United States v. Hartog

597 B.R. 673

UNITED STATES of America, Appellant,

v.Ross R. HARTOG, Chapter 7 TRUSTEE FOR the BANKRUPTCY ESTATE OF EXPORTHER BONDED CORP., Rivero Investment Group, and Continental Duty Free, Appellees.

Case Number: 18-21853-CIV-MORENO

United States District Court, S.D. Florida, Miami Division.

Signed March 20, 2019

Entered March 22, 2019

Mary Apostolakos Hervey, Michael W. May, United States Department of Justice, Washington, DC, for Appellant.

Grace E. Robson, Markowitz Ringel Trusty & Hartog, PA, Fort Lauderdale, FL, John Hyung Lee, Markowitz, Ringel, Trusty & Hartog, P.A., Leyza Florin Blanco, Sequor Law, Peter Alan Quinter, GrayRobinson, P.A., Miami, FL, for Appellee Ross Hartog.

Andrew David Zaron, Jeremy L. Kahn, Leon Cosgrove, LLP, Coral Gables, FL, for Appellees Rivero Investment Group and Continental Duty Free.

ORDER AFFIRMING BANKRUPTCY COURT

FEDERICO A. MORENO, UNITED STATES DISTRICT JUDGE

THIS CAUSE came before the Court upon Appellant's Notice of Appeal from the United States Bankruptcy Court for the Southern District of Florida (D.E. 1) , filed on May 9, 2018.

THE COURT has considered the briefs and the pertinent portions of the record, and is otherwise fully advised in the premises.

I. Overview

This is an appeal of the United States Bankruptcy Court's Order granting Trustee's Rule 9019 Motion to Approve Settlement with Rivero Investment Group, Inc. and Continental Duty Free Inc. As part of the settlement, the Bankruptcy Court issued a bar order that is limited to claims arising out of or relating to any of the facts, occurrences, or transactions alleged or which could have been alleged by Trustee. The United States, a non-settling party, is the only party objecting to the settlement. The Government wants to pursue nominee claims against the settling non-debtor parties to collect money from the sale of a warehouse, because in its view, there are sale proceeds that belong to the Debtor. The Government wants to collect the proceeds from the warehouse in order to collect the full tax that is owed by the Debtor. As part of the settlement, the United States will receive its pro rata share, which it argues should be more considering the sale of the warehouse.

The appeal presents three issues: (1) whether the Bankruptcy Court abused its discretion in approving the settlement and bar order; (2) whether an adversary proceeding was necessary for the Bankruptcy Court to issue a bar order as part of the settlement; and (3) whether the Anti-Injunction Act prohibited the Bankruptcy Court from issuing the bar order in question as part of the settlement. The Court concludes that the settlement agreement and the bar order are a reasonable, fair, and equitable resolution to the dispute, and are consistent with the factors set out in Matter of Munford, Inc., 97 F.3d 449, 455 (11th Cir. 1996) and In re Justice Oaks II, Ltd., 898 F.2d 1544 (11th Cir. 1990). The Court further holds that Bankruptcy Court Judge Robert Mark had authority to issue the bar order as part of a settlement outside the context of an adversary proceeding, and the Court will not disallow the bar order as part of a settlement because of the Anti-Injunction Act.

II. Background

On October 15, 2015, Debtor Exporther Bonded Corp., filed a voluntary Chapter 11 petition. Debtor is a ship chandelling company that was formed in 1979. During the pendency of the Chapter 11 proceedings, the United States, through the Alcohol and Tobacco Tax and Trade Bureau, was deemed by the Bankruptcy Court to hold an allowed claim against the Debtor's estate totaling $ 1,746,321.36. On November 15, 2016, the case was converted to a Chapter 7 petition, and Ross Hartog was appointed as Trustee.

Continental Duty Free and Rivero Investment Group are the non-debtor settling parties in this action. Continental Duty Free and Rivero Investment Group were formed in June 1987 and May 1992, respectively. The officers, directors, and persons in charge of the Debtor included Jorge Rivero, Juan Rivero, and Jorge Rivero Jr. The Riveros also owned and controlled Rivero Investment Group and Continental Duty Free.

On October 2012, Rivero Investment Group purchased real property comprising of a warehouse located at 2323 Northwest 72^nd Avenue, Miami, Florida 33122 from which the Debtor operated its business. Rivero Investment Group and Continental Duty Free also operated from the same property. The Debtor funded approximately $ 217,000 toward the purchase deposit, while the Riveros and Continental Duty Free contributed approximately $ 650,000 toward the purchase deposit. The balance of the purchase was funded through loans obtained from Bank of America and the Florida Business Development Corporation, both of which were backed by the U.S. Small Business Administration. The loans were secured by mortgages on the property and personally guaranteed by Jorge Rivero, the Debtor, and Continental Duty Free.

