Fort v. Tryon Clear View Grp., LLC (In re Audithead, LLC)

625 B.R. 319

IN RE, AUDITHEAD, LLC Debtor(s).

John K. Fort, as Chapter 7 Trustee, Plaintiff(s),

v.Tryon Clear View Group, LLC Laura Maryanne Terranova, Defendant(s).

C/A No. 17-02989-HB

Adv. Pro. No. 19-80017-HB

United States Bankruptcy Court, D. South Carolina.

Signed March 1, 2021

Kristin Burnett Barber, Shane W Rogers, Johnson Smith Hibbard & Wildman, Law Firm, Spartanburg, SC, for Plaintiff.

Randy A. Skinner, Skinner Law Firm, LLC, Greenville, SC, for Debtor.

Rory D. Whelehan, Whelenhan Law Firm, LLC, Greenville, SC, for Creditor.

ORDER DENYING APPROVAL OF SETTLEMENT

Helen E. Burris, Chief US Bankruptcy Judge

THIS MATTER is before the Court for consideration of the Application for Settlement and Compromise filed by Plaintiff John K. Fort, Chapter 7 Trustee for Debtor AuditHead, LLC, and Defendants Tryon Clear View Group, LLC ("TCVG") and Laura Maryanne Terranova,² and the Limited Objection filed by Creditor Catherine Rotruck ("Creditor").³ Hearings were held on December 15, 2020, and February 23, 2021, and conducted by telephone at the request of the parties. The parties ask the Court to consider the information on the case dockets in the above-captioned Chapter 7 case and adversary proceeding, and specifically call the Court's attention to the claims filed, and the Court's summary judgment order.⁴

Creditor filed the only proof of claim in the bankruptcy case in the amount of $1,677,841.00.⁵ Plaintiff filed the above-captioned adversary proceeding alleging TCVG was created by Terranova for the sole purpose of continuing AuditHead's business while avoiding Creditor's claim. Although the complaint cites 11 U.S.C. §§ 548 and 550, it only asserts causes of action for successor liability, alter ego, piercing the corporate veil, and substantive consolidation. No specific dollar amount is asserted in the complaint. Rather, Plaintiff seeks a judgment that Defendants are liable for the debts and obligations of AuditHead. Judgment was entered in favor of Terranova on all causes of action. Summary judgment was also granted in favor of TCVG on all causes of action except a mere continuation theory of successor liability.

The settlement proposes to conclude this adversary proceeding by requiring payment of $50,000.00 from TCVG and execution of a mutual release. The parties to the settlement, and thus the release, are Plaintiff (on behalf of AuditHead) and Defendants TCVG and Terranova. Creditor objected, arguing the release adversely and inappropriately affects her interests or is vague in scope. As a result of negotiations between Plaintiff, Defendants, and Creditor, the release language of the settlement was clarified.⁶ It now reads:

3. RELEASE OF CLAIMS. Except for the specific obligations set forth in this Agreement, in full accord and satisfaction, each Party hereby releases, discharges, and on behalf of said Party's heirs, executors, administrators, employees, agents, successors in interest and assigns from any and all claims, demands, damages, actions, causes of action, of any kind or nature, past, present or future, arising out of or connected with the Proceeding or any other claims available to the Trustee under chapter 5 of Title 11 of the U.S. Code (collectively the "Claims"), known or unknown, which were or could have been asserted by the Parties in the Proceeding through the date of this Agreement. As defined herein, "Claims" do not include any claim under Chapter 5 of the Bankruptcy Code that may have also been asserted by a third-party, including Catherine Rotruck, under applicable non-bankruptcy law, against any entity that is not a Party or Parties under this Agreement. For the avoidance of doubt, no third-party, including Catherine Rotruck, may assert any cause of action against any Party to this agreement if such cause of action would have constituted a cause of action under Chapter 5 of the Bankruptcy Code, whether such Chapter 5 cause of action was asserted by the Trustee or not in the Proceeding.

(emphasis added to highlight clarifying language).

Creditor agrees to and welcomes the clarification in the first highlighted sentence, but objects to the last sentence in bold ("Rotruck Language"). Creditor does not want the settlement to preclude her from bringing a state court action against parties to the release to assert fraudulent transfer claims under South Carolina's Statute of Elizabeth, S.C. Code Ann. § 27-23-10, et seq. ("Potential Action"). Plaintiff and Defendants assert these claims will be barred by the release and ask the Court to approve the settlement over Creditor's objection. They state the Rotruck Language clearly memorializes their intent and if removed, then Plaintiff and Defendants will no longer have a settlement. Defendants assert Creditor is otherwise precluded from pursuing the Potential Action because it is property of the estate under § 541(a), which only the trustee has the authority to pursue under § 704(a)(1).

Section 704(a)(1) requires the trustee to "collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as is compatible with the best interest of parties in interest." Section 554 provides:

(a) After notice and a hearing, the trustee may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.

(b) On request of a party in interest and after notice and a hearing, the court may order the trustee to abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.

(c) Unless the court orders otherwise, any property scheduled under section 521(a)(1) of this title not otherwise administered at the time of the closing of a case is abandoned to the debtor and administered for purposes of section 350 of this title.

(d) Unless the court orders otherwise, property of the estate that is not abandoned under this section and that is not administered in the case remains property of the estate.

Fed. R. Bankr. P. 9019(a) provides "[o]n motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement." "All compromises and settlements must be ‘fair and equitable.’ " In re Alpha Nat. Res. Inc. , 544 B.R. 848, 857 (Bankr. E.D. Va. 2016) (quoting 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, rhg. denied 391 U.S. 909, 88 S. Ct. 1649, 20 L.Ed.2d 425 (1968) ). "The Trustee, as proponent of the proposed settlement, has the burden of establishing that the settlement is fair and equitable and should be approved by the Court." In re Final Analysis, Inc. , 417 B.R. 332, 341-42 (Bankr. D. Md. 2009) (citing In re Kay , 223 B.R. 816, 819 (Bankr. M.D. Fla. 1998) ). In determining whether a settlement should be approved, the Court must consider the following factors: (i) the probability of success in litigation; (ii) the potential difficulties in collection; (iii) the complexity of the litigation and the expense, inconvenience, and delay necessarily involved therein; and (iv) the interest of creditors. Id. at 341 (citing Will v. Nw. Univ. (In re Nutraquest, Inc.) , 434 F.3d 639, 644 (3d Cir. 2006) ). "Basic to this process in every instance, of course, is the need to compare the terms of the compromise with the likely rewards of litigation." Id. (quoting Anderson , 390 U.S. at 424-25, 88 S. Ct. 1157 ).

"A court may approve a settlement over objections unless the proposed settlement falls below the ‘lowest point in the range of reasonableness.’ " U.S. ex rel. Rahman v. Oncology Assocs., P.C. , 269 B.R. 139, 149 (D. Md. 2001) aff'd sub nom. U.S. ex rel. Rahman v. Colkitt , 61 F. App'x 860 (4th Cir. 2003) (discussing Fed. R. Bankr. P. 9019 ) (citations omitted). "A settlement should be...