In re Derosa-Grund

567 B.R. 773

IN RE: Tony DEROSA–GRUND, Debtor.

Case No. 09–33264

United States Bankruptcy Court, S.D. Texas, Houston Division.

Signed May 19, 2017

Nelson Thomas Hensley, Attorney at Law, Johnie J. Patterson, Walker & Patterson, P.C., Houston, TX, for Debtor.

Eva Engelhart, Ross Banks May Cron and Cavin PC, Aaron James Power, Joshua Wolfshohl, Porter Hedges LLP, Houston, TX, for Trustee.

Hector Duran, Nancy Lynne Holley, U.S. Trustee, Houston, TX, for U.S. Trustee.

MEMORANDUM OPINION ON THE TRUSTEE'S APPLICATION TO COMPROMISE

CONTROVERSY UNDER BANKRUPTCY RULE 9019

[Doc. No. 306]

Jeff Bohm, United States Bankruptcy Judge

I. Brief Introduction

This case was initiated on May 7, 2009 (the "Petition Date "), and has been anything but a typical Chapter 7 proceeding. Now pending before this Court is the application (the "Application ") of the Chapter 7 trustee, Eva S. Engelhart (the "Trustee "), to approve a settlement that she has negotiated with Tony DeRosa–Grund, the debtor (the "Debtor "). New Line Productions, Inc. ("New Line "), a party-in-interest, vigorously objects to the proposed settlement. For the reasons set forth herein, this Court approves the Application. The Court does so, however, with misgivings, as it has little doubt that the Debtor, who has already made material misrepresentations under oath to this Court, will foment further frivolous litigation once the order approving the Application becomes final.

II. Factual and Procedural Background

On September 23, 2015, the Debtor filed a motion to reopen his Chapter 7 case (the "Motion to Reopen "). [Doc. No. 92]. In the Motion to Reopen, the Debtor requested this Court to reopen his case so that he could amend his schedules to disclose an asset that he claimed to have inadvertently left off his original schedules. On October 14, 2015, New Line lodged an objection to the Motion to Reopen. [Adv. Doc. No. 94]. This Court held a multi-day hearing on December 1, 2, 3, and 7, 2015, and the Court took the matter under advisement.

On January 22, 2016, this Court issued a Memorandum Opinion (the "Opinion "). [Doc. No. 122], and an order corresponding to the Opinion (the "First Order "), [Doc. No. 123]. A true and correct copy of the Opinion and the First Order are attached hereto as Exhibits A and B and incorporated herein for all purposes. The First Order ordered that this Chapter 7 case, which was closed in 2014, be reopened so that the Trustee could administer certain previously undisclosed assets. The Opinion discusses in detail how the Debtor deliberately failed to disclose certain assets on his original schedules; and then, after he received his discharge of a substantial amount of debt, attempted to collect hundreds of thousands of dollars for these assets and, when unsuccessful, then prosecuted numerous unsuccessful lawsuits against New Line (among others) seeking to obtain judgments for huge amounts.

The Opinion describes the two key assets that the Debtor failed to disclose. One is the so-called "Treatment," and the other is an entity called Silverbird Media Group LLC ("Silverbird "). The latter is a company owned by the Debtor as of the Petition Date. The former is an abridged script for what subsequently became the screenplay for a blockbuster movie entitled "The Conjuring." This movie generated revenues of over $300 million in 2013, and a sequel has since been made.

The Opinion also explains why the Court reopened the Debtor's case and the conditions that the Court imposed in doing so. Specifically, the Court required the Debtor to schedule the Treatment and Silverbird so that the Trustee could administer these assets for the benefit of the estate—i.e., for those creditors whose allowed claims had not been paid when the case was initially closed in 2014. The Opinion also set forth that if, after the Trustee administered these previously undisclosed assets, any excess funds remained in the estate, they would not be distributed to the Debtor. The Court issued this particular ruling on the grounds that the Debtor's skullduggery should, as a matter of equity, bar him from receiving any distribution. The Debtor has appealed this ruling, and the Trustee is defending this holding.

To the Trustee's credit, she has been able to sell the estate's interest in the Treatment, plus take certain other actions, such that more than enough cash has been generated to pay all allowed unsecured claims and all allowed administrative claims. [Doc. No. 371]. Indeed, the holders of unsecured claims have received interest on their claims. [Id. ]. This result is exceptional, and the Trustee deserves much credit for her efforts.