Rivero Investment Group rented the property to the Debtor and to Continental Duty Free, and collected rent in amounts sufficient to cover the monthly mortgage payments. The Debtor's books and records did not support a finding of insolvency, nor did the Debtor appear to believe that it owed any taxes to the Government at the time of the purchase of the property in October 2012. During the bankruptcy case in 2017, the property was sold, resulting in $ 4 million in sales proceeds.

The Debtor's schedules, books, and records reflect that as of the petition date, Rivero Investment Group owed the Debtor $ 890,000. After the property was sold, the Trustee investigated potential claims against Rivero Investment Group and Continental Duty Free, and then informally asserted various claims against those two parties for proceeds from the sale of the property, including claims based on avoidable transfers, breach of contract, nominee theory, alter ego, and equitable lien. The Trustee eventually entered into a pre-suit settlement with the Rivero Investment Group and Continental Duty as to the estate's potential claims. Under the pre-suit settlement, Rivero Investment Group and Continental Duty agreed to pay $ 965,000 to the Debtor's bankruptcy estate. The settlement was contingent upon the entry of a bar order, which would enjoin creditors from pursuing the settling parties or their properties arising out of or relating in any manner to any of the facts, occurrences or transactions alleged or which could have been alleged by the Trustee or that arise out of or relate in any way to the Debtor, the bankruptcy case, or any claims available to the bankruptcy estate of the Debtor.

On January 2, 2018, the Trustee filed a motion pursuant to Bankruptcy Rule 9019 to approve the settlement and bar order. Fed. R. Bankr. P. 9019. The United States was the only party that objected to the settlement. The United States wants to pursue claims against the settling non-debtor parties to collect money from the sale of the Property, because in its view, there are sale proceeds that belong to the Debtor. It wants these sale proceeds in order to collect the full tax owed by the Debtor. In its objection, the Government conceded that their claims belonged to the bankruptcy estate. On February 6, 2018, the Bankruptcy Court held a hearing on the Trustee's motion to approve the settlement. Following the hearing, Judge Robert Mark entered an order ruling that the terms of the settlement were reasonable under the In re Justice Oaks II, Ltd., 898 F.2d 1544 (11th Cir. 1990) factors. On March 19, 2018, the Bankruptcy Court held a hearing on the propriety of the bar order.

On April 25, 2018, the Bankruptcy Court entered a bench ruling approving the settlement and bar order, followed by a written order dated April 27, 2018. In its order, the Bankruptcy Court found that the Trustee adequately and properly considered the risks and benefits of pursuing litigation versus a settlement. Judge Mark further found that the settlement was negotiated, proposed, and entered into at arm's length, without fraud or collusion and in good faith. The Bankruptcy Court ultimately found that the bar order was fair and equitable and consistent with public policy.

III. Legal Standard

The District Court must affirm the Bankruptcy Court's findings of fact unless they are clearly erroneous, but its conclusions of law, however, are reviewed de novo . See Mohorne v. Beal Bank, S.S.B., 419 B.R. 488, 492 (S.D. Fla. 2009). As for finding the settlement fair and equitable, it is well established that approval of a settlement in a bankruptcy proceeding is within the sound discretion of the bankruptcy court and will not be disturbed or modified on appeal unless approval or disapproval is an abuse of discretion. See Berman v. Smith, 510 B.R. 387, 392 (S.D. Fla. 2014).

IV. Legal Analysis

Appellant United States argues that the Bankruptcy Court's order approving the settlement is erroneous for three reasons: (1) the order granting the motion to approve the settlement was not fair and equitable to creditors, including the Government, because it allowed Debtor's insiders to retain $ 3,000,000 in sales generated from the sale of real property paid for by the Debtor; (2) the Bankruptcy Court erroneously issued an injunction outside the context of an adversary proceeding, which is required under Bankruptcy Rule 7001(7); and (3) the order improperly bars the government from taking post-bankruptcy collection action in violation of the Anti-Injunction Act, 26 U.S.C. § 7421. The Government's theory is that Rivero Investment Group is a nominee or alter ego of the Debtor, such that the Property actually belonged to the Debtor.

In response, Rivero Investment Group, Continental Duty Free, and Trustee argue that (1) the settlement, including the bar order, was fair and equitable, (2) a bar order as part of a settlement can be approved outside an adversary proceeding and (3) the Anti-Injunction Act does not prevent the entry of the bar order because this case is not about discharging tax liability. For the...