In re Yormak

In re: Benjamin H. Yormak, Debtor.

No. 2:15-bk-04241-FMD

United States Bankruptcy Court, M.D. Florida, Fort Myers Division

September 16, 2021

Chapter 7

ORDER GRANTING TRUSTEE'S RENEWED MOTION TO APPROVE COMPROMISE OF CONTROVERSY WITH DEBTOR [Doc. No 876]

CARYL E. DELANO CHIEF UNITED STATES BANKRUPTCY JUDGE

The Chapter 7 trustee asks the Court to approve a compromise of all outstanding issues with the debtor. Under the proposed compromise, the trustee will release all claims against the debtor in exchange for the bankruptcy estate's retention of $401, 500.00 from a $1.1 million settlement fund previously approved by the Court. The holder of a disputed claim objects to the compromise.

In evaluating a motion to compromise under the Eleventh Circuit's holding in In re Justice Oaks II Ltd., ^[1] the bankruptcy court gives deference to the trustee's business judgment and canvasses the issues to determine whether the proposed compromise falls below the lowest point in the range of reasonableness. Having carefully considered the record, the Court finds that the proposed compromise satisfies the Justice Oaks standard and does not fall below the lowest point in the range of reasonableness. Accordingly, the Court will approve the compromise.

I. BACKGROUND

A. Debtor's Bankruptcy Case

The debtor in this Chapter 7 case, Benjamin Yormak ("Debtor"), is a practicing attorney who operates his own law firm (the "Law Firm") and primarily represents plaintiffs on a contingency fee basis. On April 24, 2015 (the "Petition Date"), Debtor filed a petition for relief under Chapter 13 of the Bankruptcy Code. At the time he filed his Chapter 13 case, Debtor had been embroiled in litigation for over a year with his father, Steven R. Yormak ("Claimant") (the "Yormak v. Yormak Lawsuit").^[2]

On September 1, 2016 (the "Conversion Date"), Debtor converted his Chapter 13 case to a Chapter 7 liquidation case, and Robert Tardif (the "Trustee") was appointed as the Chapter 7 trustee. Chapter 7 trustees are charged with liquidating the non-exempt property of the bankruptcy estate for distribution to creditors in the order of priority provided for in the Bankruptcy Code. Generally, property of the bankruptcy estate consists of all property owned by the debtor as of the date the bankruptcy petition is filed.^[3]

During the course of the Chapter 7 case, the Trustee has contended that as of the Petition Date, Debtor's principal non-exempt assets were (1) attorney's fees of $610, 000.00 earned in connection with a False Claims Act lawsuit (the "Qui Tam Action" and the "Qui Tam Fees");^[4] (2) attorney's fees to be awarded to Debtor in connection with a class action lawsuit (the "Class Action");^[5] (3) attorney's fees earned in connection with contingency cases on which clients had retained Debtor prepetition (the "Contingency Fees"); and (4) a portion of the equity in a 2013 Volvo automobile owned by Debtor and his wife.^[6]

In addition, the Trustee contended that Debtor converted his Chapter 13 case to a Chapter 7 case in bad faith, such that, under § 348(f)(2), ^[7] property of the estate is determined as of the date of conversion rather than the date of the original petition (the "Bad Faith Motion").^[8] Here, if property of Debtor's bankruptcy estate is determined as of the Conversion Date -16 months after the Petition Date -the Trustee has contended that the estate is entitled to the attorney's fees earned by Debtor between the Petition Date and the Conversion Date.

B. The First Compromise Order

The Court previously approved a partial compromise between Debtor and the Trustee in its Order Granting Trustee's Verified Motion to Approve Compromise of Controversy with Debtor, Buckner and Miles, P.A., and Hagens Berman Sobol Shapiro LLP (the "First Compromise Motion" and the "First Compromise Order") and the Court's order partially granting reconsideration of the First Compromise Order (the "Reconsideration Order").^[9]

In the First Compromise Motion, the Trustee sought approval of a settlement agreement that provided for the following:

(1) the Trustee's and Debtor's agreement that the Qui Tam Fees, in the amount of $610, 000.00, are property of the estate;

(2) an agreement between Debtor and the Trustee, on the one hand, and the two law firms that served as Debtor's co-counsel in the Class Action ("Class Counsel"), on the other hand, that Debtor was entitled to $1.1 million (the "Class Action Fees") as Debtor's share of the attorney's fees awarded in the Class Action, an increase from the $851, 340.00 previously awarded to Debtor (or the Trustee) by the United States District Court in the Class Action;^[10]

(3) the Trustee's and Debtor's agreement to allocate the Class Action Fees between Debtor and the bankruptcy estate, with the Trustee receiving $401, 500.00 on behalf of the bankruptcy estate and Debtor receiving $698, 500.00; and

(4) the Trustee's release of all claims against Debtor.

