In re Soderstrom

¶1MEMORANDUM OPINION APPROVING TRUSTEE’S COMPROMISE OF CONTROVERSY

¶2At the time debtors filed bankruptcy, they were the sole owners of Stirling International Realty, Inc. (“Stirling”), a real estate brokerage franchise with Sotheby’s International Realty, Inc.1 Debtors also wholly own related entities Data and Document Storage, LLC; World Wilde Auction Services, LLC; Stirling International Properties, Inc.; and First Global Title, LLC (the “Related Entities”) used to operate the Stirling business. Since 2005 Stirling’s income has declined steadily as a result of the national economic downturn.2 After debtors filed this personal Chapter 7 bankruptcy case, Stirling filed a Chapter 11 reorganization case.3 The Chapter 7 trustee, Richard B. Webber III, now seeks the Court’s approval of a settlement agreement (the “Settlement”) in which he proposes to sell Stirling and the Related Entities back to debtors.4 The Court has considered the Settlement and the creditors’ objections5 and approves the Settlement as reasonable and in the best interest of creditors.

¶3*252The Trustee’s Motion to Settle is Granted

¶4Bankruptcy Rule 9019 authorizes a bankruptcy court to approve a settlement agreement between interested parties. Although a settlement agreement must, at a minimum, be fair and “not fall below the lowest point in the range of reasonableness,”6 the ultimate decision to approve a settlement lies within the sound discretion of the bankruptcy court.7 A bankruptcy must “apprise itself of all necessary facts to make an intelligent evaluation and to make an independent judgment as to whether the settlement presented is fair and equitable.”8 The Eleventh Circuit in In re Justice Oaks, II, Ltd. established the following factors to determine the fairness and reasonableness of a proposed settlement:

(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.9

¶5A trustee must make a comprehensive examination of the underlying facts and prove a settlement agreement is reasonably beneficial to an estate.10 A court is not required to decide the merits of each claim or hold a “mini trial” of the underlying litigation but must have enough information to evaluate the reasonableness of a trustee’s proposed settlement.11 When the potential augmentation of a bankruptcy estate “involves protracted investigation or potentially costly litigation, with no guarantee as to the outcome, the trustee must tread cautiously, and an inquiring court must accord him wide latitude in deciding whether to [settle].”12

¶6As part of the Settlement, the trustee proposes to sell back to debtors any interest the trustee acquired in Stirling or *253the Related Entities.13 Debtors have agreed to pay $10,000 for all the stock and interests in these interrelated companies and waive the exemptions they have asserted as to some of their other business entities.14

¶7In exchange, the trustee will withdraw certain motions he has pending in debtors’ and Stirling’s bankruptcies,15 including his motion to revoke Stirling’s Chapter 11 Plan Confirmation because debtors, as sole owners of Stirling, proceeded as debtors-in-possession in Stirling’s Chapter 11 bankruptcy after they filed for Chapter 7.16 The trustee’s motion argues that because all debtors’ assets individually became property of their Chapter 7 estate upon filing,17 including their ownership interest in Stirling, debtors acted without authority when they proceeded to confirm a plan in the Stirling bankruptcy without the trustee’s involvement.

¶8The trustee submits this compromise is fair, equitable, and in the best interest of the estate because the companies debtors are purchasing are largely valueless, and the estate will receive $10,000 without having to expend the time and money to pursue more unproductive litigation.18 The trustee further argues that even if he were able to recover and sell the stock of these companies, he would not gain anything of value for debtors’ estate because taking over Stirling would trigger a default under its franchise agreement with Sotheby’s, destroy the Chapter 11 reorganization, and effectively close the business.19

¶9Creditors Horizons a Far (“Horizons”), Joan Thompson, and J. Thompson Investments (“Creditors”) object to the Settlement for multiple reasons. First, Creditors argue the Settlement is not based on the trustee’s informed decision because the trustee has not provided any information to support his contention that the properties are largely worthless. He has not submitted a valuation of any of the Related Entities, nor has he attempted to auction them to determine their market value.20 Pointing to debtors’ initial willingness to contribute $25,000 to purchase Stirling from Stirling’s bankruptcy estate,21 Creditors argue $10,000 is not a fair price to pay for all five companies because they are *254worth at least $25,000 to the debtors and taking less reduces the claims debtors’ estate will be able to distribute to creditors.

