City Sanitation, LLC v. Allied Waste Services of Massachusetts, LLC , 656 F.3d 82 ( 2011 )

United States Court of Appeals
For the First Circuit
No. 10-2284
IN RE AMERICAN CARTAGE, INC.,
Debtor.
____________________
CITY SANITATION, LLC,
Appellant,
v.
ALLIED WASTE SERVICES OF MASSACHUSETTS, LLC, ET AL.,
Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. F. Dennis Saylor IV, U.S. District Judge]
Before
Howard, Selya and Thompson,
Circuit Judges.
Marshall F. Newman, with whom Newman & Newman, P.C. was on
brief, for appellant.
Euripides Dalmanieras and John A. Burdick, Jr., with whom
Kenneth S. Leonetti, Foley Hoag LLP, D. Ethan Jeffery, and Murphy
& King, P.C. were on consolidated brief, for appellees.
August 31, 2011
SELYA, Circuit Judge. This appeal is the culmination of
a pitched battle between two waste-disposal firms, squabbling over
the carcass of a third. The littered battlefield brings to mind
the familiar adage that one man's trash is another man's treasure.
Telling the tale requires us to resolve questions of
standing to prosecute claims arising out of a bankruptcy; questions
of first impression as to the distinction between "commercial tort
claims" and "proceeds" and as to the force and effect of Bankruptcy
Rule 8006; and a question anent the fairness of a negotiated
settlement. After careful consideration, we conclude that the
disputed claims are commercial tort claims; that the trustee in
bankruptcy had exclusive standing to pursue and settle those
claims; that the appellant, by failing to comply with Bankruptcy
Rule 8006, waived its theory of abandonment; and that the
bankruptcy court's approval of the proposed settlement was within
the realm of its discretion. Accordingly, we affirm the judgment
below.
I. BACKGROUND
This case arises out of the ashes of American Cartage,
Inc., a waste-disposal firm. During its halcyon days, American
Cartage borrowed money from Financial Federal Credit, Inc. (FFC) to
finance its operations and defray the cost of acquiring needed
equipment. In return, it gave FFC promissory notes and a security
-2-
interest in the purchased equipment (the Equipment Collateral).
The security interest extended to
all goods, inventory, equipment, accounts,
accounts receivable, chattel paper, documents,
instruments, contract rights, general
intangibles, investment property, securities
entitlements, deposit accounts, fixtures and
other property, wherever located, now or
hereafter belonging to [American Cartage] . .
. and in all proceeds, insurance proceeds,
substitutions, replacement parts, additions
and accessions of and/or to all of the
foregoing.
On July 23, 2003, American Cartage filed a voluntary
bankruptcy petition under Chapter 11, see 11 U.S.C. § 301, and
moved for leave to continue business operations during the
reorganization period. The bankruptcy court granted replacement
liens for the secured creditors (including FFC) and allowed the
debtor to use a specified amount of cash collateral for payroll and
other post-petition expenses.
Within two weeks, the United States Trustee filed an
emergency motion seeking either to dismiss the case or to convert
it to a straight Chapter 7 bankruptcy. See id. §§ 701-727. This
motion was sparked by the debtor's failure to obtain commercial
liability insurance covering its ongoing operations. The
bankruptcy court responded by directing that a Chapter 11 trustee
assume responsibility for the debtor's affairs. Soon thereafter,
the court approved the appointment of John Burdick as trustee.
-3-
Up to this point, William Zoll had managed the debtor's
day-to-day operations. The trustee sought and received the court's
blessing to retain Zoll as a consultant. With Zoll's help, the
trustee continued to run the business while attempting to construct
a viable reorganization plan.
By January of 2005, the trustee had despaired of any
reorganization and moved to convert the proceeding to a Chapter 7
liquidation. Zoll, with the trustee's assent, engaged Allied Waste
Services of Massachusetts, LLC (Allied) to service the debtor's
remaining customers during the wind-up period.
Faced with this new reality, FFC sought relief from the
automatic stay, id. § 362, in order to take possession of the
Equipment Collateral, including garbage trucks and industrial-sized
trash containers. FFC wanted to sell this equipment to a rival
trash hauler. The trustee did not oppose FFC's motion.
