110 Beaver Street Partnership v. Goffe, Inc.

This is an appeal from the district court’s affirmance of a bankruptcy court’s order that approved a settlement between the bankruptcy trustee and certain defendants against whom the debtor, 110 Beaver Street Partnership, had asserted legal claims. The bankruptcy court approved the settlement, and the district court affirmed. For the reasons set forth in this opinion, we now affirm the judgment of the district court.

I. BACKGROUND

A.

In October 1994, the 110 Beaver Street Trust (the “Trust”) purchased land and buildings located at 110 Beaver Street in Waltham, Massachusetts (the “Property”) from George W. Moore, Inc. (“Moore”). To finance the purchase, the Trust executed a promissory note payable to Moore in the amount of $850,000. The note was secured by a mortgage on the Property. The sole beneficiary of the Trust is an entity called the 110 Beaver Street Partnership (the “Partnership”). Martha Jean Eakin and Paul McGinty (the “Partners”) are partners in the Partnership; Jeff Buster is the former trustee of the Trust. We shall refer to Ms. Eakin, Mr. McGinty and Mr. Buster collectively as the “Principals.”

In April 1996, the Duffy Brothers Management Company, owner of a parcel of land next to the Property, filed a proposal with the Waltham Conservation Commission to build a shopping mall on its parcel. The Trust opposed the proposal on the ground that the project, if approved, would cause harm to the Property in violation of the Massachusetts Wetlands Protection Act, Mass. Gen. Laws ch. 131, § 40. In July 1996, the Commission nevertheless approved the Duffy Brothers proposal. The Trust then filed an appeal with the Department of Environmental Protection (“DEP”). This appeal had the practical effect of postponing any development until the Trust had exhausted its right to both administrative and judicial review. 1

On November 13, 1996, Moore commenced foreclosure proceedings on the 110 Beaver Street property. Thirteen days later, Moore sold and assigned the mortgage and the promissory note to Goffe, Inc., a company controlled by the Duffys. 2 *434 In response to the foreclosure, Mr. Buster filed an action in Massachusetts Superior Court, to which the other Principals were later joined. The complaint in this action alleged two sets of claims relevant to this discussion. It alleged that Goffe had undertaken the foreclosure to prevent the Principals from exercising their First Amendment right to petition by prosecuting the DEP appeal (the “Civil Rights Claims”), and that Moore had refused to remove its inventory from the Property in a timely manner (the “Storage Claims”). See R.App. 791-801.

Once they had taken ownership of the mortgage through Goffe, the Duffys met with the Principals and offered to allow them to deed the Property in lieu of foreclosure or to negotiate a forbearance. Buster v. George W. Moore, Inc., No. 97-687-F, 2000 WL 576363, at *11 (Mass.Super.Apr. 28, 2000). Both options required, however, that the Principals withdraw the DEP appeal and dismiss the Superior Court action. The Principals refused.

B.

Goffe then scheduled a foreclosure sale for February 1997. However, on the day of the sale, the Partnership filed a petition in the United States Bankruptcy Court for the District of Massachusetts, seeking relief under Chapter 11 of the Bankruptcy Code. The commencement of this bankruptcy action triggered the automatic-stay provision of 11 U.S.C. § 362(a), barring Goffe from proceeding with the foreclosure sale.

In April 1997, Goffe, hoping to foreclose on the Property, moved for relief from the automatic stay. It argued that, because there was no equity in the Property and the Property was not necessary for effective reorganization, relief from the stay was justified under 11 U.S.C. § 362(d)(2). 3 R.App. 57. Goffe also argued that the Partnership had violated zoning, environmental and building regulations, which threatened the insurability, marketability and value of the collateral, justifying relief under 11 U.S.C. § 362(d)(1). R.App. 61, 64.

On May 30, the Duffys met with the Mayor of Waltham and told him that they believed that there were safety violations at 110 Beaver Street. Subsequently, a comprehensive fire inspection of the Property took place. The violations uncovered were sufficiently serious to result in the issuance of a cease and desist order. Buster, 2000 WL 576363, at *14; In re 110 Beaver St. P’ship, 244 B.R. 185, 189 (Bankr.D.Mass.2000); R.App. 256. 4

*435 Shortly thereafter, the Partnership and Goffe entered into an agreement that would have put in place a Goffe-supported reorganization plan, released the Principals from any liability on the note and released all claims against Goffe. Mr. Buster signed the agreement on behalf of the Principals, but then subsequently opposed it. Mr. Buster claimed that the agreement was “done under duress,” R.App. 383, and involved risk, R.App. 384. When asked by the court to identify the aspect of the agreement with which he disagreed, Mr. Buster responded only that “it says something to the tune of ‘not then perform.’ ” R.App. 385. The bankruptcy court characterized these complaints as “vague and unintelligible.” R.App. 428. The court approved the settlement and appointed a bankruptcy trustee, Harold B. Murphy, who filed a motion to compel the Principals to comply with the agreement. R.App. 820-24. At a hearing on the motion in October 1997, the court said, “I think the settlement is a good one,” but nevertheless concluded that, in light of Mr. Buster’s “absolutely outrageous” conduct, the cost of enforcing the settlement would be too high to justify. Rather than enforce the settlement, the court opted to grant Goffe relief from the automatic stay. The court stated that Goffe was entitled to such relief “because it [Goffe] lacks adequate protection due to the fact that the property has been the subject of cease and desist orders by the City of Waltham which impair, potentially seriously hurt Goffe’s ability to realize on its collateral.” R.App. 451-52. The court’s action allowed the foreclosure sale to proceed, and the Property was sold in 1998 for approximately $1.3 million. 5 Also in 1998, the bankruptcy case was converted to Chapter 7. Beaver St, 244 B.R. at 190.

