United States District Court, District of Delaware
In re SCH CORP., et al., Debtors.
Carl Singley, Responsible Officer Appellee. CFI Class Claimants, Appellants, Bank No.09-10198 BLS
At Wilmington this 2nd day of April, 2014 having reviewed the appeal taken by the CFI class action claimants ("CFI claimants"), and the papers submitted in connection therewith; the court issues its decision based on the following analysis:
Carl Singley ("Singley") is the disbursing agent, litigation designee, and responsible officer for SCH Corp., American Corrective Counseling Services, Inc., and ACCS Corp. (the "debtors"). (D.I. 18 at 1) Singley is counsel to the firm Ciardi Ciardi & Astin ("Ciardi"). (D.I. 17 at 15)
2. Prior to the debtors' bankruptcy filings, class action litigations against the debtors occurred in California, Florida, Indiana, and Pennsylvania, alleging, among other harms, violations of the Fair Debt Collection Practices Act ("FDCPA"), 15 U.S.C. § 1692 et seq., and certain state statutes. The class action plaintiffs in California ("Del Campo"), Florida, and Indiana are collectively the "CFI claimants." The plaintiffs in the Pennsylvania case were separately represented. (D.I. 17 at 6-7)
3. On January 19, 2009 (the "Petition Date"), the debtors each filed a voluntary petition for relief under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code") in the bankruptcy court. The CFI claimants were actively represented by counsel in the chapter 11 case. (D.I. 18 at 6)
4. On February 10, 2009, the bankruptcy court approved the debtors' motion to conduct an auction for the sale of all the debtors' operating assets, over the objections of the CFI claimants. On March 3, 2009, the debtors filed a motion to approve the sale of substantially all of their assets and for certain related relief. (BR D.I. 202) The CFI claimants objected and moved to dismiss the bankruptcy as lacking in good faith. (D.I. 17 at 8; D.I. 18 at 6-7)
5. On March 31, 2009, the bankruptcy court conducted a hearing on both the debtors' motion to approve the sale and the CFI claimants' motion to dismiss. The bankruptcy court approved the sale, over the objection of the CFI claimants, and denied the motion to dismiss. The sale authorized the transfer of substantially all of the debtors' assets to National Corrective Group, Inc. ("NCG"), a subsidiary of LLCP. The CFI claimants did not appeal, and the sale was consummated on April 11, 2009. (D.I. 17 at 8; D.I. 18 at 7)
6. On or about May 22, 2009, the debtors filed a proposed plan for the sale to NCG. The proposed plan contained third-party releases, with the total consideration to the estates of approximately $2.5 million. After objections from the CFI claimants, the debtors abandoned the proposed plan. (D.I. 18 at 8)
7. On August 5, 2009, LLCP filed the first amended plan (the "amended plan"), which contained a second amendment (the "second amendment"). The second amendment required LLCP to fund up to $200, 000 of plan funding per year for up to five years (the "post-sale payments"), with payments commencing on April 11, 2010. The second amendment also provided for certain reductions to the post-sale payments, i.e., an offset of up to 50% of each payment, including the cost of future lawsuits, and an advance of funds to the two law firms representing the debtor for unpaid counsel fees. (D.I. 17 at 10-12; D.I. 18 at 9)
8. On November 2, 2009, the bankruptcy court confirmed the plan, with an effective date of December 21, 2009. (D.I. 17 at 13-14; D.I. 18 at 9) The plan provided the following benefits to the CFI claimants: (a) all disputes regarding the validity of the class proofs of claims filed by the CFI claimants were deemed "resolved;" (b) the CFI claimants owned a 90% share of any distributions for the benefit of unsecured creditors, from which CFI counsel were given the right to claim $175, 000 in bankruptcy legal fees; (c) the CFI claimant's attorney, Paul Arons ("Arons"), was named as the trustee of any funds designated for the CFI claimants; and (d) LLCP agreed to provide CFI counsel with data regarding certain fees consumers had paid. (D.I. 17 at 13) The plan identified two main sources of funds for the benefit of creditors: 1) the post-sale payments by NCG, and 2) a 70% share of the "Mealing litigation, " a pending lawsuit by LLCP against the prior owners of ACCS, which, under the plan, LLCP was to continue to pursue, while providing "monthly status reports" on the litigation to the estate's representative. (D.I. 17 at 13)
9. On January 4, 2010, Irv Acklesberg ("Acklesberg") and Arons, counsel for CFI claimants prior to and during the bankruptcy cases, along with other counsel, filed a new class action in the Northern District of California against LLCP and NCG, alleging claims under the FDCPA, RICO, and state law on behalf of Christina Smith and other plaintiffs. See Christina Smith et al. v. Levine Leichtman Capital Partners, Inc., et al, Civ. No. 10-cv-0010 (N.D. Cal.) ("the Smith action"). (D.I. 17 at 15; D.I. 18 at 9-10) On March 9, 2011, the United States District Court for the Northern District of California granted a motion forcing withdrawal of Acklesberg and Aron in the Smith action, on conflict of interest grounds, finding that expenses incurred by LLCP and NCG in defending the Smith action would ultimately reduce the recoveries available to the Del Campo plaintiffs under the amended plan. The Ninth Circuit upheld the decision on October 31, 2012. (D.I. 18 at 10)
10. On April 30, 2010, Madeline Johnson, a member of the certified del Campo class and a CFI class claimant who had filed an individual proof of claim in the bankruptcy, filed a "class action" malpractice suit purportedly on behalf of all California CFI class members, against most of the CFI class counsel and their law firms, in Los Angeles state court ("the Johnson action"). The suit alleged conflicts of interests. (D.I. 17 at 16-17)
11. On November 23, 2010, Singley, on behalf of the liquidating estate, brought an adversary action against the CFI lawyers who filed the Smith action and against all the Smith plaintiffs ("the Singley action"). The Singley action made allegations almost identical to those asserted in the motion in Smith and in the Johnson malpractice complaint. (D.I. 17 at 18-19)
12. A post-confirmation dispute began in December 2011 regarding the potential funding for the amended plan. On March 15, 2012, Singley filed a motion to approve a settlement ("settlement") to resolve the funding dispute. (09-10198-BLS, D.I. 812) On March 27, 2012, counsel for CFI claimants filed a motion to ...