921 F.2d 279
NOTICE: Ninth Circuit Rule 36-3 provides that dispositions other than opinions or orders designated for publication are not precedential and should not be cited except when relevant under the doctrines of law of the case, res judicata, or collateral estoppel.
In re DELTA FINANCIAL SERVICES, INC., Debtor.
UNSECURED CREDITORS' COMMITTEE, Plaintiff-Appellant,
DELTA FINANCIAL SERVICES, INC., Rodney J. Waldaum, Special
Master, Harry S. Gamble, Kathy E. Gamble, Diana
Joy Gamble, Austin Wolff, Defendants-Appellees.
United States Court of Appeals, Ninth Circuit.
Argued and Submitted June 7, 1990.
Dec. 18, 1990.
Before CYNTHIA HOLCOMB HALL, DAVID R. THOMPSON and LEAVY, Circuit Judges.
The Unsecured Creditors' Committee ("the committee"), appointed to represent the interests of the unsecured creditors of Delta Financial Services, Inc. ("Delta") in Delta's reorganization, appeals the district court's judgment affirming an order of the bankruptcy court approving settlement agreements. We have jurisdiction under 28 U.S.C. Sec. 158(d), and we affirm.
Prior to filing a Chapter 11 bankruptcy petition on September 11, 1987, Delta sold debentures to investors and lent the proceeds to affiliated companies that purchased and managed real estate and operated a consumer goods warranty sales business. Delta and its affiliates were all owned by Harry Gamble, Diana Joy Gamble, Austin Wolff, and Margaret Wolff, in the following respective shares: 40%, 10%, 37.5%, and 12.5%.
The bankruptcy court appointed the committee to represent the interests of Delta's 6,500 unsecured creditors in Delta's reorganization. See 11 U.S.C. Sec. 1102. On October 17, 1988, the bankruptcy court confirmed Delta's First Amended Plan of Reorganization ("the plan") with an effective date of November 1, 1988. The plan provided that Delta's management, led by Harry Gamble, would continue to control the company so long as Delta could meet an economic viability test. Under the plan, proceeds from the sale of assets held by Delta and its affiliates, profits from continued operations, and money realized from the settlement of claims Delta had against various entities would fund full payment of Delta's creditors, with interest, over a five-year period.
Delta's potential legal claims included claims against its four shareholders in connection with the events leading to its bankruptcy, and claims against Cathy Gamble, Harry Gamble's wife, based on assets Harry Gamble transferred to her. Prior to the effect date of the plan, Delta, the committee, the Gambles, and the Wolffs engaged in settlement negotiations to resolve these claims. The bankruptcy court held hearings in October 1988 on settlement agreements Delta proposed between itself and the Gambles, but then continued the hearings when it discovered that a group of Delta's creditors had filed a related action in the district court. Delta later reached settlements with the Gambles ("the Gamble agreements"), under which Delta agreed to release its adversary claims against the Gambles and to indemnify the Gambles for legal expenses incurred in defending claims arising from their actions performed on behalf of Delta. In return, the Gambles promised to transfer assets to Delta for the benefit of Delta's creditors.
The bankruptcy court held hearings on the proposed Gamble agreements in November and December 1988. Delta and the Gambles supported the agreements, but the committee objected to the indemnification provisions. The bankruptcy court ultimately approved the Gamble agreements on December 15, 1988.
The bankruptcy court had also scheduled a hearing in October 1988 to consider a possible settlement agreement between Delta and Austin Wolff, but had continued the hearing. On December 8, 1988, the bankruptcy court considered a settlement agreement proposed by Austin Wolff and supported by the committee ("the Wolff agreement"). Like the Gamble agreements, the Wolff agreement contained a release of Delta's claims and an indemnification provision in return for a transfer of assets to Delta. However, the Wolff agreement's indemnification provision was much broader, and the agreement also provided for a voting trust to enable the committee to vote Austin Wolff's stock in the surviving Delta entity during the term of the plan.
The bankruptcy court refused to approve the Wolff agreement unless the indemnification provision was modified and the voting trust provision was removed. At a hearing on December 15, 1988, the bankruptcy court considered a modified version of the Wolff agreement that incorporated the changes it had suggested. The committee objected to the Wolff agreement as modified, and attempted to withdraw its support for the agreement. The bankruptcy court ruled that, because the committee had previously proposed the agreement and accepted its economic aspects, the committee was estopped from withdrawing its support notwithstanding modification of the agreement's noneconomic aspects. The bankruptcy court approved the modified Wolff agreement at the December 15 hearing.1 The district court entered judgment on July 19, 1989, affirming the bankruptcy court's orders.