On February 7, 2005, the bankruptcy court converted the
proceeding, assured continuity by appointing Burdick as the Chapter
7 trustee, lifted the automatic stay to the extent requested, and
ordered the debtor to turn over the Equipment Collateral to FFC.
With no further business to be done, the trustee terminated Zoll's
contract. Zoll subsequently obtained employment with Allied.
Approximately one month later, FFC again moved for relief
from the automatic stay. This time, it sought to take possession
of, and sell, the remaining assets in which it held a security
-4-
interest (the Other Collateral). FFC represented that it had found
a buyer willing to pay $142,500 for the Equipment Collateral and
the Other Collateral as a package. The trustee assented to the
motion on the condition that the bankruptcy estate receive a
$12,500 carve-out for administrative expenses. FFC agreed, and the
bankruptcy court granted the motion, entering a form of order
prepared by FFC.
FFC foreclosed on the assets and sold them to Todesca
Equipment Company, which resold them to the appellant, City
Sanitation, LLC (City).
In February of 2007, City filed a state court action
against Allied and Zoll. Posturing itself as the debtor's
successor in interest, it alleged that Zoll, while working for the
debtor and acting in concert with Allied, had converted assets,
interfered with contractual relationships, breached fiduciary
duties, and conspired to commit these acts.1 Although those claims
were lodged against both Allied and Zoll, for ease in exposition we
refer to them as claims against Allied.
A series of procedural maneuvers followed, but none of
them is relevant here. What matters is that the trustee, unaware
of the pendency of the state court action, filed his final report,
and the bankruptcy court — equally unaware of the state court
1
City further alleged that Zoll and Allied had violated the
Racketeer Influenced and Corrupt Organizations Act (RICO), 18
U.S.C. §§ 1961-1968. This claim is not at issue here.
-5-
action — closed the bankruptcy case. It was not until some
eighteen months later that Allied brought the state court action to
the trustee's attention. At that juncture, the trustee moved to
reopen the bankruptcy case.
The bankruptcy court granted the motion and, over City's
strenuous objection, authorized the trustee to take over the claims
against Allied. The court reasoned that the claims were commercial
tort claims, that they belonged to the estate, and that the trustee
had exclusive standing to pursue them. In re Am. Cartage, Inc.,
No. 03-44308, 2009 WL 4780972, at *4-6 (Bankr. D. Mass. Dec. 11,
2009). With City continuing to object, the court then approved the
trustee's proposal to settle the claims for $12,000. Id. at *7-8.
City took a first-tier appeal to the district court,
which affirmed the bankruptcy court's orders. See City Sanit., LLC
v. Burdick (In re Am. Cartage, Inc.), 438 B.R. 1 (D. Mass. 2010).
This timely appeal ensued.
II. ANALYSIS
In bankruptcy cases, Congress has fashioned a two-tiered
framework for appellate review as of right. Under this framework,
litigants in the ordinary case must first appeal to the district
court (or, in some circuits, a bankruptcy appellate panel). See 28
U.S.C. § 158(a)-(b); Brandt v. Repco Printers & Lithographics, Inc.
(In re Healthco Int'l, Inc.), 132 F.3d 104, 107 (1st Cir. 1997).
The courts of appeals are then available as a second tier of
-6-
appellate review. See 28 U.S.C. § 158(d)(1); Stornawaye Fin. Corp.
v. Hill (In re Hill), 562 F.3d 29, 32 (1st Cir. 2009). Despite
this sequencing, we cede no special deference to the
determinations made by the first-tier tribunal (whether a district
court or a bankruptcy appellate panel), but assess the bankruptcy
court's decision directly. Gannett v. Carp (In re Carp), 340 F.3d
15, 21 (1st Cir. 2003). In that process, we review findings of
fact for clear error and conclusions of law de novo. Groman v.
Watman (In re Watman), 301 F.3d 3, 7 (1st Cir. 2002).
In this second-tier appeal, City asseverates that it had
standing to prosecute the claims against Allied and that, in all
events, the settlement negotiated by the trustee should have been
rejected. We address these contentions separately.
A. The Disputed Claims.
City argues that the claims against Allied are proceeds
of the collateral that it acquired from FFC (through Todesca) and
that, therefore, it has standing to pursue those claims. Allied
asserts that the disputed claims are commercial tort claims, not
proceeds, and as such, are not covered by FFC's security interest.
