In Re: Martin , 91 F.3d 389 ( 1996 )

Opinions of the United
1996 Decisions States Court of Appeals
for the Third Circuit
5-7-1996
In Re: Martin
Precedential or Non-Precedential:
Docket 95-1581
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Recommended Citation
"In Re: Martin" (1996). 1996 Decisions. Paper 186.
http://digitalcommons.law.villanova.edu/thirdcircuit_1996/186
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UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
__________________
No. 95-1581
__________________
IN RE: JOHN C. MARTIN; SALLY A. MARTIN,
Debtors
JO ANN MYERS; MELVIN MORANE
v.
JOHN C. MARTIN; SALLY A. MARTIN
John C. Martin and Sally Martin, husband and wife,
Appellants
__________________
Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. Civil No. 94-01717)
__________________
Argued: Tuesday, March 12, 1996
Before: NYGAARD, SAROKIN and ALDISERT, Circuit Judges
(Filed May 7, 1996)
__________________
Michael B. Goodman
Steven H. Lupin (argued)
Carl N. Weiner
HAMBURG, RUBIN, MULLIN,
MAXWELL & LUPIN
375 Morris Road
P.O. Box 1479
Lansdale, PA 19446
ATTORNEYS FOR APPELLANTS
Kevin J. Sommar (argued)
SOMMAR, TRACY & SOMMAR
210 South Broad Street
Lansdale, PA 19446
ATTORNEY FOR APPELLEES
__________________
OPINION OF THE COURT
__________________
ALDISERT, Circuit Judge
This appeal by a creditor arises from a district court
judgment reversing a bankruptcy court's order disapproving a
stipulation of settlement entered into by the Appellees and the
trustee for the debtors that mutually released all claims between
them relating to the sale of the debtors' home to the Appellees
without any payment by either party.
The question for decision is whether the bankruptcy
court abused its discretion by disapproving the stipulation after
a jury verdict was entered in favor of the debtors and against
the Appellees in a non-core proceeding in state court properly
remanded there by the bankruptcy court. Eichenholtz v. Brennan,
52 F.3d 478, 487 (3d Cir. 1995) (standard of review). The
district court had jurisdiction under 28 U.S.C. 158(a), and
reversed the bankruptcy court. We have jurisdiction under 28
U.S.C. 158(d), and find no abuse of discretion by the
bankruptcy court. We therefore will reverse the district court
judgment.
I.
This contest began with a mine-run dispute between
parties to a real estate contract. In the spring of 1988, John
and Sally Martin contracted to sell their house in Green Lane,
Pennsylvania to Jo Ann Myers and Melvin Morane (hereafter jointly
referred to as "the Myers"). After the contract was executed,
the Myers refused to complete the purchase of the house,
alleging, inter alia, that the septic system was in need of
repair. Both parties eventually initiated actions in the
Pennsylvania Court of Common Pleas for breach of contract; the
Martins prayed for damages, and the Myers sought specific
performance. In addition, the Myers filed a lis pendens against
the Martins' property, preventing its sale and limiting its value
as a source of loan collateral.
Because the Martins were relying on the real estate
sale proceeds to service accumulated debts, this dispute caused
them to suffer extreme economic hardship. Indeed, on February
12, 1992, the Martins filed a voluntary Chapter 7 bankruptcy
petition. The Chapter 7 filing stayed the Myers' action, and the
Martins' action became property of the estate. Both actions
subsequently were labeled non-core proceedings and were remanded
to the Court of Common Pleas.
The series of events that followed disclose some
tension between the debtors and the trustee for the estate, or at
least a fundamental breakdown in communications. The trustee
announced to the bankruptcy judge on September 14, 1993, that she
had reached an agreement with the Myers, resolving their dispute
with the debtors, and providing for a mutual release of the two
state court actions. Assuming that there was an open-ended trial
date for the state court action (as this had been true for
approximately a year-and-a-half), and that delay was detrimental
to the estate, the trustee believed that she was acting in the
best interests of the creditors by entering into this compromise.
The terms were memorialized in a written stipulation of
settlement filed by the trustee and the Myers on December 17,
1993. On December 23, 1993, the bankruptcy court approved the
stipulation.
The Martins then filed an objection to the stipulation,
on the ground that the bankruptcy court had approved the
stipulation in violation of Rule 9019(a), Federal Rules of
Bankruptcy Procedure, which provides:
On motion by the trustee and after notice and
a hearing, the court may approve a compromise
or settlement. Notice shall be given to
creditors, the United States trustee, the
debtor, and indenture trustees as provided in
Rule 2002 and to any other entity as the
court may direct.