¶10In response to the trustee’s claims that the entities are largely worthless, Creditors point to the income that some of the Related Entities generate as an indication of the companies’ positive market values. Creditors also claim First Global Title, LLC and World Wide Auction, LLC must have positive values because both pay annual filing dues and both submit an annual report to the State of Florida, and no company would pay these amounts if it were valueless. Finally, Creditors argue the Settlement should be denied because they have not had an opportunity to conduct their own discovery that would test the validity of the trustee’s assertions that none of these entities have value.22

¶11Horizons also claims the trustee’s withdrawal of claims against debtors or Stirling is unreasonable because waiving these claims is not in the best interest of creditors.23 Specifically, Horizons objects to the trustee’s withdrawal of his motion to revoke the Court’s Order Confirming Stirling’s Fourth Amended Plan and Disclosure Statement24 because pursing this claim against Stirling “may add potential assets to debtors’ estate.” Horizons also argues debtors’ waiver of their exemptions is a trivial conciliation because most of the property debtors claim as exempt is already owned by someone other than the debtors (including the trustee) or has no value.25

¶12This Court agrees with the general policy of encouraging settlements and favoring compromises to reduce the costs of litigation.26 As with most settlements, it may be possible to achieve a more favorable outcome for creditors through additional litigation. But, when the administration of an estate is burdened with costly litigation and drawn out to a pointless end, the trustee is encouraged to find alternative solutions.27 Litigation costs are particularly burdensome on bankruptcy estates given the financial instability of a debtor.28

¶13Here, the Court respects the trustee’s business judgment that the risks of litigation and ultimately obtaining no value for the estate justify his decision to settle.29 In this case, even if the trustee were to administer all the assets of debtors’ estate without selling Stirling or the Related Entities back to debtors, the difficulties in recovering any value strengthen the trustee’s arguments in favor of settlement. Stirling, hampered by debts far exceeding its assets, is valueless to anyone other than debtors.30 In the March 15, 2012 valuation hearing, the Court found the corporate value of the stock was likely less than zero,31 but acknowledged the unique intrin*255sic value of the Stirling stock to debtors. The Court found the value of Stirling to debtors is not $0 because “debtors value this stock greatly and hope to realize a return on investment in the future.”32 The Court left unanswered the question of just how much intrinsic value the debtors should place on the stock. Regardless of whether Stirling is worth $10,000 or $25,000 to debtors, without debtors at the helm, Sotheby’s has stated it would likely revoke debtors’ franchise agreement with Stirling.33 If this were to occur, Stirling would almost certainly cease to exist.34

¶14Recovery of any value from the Related Entities is also unlikely. Debtors, Stirling, and the trustee have all stated that the Related Entities operate solely in support of Stirling’s real estate brokerage business and that, without Stirling, the Related Entities are worthless.35 Their only “value” comes from what debtors would be willing to pay for them. Even though, as Creditors point out, the Related Entities may generate some income through the Stirling business, income alone is not an indication of value. Creditors argue they might be able to find value if they had more time for discovery,36 but Creditors have had the opportunity to discover additional financial information about the Related Entities by examining debtors at either the March 15 or July 25, 2012 hearings, yet they failed to do so or even ask a single question. Creditors simply have failed to establish a plausible theory of recovery against any of the Related Entities that would dispute the trustee’s claim that these entities are valueless.37

¶15Facing this possibility that debtors would walk away without contributing anything for the companies, the trustee reasonably has agreed to a value of $10,000 to recover something for the estate. The trustee need not spend the considerable time it would take to auction the properties to determine their value. An auction could be as labor intensive and perhaps more costly as holding a full blown valuation hearing. Moreover, given Sotheby’s anti-assignment provision, an action or sale to anyone other than the debtors would be pointless. A settlement necessarily vitiates the need to decide the merits of each underlying argument to promote judicial efficiency and foster cooperation among the parties in resolving complex cases such as this.