We look to state law to resolve this issue.
"Creditors' entitlements in bankruptcy arise in the first
instance from the underlying substantive law creating the debtor's
obligation." Shamus Holdings, LLC v. LBM Fin., LLC (In re Shamus
Holdings, LLC), 642 F.3d 263, 267 (1st Cir. 2011) (quoting Raleigh
-7-
v. Ill. Dep't of Rev., 530 U.S. 15, 20 (2000)). Here, the
underlying substantive law is the law of Massachusetts, a
jurisdiction in which secured transactions are governed by a state-
specific iteration of Article 9 of the Uniform Commercial Code
(UCC). See Mass. Gen. Laws ch. 106, §§ 9-101 to 9-709. It is
uncontradicted that, in this case, the debtor gave FFC a security
interest in many of its assets. The question, then, is whether the
claims asserted against Allied were caught up within the sweep of
this security interest.
By its terms, Article 9 applies to transactions that
"create[] a security interest in personal property or fixtures by
contract" and to sales of "accounts, chattel paper, payment
intangibles, or promissory notes." Id. § 9-109(a)(1), (3). But
this article does not apply to "an assignment of a claim arising in
tort, other than a commercial tort claim." Id. § 9-109(d)(12). A
commercial tort claim is defined in relevant part as a "claim
arising in tort with respect to which[] the claimant is an
organization." Id. § 9-102(a)(13). Since all of the potential
claimants — the debtor, FFC, Todesca, and City — are organizations,
we will not dwell upon that aspect of the definition. See 4 James
J. White & Robert S. Summers, Uniform Commercial Code § 30-10, at
81 (6th ed. 2010).
Here, the asserted claims are claims for conversion,
interference with contractual relations, breach of fiduciary duty,
-8-
and civil conspiracy. Each of them sounds in tort. See, e.g.,
City Sanit. LLC v. Beck, 947 N.E.2d 1152 (Mass. App. Ct. 2011)
(table) (conversion); Cachopa v. Town of Stoughton, 893 N.E.2d 407,
409 n.3 (Mass. App. Ct. 2008) (interference with contractual
relations); Doe v. Harbor Sch., Inc., 843 N.E.2d 1058, 1065-66
(Mass. 2006) (breach of fiduciary duty); Kyte v. Philip Morris
Inc., 556 N.E.2d 1025, 1027 (Mass. 1990) (civil conspiracy); see
also Restatement (Second) of Torts §§ 222A, 766, 874, 876. Thus,
the claims fall squarely within the UCC's definition of commercial
tort claims.
Under Massachusetts law, commercial tort claims must be
described with specificity in a security agreement in order to be
considered part of that agreement. Mass. Gen. Laws ch. 106, § 9-
108(e)(1). This requirement places commercial tort claims in stark
contrast to other kinds of collateral, which may be defined broadly
by type as long as the description, even if not specific,
"reasonably identifies what is described." Id. § 9-108(a).
Furthermore, an after-acquired property clause in a security
agreement cannot create a security interest in a commercial tort
claim. Id. § 9-204(b)(2). The claim must already exist when the
parties enter into the security agreement. See id. cmt. 4; see
also id. § 9-108 cmt. 5.
The security agreement here did not specifically mention
any claims against Allied. Moreover, no such claims existed when
-9-
the security agreement was signed (indeed, Allied had not then
appeared on the scene). It is, therefore, plain that these
commercial tort claims were not transferred by foreclosing pursuant
to the security agreement. Rather, those claims remain the
property of the estate, and the trustee is the proper party to
prosecute them. See 11 U.S.C. § 323(b); see, e.g., In re Kane, 628
F.3d 631, 637 (3d Cir. 2010); Moses v. Howard Univ. Hosp., 606 F.3d
789, 795 (D.C. Cir. 2010).
City tries to avoid the force of this reasoning by
characterizing the claims as proceeds of collateral. This argument
presents an issue of first impression in this circuit. The
question is whether the right to pursue a commercial tort claim can
be passed to a secured creditor as proceeds of original collateral.
We conclude that it cannot.