The bankruptcy court acknowledged that its prior approval was
premature, and vacated the prior approval. The bankruptcy court
formally noticed the debtors and, on January 13, 1994, held a
hearing on the trustee's motion to approve the stipulation.
At the hearing, the debtors objected to the stipulation
because their state court action against the Myers was ready for
trial. Apparently, the trustee had not informed the debtors of
her negotiations with the Myers regarding the possibility of a
mutual release of claims. And meanwhile, unbeknownst to the
trustee and the bankruptcy court, the Martins had convinced the
state court to grant an expedited trial date of January 31, 1994.
Recognizing the potential to recover additional property for the
estate, the trustee "did not argue in favor of its ... [m]otion"
to approve the stipulation. Brief of Appellees at 5. When
called to testify by the Myers' counsel, who argued in favor of
the trustee's motion, the trustee's counsel stated that, although
she [the trustee] believed the stipulation was in the best
interest of the estate at the time she signed it, she would not
have agreed to the stipulation had she known of the expedited
trial date arranged by the Martins. N.T. (1/25/94) at 3-8.
After hearing extensive testimony on the merits of both
pending state court suits, the bankruptcy court engaged in a
discussion with counsel regarding the forthcoming trial in the
state court. In this dialogue, the Myers' counsel indicated that
resolution of the state trial would have no effect on the
validity of the stipulation. The bankruptcy court deferred
ruling on the trustee's motion to approve the stipulation until a
date certain, to wit, February 8, 1994.
Meanwhile, the Martins' state court action proceeded to
trial on January 31, 1994, and the Martins obtained a jury
verdict of $150,500 against the Myers. Thereafter, on February
8, 1994, the bankruptcy court informed the parties that the court
was aware that the state court trial had occurred, and inquired
as to the results. The Myers' counsel objected to the
introduction of the jury verdict into the record because "the
hearing had concluded on the trustee's motion to approve the
stipulation" and because the trustee had acted "in contravention
of that stipulation [by] authoriz[ing] special counsel to proceed
with the action that [s]he agreed was ended with respect to us."
N.T. (2/8/94) at 3.
Faced with the potential increase of $150,500 in the
bankruptcy estate, the bankruptcy court denied the pending motion
to approve the stipulation, explaining:
[T]he result's pretty obvious what I have to
do. If I were going to grant that motion,
and I felt sure it should be granted, I would
have granted it. I wouldn't have made the
poor Court go through a jury trial. I mean I
wouldn't have wasted the taxpayers' money to
that extent if I had a question. But I
wanted to see whether it was actually going
to come off, because I thought there was a
possibility. It may not come off again. And
then I wasn't going to piddle around anymore.
But it did come off, apparently. And I had
no idea what the result would be, obviously,
although the Judge did call me beforehand
because he wanted to make sure that he should
go forward with it. And I said, yeah, as far
as I know you can. And I assumed they would,
and they did, obviously. So I won't approve
that stipulation.
N.T. (2/8/94) at 8. An order denying the motion was filed the
following day.
On February 18, 1994, the Myers filed a notice of
appeal with the district court, challenging the bankruptcy
court's order denying the trustee's motion. The district judge
scheduled a telephone conference with the counsel for the parties
on May 19, 1995, after which the district court entered an order
reversing the bankruptcy court's order and remanding the matter
back to the bankruptcy court with instructions to approve the
stipulation entered into between the trustee and the Myers. The
district court determined that the trustee had violated her duty
of good faith and fair dealing by refusing to support her own
motion to approve the stipulation and by authorizing the Martins
to pursue a state court claim subsequent to entering into a valid
settlement agreement with the Myers. This appeal by the debtors
followed.
II.
To minimize litigation and expedite the administration
of a bankruptcy estate, "[c]ompromises are favored in
bankruptcy." 9 Collier on Bankruptcy 9019.03[1] (15th ed.
1993). Indeed, it is an unusual case in which there is not some
litigation that is settled between the representative of the
estate and an adverse party. Under Bankruptcy Rule 9019, a
bankruptcy judge has the authority to approve a compromise of a
claim, provided that the debtor, trustee and creditors are given
twenty days' notice of the hearing on approval of a compromise or
settlement by the trustee. Bankruptcy Rule 2002(a)(3).