As we have stated:
In an appeal from the district court's affirmance of a decision of the bankruptcy court, our role is essentially the same as that of the district court, and we are, in essence, reviewing the final order of the bankruptcy court.
We review the bankruptcy court's findings of fact under the "clearly erroneous" standard and its conclusions of law de novo.
In re A & C Properties, 784 F.2d 1377, 1380 (9th Cir.1986) (citations omitted).
1. Voting Rights Provision
The committee contends that the bankruptcy court abused its discretion in rejecting the original Wolff agreement which created a voting trust in the committee's favor. For a bankruptcy court to approve a settlement agreement, the court must conclude that the settlement is reasonable, fair and equitable. Id. at 1381. The court should consider the wishes of creditors, but it must also determine what is in the best interest of the bankrupt estate. See id. at 1382; In re Transcontinental Energy Corp., 764 F.2d 1296, 1299 (9th Cir.1985).
In this case, the bankruptcy court concluded that the voting rights provision was inconsistent with the plan of reorganization. Under section 4.2 of the plan, Delta and the committee were to work jointly to pursue settlement of Delta's legal claims against the Wolffs and the Gambles. If agreements were not reached prior to the effective date, the committee would "be vested with the power, on behalf and in the name of Delta, to pursue such relief against [them] as the Committee deem[ed] appropriate." The committee joined Austin Wolff in proposing, after the effective date, a settlement of Delta's claims against him.
As the bankruptcy court noted, the plan did not provide a voting control role for the committee. Rather, the committee's role was specified in detail in section 7.2, which enumerated the committee's specific powers. As the bankruptcy court stated, "if the Creditors' committee wanted to be a director of this entity, they should have negotiated it."
Further, the voting rights provision benefited the committee, not Delta, whose legal claim against Austin Wolff was to be released. Rather, as the bankruptcy court concluded, the voting trust could have impaired Delta's ability to operate efficiently under the plan. As the bankruptcy court stated, the need for the committee's representative on Delta's board of directors to consult on important matters with the full committee--or perhaps with the entire body of 6,500 creditors--"could create substantial delays in Delta's ability to make business decisions and conduct its business effectively." Moreover, as the bankruptcy court concluded, the committee would gain little added protection for the unsecured creditors, given the elaborate controls already present in the plan that protected their interests.
The bankruptcy court did not abuse its discretion in rejecting the voting trust provision of the Wolff agreement. The court held hearings on the proposal and considered the best interests of Delta and of the creditors before reaching its decision.
2. The Modified Wolff Proposal
The committee also contends that, once the bankruptcy court rejected the original Wolff agreement, no agreement with Wolff was properly before the bankruptcy court for its consideration.
a. The Committee as Proponent
Section 4.2 of the plan2 gave the committee the right to pursue Delta's claims against Austin Wolff after the effective date as the committee deemed appropriate. Having negotiated in the plan the authority to pursue Delta's legal claims against Austin Wolff after the effective date, the committee exercised this authority when it proposed the original Wolff agreement.3 Then, when the bankruptcy court indicated that it would approve a modified version of the Wolff agreement, one that did not contain the voting rights provision, the committee sought to withdraw its support of the proposal. The bankruptcy court ruled that the committee was estopped from opposing the modified Wolff agreement because of its prior approval of the "economic aspects" of the agreement.
"[T]he doctrine of judicial estoppel acts to bar advancement of truly inconsistent positions." Arizona v. Shamrock Foods Co., 729 F.2d 1208, 1215 (9th Cir.1984), cert. denied, 469 U.S. 1197 (1985). The policies underlying preclusion of inconsistent positions are the protection of the orderly administration of justice and the maintenance of the dignity of judicial proceedings. Id. at 1215.
Here, the committee's attempt to withdraw its support from the Wolff agreement once it was modified is not inconsistent with its prior support for the original agreement. The committee bargained with Austin Wolff over terms and reached an agreement. The committee agreed that Delta would release its claims against Wolff and indemnify him in later suits in return for his transfer of assets to Delta and his creation of a voting trust in the committee's favor. The voting trust provision represented part of the benefit of the bargain the committee had negotiated. When that provision was deleted form the agreement, it was not unreasonable for the committee to object to the new, modified agreement. At that point, the bankruptcy court should no longer have characterized the committee as the proponent of the Wolff agreement.
b. Delta as Proponent
Delta contends that, even if the committee could not have been considered the proponent of the modified Wolff agreement, Delta itself could have been considered the proponent, so that the modified agreement was properly before the bankruptcy court for approval. Delta contends that the bankruptcy court continued hearings on a settlement with Austin Wolff that began prior to the effective date to a time after the effective date and that the committee agreed to allow Delta to propose a settlement agreement with Wolff at that time.