And, also to her credit, the Trustee is trying to comply with the Opinion and the First Order by not distributing any excess funds to the Debtor. Specifically, after she paid off all allowed unsecured claims, and set aside what she believes is a sufficient amount of funds to pay off all allowed administrative claims, the Trustee calculated that there are excess funds in the estate. On February 1, 2017, she filed a motion requesting this Court's approval to pay a portion of these excess monies to two charitable organizations as follows: (1) to the Ronald McDonald House of Houston, Inc., the sum of $35,000.00; and (2) to the Covenant House Texas, the sum of $35,000.00. [Doc. No. 287]. The Court approved this request in an order dated February 9, 2017 (the "Second Order "), and the Debtor timely appealed this ruling. [Doc. No. 289]. As with the Debtor's appeal of the First Order, the Trustee is defending the Second Order. Both appeals are presently pending before the Honorable Sim Lake, United States District Judge for the Southern District of Texas ("Judge Lake "). [Doc. No. 290 & 303]; [Civ. Act. No. 4:17cv591].

At a status conference before Judge Lake, the following exchange, in pertinent part, occurred among Judge Lake, counsel for the Trustee, and counsel for the Debtor:

The Court: Is there a chance that this matter can be resolved? I mean, I hate to spend—let me just talk a second. I hate to spend money when the creditors have been paid. Of course, it benefits your law firm, that's great. I have also been skeptical of awarding money to a charity from a party. That's like forced contributions. It's just not something that, I don't think courts—who's going to decide which charity?

Trustee's Attorney: The trustee. Judge Bohm has ordered the trustee should decide what charity they go to. I would say this about settlement. I believe that if Mr. Patterson and I in a different context had this pool of money and these issues we would settle it. In bankruptcy court, any settlement that we would reach would have to be approved by Judge Bohm. And I am very confident, given that opinion you read and the record so far, he is not going to approve any settlement whereby I let Mr. Patterson's client walk away with any money.

The Court: Well, he might if the reference were withdrawn and I were going to approve it.

Debtor's Attorney: If that were to happen, Judge, I feel like there is probably an 80 percent chance we could resolve everything.

The Court: I am not saying I am going to do that, but I am looking at the specter of writing three long opinions and I am looking at the specter—and nothing more do I love than writing bankruptcy opinions. That's the reason I wanted to become a federal judge. But seriously, it's just if we're spending a huge amount of attorney and judge time on an issue that could be resolved, I would seriously consider any reasonable relief you could suggest.

Trustee's Attorney: I appreciate that, Your Honor.

The Court: That's all I am going to say.

...

Debtor's Attorney: Quite frankly, as far as settlement, we haven't. I mean, all of us work here, work together. We work in that little environment downstairs in bankruptcy court all the time. And so, this is something that can be resolved. It's not something that can be resolved and approved by Judge Bohm at this stage, quite frankly. I mean, that's just—

The Court: Well, Judge Bohm is a fine judge, but the appeal is to me. The way the courts work, sometimes the Fifth Circuit does things that I didn't think would be a good idea, but that's the way the system works.

[Trustee's Ex. 18, 23:9–24:17, 25:2–12].

After reflecting upon Judge Lake's comments, the Trustee became concerned that she would not prevail in the appeals, and that therefore the Debtor—not the two charities—would end up receiving all of the surplus funds in this case. [Mar. 10, 2017 Tr. 4:15–24]. Accordingly, she entered into settlement discussions with the Debtor, and has negotiated a compromise that, if approved, results in the two charities still each receiving $35,000.00. [Mar. 10, 2017 Tr. 28:3—11]; [Doc. No. 306, p. 8 ¶ 33]. The terms of the proposed settlement (the "Proposed Settlement ") are set forth in the Application, which the Trustee filed on February 24, 2017. [Doc. No. 306]. The material terms are as follows:

(1) The Debtor will dismiss his appeal of the First Order with prejudice;

(2) The Debtor will dismiss his appeal of the Second Order with prejudice;

(3) The Trustee will proceed to pay $35,000.00 to each of the two charitable organizations as set forth in the Second Order;

(4) Upon closing this Chapter 7 case, the Trustee will abandon the estate's interest in two entities: Silverbird and Evergreen Media Group LLC ("EMG "). The former is the entity that the Debtor did not initially disclose in his schedules, but, as required by the First Order, did subsequently disclose, representing that the value of his interest in this corporation is $0.00. The latter is an entity that the Debtor did initially disclose—representing that his interest in this corporation has a value of $1,000.00;

(5) The Trustee will disclaim any right that she has to receive any portion of future payments relating to "The Conjuring";

(6) The Trustee will exchange mutual releases with the Debtor, Silverbird, EMG, and Evergreen Media Holdings LLC ("Holdings "). The latter

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