Here, the ultimate issue on appeal is whether the
bankruptcy court abused its discretion when it disapproved the
compromise. This particular process of bankruptcy court approval
requires a bankruptcy judge to assess and balance the value of
the claim that is being compromised against the value to the
estate of the acceptance of the compromise proposal. Taking our
cue from Protective Committee Stockholders of TMT Trailer Ferry,
Inc. v. Anderson, 390 U.S. 414, 424-25 (1968), we recognize four
criteria that a bankruptcy court should consider in striking this
balance: (1) the probability of success in litigation; (2) the
likely difficulties in collection; (3) the complexity of the
litigation involved, and the expense, inconvenience and delay
necessarily attending it; and (4) the paramount interest of the
creditors. See In re Neshaminy Office Bldg. Assocs., 62 B.R.
798, 803 (E.D. Pa. 1986).
Our consideration of these four factors supports the
bankruptcy court's decision to disapprove the stipulation.
First, when the stipulation was disapproved, the debtors'
probability of success was 100 percent, because the verdict
already had been obtained. Second, the record reveals no
expected difficulty in collection. Third, again because the
verdict already had been obtained, there was neither
inconvenience nor delay. And fourth, the interest of all
creditors was served by collecting an additional $150,500 as
property of the estate. Considered together, these factors
clearly militate in favor of the bankruptcy court's decision to
disapprove the stipulation, and thus suggest that there was no
abuse of discretion.
III.
The district court reversed the bankruptcy court,
however, because "the trustee did not act consistently with her
obligation of good faith and fair dealing." 1995 WL 38952 at
*11. The district court reasoned that the trustee was obliged to
honor the compromise she had struck with the Myers, and that her
failure to do so constituted a breach of the duty of good faith
and fair dealing. The district court concluded therefrom that
the bankruptcy court should not have taken the expedited trial
date or the outcome of the state court trial into consideration
in deciding the motion to approve the stipulation.
We have no quarrel with the district court's statement
that the trustee was required to deal with the Myers with
"honesty in fact in the conduct or transaction concerned ... and
[to] refrain from doing anything that would destroy or injure the
other party's right to receive the fruits of the contract."
1995 WL 389592 at *11 (citations and quotations omitted). The
Restatement (Second) of Contracts 205 implies a duty of good
faith and fair dealing for all contracts; the Restatement
position has been adopted in Pennsylvania in limited situations,
including a trustee's duty as a fiduciary to the creditors of an
estate. Commodity Futures Trading Comm'n v. Weintraub, 471 U.S.
343, 354-55 (1985); Parkway Garage, Inc. v. City of Philadelphia,
5 F.3d 685, 701 (3d Cir. 1993). Accordingly, the district court
was correct in emphasizing the role of the trustee as a
fiduciary.
However, a trustee has a fiduciary relationship with
all creditors of the estate. See Weintraub, 471 U.S. at 354-55.
Indeed, under the Code a trustee must investigate all sources of
income for the estate and "collect and reduce to money the
property of the estate." 11 U.S.C. 704(1). She has the duty
to maximize the value of the estate, Weintraub, 471 U.S. at 353,
and in so doing is "bound to be vigilant and attentive in
advancing [the estate's] interests." In re Baird, 112 F. 960,
960 (D.C. Cir. 1902). In sum, "it is the trustee's duty to both
the debtor and the creditor to realize from the estate all that
is possible for distribution among the creditors." 4 Collier on
Bankruptcy 704.01 (15th ed. 1993). Thus, this trustee was
faced with a conflict between her fiduciary duty to the creditor
body as a whole and the alleged duty to go forward with a
settlement agreement favoring one creditor but otherwise
detrimental to the estate.
We cannot require a trustee herself to choose between
these conflicting legal obligations. Rather, Rule 9019(a)
demonstrates the legislature's intent to place this
responsibility with the bankruptcy court. In order to make such
a determination, the bankruptcy court must be apprised of all
relevant information that will enable it to determine what course
of action will be in the best interest of the estate.
Accordingly, the trustee should inform the court and the parties
of any changed circumstances since the entry into the stipulation
of settlement. The trustee may even opt not to argue in favor of
the stipulation, as was done here, if she no longer believes the
settlement to be in the best interest of the estate. The trustee
does not breach any term of the stipulation by doing so, for the
bankruptcy court may nonetheless approve the settlement.
Hence, we reject the proposition that a trustee is
required to champion a motion to approve a stipulation that is no
longer in the best interest of the estate. This trustee did not
flout or breach any term of the stipulation. Nor did she
withdraw the motion to approve the stipulation. Rather, at the
hearing, the trustee simply elected not to argue in favor of her
motion. Thus, the very nice question before us is the proper
conduct of a trustee in her responsibility to all creditors, the
debtor and the court. This appeal raises a very narrow issue,
and we will not expand the matter beyond its perimeters.
