In re Full Spectrum Mgmt., LLC

621 B.R. 421

IN RE: FULL SPECTRUM MANAGEMENT, LLC, Debtor.

Case No. BT 19-00613

United States Bankruptcy Court, W.D. Michigan.

Signed November 6, 2020

Kevin M. Smith, Esq., Rochester Hills, Michigan, attorney for Kelly M. Hagan, Chapter 7 Trustee.

Sandra S. Hamilton, Esq., Grand Rapids, Michigan, attorney for Independent Bank.

Wallace H. Tuttle, Esq., and Gerald B. Zelenock, Esq., Traverse City, Michigan, attorneys for Mark D. Noss, Mark D. Noss O.D., LLC, and MDN Development, LLC.

OPINION GRANTING TRUSTEE'S MOTION FOR APPROVAL OF COMPROMISE

James W. Boyd, United States Bankruptcy Judge

This matter is before the court on the Trustee's Motion for Approval of Compromise Pursuant to F.R.B.P. 9019 (Dkt. No. 25, as supplemented at Dkt. No. 30). The proposed settlement is between Kelly M. Hagan, the Chapter 7 Trustee ("Trustee") and Independent Bank, successor in interest to Traverse City State Bank (collectively, the "Bank"). The Bank asserts that Full Spectrum Management, LLC (the "Debtor") owes it approximately $800,000 under a promissory note dating back to March 2014, and that this obligation is secured by substantially all of the Debtor's assets. The Trustee has asserted that she may avoid the note and the related security interest under 11 U.S.C. § 544. Under the proposed settlement, the Trustee agrees not to pursue her potential avoidance claims against the Bank. In exchange, the settlement proposes giving the Bank derivative standing to pursue collection of accounts receivable and potential fraudulent transfer claims against Mark D. Noss, Steven Ingersoll, and their related entities. These claims are currently the subject of an adversary proceeding filed by the Trustee and pending before this court. Under the settlement agreement, the Bank would bear the costs of this litigation and provide the estate 25% of any gross recovery.

An objection to the motion to approve the settlement was filed by Mark. D. Noss ("Noss"), Mark D. Noss, LLC, and MDN Development, LLC (collectively, the "Objecting Creditors") in their capacity as unsecured creditors in the case. Noss is the managing member of the Debtor and authorized the filing of the bankruptcy petition. Noss and the other Objecting Creditors are also among the defendants in the related adversary proceeding filed by the Trustee.

The court initially conducted a hearing on March 12, 2020, and required supplemental briefing by the Trustee and the Objecting Creditors. The Trustee filed her Supplemental Motion on March 19, 2020 (Dkt. No. 30) and the Objecting Creditors filed their Response on March 27, 2020 (Dkt. No. 32). On April 1, 2020, the court held a telephonic status conference, and determined to set an evidentiary hearing on the Trustee's Motion. However, at that time, Michigan was (and remains) in the midst of the Covid-19 health pandemic. As a result, scheduling of the evidentiary hearing was delayed several times because the court, and some of the counsel for the parties, did not believe it was safe to conduct an in-person hearing. The court eventually scheduled an evidentiary hearing for August 26, 2020. As that date approached, the parties were not in agreement as to whether the hearing should be conducted in-person or via videoconferencing. The court granted the Objecting Creditors' request for a final adjournment of the August hearing. See Order Granting Motion to Adjourn Evidentiary Hearing on Trustee's Motion for Approval of Compromise (Dkt. No. 47.) Finally, the court scheduled the evidentiary hearing for September 22, 2020, and gave the parties and counsel the option of appearing either in-person or via Zoom videoconferencing. The Trustee, counsel for the Trustee, and counsel for the Bank appeared by Zoom videoconferencing. Counsel for the Objecting Creditors, and Noss, appeared in the Traverse City courtroom wearing protective masks and following appropriate social-distancing policies.

I. JURISDICTION.

The court has jurisdiction over this chapter 7 bankruptcy case. 28 U.S.C. § 1334. The case, and all related proceedings and contested matters, have been referred to this bankruptcy court for determination. 28 U.S.C. § 157(a) ; LGenR 3.1(a) (W.D. Mich.). The matter before the court is a core proceeding and this court has authority to enter a final order. 28 U.S.C. § 157(b)(2)(A) and (O) ; see In re Junk , 566 B.R. 897, 904 (Bankr. S.D. Ohio 2017) ("bankruptcy courts have the constitutional authority to enter final orders approving settlements under Rule 9019(a) of the Federal Rules of Bankruptcy Procedure").