After his appointment, Trustee Murphy took up the prosecution of the Superior Court action as well as two additional claims: that Goffe had violated the automatic stay by informing Waltham officials of code violations at the Property (the “Stay Claim”), and that Goffe had overstated its claim to the foreclosure proceeds (the “Proceeds Claim”).

The year 2000 was a significant year for this case. First, the bankruptcy court declined to approve a settlement that Trustee Murphy had reached with Goffe. The court believed that the compromise was deficient with respect to all of the claims that we have mentioned. Second, following that rejection, the Civil Rights Claims were tried in Superior Court, and the court found no liability. Buster, 2000 WL 576363, at *27. The decision was affirmed subsequently by the Supreme Judicial Court. Buster v. George W. Moore, Inc., 438 Mass. 635, 783 N.E.2d 399, 403 (2003). Consequently, only the Stay Claim, the Storage Claim and the Proceeds Claim remained unresolved.

C.

After quite a few years with little significant activity, in 2007, Trustee Murphy and Goffe negotiated the settlement at issue in this case. The settlement resolved the Proceeds Claim, the Storage Claim and the Stay Claim—the last remaining assets of the estate—for $125,000. R.App. 598, 612-16. The Principals opposed the settlement. They also asked the bankruptcy court for an evidentiary healing on their allegation that Goffe had violated the automatic stay.

*436 The court held that the settlement was reasonable. It noted that, in light of the resolution of the Civil Rights Claims by the Supreme Judicial Court of Massachusetts and the accrual of increased legal fees, the Partnership’s prospects of recovering significantly more than the settlement amount were “at best, very uncertain.” Appellant’s Addendum 13-14. Also, continued litigation would involve additional expense, inconvenience and delay. Id. The court also pointed out that no non-insider creditor had voiced any objection to the settlement, and that “where[, as here,] administrative and non-insider unsecured claims will not be fully paid, the interest of the principals is more attenuated than before[.]” Id. The court also denied the Principals’ motion for an evidentiary hearing on the Stay Claim, saying that “[l]itigating causes of action to assess their outcome is precisely what the reasonableness standard for compromises is intended to avoid.” Id.

Following the approval of the settlement, the Principals filed an adversary complaint in the bankruptcy court. The complaint outlined the Duffys’s alleged violation of the automatic stay and attempted to frame the Duffys’s conduct as a broader pattern of wrongdoing: fraudulently obtaining the cease and desist orders, failing to disclose their conduct to the court and using the orders to argue impairment of their collateral, “when the real reason they wanted to foreclose was to silence the Debtor’s petitioning activities[.]” R.App. 1209-10. The complaint sought monetary sanctions pursuant to 11 U.S.C. § 105(a) and the bankruptcy court’s inherent powers. The district court dismissed this complaint sua sponte. R.App. 1172.

The Principals appealed the bankruptcy court’s decisions to the district court, which affirmed. They now appeal to this court.

II. DISCUSSION

A.

In reviewing this matter, we must confine ourselves to the same record that was before the bankruptcy court and the district court. We review independently the bankruptcy court’s determination. With respect to that court’s findings of fact, we apply the clearly erroneous standard; with respect to its conclusions of law, we apply a de novo standard of review. Jeffrey v. Desmond, 70 F.3d 183, 185 (1st Cir.1995). Our case law establishes that, in deciding whether to accept a compromise proposal that discharges legal claims held by the debtor, the bankruptcy court should consider the following 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 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.

Id. at 185. In applying these factors, the trustee is accorded a significant range of discretion in the prudent exercise of business judgment. We also must keep in mind the general principle that “compromises are favored in bankruptcy.” In re Mailman Steam Carpet Cleaning Corp., 212 F.3d 632, 635 (1st Cir.2000) (internal quotation marks and citation omitted). Consequently, our task is to determine whether the settlement meets the “lowest point in the range of reasonableness.” In re Healthco Int’l, 136 F.3d 45, 51 (1st Cir.1998) (internal quotation marks and citation omitted).

The Principals’s opening brief in this court makes no focused argument with respect to the Proceeds Claim and the Storage Claim. Accordingly, these issues *437 are waived. See Playboy Enters. v. Pub. Serv. Comm’n of Puerto Rico, 906 F.2d 25, 40 (1st Cir.1990) (“An appellant waives any issue which it does not adequately raise in its initial brief[.]”). The brief provides scant information, and it is not our role to make arguments not presented by the parties at the appropriate time. Suffice it to say that the Principals would be hard-pressed to show that these claims would add value to the estate, given the very significant administrative expenses amassed during the course of these bankruptcy proceedings.

