In re Gaddy

622 B.R. 440

IN RE: Jerry DeWayne GADDY, Debtor.

Case No. 17-01568

United States Bankruptcy Court, S.D. Alabama.

Signed March 26, 2020

Lee R. Benton, Birmingham, AL, for Debtor.

ORDER APPROVING SECOND MOTION TO COMPROMISE (DOC. 146) AND DENYING MOTION TO APPROVE PURSUIT OF CLAIMS (DOC. 156)

HENRY A. CALLAWAY, CHIEF U.S. BANKRUPTCY JUDGE

This case came before the court on January 27, 2020 for an evidentiary hearing on (1) the second motion to compromise (doc. 146) filed by chapter 7 trustee Terrie Owens and the defendants ("movants" or "defendants"), including the debtor Jerry DeWayne Gaddy ("Gaddy"), in case no. 1:16-CV-00332-JB-M currently pending in the United States District Court for the Southern District of Alabama; (2) the objection (doc. 149) filed by creditor SE Property Holdings, LLC ("SEPH"); and (3) SEPH's related motion to approve pursuant of claims on behalf of the estate (doc. 156). The evidentiary hearing lasted eight hours. The court heard testimony from Jennifer Corbitt, Vice President of SEPH; the trustee Ms. Owens; and Gaddy. It admitted movants' exhibits 1-29, 31-65, 68-71 and SEPH's exhibits 1-28 (except page 3 on exhibit 7). Having carefully considered the evidence and the applicable law, the court approves the second motion to compromise and denies SEPH's motion to approve pursuit of claims.

Background

In 2006 and 2008, Gaddy guaranteed two business loans by Vision Bank to Water's Edge, LLC related to a real estate project in Baldwin County, Alabama. The real estate project ultimately failed, and Water's Edge defaulted on its obligation to Vision Bank in June 2010. Vision Bank is no longer operating; it sold all of its assets in or around 2011¹ and SEPH now owns the two loans at issue. Corbitt testified that SEPH holds the Vision Bank "legacy assets" and that SEPH will continue in operation "however long it takes" to collect those assets.

Vision Bank (later SEPH) sued Gaddy and other guarantors in October 2010 in the Circuit Court of Baldwin County, Alabama. In December 2014, the circuit court entered judgment in favor of SEPH against Gaddy and others in the amount of $9,168,468.14, although the Alabama Supreme Court later held that the judgment was not final because of one defendant's bankruptcy.² See Gaddy v. SEPH , 218 So. 3d 315, 324 (Ala. 2016).

In 2016, SEPH sued Gaddy, his wife, his daughter, and several family-owned business entities in the U.S. District Court for the Southern District of Alabama, case nos. 16-CV-00332 and 16-cv-00560, for a variety of fraudulent transfer and conspiracy claims under Alabama law. (See movants' exs. 43, 44). The district court consolidated both cases into case no. 16-cv-00332, and SEPH subsequently amended its complaint in that case. (See movants' exs. 45, 46).

In the district court case, SEPH alleges that from 2009 through 2014, with knowledge of Water's Edge potential and then actual default, Gaddy began transferring his property to family members and others. Neither side disputes that these transfers took place. The following is a summary of pertinent events from SEPH's district court complaints and the evidence admitted at the hearing:

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Some discovery was conducted in the district court case before it was stayed in May 2017 because of Gaddy's bankruptcy. (See, e.g. , movants' exs. 47-57; SEPH exs. 12, 22-27). The trustee was substituted as the party in interest to the district court case in June 2019. (See SEPH ex. 12). A jury trial was requested; the case is not currently set for trial. (See id. , movants' exs. 63, 64).

On May 9, 2019, the trustee and the defendants filed a motion in the bankruptcy court to approve a compromise (doc. 115) of the district court claims in the amount of $375,000. This court denied approval of that settlement because SEPH was willing to pay $400,000 to the trustee to be able to pursue the claims. (See order, doc. 134). This court (with the permission of the district court judge) ordered the trustee and the defendants to mediate the district court claims with retired Bankruptcy Judge Jack Caddell. SEPH also participated in the mediation. Although a settlement was not reached at mediation, the trustee and the defendants continued to negotiate and filed the subject motion on November 15, 2019 proposing to settle the claims in the district court case for $825,000.

SEPH and Union State Bank are the only two creditors in this chapter 7 case. SEPH has filed a claim for about $2.5 million, and Union State Bank has filed a claim for about $1.87 million. Both claims are filed as secured, but the collateral does not appear to be property of the bankruptcy estate, so without ruling upon the issue the court has considered both claims to be unsecured for purposes of this decision. Union State Bank supports the proposed settlement (see joinder, doc. 170), while SEPH opposes it.

