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In re Western Funding Inc.

United States Bankruptcy Appellate Panel, Ninth Circuit

June 8, 2016


         Argued and Submitted at Las Vegas, Nevada May 19, 2016.

          Appeal from the United States Bankruptcy Court for the District of Nevada. Bk. No. 2:13-bk-17588-LED. Honorable Laurel E. Davis, Bankruptcy Judge, Presiding.

         Louis Edward Humphrey, III, of Humphrey Lopez PLLC argued for appellant Greif & Co.

         Robert E. Atkinson, of Atkinson Law Associates, Ltd., argued for appellee Brian D. Shapiro, Trustee of WFI Liquidating Trust.

         Before: DUNN, FARIS and BARASH,[1] Bankruptcy Judges.


         DUNN, Bankruptcy Judge:

         The WFI Liquidating Trust, with Brian D. Shapiro as its trustee (" Liquidating Trustee" ), was established upon confirmation of the chapter 11[2] plan of the jointly administered debtors Western Funding Incorporated (" WFI" ), Western Funding Inc. of Nevada and Global Track GPS, LLC (collectively " Debtors" ). The confirmed plan empowered the Liquidating Trustee to litigate and settle claims belonging to the chapter 11 bankruptcy estates, provided that bankruptcy court approval be sought and obtained to settle any claims over $50,000. The Liquidating Trustee commenced litigation against American Express Travel Related Services Company, Inc. and American Express Centurion Bank (collectively " Amex" ) to avoid and recover over $2 million in allegedly fraudulent prepetition transfers made by WFI. Subsequently, the Liquidating Trustee requested the bankruptcy court's approval of his agreement to settle the claims against Amex for $331,476.53.

         Greif & Co. (" Greif" ), a beneficiary of the WFI Liquidating Trust, objected to the proposed settlement. Greif argued that the settlement amount was unacceptably small, and the Liquidating Trustee had undervalued the claims in his own complaint. Ultimately, the bankruptcy court approved the settlement. Greif appeals; we AFFIRM.


         A. Events leading up to and including confirmation

         WFI was a servicer of subprime auto loans. In 2010, Harbor Structured Finance LLC, a Delaware entity controlled by Frederick and Katherine Cooper, acquired WFI. The Coopers were appointed to management positions in WFI. They established Amex credit card accounts for themselves and other employees. Although WFI was not the holder of any of the Amex cards, the Coopers routinely caused WFI to pay the balances on the cards. In WFI's accounting records, the Coopers designated many, but not all, of the charges on their Amex cards as business expenses.

         In 2013, WFI filed a chapter 11 petition, and the case was administratively consolidated with the chapter 11 cases of the two other Debtors. On March 31, 2014, the bankruptcy court approved a joint plan of liquidation (the " Plan" ) for the Debtors. The Plan provided for the dissolution of the Debtors and the vesting of all property of the Debtors' bankruptcy estates in the WFI Liquidating Trust (" Trust" ) to be administered by the Liquidating Trustee. This vesting specifically included any claims or causes of action held by any of the Debtors' estates. Creditors of the Debtors' estates became beneficiaries of the Trust. The Plan gave the Liquidating Trustee the " exclusive right, authority, and discretion to determine and to initiate, file, prosecute, enforce, abandon, settle, compromise, release, withdraw, or litigate" any claim " and to decline to do any of the foregoing without the consent or approval of any third party or further notice to or action, order, or approval" of the bankruptcy court. The Plan also permitted the Liquidating Trustee to " sell and/or assign" claims to a third party to be pursued for the assignee's " own benefit." The only stated limitation on the Liquidating Trustee's settlement authority was that bankruptcy court approval would be required to settle any claim seeking to recover more than $50,000. Neither the procedure for requesting such approval nor the criteria for granting it were specified. The Trust was to be administered according to a WFI Liquidating Trust Agreement (" Trust Agreement" ), which authorized the Liquidating Trustee, among other things, to settle actions in his " good faith judgment."

         B. The adversary proceeding and the settlement

         Several months later, the Liquidating Trustee filed an adversary proceeding complaint against Amex, seeking to recover allegedly fraudulent transfers. The transfers at issue were the payments made by WFI to Amex on the Coopers' credit card accounts. In the complaint, the Liquidating Trustee alleged that the " overwhelming majority" of the credit card charges were for personal expenses of the Coopers and other employees. Because the charges were for personal rather than business expenses, the Liquidating Trustee alleged that WFI did not receive reasonably equivalent value in exchange for paying them. In the two years preceding WFI's bankruptcy filing, the charges totaled over $2 million. The complaint asserted the following theories of avoidance and recovery:[3]

1. The transfers were avoidable under § 548(a)(1)(B)(ii) because the transfers were made at a time when WFI either was insolvent or was about to engage in transactions leaving it with unreasonably small capital (" Insolvency" theory).