When the bankruptcy court continued the hearings, Austin Wolff's attorney asked if he was correct in assuming that he was to continue negotiating a settlement with Delta after the effective date, and the bankruptcy court responded that that was its intention. The bankruptcy court then addressed the committee's counsel, who stated, "That's fine, your Honor." With this response, the committee waived its right under the plan to be the only entity allowed after the effective date to propose a settlement of Delta's claim against Austin Wolff. Cf. CBS, Inc. v. Merrick, 716 F.2d 1292, 1295 (9th Cir.1983) (contractual deadline may be waived by acts, words or conduct inconsistent with the deadline); In re Stratford of Texas, Inc., 635 F.2d 365, 368 (9th Cir.1981) (confirmed plan should be construed basically as a contract).
We can affirm the district court's decision upholding the bankruptcy court's Wolff order on the basis of any evidence in the record that supports that order. Golden Nugget, Inc. v. American Stock Exch., Inc., 828 F.2d 586, 590 (9th Cir.1987) (per curiam); South-Western Publishing Co. v. Simons, 651 F.2d 653, 656 n. 2 (9th Cir.1981), cert. denied, 455 U.S. 1018 (1982). Here, evidence in the record leads us to conclude that the committee did in fact waive its exclusive authority to propose a settlement agreement with Wolff after the effective date. Further, because the evidence is clear that Delta supported the modified Wolff agreement when it came before the bankruptcy court, we conclude that Delta can be considered the proponent of the modified Wolff agreement, so that as modified the agreement was properly before the bankruptcy court for approval.4
3. Indemnification Provisions
The committee challenges the bankruptcy court's approval of the indemnification provisions in the Gamble and Wolff agreements under which Delta agrees to indemnify the Gambles and Austin Wolff against legal expenses and, in Austin Wolff's case, against liability, for activities they took on behalf of Delta.
a. Substantive Due Process
The committee first contends that the indemnification provisions deny the unsecured creditors' rights to substantive due process, because any amount won from the Gambles and Austin Wolff in pursuit of the creditors' own claims against them would reduce the amount of assets held by Delta available to pay off creditors. The committee's substantive due process claim lacks merit. "[A]n unsecured claim confers no rights in specific property of the obligor." In re Blumer, 66 B.R. 109, 114 (9th Cir.B.A.P.1986), aff'd, 826 F.2d 1069 (9th Cir.1987). The committee cannot claim an interest in specific funds Delta would use to indemnify the Gambles and Austin Wolff. Further, the indemnification provisions do not prevent the unsecured creditors from pursuing claims against the Gambles and Wolff and collecting on them.
b. State Law Prohibitions
The committee next contends that the indemnification provisions violate Washington state corporate law. Section 23A.08.025(2)(a) of the Revised Code of Washington specifies that a corporation has the power to indemnify a person made party to a proceeding because that person is or was a director if that person acted in good faith and reasonably believed his conduct to be in the corporation's best interests. Subsection (4) prohibits a corporation from indemnifying a present or past director under the prior subsection if the director was found liable because he received an improper personal benefit. Subsection (6) specifies that indemnification can be made only after the corporation determines that the director's conduct warrants it under the prior two subsections.5
"[W]ords and other symbols must be interpreted in the light of the surrounding circumstances; and the existing statutes and rules of law are always among these circumstances." 3 Corbin on Contracts Sec. 551, at 198 (1960); see also Farmers and Merchants Bank v. Federal Reserve Bank, 262 U.S. 649, 660 (1923) ("Laws which subsist at the time and place of the making of a contract, and where it is to be performed, enter into and form a part of it, as fully as if they had been expressly referred to or incorporated in its terms."). Thus, we interpret the indemnification provisions in the context of applicable state corporate law. The indemnification duty may be literally broad, but in the event one of the Gambles or Austin Wolff attempts to enforce the duty against Delta after a judgment that he or she received an improper personal benefit, a court can hold the indemnity provision unenforceable to the extent necessary to comply with state law. See, e.g., In re Southwest Restaurant Sys., Inc., 607 F.2d 1241, 1242 (9th Cir.1979) (indemnification agreement did not create valid obligation of debtor in reorganization because it violated state corporate law). Therefore, we conclude that the indemnification provisions do not violate Washington state corporate law.
c. Best Interests of the Bankrupt
The committee also contends that the indemnification provisions in the Gamble and Wolff agreements render those agreements contrary to Delta's best interests. The committee argues that Delta's assets, needed to repay creditors, will be diverted to pay for the legal defense of the Gambles and the Wolffs.