Analysis

In deciding whether or not to approve a settlement, a bankruptcy court must consider the following factors to the extent applicable:

(a) The probability of success in the litigation; (b) the difficulties, if any, to be encountered in the matter of collection; (c) the complexity of the litigation involved, and the expense, inconvenience[,] and delay necessarily attending it; (d) the paramount interest of the creditors and a proper deference to their reasonable views in the premises.

In re Justice Oaks II, Ltd. , 898 F.2d 1544, 1549 (11th Cir. 1990). The court "consider[s] these factors to determine the fairness, reasonableness[,] and adequacy of a proposed settlement ...." See In re Chira , 567 F.3d 1307, 1312-13 (11th Cir. 2009) (citation and quotation marks omitted).

"In examining the relevant factors, courts have deferred to the [t]rustee's business judgment when reasonable." In re Sportsman's Link, Inc. , No. 07-10454, 2011 WL 7268047, at *11 (Bankr. S.D. Ga. Dec. 20, 2011) ; see also In re Morgan , 439 F. App'x 795, 795 (11th Cir. 2011) ; In re Able Body Temporary Servs., Inc. , No. 8:13-BR-6864-CED, 2015 WL 791281, at *4 (M.D. Fla. Feb. 25, 2015), aff'd , 632 F. App'x 602, 602 (11th Cir. 2016). While the court must not just "rubber stamp" the trustee's proposal, it also must not "substitute its own business judgment for that of the [t]rustee." See In re Harbour E. Dev., Ltd. , No. 10-20733-BKC-AJC, 2012 WL 1851015, at *1 (Bankr. S.D. Fla. May 21, 2012). It need not "hold a ‘mini-trial’ to determine the merits of each and every claim subject of a disputed settlement ... but must simply be convinced that a trustee's judgment is based upon a sound assessment of the situation." See id. (citation and quotation marks omitted); see also Brown v. Harris , No. 3:11-CV-25 CDL, 2011 WL 3473312, at *2 n.5 (M.D. Ga. Aug. 9, 2011).

The court's role "is not to decide the numerous questions of law and fact raised by [the litigation] but rather to canvass the issue[s] and see whether the settlement falls below the lowest point in the range of reasonableness." In re Pullum , 598 B.R. 489, 492-93 (Bankr. N.D. Fla. 2019) (citation, quotation marks, and brackets omitted). "The concept of the ‘range of reasonableness’ has been defined as a range which recognizes the uncertainties of law and fact in any particular case and the concomitant risks and costs necessarily inherent in taking any litigation to completion." Id. (citation, quotation marks, and ellipses omitted). The court should examine "the probable outcomes of the litigation, including its advantages and disadvantages, and make a pragmatic decision based on all equitable factors." See In re McDowell , 510 B.R. 660, 663 (Bankr. N.D. Ga. 2014). "Settlements are favored in bankruptcy and appellate courts have held that a bankruptcy court's approval of a compromise must be affirmed unless the court's determination is either (1) completely devoid of minimum evidentiary support displaying some hue of credibility, or (2) bears no rational relationship to the supportive evidentiary data." Matter of Marvelay, LLC , No. 18-69019-LRC, 2019 WL 3334706, at *6 (Bankr. N.D. Ga. July 23, 2019) (citation, quotation marks, and brackets omitted).

SEPH argues (1) that the court should have required the trustee to conduct more discovery or allowed SEPH more discovery and (2) that the Justice Oaks factors are not met. The court discusses SEPH's arguments below.

I. SEPH's request for more discovery

SEPH's argument that the settlement should not be approved without more discovery is not well-taken. It is not SEPH's role to evaluate the settlement; that is for the court. See infra, section II.A.

Jennifer Corbitt, SEPH's representative, testified that SEPH obtained some documents and appraisals on at least some of the properties at issue as part of the state court case. There was also some discovery done in the district court case before the bankruptcy was filed. Additionally, SEPH could have requested discovery under Federal Rule of Bankruptcy Procedure 2004 related to the alleged fraudulent transfers. Throughout the almost three years that this bankruptcy has been pending since April 2017, SEPH has not requested an examination (and related documents) of the debtor or any of the other defendants under Bankruptcy Rule 2004. As a creditor of the debtor's chapter 7 bankruptcy estate, SEPH is a "party in interest" under Rule 2004(a) entitled to make such a request.³

Instead, when the court asked SEPH to outline what discovery it believed it needed to evaluate the trustee's first settlement proposal, SEPH responded with what this court considered to be essentially full litigation of the district court case through the discovery stage. (See order, doc. 125; SEPH resp. to court order, doc. 127; SEPH ex. 15); Brown v. Harris , 2011 WL 3473312, at *2 n.5 (bankruptcy judge not required "to hold a full evidentiary hearing or even a ‘mini-trial’ before a compromise can be approved[; otherwise, there would be no point in compromising, the parties might as well go ahead and try the case") (citations and quotation marks omitted). SEPH did not limit...