2. Some of the transfers were avoidable under § 548(a)(1)(B)(ii)(IV) because they were " made under an employment contract for the benefit of an insider, outside the ordinary course of business" (" Employment Contract" theory).

         Amex contacted the Liquidating Trustee to initiate settlement negotiations on December 8, 2014, approximately two weeks after the complaint was filed. Five months later, the parties reached a settlement, and the Liquidating Trustee filed a motion with the bankruptcy court seeking approval of the settlement (" Settlement Motion" ). Amex agreed to pay $331,476.53 to the Trust in exchange for dismissal of the adversary proceeding and a mutual release of claims, and Amex would be entitled to an allowed general unsecured claim under the Plan in the amount of the settlement payment.

         The Liquidating Trustee took the position that, because he derived his authority not from the Bankruptcy Code but from the terms of the confirmed Plan and the Trust Agreement, he was not a " trustee" as that term is used in the Code and Rules. Thus, he argued that standards governing settlement motions by bankruptcy trustees were not applicable. The Liquidating Trustee argued he was entitled to " greater deference in approval of settlements" based on the Plan and Trust Agreement, but he contended that the Settlement Motion should be approved regardless of whether the bankruptcy court accepted that argument.

         In the Settlement Motion and an accompanying declaration, the Liquidating Trustee went on to analyze the settlement under the factors enumerated in Martin v. Kane (In re A & C Properties), 784 F.2d 1377, 1381 (9th Cir. 1986) (the " A & C Factors" ). The Liquidating Trustee recognized the claims asserted in the complaint were susceptible to factual dispute. In particular, though the Liquidating Trustee believed certain of the charges in question were " easily identified" as personal, he acknowledged that others were subject to dispute as to whether they were legitimate business expenses that may have provided value to WFI. Likewise, the Liquidating Trustee believed that WFI was undeniably insolvent at the petition date and that the evidence " strongly supported" a finding of insolvency at least nine months earlier. Yet he recognized the difficulty in proving that, as he suspected, the insolvency period had begun much earlier still. He concluded:

In my business judgment, compromise results in a fair and reasonable recovery for the estate, factoring in the overall recovery, my estimate for success in the resolved matter, and the significant costs and delay necessarily associated with litigating in an effort to obtain greater recovery.
. . . Furthermore, the compromise represents an immediate recovery for the Liquidating Trust that will allow for payment of a large portion of the outstanding administrative expenses, which in turn maximizes the probability that future recoveries will allow for meaningful distribution to general unsecured creditors, and makes additional funds available for payment of cost[s] and expenses in pursuit of other causes of action.
. . . Accordingly, I assert that the compromise is in the best interest of the bankruptcy estate's creditors.

         C. The dispute over the Settlement Motion

         Two creditors, Greif and Guerin Senter, expressed views on the settlement. Mr. Senter supported and joined in the Settlement Motion, but Greif vigorously opposed it. Greif complained that the proposed settlement would pay subordinated administrative claims, including Mr. Senter's claim, but other creditors would likely receive nothing. Greif wanted the Liquidating Trustee " to present the relevant facts and legal analysis surrounding the claims asserted [in the complaint] (and an explanation of why some theories were left out)" to allow the bankruptcy court to evaluate the Settlement Motion. Greif presented its own analysis of the Insolvency and the Employment Contract claims, along with an additional theory of recovery under § 548(a)(1)(A), which the Liquidating Trustee did not assert (" Fraudulent Intent" theory).

         Concerning the Insolvency theory, Greif believed WFI likely became insolvent in August 2010 and was rendered " even more leveraged" after a March 2012 transaction. Greif argued that these facts supported greater recovery. As to the Employment Contract theory, Greif noted that insolvency is not an element and questioned the lack of discussion of this theory in the Settlement Motion. Regarding both theories, Greif demanded additional details concerning the methodology by which the parties arrived at the settlement amount, as well as information concerning the expected difficulty and expense of prevailing in litigation. Finally, Greif asked the bankruptcy court to require the Liquidating Trustee to justify his decision not to pursue a Fraudulent Intent claim.

         The Liquidating Trustee filed a reply to Greif's objection in which he provided some of the additional information Greif requested. He explained that the settlement amount was based on calculations using two " estimates in compromise" between himself and Amex. First, the parties had divided the universe of questioned credit card charges into two categories, which the Liquidating Trustee called " Type 1" and " Type 2" charges. Type 1 charges were those that the Coopers had not designated as business expenses. Type 2 charges were those that were designated as business expenses, though the Liquidating Trustee disputed the accuracy of that designation. For purposes of calculating the settlement amount, the parties agreed to treat all Type 1 charges and exactly half of the Type 2 charges as having provided no value to WFI. Second, the parties agreed, again as an " estimate in compromise," that WFI " would probably be found to be 'insolvent' . . . from January 2013 onward." The Liquidating Trustee emphasized that the parties had disagreed during negotiations as to the correct ...

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