In re Milazzo

450 B.R. 363

In re Barbara J. MILAZZO, Debtor.

No. 00–33721.

United States Bankruptcy Court, D. Connecticut.

March 31, 2011.

Edward P. Jurkiewicz, Esq., Lawrence & Jurkiewicz LLC, Torrington, CT, for Chapter 7 Trustee.Richard M. Levy, Esq., Kroll, McNamara Evans & Delehanty LLP, West Hartford, CT, for CadleRock Joint Venture II, L.P.

MEMORANDUM ON REMAND FROM DISTRICT COURT OF RULING AND ORDER ON MOTION TO APPROVE SETTLEMENT

Re: ECF NOS. 120 (Motion), 133 (Order) & 154 (Remand)

ALBERT S. DABROWSKI, Bankruptcy Judge.

I. INTRODUCTION AND PROCEDURAL BACKGROUND

Barbara J. Milazzo (hereafter, the “Debtor”), on August 23, 2000 (hereafter, the “Petition Date”), commenced a Chapter 7 bankruptcy case which remains pending before the Court after almost eleven years. The duly appointed Chapter 7 Trustee, on August 23, 2002, timely commenced an adversary proceeding (Adv. Pro. No. 02–3101) (hereafter, the “Avoidance Action”) by the filing of a complaint (hereafter, the “Complaint”) seeking to avoid certain alleged prepetition and postpetition transfers from the Debtor to Michael G. Milazzo (hereafter, “Michael”), her non-debtor spouse (together, the “Milazzos”). After years of extensive discovery, the Trustee and the Milazzos negotiated an agreement to settle the Avoidance Action in return for a payment to the bankruptcy estate of $20,000 (hereafter, the “Settlement”). The Trustee then filed a Motion for Authority to Compromise Claim of the Estate and for Approval of Settlement Agreement (hereafter, the “Motion”), ECF No. 120, requesting approval of the Settlement pursuant to Fed. R. Bankr.P. 9019. CadleRock Joint Venture II, L.P. (hereafter, “CadleRock”), a creditor holding almost 99% of the unsecured claims against the bankruptcy estate, then sent the Trustee a letter seeking to “purchase” the right to pursue the Avoidance Action for $22,500. After the Trustee declined to accept the offer, CadleRock filed an Objection ... to [the Motion] (hereafter, the “Objection”), ECF No. 125. Through the Objection CadleRock urged the Court to deny the Motion, and compel the Trustee to either accept its offer, or file a notice of intent to sell the relevant cause of action at a sale subject to opportunity to make higher and better offers pursuant to Section 363(b).

The Court, on March 31, 2009, held a hearing on the Motion and Objection and that same date entered a Ruling and Order on Motion to Approve Settlement (hereafter, the “Approval Order”), ECF No. 133, granting the Motion and overruling the Objection. CadleRock timely appealed the Approval Order to the United States District Court for the District of Connecticut. On September 14, 2009, United States District Judge Robert N. Chatigny, remanded the matter (ECF No. 154; hereafter, the “Remand Order”) for further proceedings to provide an opportunity for this Court to articulate (1) its reasons for not requiring an auction and (2) to expand upon its basis for approving the Settlement.¹

Following the remand, the Court entered an Order on Remand, ECF No. 156, establishing, inter alia, a post-remand briefing schedule and setting a date for a hearing in accordance with which CadleRock and the Trustee filed memoranda of law (ECF Nos. 161, 162) addressing the issues set forth in the Remand Order and a Joint Stipulation of Facts (hereafter, the “Stipulation”), ECF No. 169.² The Court held a hearing on February 9, 2010, after which it took the matter under advisement.

In accordance with the Remand Order, the Court now articulates the basis for its determination that CadleRock's position that the Trustee be required to hold an auction and “sell” the Avoidance Action to the highest bidder is inconsistent with the relevant case law of this Circuit, i.e., “its reasons for approving the trustee's motion without requiring an auction”, and further articulates its reasons for concluding that approval of the Settlement was in accordance with the applicable standards.

II. JURISDICTION

The United States District Court for the District of Connecticut has jurisdiction over the instant case by virtue of 28 U.S.C. § 1334(a); and this Court derives its authority to hear and determine this proceeding on reference from the District Court pursuant to 28 U.S.C. § 157(a), (b)(1) and the District Court's General Order of Reference dated September 21, 1984. This is a “core proceeding” pursuant to 28 U.S.C. § 157(b)(2)(H).

III. FACTUAL BACKGROUND

The following Findings of Fact, solely for purposes of the present matter, see fn. 2, supra, are derived from the record of the March 31, 2009 hearing on the Motion, the February 9, 2010 hearing after remand, the Stipulation, and the Court's independent review and noticing of the files and records of the instant case and related adversary proceeding. See Fed.R.Evid. 201 ( Inter alia, the court may take judicial notice, whether requested or not, at any stage of the proceeding of its own orders and records not subject to reasonable dispute).