II. FACTUAL BACKGROUND.

At the evidentiary hearing, the court heard testimony from one witness: Kelly M. Hagan, the Chapter 7 Trustee. The Trustee gave her direct testimony via Zoom video conferencing and was also cross-examined by counsel for the Objecting Creditors through the Zoom platform. The Trustee is an experienced chapter 7 trustee. The Trustee testified that in her sixteen years as a trustee, she has administered approximately 15,000 cases and has entered into settlement agreements in approximately 2-3% of those cases. The court found Trustee Hagan credible as a witness. The court also admitted seven exhibits into evidence. After the court concluded the evidentiary hearing, it requested that the parties file post-hearing briefs, both of which were filed on October 6, 2020 (Dkt. No. 51 and 52).

A. Background, Chapter 7 Filing, and the Bankruptcy Estate.

The Trustee's testimony and the exhibits presented at the hearing establish the following factual background for the proposed settlement. The Trustee explained that prior to 2014, Steven Ingersoll, though his company Smart Schools Management, was party to an Educational Provider Agreement with the Grand Traverse Academy ("GTA"). In March 2014, criminal allegations were raised against Ingersoll, and it was agreed that management of GTA would transition to Noss, and his newly-formed entity, Full Spectrum Management, LLC. Noss, Ingersoll, GTA, and the Bank engaged in negotiations and ultimately agreed on a process for accomplishing this transition. Ingersoll and Smart Schools were released from the contract with GTA, and on March 19, 2014, the Debtor entered into a new Educational Provider Agreement with GTA. (Trustee's Exh. 6.) The contract had a term of approximately two years. Under the Agreement, the Debtor was to be paid a minimum of $650,000 per year for the management services provided to GTA. The maximum amount to be paid per year was $2,000,000. In addition, all costs incurred by the Debtor under the Educational Provider Agreement were passed on to GTA and reimbursed to the Debtor by GTA.

As part of the transition, the Debtor also assumed Smart Schools' obligations to the Bank. On March 20, 2014, the Debtor executed a new promissory note, in the principal amount of $925,000 (Trustee's Exh. 2) and a Commercial Security Agreement giving the Bank a lien on substantially all of the Debtor's assets, including the Educational Provider Agreement with GTA (Trustee's Exh. 3; see also Trustee's Exh. 4, the UCC Financing Statement). The Debtor also executed a separate Assignment of Agreement as Collateral, which assigned and pledged the Debtor's interest in the GTA contract to the Bank as security for the promissory note. (Trustee's Exh. 5.)

The Debtor, through Noss, filed a voluntary chapter 7 petition on February 19, 2019. The Trustee testified that when the Debtor was still operating, the Educational Provider Agreement with GTA, which was subject to the Bank's lien, was the Debtor's primary asset and only source of income. The estate's only assets at this time are three potential causes of action:

1. Avoidance Claim against the Bank .

The first of the estate's causes of action is a potential claim against the Bank for avoidance of the promissory note, security agreement, and assignment as constructively fraudulent transfers. If the estate were to prevail on this claim, the Bank's all-asset lien would be avoided and approximately $330,000 in payments made to the Bank under the note could potentially be recovered. Presumably, the Bank's $800,000 claim against the estate could also be eliminated. However, in her testimony, the Trustee noted that for the estate to prevail on this claim, it would have to establish that the Debtor was insolvent in March of 2014, when the transaction occurred. She explained that this could be a difficult burden to meet, because the minimum value of the Educational Provider Agreement was $1.3 million and the debt to the Bank was only $925,000. She also stated that it could be difficult for the estate to establish that the Debtor did not receive reasonably equivalent value in the transaction, because there may have been indirect benefits that flowed to the Debtor (specifically, being awarded the Educational Provider Agreement) that would not have occurred absent an assumption of the debt to the Bank.

The Trustee also testified that she believed that the estate would incur significant expenses pursuing the claim against the Bank. These costs would include retaining an expert to value the contract, forensic accounting expenses, and deposition costs. The Trustee stated that the estate has no money to pay these expenses and would likely have to seek litigation funding to pursue the claim. She expressed doubt that the estate would be eligible for such funding.

2. Claims against Noss, Ingersoll, and their Business Entities.

The estate also holds claims against Noss, Ingersoll, and their entities for collection of approximately $212,000 in accounts receivable and avoidance of over $790,000 in potentially fraudulent transfers. The claims have been alleged in an adversary proceeding that was filed by the Trustee on April 30, 2020, while the motion to approve settlement was pending. (Trustee's Exh. 7.) According to representations made by counsel for the Trustee and the Bank at the initial hearing on the motion, the adversary proceeding was filed at that time to preserve claims against the...