¶16The Court agrees that the Settlement should be approved. The trustee testified that $10,000 is a reasonable and fair price to pay to avoid protracted litigation and costly valuation hearings, with potentially no recovery in sight.38 With enough time and resources, the trustee may be able to squeeze more than $10,000 from debtors or pursue a liquidation strategy of these assets, but this is not necessary. Settling a claim for less than the maximum conceivable amount of recovery *256is acceptable in complex cases where a trustee envisions the costs of litigation outweigh the likelihood of success.39 Debtors may have offered $25,000 at one time, but they are not offering it now to settle the matter. If they refuse to pay more and walk away from assets, the trustee may very well be left with nothing. In this case, under these circumstances, a bird in the hand is worth two in the bush.40

¶17With respect to the trustee’s proposal to withdrawal his motion to revoke Stirling’s discharge and convert Stirling’s Chapter 11 case to a 7, the Court cannot see how forcing the trustee to pursue these actions would recover anything additional for Creditors, who are not even creditors in Stirling’s Chapter 11 bankruptcy. Even if Creditors had claims against Stirling, Stirling estimates in its Chapter 11 Plan and Disclosure Statement that no funds would be available for distribution to unsecured, administrative, or priority creditors if Stirling were liquidated.41 Thus, no assets would be distributed to debtors that would become property of debtors’ Chapter 7 estate. Therefore, the Court finds no reason to undermine the trustee’s judgment to withdraw these motions. Nor does the Court see any harm in accepting debtors’ waiver of exemptions to other assets.

¶18The Court finds the trustee’s Settlement is based on a sound and thorough assessment of the facts.42 The trustee has duly weighed the substantial administrative costs and risks associated with continued litigation against the prospects of recovery in excess of the Settlement and has concluded the Settlement is in the best interest of the estate. The Court agrees. The Settlement is approved as to Stirling and the Related Entities to the extent the trustee owns them.43

¶19Horizons argues the trustee may not administer Stirling Properties International, Inc., one of the Related Entities listed by the trustee in the Settlement, because this entity is not listed on Florida’s Division of Corporation website. The entity listed by the trustee is likely a typographical error; debtors have claimed ownership in Stirling International Properties, Inc., which is listed on the website as owned by debtors.44 Additionally, debtors list a 50% undivided interest in First Global Title, LLC, and list the other 50% as owned by Phil Logas, the managing member named on Florida’s website.45 The trustee may sell these Related Entities to debtors, but only to the extent debtors owned them on the date this bankruptcy case was filed, and only after debtors submit evidence of ownership of their 50% interest in First Global Title, LLC to the trustee.

¶20Stirling’s Motion to Authorize Release of Escrow Funds is Granted

¶21In January of 2012, Stirling brokered the sale of real property owned by *257an affiliate of the debtors, for which Stirling was due to receive $16,920 in net commission’s.46 The Court ordered the commission payment to be held in escrow pending further order of the Court.47 Stirling has filed a Motion to Authorize the Escrow Agent to Release Escrow Funds.48

¶22The Court grants Stirling’s motion, and rejects Horizon’s argument that these funds should not be released to Stirling, but instead should be used to pay debtors’ creditors.49 The funds in escrow are owed to Stirling, not to debtors personally, and are not property of debtors’ bankruptcy estate. Stirling is a debtor-in-possession authorized to use these funds to operate its business as it sees fit.50 Horizons filed a claim against debtors and is a creditor in debtors’ bankruptcy only.51 Horizons is not a creditor in Stirling’s bankruptcy, and therefore lacks standing to pursue claims against property that properly belongs to Stirling.52

¶23A separate order consistent with this Memorandum Opinion shall be entered.

¶24DONE AND ORDERED.