Proceeds are defined in relevant part as "rights arising
out of collateral [and,] to the extent of the value of collateral,
claims arising out of the loss, nonconformity, or interference with
the use of, defects or infringement of rights in, or damage to, the
collateral." Mass. Gen. Laws ch. 106, § 9-102(a)(64)(C)-(D). City
argues that FFC's security interest (to which it has succeeded)
confers upon it the right to prosecute claims arising from
interference with the collateral. But we interpret the UCC and the
case law to mean that the term "proceeds" refers to the secured
-10-
creditor's right to value derived from the collateral, not to the
mere act of attempting to recover that value.
Of course, the UCC states that "[a] security interest in
a tort claim . . . may exist under this Article if the claim is
proceeds of other collateral." U.C.C. § 9-102 cmt. 5(g). But this
comment must be read in light of the UCC's statement that it is a
right to payment from the resolution of a tort claim, and not the
claim itself, that may constitute proceeds of collateral.
"[Article 9] . . . applies to assignments of 'commercial tort
claims' . . . as well as to security interests in tort claims that
constitute proceeds of other collateral (e.g., a right to payment
for negligent destruction of the debtor's inventory)." Id. § 9-109
cmt. 15 (emphasis added). Viewed as a whole, Article 9 teaches
that when a party has an interest in a commercial tort claim as
proceeds, what the secured party has is a right to the recovery,
not a right to the claim itself. An action for conversion is not
proceeds; only the end product of that action — the settlement
amount or award — constitutes proceeds.
The case law cited by City is unpersuasive. Those cases
stand only for the proposition that money received from the
settlement of, or judgment on, a tort claim can be proceeds of the
collateral harmed. Thus, "[t]he usual proceeds of collateral are
the money obtained from selling it [or] money obtained in
compensation for a diminution in [its] value." Helms v. Certified
-11-
Packaging Corp., 551 F.3d 675, 678 (7th Cir. 2008); see McGonigle
v. Combs, 968 F.2d 810, 828 (9th Cir. 1992) (stating that proceeds
arise out of "[t]he classic situation . . . of a tort recovery
obtained by a debtor for damage to secured property"). These cases
speak of claims that already have been brought to fruition and
resulted in recoveries. Contrary to City's importunings, these
cases do not support the notion that a secured party acquires the
right to prosecute the debtor's commercial tort claims as proceeds,
as opposed to acquiring the right to a payment compensating for
harm to its collateral.
To cinch matters, treating commercial tort claims
themselves as proceeds would blur any meaningful distinction
between the two categories. We do not believe that either the
Massachusetts legislature or the drafters of the UCC had such an
obscuration in mind. Cf. Local 589, Amalg'd Transit Union v. MBTA,
491 N.E.2d 1053, 1057 (Mass. 1986) (explaining that the adoption of
such a definition would "creat[e] an exception capable of
swallowing the rule" (citation omitted)). Unliquidated claims of
an organization alleging tortiously inflicted harm are properly
classified as commercial tort claims. The claims asserted against
Allied are commercial tort claims, not proceeds.
City has a laundry list of related arguments. We can
dispose summarily of the first item on this list: City's suggestion
that the trustee's agreement to provide FFC with relief from the
-12-
automatic stay and the bankruptcy court's ensuing order gave FFC a
security interest in the claims against Allied. The replacement
liens never specifically described any claims against Allied, so
they could not have transferred an interest in such claims to FFC.
See Mass. Gen. Laws ch. 106 § 9-108(e)(1).
City's allusion to the form of order prepared by FFC in
connection with the lifting of the automatic stay gains it no
traction. This order, entered by the bankruptcy court, listed
among other items of collateral "trade names, service names,
service marks, telephone numbers, choses in action [and] vehicles."
City posits that the inclusion of "choses in action" somehow
transferred any claims that the debtor might have had
notwithstanding the fact that the debtor never granted a security
interest in "choses in action" to FFC. This premise is hopeless.
Massachusetts law holds that "in the absence of statutory
restrictions, the rights of the parties to secured transactions are
controlled by the agreement between them," Mechs. Nat'l Bank of
Worcester v. Killeen, 384 N.E.2d 1231, 1236 (Mass. 1979), and as
the security agreement here did not include an interest in "choses
in action," we will not expand the parties' rights under that
agreement to include such an interest.
