court ordered the parties to file a joint pre-trial order. In the pre-trial order filed January 17, 1996, the Trustee objected to the introduction of partially disclosed evidence' and the failure to comply thoroughly with the Rule 2004 Order. The Trustee’s objection was denied at an eviden-tiary hearing held on February 28,1996. At this hearing, the Court, strongly encouraged the parties to settle.
On March 29,1996, the Trustee filed a one page motion to compromise the dispute without any analysis of the Woodson factors. The motion does not contain any admissible evidence, i.e., by way of declarations or otherwise. The settlement was based on the value of the stock at $10,000.00. After taxes, the debtor allegedly would only receive about $4,000. The Trustee would receive $2,000. The appellants timely filed their written objection to the proposed compromise.
The Trustee’s motion to approve the compromise was heard on June 10, 1996, at which time no testimony was given in support of the compromise. Counsel for the appellants objected to the proposed settlement as not in the best interests of the estate because the entire Trust document was not disclosed to the bankruptcy trustee and a 2004 Order was ignored. Counsel also pointed out that Ms. Rayndon was representing both the debtor and the Stelzer Trust in an apparent conflict of interest.
Counsel restated the appellants’ offer to withdraw the objection to the settlement if the Trustee were allowed an opportunity to review the entire Trust document completely or, in the alternative, to allow the appellants *428to purchase the Trustee’s position in order to step into his shoes and continue the litigation.
The Trustee found it difficult to argue with the appellants’ objection to the proposed settlement. The Rule 2004 Order had been issued and there was not a full and complete compliance.
The following statements by counsel for the chapter 7 Trustee at the June 10 hearing showed his concerns over the lack of full disclosure:
MR. DAKE: The Trustee is always, in trying to approve settlements, is put in somewhat of a difficult situation. I find it hard to argue with several of Mr. O’Con-nor’s points. This is a case where Rule 2004 Orders have been issued and there has not been a full and complete compliance with those orders. In this particular instance, there was an order by the Court directing the trustee of this trust to provide the Trustee information concerning the debtor’s interest in the trust. What we got was redacted information.
We came down here at one point to commence a trial on this matter, and the information we had received from the trustee indicated that the total distribution that could be expected was approximately $4500. And the Court strongly encouraged us to try and resolve this matter—
THE COURT: I think I did.
MR. DAKE: —and we came back with this proposed settlement. So we have to admit that we were settling this case based upon information that has been provided by the attorney in Oregon for Ms. Enright, and to a certain extent we are relying upon him to provide accurate information about what’s in the trust and what the distribution is going to be. It seems to me we would likely have recourse against him if he ever made false representations to us. We are always troubled by a party’s failure to comply with the Court’s ruling under 2004.
(Emphasis added).
The Trustee’s counsel expressed a willingness to allow the appellants to purchase the estate’s interest in the litigation:
MR. DAKE: ... To the extent that Mr. O’Connor’s client would like to make a higher and better offer for the estate’s interest in litigation, the Trustee is always interested in maximizing the return to the estate, and we would be willing to accept the offer, depending on how the Court wants to handle this matter from this point forward. But, again, we are operating on a little less than all of the information that we should have. We are relying upon the representations made by Mr. Rutkowski, who is the attorney in Oregon.
(Emphasis added).
The matter was taken under advisement. The bankruptcy court filed its decision on June 20, 1996 approving the proposed settlement made by the Trustee in spite of the fact that the Trustee had offered no support for the settlement figures, except for Enright’s Oregon trust counsel Rutkowski’s correspondence.
Because the settlement agreement was only based upon Rutkowski’s “interpretation” of the Trust amendment and not on the complete Trust, the appellants filed their Notice of Appeal on June 28,1996.