Accordingly, we will not constrain a bankruptcy trustee from
fulfilling her statutory duty to the estate and the creditor body
as a whole by preventing her from informing the court and the
parties of changed circumstances.
This interpretation comports with our understanding of
the Bankruptcy Rules and Code. Settlement agreements frequently
involve the disposition of assets of the estate. The Code
contemplates these transactions, but restricts a trustee's
ability to use and sell such assets. Section 363 provides:
The trustee, after notice and a hearing, may
use, sell, or lease, other than in the
ordinary course of business, property of the
estate.
11 U.S.C. 363(b)(1) (emphasis added); see In re Roth American,
Inc., 975 F.2d 949, 953 (3d Cir. 1992) (post-petition extension
of collective bargaining agreement was outside ordinary course of
business and was not enforceable where not approved under Section
363). The instant agreement compromised an asset of the debtors'
estate. And clearly, this act ventured beyond the domain of
transactions that the Martins encountered in the ordinary course
of business prior to the filing of bankruptcy, thereby
implicating Section 363. See In re Roth American, Inc., 975
F.2d at 954. The import of Section 363 is that a trustee is
prohibited from acting unilaterally; this schema is intended to
protect both debtors and creditors (as well as trustees) by
subjecting a trustee's actions to complete disclosure and review
by the creditors of the estate and by the bankruptcy court.
The approval process thus is integral to the proper
functioning of a liquidation, and the court relies heavily on the
trustee, who is entrusted to represent the creditor body.
Indeed, under normal circumstances the court would defer to the
trustee's judgment so long as there is a legitimate business
justification. In re Schipper, 933 F.2d 513, 515 (7th Cir.
1990). If, however, a trustee is prohibited from informing the
court of changed circumstance, or from advocating on behalf of
creditors in light of changed circumstances, a bankruptcy court
could proceed without full information, and the creditor body
could suffer.
Accordingly, we conclude that the better course is to
allow a trustee who fulfills her statutory duty to maximize
assets of the estate the opportunity to report the change in
circumstances to the court and to the creditors; such an act
without more would not constitute a breach of contract. What the
trustee did here was to fulfill her obligations to all creditors,
as required by, inter alia, 11 U.S.C. 704(1). Although a party
to the stipulation, the trustee was not bound to vigorously urge
the court to accept it in light of changed circumstances that
added $150,500 to the corpus of the bankruptcy estate. Indeed,
had she done so, a serious question of breach of a fiduciary
responsibility to all creditors would have arisen. Moreover, she
took no affirmative steps to withdraw the motion to approve, but
simply supplied additional information to the court, disclosing
the state court verdict.
Thus we conclude that the trustee did not breach the
settlement by allowing the Martins to proceed with the trial
pending the bankruptcy court's approval of the settlement. While
we recognize that some jurisdictions have concluded that a
stipulation of settlement is binding upon the parties pending
approval of the settlement by the bankruptcy court, see, e.g., In
re Lyons Trans. Lines, Inc., 163 B.R. 474, 476 (Bankr. W.D. Pa.
1994); In re Columbus Plaza, Inc., 79 B.R. 710, 715 (Bankr. S.D.
Ohio 1987); In re Tidewater Group, 8 B.R. 930, 933 (Bankr. N.D.
Ga. 1981); but see In re Sparks, 190 B.R. 842, 845 (Bankr. N.D.
Ill. 1996) (holding bankruptcy court approval a prerequisite to
enforceability), we think that such a rule is inapplicable to the
unique facts of this case.
Here, the bankruptcy judge deferred his determination
of whether to approve the settlement for the express purpose of
seeing whether the trial would actually take place. The judge
thus essentially issued a stamp of approval to behavior on the
part of the trustee that is violative of the settlement -- i.e.,
permitting the Martins to proceed with the trial despite the
agreement to settle the litigation. We conclude that where a
bankruptcy court formally endorses a course of action pending its
approval of a stipulation of settlement, no party who follows
this course of action can be found to have breached the
settlement. We emphasize that in reaching this conclusion we do
not decide the broader issue of whether, absent intervention of a
bankruptcy court, parties are bound by the terms of a settlement
pending final approval of the bankruptcy court.
Accordingly, we conclude that the conduct of this
trustee did not constitute a breach of her duty of good faith and
fair dealing. In ruling that such a breach occurred, the
district court erred. The bankruptcy court's subsequent
disapproval of the stipulation agreement was within the sound
discretion of the bankruptcy court.
IV.
We have considered all arguments advanced by the
parties and conclude that no further discussion is necessary.
We will reverse the judgment of the district court
reversing the bankruptcy court.