The Court granted the First Compromise Motion over Claimant's objection. Claimant then filed a motion for reconsideration, which the Court granted in part, as set forth in the Reconsideration Order.

In the Reconsideration Order, the Court, with the Trustee's and Debtor's consent, approved (1) their agreement that the Qui Tam Fees are property of the estate, and (2) their agreement with Class Counsel regarding Debtor's entitlement to the Class Action Fees. However, the Court denied approval of the Trustee's proposed allocation of the Class Action Fees between Debtor and the bankruptcy estate and the Trustee's release of all claims against Debtor.

Claimant appealed the First Compromise Order and the Reconsideration Order;^[11] the appeal is now pending in the District Court.^[12]

C. The Second Compromise Motion and Claimant's Objection

About a year later, the Trustee filed his Corrected Renewed Motion to Approve Compromise of Controversy with Debtor (the "Second Compromise Motion").^[13] Under the Second Compromise Motion, the Trustee seeks to resolve all disputes between Debtor and the Trustee, including (1) the allocation of the Class Action Fees; (2) the Bad Faith Motion; (3) the extent to which Debtor's prepetition and pre-Conversion Date Contingency Fees are property of the bankruptcy estate; and (4) the Trustee's objection to Debtor's claimed exemption in the Volvo.

Under the proposed settlement, $401, 500.00 of the Class Action Fees will be allocated to the bankruptcy estate, and $698, 500.00 will be allocated to Debtor-the same allocation previously agreed to by the parties in the First Compromise Motion - and the Trustee will release all claims against Debtor. At the July 27, 2021 hearing on the Second Compromise Motion, the Trustee clarified that the $401, 500.00 payment to the estate is intended to resolve not only the dispute regarding the estate's interest in the Class Action Fees, but to resolve all disputes between Debtor and the Trustee. In other words, the parties looked to the Class Action Fees "as a pot to fund the global settlement." ^[14]

Claimant objects to the Second Compromise Motion on four grounds.^[15]Claimant contends, first, that the proposed allocation of the Class Action Fees does not fairly represent Debtor's prepetition work on the Class Action or the Contingency Fees; second, that Debtor has never fully disclosed the Contingency Fees to which he was entitled; third, that Debtor's representations regarding his earned Contingency Fees lack credibility; and fourth, that the Trustee has not adequately investigated the extent to which the Class Action Fees and the Contingency Fees are property of the estate.

II. ANALYSIS

A. Standard for Approval of a Compromise

Under Federal Rule of Bankruptcy Procedure 9019, courts may approve a compromise or settlement on motion by the trustee and after notice and hearing.^[16] "It is a fundamental tenet of bankruptcy jurisprudence that the proponent of a settlement, such as the trustee in this case, bears the burden of demonstrating that the proposal is both reasonable and in the best interest of the bankruptcy estate."^[17]

In the Eleventh Circuit, bankruptcy courts consider four factors, commonly referred to as the Justice Oaks factors, to determine the "fairness, reasonableness and adequacy"^[18] of a proposed compromise:

(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.^[19]

In evaluating the Justice Oaks factors, courts generally defer to the trustee's business judgment when reasonable, ^[20] although the ultimate decision to approve a settlement lies within the court's discretion.^[21] In exercising its discretion, the court seeks to determine whether the settlement, at a minimum, is fair and does "not fall below the lowest point in the range of reasonableness."^[22]

B. The Justice Oaks Factors Support Approval of the Compromise.

1. The Probability of Success on the Merits

Under the first Justice Oaks factor, the probability of success in the litigation, courts do not actually decide the specific legal and factual issues presented; rather, courts canvass the issues to determine only the probability of succeeding on the claims.^[23]

Here the Trustee's dispute with Debtor relates to four issues (a) the extent to which the Class Action Fees are sufficiently rooted in Debtor's pre-bankruptcy past to qualify as property of the estate; (b) whether Debtor converted his Chapter 13 case to Chapter 7 in bad faith; (c) whether the Contingency Fees other than the Class Action Fees and...