A bankruptcy court abuses its discretion if it approves a settlement agreement not in the best interests of the bankrupt estate. See In re Transcontinental Energy Corp., 764 F.2d at 1299 (9th Cir.1985). In passing on a proposed settlement, the bankruptcy court must consider the following factors:
(a) the probability of success in the litigation;
(b) the difficulties, if any, to be encountered in the matter of collection;
(c) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it;
(d) the paramount interest of the creditors and a proper deference to their reasonable views in the premises.
A & C Properties, 784 F.2d at 1381 (citation omitted).
Here, the bankruptcy court considered the fairness of the indemnity provisions in each settlement agreement at length before approving the agreements. The bankruptcy court concluded that the provisions made the settlement agreements possible, resulting in the transfer to Delta of substantial assets that otherwise might have been spent in litigating uncertain claims. further, the bankruptcy court noted that the provisions limited the total amount of indemnification to the value of the assets each individual transferred to Delta, so that Delta assured itself of no net loss under the agreements. On these facts, we conclude that the bankruptcy court did not abuse its discretion in approving the indemnification provision.
This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by 9th Cir.R. 36-3
Austin Wolff contends that the propriety of the bankruptcy court's order approving the Wolff agreement is a moot issue, because he has, in reliance on the agreement, followed the terms of the plan by voting for a corporate reorganization of the Delta entities. An appeal of a bankruptcy order is moot if either the reorganization has progressed so as to prevent a court from fashioning effective relief or the appellant's failure to obtain a stay has rendered it inequitable for a court to consider the merits of the appeal. In re International Envtl. Dynamics, Inc., 718 F.2d 322, 325-26 (9th Cir.1983). Here, the committee's appeal is not moot because Austin Wolff has done only what the plan requires him to do: vote his shares for a reorganization of the Delta entities. The committee's appeal is not moot
Section 4.2 states:
Claims Against Certain Named Individuals. Prior to the Effective Date, Delta and the Committee shall work jointly in an effort to reach a settlement of the possible claims which Delta, any of the Delta companies or any party claiming by or through any of them, may have against each of the following Persons: Harry S. Gamble, Cathy Gamble, Diana Joy Gamble, Gordon Hostrom, Margaret Wolff, Austin Wolff, Curtis Dalrymple, Dalrymple & Associates, Inc., Ronald Benson, Dagny Benson, Stephen Childress, John O. Anderson and Cheryl Dickerson and the spouse, at the pertinent time, of any of the foregoing. If, prior to the Effective Date, Delta reaches a tentative settlement with such Persons satisfactory to Delta, Delta shall submit such proposed settlement, together with any recommendations regarding its acceptance or rejection by the Committee, to the Bankruptcy Court for its approval. If, on or before the Effective Date, a settlement is not reached with such Person or is disapproved by the Bankruptcy Court, the Committee will, thereafter, be vested with the power, on behalf and in the name of Delta, to pursue such relief against such Persons as the Committee deems appropriate. The expenses of the Committee and its legal counsel in pursuing such claims on behalf of Delta will be borne by Delta Holding subject to the limitations contained in Section 7.3.
The original Wolff agreement was first proposed by Austin Wolff. The bankruptcy court concluded that he had no standing to propose a settlement, and instead considered the committee to be the proponent, because the committee supported the agreement. The committee has not disputed this characterization
The committee points to the bankruptcy court's deletion of the following language from the Wolff order originally proposed by Delta as evidence that the bankruptcy court did not intend to allow Delta to propose a settlement agreement with Austin Wolff after the effective date:
In making its October 19, 1989 ruling, the court did not intend to terminate Delta's right to propose an agreement with Mr. Wolff. As a result, the court will consider Delta a co-proponent of the Motion and the Modified Wolff Agreement for purposes of this Order.
Yet it is more likely that the bankruptcy court's removal of this language simply indicated that the language was unnecessary, because the bankruptcy court considered the committee to be the proponent of the modified Wolff agreement. At a hearing on December 8, 1988, the court commented, "I have not answered the question of whether the debtor would have such authority [to propose a settlement agreement after the effective date]. But it seems to me the Creditors' Committee does." We are not persuaded by the committee's argument.
Although Delta contends that Harry Gamble was the only shareholder who acted as a director of Delta, a similar provision covering indemnification of officers and agents of the corporation is found in subsection (10), though without the specific personal benefit prohibition found in subsection (4)