There is substantial reason to believe that the Partnership would not prevail on the Stay Claim. In In re McMullen, 386 F.3d 320, 328 (1st Cir.2004), we held that, for public policy reasons, courts should be circumspect about construing a “private party’s reporting of wrongful conduct to governmental regulatory authorities” as a violation of the automatic stay. The Principals seek to distinguish McMullen by claiming that it does not apply in cases of bad faith. However, even if the Principals were successful in proving bad faith (and it is clear that proving this point would be a substantial undextaking), we have expressed skepticism in both McMullen and In re Spookyworld, Inc., 346 F.3d 1 (1st Cir.2003), that an allegation of bad faith makes any difference in the valuation process. In Spookyivorld, for example, we expressed concern that inquiring into the legitimacy of the regulatory claims would mire the bankruptcy courts in “mini-trials of purely state regulatory issues.” Id. at 10 (internal quotation marks and citation omitted). In McMullen, we cited Spookyworld in noting “the tenuousness of the arguments for engrafting such a ‘bad faith’ exception ... noting the emergent rule that bankruptcy eoui'ts should not inquire into the legitimacy of ongoing administrative enforcement proceedings in determining whether the police power exception applies to them.” 386 F.3d at 328 (internal quotation marks and citation omitted).

Moreover, even if the Partnership pi’evailed on this claim, it is questionable whether it would be able to collect much in the way of damages. See 11 U.S.C. § 362(k)(1); 6 Spookyworld, 346 F.3d at 7 (holding that a debtor that is a corporation cannot sue under § 362(h) for a violation of the automatic stay). Furthermore, any recovery likely would be offset by the fees and costs incurred in pursuing litigation. 7

*438 The fourth prong of the Jeffrey analysis requires that the bankruptcy court recognize “the paramount interest of the creditors and a proper deference to their reasonable views in the premise.” 70 F.3d at 185. Notably, none of the non-insider creditors objected to the settlement, which provided a payment of thirty-two cents on the dollar to the unsecured creditors. Had the Trust been required to litigate these claims, there is a good chance that these creditors would have received a great deal less, assuming there had been some recovery. In that respect, we give substantial deference to a bankruptcy court’s decision to approve a proposed settlement.

The Principals, therefore, have not carried their burden of showing that the bankruptcy court’s determination falls below the bottom of the range of reasonableness. Even if the claims have merit, the amount that the Trust might collect is so uncertain as to make the bankruptcy court’s decision to approve the settlement reasonable. We have no difficulty in determining that the judgment of the trustee was well within the range of reasonableness and that the bankruptcy court correctly approved the settlement. The strength of the Partnership’s remaining claims was indeed questionable, and the offer of settlement approved by the bankruptcy court was a very realistic one.

B.

In its ruling on the motion to reconsider approval of the settlement, the bankruptcy court dismissed sua sponte an adversary complaint filed by the Principals. Its discussion of the matter was brief:

The partners’ rights (including any rights of the 110 Beaver Street Trust) to relief in the adversary proceeding are subject to the terms of the settlement, which was approved before the filing of the adversary proceeding. Moreover, the demands for relief in the adversary proceeding are predicated entirely on rights of the debtor and of the bankruptcy estate, which rights have now been settled by the agreement. Therefore, the adversary proceeding too must be dismissed.

R.App. 1172.

A sua sponte dismissal “without prior notice to plaintiff may be proper in relatively egregious circumstances.” Martinez-Rivera v. Sanchez Ramos, 498 F.3d 3, 7 (1st Cir.2007). In such cases, it is “crystal clear that the plaintiff cannot prevail and that amending the complaint would be futile[.]” Gonzalez-Gonzalez v. United States, 257 F.3d 31, 37 (1st Cir.2001). These cases have “incurable defects that are evident from the face of the eomplaint-e.y., claims based on indisputably bogus legal theories or delusional factual scenarios.” Green v. Concord Baptist Church, 313 Fed.Appx. 335, 336 (1st Cir.2009) (citing Martinez-Rivera, 498 F.3d at 7-9).

When a partnership enters bankruptcy, the partnership’s claims become property of the bankruptcy estate, and the partners *439 may not bring them. 8 Acknowledging this rule, the Principals submit that they are asserting claims that are “different and distinct” from those resolved by the settlement, Appellant’s Br. 35, and predicated on a “different and distinct” factual and legal basis. Appellant’s Br. 38. On the basis of our own review of the complaint, we cannot accept this argument. The complaint presents a fundamental problem on its face that makes clear the correctness of the bankruptcy court’s decision. The complaint simply does not state a claim for damages that is separate, as a matter of fact and law, from damage to the Partnership. The Principals’s allegations, as well as their arguments in their briefs, make clear that whatever injury they might be able to show would constitute injury to the Partnership. Such alleged injuries suffered by the Partnership are precisely the matters that were compromised by the settlement agreement. 9

III. CONCLUSION

For the foregoing reasons, the judgment of the district court is affirmed.

Affirmed.