City's next argument requires more discussion. It says
that Allied harmed its collateral as opposed to harming the assets
-13-
of the bankruptcy estate, so that it has standing to pursue the
disputed claims. This argument puts the cart before the horse.
It is common ground that when a cause of action belongs
to the bankruptcy estate, the trustee has the exclusive right to
assert it. Honigman v. Comerica Bank (In re Van Dresser Corp.),
128 F.3d 945, 947 (6th Cir. 1997); Koch Ref. v. Farmers Union Cent.
Exch., Inc., 831 F.2d 1339, 1342 (7th Cir. 1987). Conversely, the
trustee lacks standing to pursue claims that belong personally to
the creditors. Stevenson v. J.C. Bradford & Co. (In re Cannon),
277 F.3d 838, 853 (6th Cir. 2002); Koch Ref., 831 F.2d at 1348-49.
A court tasked with determining who can pursue a particular claim
must look to the kind of harm alleged.
If the claim is a general one, it is property of the
estate. See Koch Ref., 831 F.2d at 1348-49 (claim is general if
"the liability is to all creditors of the corporation"). Put
another way, when the alleged injury to a creditor is indirect or
derives solely from an injury to the debtor, the claim is general.
Schertz-Cibolo-Univl. City, Indep. Sch. Dist. v. Wright (In re
Educators Grp. Health Trust), 25 F.3d 1281, 1284 (5th Cir. 1994).
Claims are deemed personal, rather than general, when a creditor
"himself is harmed and no other claimant or creditor has an
interest in the cause." Koch Ref., 831 F.2d at 1348. A trustee in
bankruptcy has no standing to prosecute such a personal claim. In
re Cannon, 277 F.3d at 853-54.
-14-
In this instance, the claimed wrongdoing supposedly
occurred while Zoll was still in the debtor's employ. His acts (if
they occurred at all) took place well before FFC gained possession
of its collateral. Any wrong committed would, therefore, have been
directly adverse to the debtor's interests and would have
diminished its estate generally. See Highland Capital Mgmt., L.P.
v. Welsh, Carson, Anderson & Stowe, VI, L.P. (In re Bridge Info.
Sys., Inc.), 344 B.R. 587, 594-95 (E.D. Mo. 2006); In re Eagle
Enters., Inc., 265 B.R. 671, 678 (E.D. Pa. 2001). Consequently,
the harm was to the debtor, and these claims must be considered
part of the debtor's estate.
This point is reinforced by an examination of the state
court complaint, which only describes harm inflicted upon the
debtor, its customers, and its assets. As to City, the harm
alleged is derivative and indirect.
The short of it is that FFC (in whose shoes City stands)
is no different from any other creditor of the debtor with respect
to the asserted claims. If Allied, with Zoll's connivance,
misappropriated the debtor's assets, the trustee is the proper
party to assert those claims. See Koch Ref., 831 F.2d at 1342-43.
In an effort to change the trajectory of the debate, City
falls back on the venerable tenet that any property not
administered when a bankruptcy case is closed is deemed abandoned.
See 11 U.S.C. § 554(c). Based on that tenet, it posits that it
-15-
owns the claims against Allied because the trustee abandoned them.
The district court did not reach the merits of this argument, nor
do we.
Bankruptcy Rule 8006 requires that a first-tier appeal
include "a statement of the issues to be presented." Several
courts have held that a party's failure to include a particular
issue in such a statement means — at least in the absence of
exceptional circumstances — that the issue is waived. See, e.g.,
Zimmermann v. Jenkins (In re GGM, P.C.), 165 F.3d 1026, 1032 (5th
Cir. 1999); Snap-On Tools, Inc. v. Freeman (In re Freeman), 956
F.2d 252, 255 (11th Cir. 1992). We have heretofore avoided ruling
on this point. See Yacovi v. Rubin and Rudman, L.L.P. (In re
Yacovi), 411 F. App'x 342, 348 (1st Cir. 2011). This case presents
the question head-on.
While we are aware of the existence of some authority to
the contrary, see, e.g., Office of the U.S. Tr. v. Hayes (In re
Bishop, Baldwin, Rewald, Dillingham & Wong, Inc.), 104 F.3d 1147,
1148 (9th Cir. 1997) (per curiam), we believe that the rationale
behind the waiver rule is sound. Cf. Sunview Condo. Ass'n v.