The Debtor and Michael have jointly owned their home, located at 70 Swathmore Street, Hamden, Connecticut (hereafter, the “Residence”) since May, 1996. In her bankruptcy petition, the Debtor, in Schedule A (Real Property), listed the fair market value of the Residence as $230,000 and, in Schedule D (Secured Claims), the encumbrances thereon as a first mortgage in the amount of $146,000 and a home equity line of credit in the amount of $100,000 secured by a second mortgage.³

The first mortgage was a purchase money mortgage executed in 1996. Thereafter, on March 2, 2000, the Debtor and Michael jointly applied for and obtained a $100,000 home equity line of credit secured by the second mortgage. Shortly thereafter, on March 13, 2000, the Milazzos drew $100,000 on the line of credit (hereafter, the “Prepetition Draw”). CadleRock and the Trustee have stipulated that Michael used the proceeds to participate in a business venture with a third party, purchasing, rehabilitating and selling a parcel of real property (hereafter, the “Lincoln Street Property”); that the Lincoln Street Property was sold in November, 2000; that Michael made a profit of $26,823 from the venture; that Michael repaid $70,000 of the line of credit in December, 2000; that, around that same time, the Milazzos also purchased a Honda minivan, titled in the name of the Debtor, from the proceeds of the Lincoln Street Property; and that the Debtor was not employed outside of the home at any time during the year 2000.

The Milazzos filed joint federal and state income tax returns for the year 2000. To pay the taxes owed, they drew another $23,000 on the line of credit in April, 2001 (hereafter, “the Postpetition Draw”). Inter alia, the Complaint, as amended,⁴ seeks avoidance of the Pre and Postpetition Draws pursuant to Bankruptcy Code §§ 548(a) and 549(a), and recovery, pursuant to Bankruptcy Code § 550(a), of the portion of such draws attributable to the estate's interest in the Residence.

Because, as of the Petition Date, the Residence was overencumbered, the Debtor lacked any equity therein. Utilizing the federal exemptions of Bankruptcy Code § 522(d), she claimed, in Schedule C (Exempt Property), an exemption of $1.00 for her interest in the Residence. The Debtor's bankruptcy schedules indicate that, in the absence of the home equity line of credit and the transfers made pursuant thereto, the Debtor, as of the Petition Date, would have had $42,000 of equity in the Residence.⁵

CadleRock's claim against the estate arises out of the Debtor's guaranty of a 1991 business loan to an entity known as Melina Enterprises, Inc. (hereafter, “Melina”). Michael, as president of Melina, on July 17, 1991, executed, on behalf of Melina, a term note (hereafter, the “Term Note”) in the initial amount of $175,000, payable to Connecticut Savings Bank. See Claim No. 3–1. The Debtor was one of four individuals who, also on July 17, 1991, signed documents personally guaranteeing the Term Note. See Claim No. 3–1; ECF Nos. 78, 81. The Term Note provided for payments of specified amounts each month, with the final payment due July 1, 1996. Melina defaulted on the Term Note, which was subsequently acquired by CadleRock on July 25, 1997. CadleRock, in 1998, initiated an action in state court against Melina and all guarantors of the Term Note. Upon the filing of the Debtor's bankruptcy petition the state court proceedings were initially stayed by the automatic stay of 11 U.S.C. § 362(a). However, CadleRock then sought and was granted relief from automatic stay to proceed to judgment in state court.

CadleRock has filed an undisputed Proof of Claim (Claim No. 3–1) asserting a nonpriority, unsecured claim against the estate for $222,073.35, the entire amount due under the Term Note as of the Petition Date.⁶ CadleRock is, by far, the estate's largest unsecured creditor, holding almost 99% of the unsecured claims.

IV. DISCUSSION

The standards used by the Court in considering whether to approve the Trustee's Motion depend upon whether the proposed Settlement is considered a compromise subject to Court approval pursuant to Fed. R. Bankr.P. 9019, or a sale of estate property pursuant to Bankruptcy Code § 363(b). The Motion was prosecuted by the Trustee as a compromise pursuant to Fed. R. Bankr.P. 9019(a) which provides, in pertinent part: “On motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement.” It is well-established in this Circuit that, “[i]n undertaking an examination of the settlement, ... the responsibility of the bankruptcy judge ... is not to decide the numerous questions of law and fact raised by appellants but rather to canvass the issues and see whether the settlement falls below the lowest point in the range of reasonableness.” In re W.T. Grant Company, 699 F.2d 599, 608 (2d Cir.1983) (citation and internal quotation marks omitted).

A. Under Established Case Law in the Second Circuit the Trustee Cannot be Compelled to Sell...