The In Camera Inspection Of The Trust Documents

A bizarre twist to this otherwise unusual case occurred when, on August 20, 1996, the debtor filed a motion for documents to be reviewed in camera. I share appellants’ suspicions and frustrations over the lack of full disclosure. I am particularly disturbed by the debtor’s lack of good faith regarding this motion.
Even the majority has recognized that the debtor failed to show that somehow this in camera disclosure solely to the court cured the lack of full disclosure.
I generally agree with the following part of the appellants’ response to the in camera motion:
It becomes more difficult to determine as time goes on exactly which planet debt- or Marie Schmitt and her attorneys are residing on. The current motion for “in camera” review by the Court is filed in Adversary No. 95-580, which was an adversary commenced, in effect, by Marie to *429dismiss her bankruptcy, which adversary was dismissed at her request. The current motion for “in camera” review by the Court concerns a matter in Adversary No. 95-657 which has been appealed to the Ninth Circuit Court of Appeals, thereby divesting this Court of jurisdiction thereof. If memory serves undersigned counsel correctly, the matter being appealed, the settlement of Adversary No. 95-657 in spite of the fact that there has not been full disclosure of the trust agreement in question, involves a ruling of this Court in which Marie and the Stelzer Trust prevailed. Do the adversary defendants wish to set aside a ruling in which they prevailed before an appeal hearing is given?
The English language does not contain words to describe the utter and sheer nonsense of the motion. Wrong case. No jurisdiction. De facto motion to undermine a ruling in which a party prevailed.
On a substantive basis, the motion is no less wrong-headed and obtuse. Do defendants wish to re-introduce a star chamber for civil matters? This obsession with “in camera” proceedings has gone a bit far. First, the defendants refuse to disclose the existence of the trust in Marie’s schedules, in an effort to hide Marie’s assets. Then, they refuse to disclose the trust pursuant to this Court’s discovery order. Then, they refuse to disclose the trust in the adversary proceeding. Now, they still refuse to disclose the trust.
What is even more weird, Enright refuses to disclose the trust to her attorney, Ms. Rayndon, as Ms. Rayndon admitted at the hearing in which the settlement was opposed. How is it, then, that this Court is to be assured that what is presented “in camera’’ is even the complete trust?
(Emphasis added).
CONCLUSION
I strongly disagree with the majority’s statement that “the main dispute in this appeal concerns the probability of success in the litigation.” It was impossible for the Trustee or the Court, and it is now impossible for this Panel, to properly assess the probability of success in the litigation without full disclosure of all the relevant documents relating to the debtor’s rights under the Trust.
It is an affront to the integrity of the bankruptcy system to allow the intentional concealment of relevant documents in violation of a Rule 2004 order to go unpunished and to result in the approval of the compromise.
I agree with the following statement of the majority regarding the relevant law:
A compromise should not be approved where key facts relevant to a cause of action are not revealed. In re Lion Capital Group, 49 B.R. 168, 189 ([Bankr.]S.[D.]N.Y.1985). An approval of a compromise absent a sufficient factual foundation inherently constitutes an abuse of discretion. Matter of AWECO, Inc., 725 F.2d 293, 299 (5th Cir.1984). On the other hand, in determining whether to propose a compromise a trustee need not burden the estate “with costs and expenses arising out of all manner of questions that may be presented for litigation.” Matter of Carla Leather, Inc., 44 B.R. 457, 472 ([Bankr.]S.[D.]N.Y.1984), aff'd, 50 B.R. 674 [764] (S.D.N.Y.1985).
As previously discussed, the cost to litigate this matter after full disclosure would be de minimis. A mere two hours was estimated for trial.
However, I disagree with the majority’s one paragraph concluding discussion which followed. For example:
Therefore, it is doubtful whether the Trust document provides further detail about the Debtor’s gift or her rights.
(Emphasis added).
Upon what evidence does the majority base its conclusion? Certainly not the evidence admitted at the hearing on the compromise because there is none. If it is based on a review of incomplete documents alleged to be the relevant Trust documents, I disagree. How from the record can the majority be sure that these are all the documents relevant to the debtor’s rights? It is also clear from the appellants’ brief that they never stipulated that from the partial docu*430ments presented, one could determine the debtor’s rights under the Trust.
I would therefore REVERSE the order approving the compromise with instructions to require full compliance with the rights of both the Trustee and the creditors to have full disclosure pursuant to Rule 2004.

, My deferral of the'merits of the litigation does not mean that I agree with the majority's conclusion that the debtor’s interest in the Trust is not property of the estate.