Flexel Int'l, Ltd., 116 F.3d 962, 964-65 (1st Cir. 1997)
(concluding that plaintiff who did not seek district court review
of magistrate judge's ruling waived the right to challenge that
ruling on appeal). Rules are essential for the orderly processing
of litigation, and a party's disregard of a rule, without good
-16-
cause, ought not to be condoned. We therefore hold that at least
where, as here, there are no exceptional circumstances, failure to
comply with Rule 8006 waives the omitted issue on appeal.
This does not mean, of course, that the list of issues
must be precise to the point of pedantry. An issue that is not
specifically enumerated may be deemed preserved if the substance of
the issue reasonably can be inferred from an issue or issues that
are listed. See In re Freeman, 956 F.2d at 255. Here, however,
the abandonment issue is both legally and factually distinct from
the issues that City articulated in its Rule 8006 statement.
We need not tarry. The district court carefully examined
City's Rule 8006 statement and cogently explained why the omitted
argument could not be inferred from any argument identified
therein. See City Sanit., 438 B.R. at 8-10. It would serve no
useful purpose to rehearse that exercise here. The bottom line is
that, in the circumstances of this case, City's noncompliance with
Rule 8006 resulted in a waiver of its afterthought abandonment
argument.
That ends this aspect of the appeal. For the reasons
stated, we conclude that the claims against Allied were commercial
tort claims; that those claims remained property of the debtor's
estate; and that the trustee had exclusive standing to assert them.
-17-
B. Approval of the Settlement.
Our conclusion that the trustee had exclusive standing to
maintain the disputed claims brings us to City's back-up argument:
that the bankruptcy court abused its discretion when it approved
the trustee's proposed settlement of those claims.2
Bankruptcy court approval of a negotiated settlement
engenders deferential review. The authority to approve or
disapprove a settlement lies within the sound discretion of the
bankruptcy court, and we will overturn the exercise of that
discretion only upon a showing of abuse. See, e.g., Ars Brook, LLC
v. Jalbert (In re Servisense.com, Inc.), 382 F.3d 68, 71 (1st Cir.
2004). In such situations, appellate review operates with the
background understanding that settlements are looked upon with
favor in bankruptcy proceedings. Protective Comm. for Indep.
Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414,
424 (1968); Hicks, Muse & Co. v. Brandt (In re Healthco Int'l,
Inc.), 136 F.3d 45, 50 n.5 (1st Cir. 1998). The task of both the
bankruptcy court and any reviewing court is "to canvass the issues
and see whether the settlement falls below the lowest point in the
range of reasonableness." Cosoff v. Rodman (In re W.T. Grant Co.),
2
We have some doubt as to whether City has standing to raise
this ground of appeal. See Spenlinhauer v. O'Donnell, 261 F.3d
113, 117-18 (1st Cir. 2001) (noting limitations on appellate
standing in bankruptcy). Because the merits of City's plaint are
easily resolved, we assume arguendo that City has standing.
-18-
699 F.2d 599, 608 (2d Cir. 1983) (alterations, internal quotation
marks, and citation omitted).
The trustee plays a special role in the approval process
because he is the person "entrusted to marshal an estate's assets
and liabilities, and proceed in settling its accounts on whatever
grounds he, in his informed discretion, believes will net the
maximum return for the creditors (on whose behalf he toils)."
LeBlanc v. Salem (In re Mailman Steam Carpet Cleaning Corp.), 212
F.3d 632, 635 (1st Cir. 2000). If a trustee chooses to accept a
less munificent sum for a good reason (say, to avoid potentially
costly litigation), his judgment is entitled to some deference.
See Kowal v. Malkemus (In re Thompson), 965 F.2d 1136, 1145 (1st
Cir. 1992). Nevertheless, a bankruptcy court cannot blindly take
the trustee's word that a settlement is fair and reasonable. It
"must apprise [it]self of all facts necessary to evaluate the
settlement and make an 'informed and independent judgment.'"
LaSalle Nat'l Bank v. Holland (In re Am. Reserve Corp.), 841 F.2d
159, 162 (7th Cir. 1987) (quoting TMT Trailer Ferry, 390 U.S. at
424); see In re Mailman Steam Carpet Cleaning, 212 F.3d at 635.
In considering the reasonableness of a proposed
settlement, a bankruptcy court's decisional calculus typically is
informed by the Jeffrey factors:
(i) the probability of success in the
litigation being compromised; (ii) the
difficulties, if any, to be encountered in the
matter of collection; (iii) the complexity of
-19-
the litigation involved, and the expense,
inconvenience and delay attending it; and,
(iv) the paramount interest of the creditors
and a proper deference to their reasonable
views in the premise.
Jeffrey v. Desmond, 70 F.3d 183, 185 (1st Cir. 1995); see TMT
Trailer Ferry, 390 U.S. at 424 (enumerating a similar mix of
factors as "relevant to a full and fair assessment of the wisdom of
the proposed compromise"). In the case at hand, City strives to
convince us that all the Jeffrey factors favor it and that the
bankruptcy court miscalibrated the scales. We are not persuaded.
City insists that collecting a judgment from Allied, a
publicly traded company, would be child's play. Even so, this
consideration is outweighed by the three remaining Jeffrey factors.
We start with the probability of success, which the
bankruptcy court concluded was low. In re Am. Cartage, 2009 WL
4780972, at *7. This conclusion is supported by the fact that the
trustee (a person intimately familiar with the debtor's internal
operations) thought that the claims were groundless. See In re
Thompson, 965 F.2d at 1145 (crediting trustee's representation
regarding merits of litigation). It is also supported by the fact
that the trustee hired Allied and introduced Allied to the debtor's
customers in order to curtail serial breaches of the debtor's
existing contracts. The debtor's failure to obtain liability
insurance (thus jeopardizing the bankruptcy estate) lends credence
to the notion that the debtor was incapable of servicing its
-20-
customers by itself. Allied's non-culpable involvement with the
debtor's customers was, thus, fully explained, and the bankruptcy
court appears carefully to have weighed this explanation.
The third Jeffrey factor also cuts in favor of approval.
The convoluted nature of the state court action, which featured
multiple claims involving third parties and a tangled procedural
posture, sounds an aposematic note. If the trustee were to pursue
the claims, he would be obliged to expend substantial resources on
discovery, motion practice, and trial, without a high likelihood of
success. Because the estate had been closed, there were no funds
available to underwrite such costs. In these straitened
circumstances, we cannot second-guess the bankruptcy court's
inference that continued litigation would bring with it too high a
level of expense and delay. See In re Servisense.com, 382 F.3d at
75-76; In re Dennett, 449 B.R. 139, 145-46 (Bankr. D. Utah 2011).
Finally, the bankruptcy court appropriately took into
account the paramount interest of the creditors. Settling quickly
for $12,000 allowed the trustee to distribute something to
creditors. In bankruptcy, as in life, half a loaf is sometimes
better than none.
City takes umbrage with the fact that it was never
consulted about the probability of success in the state court
action. But City points to no requirement that a trustee must
consult a potential creditor before settling a general claim, and
-21-
we do not think that any such requirement existed here. Cf.
Whispering Pines Estates, Inc. v. Flash Island, Inc. (In re
Whispering Pines Estates, Inc.), 370 B.R. 452, 461 (B.A.P. 1st Cir.
2007) (finding no reason to defer to party proposing settlement
simply because it stood to benefit from proposal).
City also suggests that the trustee neglected to apprise
the bankruptcy court of all the material facts. But despite the
sound and fury in which this suggestion is couched, City never
identifies any material information that the trustee withheld from
the bankruptcy court.
In the last analysis, "many, if not most, claims settled
in bankruptcy proceedings are not amenable either to ready or exact
valuation." Hicks, 136 F.3d at 51. In this case, the bankruptcy
court made a thorough examination into the bona fides of the
proposed settlement and the attendant risk-reward ratio. It
sensibly concluded that the recommended settlement fell within the
range of reasonableness. In light of the totality of the
circumstances, we conclude, without serious question, that the
approval of the settlement was within the bankruptcy court's wide
discretion. See, e.g., Jeremiah v. Richardson, 148 F.3d 17, 22
(1st Cir. 1998) (affirming settlement when lower court "patiently
informed itself of the relevant facts, and carefully exercised
independent judgment").
-22-
III. CONCLUSION
We need go no further. For the reasons elucidated above,
we reject City's appeal.
Affirmed.
-23-