United States District Court, D. Delaware
IN RE NOVAPRO HOLDINGS, LLC, et al, Debtors.
CHARLES A. STANZIALE, JR., et al, Appellees. NEBO VENTURES, LLC, Appellant, Adv. No. 16-50435-LSS
before this Court is the appeal of Nebo Ventures, LLC
("Nebo") from a Memorandum Order (Adv. D.I. 68)
("Op."),  entered by the Bankruptcy Court on May 4,
2018, which approved a motion for approval of the settlement
of claims pursuant to Federal Rule of Bankruptcy Procedure
9019 (B.D.I. 57) ("Settlement Motion") filed by
Charles A. Stanziale, Jr., as the trustee appointed in the
above-captioned Chapter 7 cases ("Trustee"). For
the reasons set forth below, the Memorandum Order is
appeal arises from the Chapter 7 cases of NovaPro Holdings,
LLC ("NPR") and certain of its affiliates
(together, "Debtors"). The settlement underlying
this appeal is among the Trustee and defendants who are
former owners and chief executives of the Debtors (together,
"Defendants"): (i) U.S. Risk Insurance Group, Inc.
("U.S. Risk"), which holds a 75.9% share of the
Debtors (directly and indirectly); (ii) ISLLC Investments,
Inc. ("ISLLC"), an affiliate of U.S. Risk, which
holds the other 24.1% share of the Debtors; and (iii) Randall
G. Goss ("Goss"), who is the Debtors' chief
executive officer and board chairman and is also U.S.
Risk's chief executive officer.
embroiled in prepetition litigation with appellant Nebo as
well as NPR's former chief operating officer, Russell
Whitmarsh. (10/26/17 Hr'g Tr. ("Hr'g Tr.")
at 18:14-18; 23:10-23; 32:14-25). Nebo assists financial
service companies and workmen's compensation insurance
providers and administrators in obtaining and performing
under contracts with state and local governments. In 2003,
NPR retained Nebo to assist it in selling administrative
services to potential customers. On July 1, 2011, Nebo sued
NPR for breach of contract and fraud for fees owed to Nebo on
NPR's contract with the City of Atlanta, which led to
four years of state court litigation.NPR initially failed to
disclose that it received a $1 million bonus from the City of
Atlanta which would have resulted in additional fees payable
to Nebo. Following the trial, Nebo obtained a
judgment of $1, 437, 357.86. Whitmarsh filed an employment
claim with the American Arbitration Association following his
termination and was awarded judgment in the amount of $544,
400.73 plus interest.
2011, while under Defendants' control, NPR sold 100% of
its assets to Carl Warren & Co., which generated sale
proceeds in excess of $7 million. After completing the asset
sale, the Debtors made various payments and entered into
obligations with Defendants, which would later become of
interest to Trustee (collectively, the
"Transfers"). One group of Transfers, totaling
approximately $1.7 million, were made to U.S. Risk
("Intercompany Transfers"). A second group of
Transfers, two alleged dividend payments ($1, 062, 600 and
$337, 400), were made to various Defendants ("Equity
Distribution Transfers"). A third group of transfers,
totaling approximately $120, 000, were based on payments to
U.S. Risk pursuant to a post-asset sale management agreement
("Management Agreement Transfers") while NPR was no
April 15, 2014, Debtors filed voluntary Chapter 7 petitions.
Trustee was appointed in each of the Debtors' cases,
which were jointly administered and later substantively
consolidated. On the petition date, Debtors had $1.98 in
their bank accounts. Trustee retained McCarter & English
as counsel and MazarsUSA LLP as its financial advisor.
(B.D.I. 11). Trustee's professionals were retained to
investigate transfers made to insiders, potential preference
and fraudulent conveyance claims, provide forensic accounting
services, and prepare a forensic solvency analysis. (B.D.I.
45 & 66; Hr'g Tr. at 51:1-10).
largest proofs of claims in the Chapter 7 cases were filed by
U.S. Risk ($660, 000), Nebo ($1, 437, 357.86), and Whitmarsh
($623, 321.78). Together, Nebo and Whitmarsh account for 99%
of the non-insider claims. (Hr'g Tr. at 14:23-15:1). With
respect to administrative claims, McCarter & English is
owed non-contingency fees of $125, 000 and MazarsUSA is owed
$136, 000. (Op. at 4).
April 4, 2016, Trustee commenced an adversary proceeding
against U.S. Risk and the other Defendants seeking avoidance
of the Transfers, compensation for alleged damages, equitable
relief, and disallowance and/or subordination of the proof of
claim filed by U.S. Risk. (Adv. D.I. 1; Hr'g Tr. at
8:12-25). Trustee sought to recover, on various legal
theories, the approximately $3.34 million in Transfers made
by the Debtors to U.S. Risk over the period of October 3,
2011 through July 10, 2012, and to avoid the obligations
incurred in the entry of the post-asset sale management
agreement with U.S. Risk. Trustee further sought to recover
against Goss for breach of fiduciary duty or aiding and
abetting of breach of fiduciary duty in directing or
permitting the Transfers. Trustee further sought to recover
against all Defendants on an "alter ego" theory,
pursuant to which Trustee alleged that Defendants maintain
direct or indirect ownership interests in Debtors, conducted
the Debtors' affairs, and used the Debtors as a vehicle
to defraud Debtors' creditors. The Complaint further
alleges that each of the Debtors' officers was an officer
of U.S. Risk. Finally, Trustee sought to disallow and/or
subordinate the $660, 000 proof of claim filed by U.S. Risk.
of 2016, each of the Defendants moved to dismiss
("Motions to Dismiss") the Complaint, which Trustee
opposed. The Motions to Dismiss assert multiple grounds for
dismissal, including that the claims are barred by the
applicable statutes of limitation, Trustee lacks standing
with respect to claims against two of the Debtors, and
Trustee fails to state causes of action. Trustee moved to
amend the Complaint, which Defendants opposed.
March of 2017, the parties engaged in mediation. While the
mediation was unsuccessful, Trustee asserts that he and his
professionals "gained more insight into Defendants'
defenses and position in the adversary proceeding."
(Adv. D.I. 57 at 3). Trustee further asserts that,
thereafter, and in consultation with his professionals,
Trustee determined that "settling the adversary
proceeding provided the best route to recovery for
creditors." (Id. at 4). Trustee subsequently
reached a settlement with Defendants. The settlement requires
(1) U.S. Risk to pay Trustee $300, 000; (2) U.S. Risk to
withdraw its $660, 000 proof of claim and waive any other
claims it may have had; (3) Defendants' waiver of the
$300, 000 claim under § 502(h) of the Bankruptcy Code;
and (4) mutual releases of all claims. Trustee projected a
10% recovery to general unsecured creditors, like Nebo, if
the settlement was approved. To facilitate that distribution,
McCarter & English agreed to write off $150, 000 in
non-contingency fees and Mazars agreed to write off $75, 000
in fees. On September 6, 2017, Trustee filed the Settlement
Motion asking the Bankruptcy Court to approve the
parties' compromise. (Adv. D.I. 57).
opposed the settlement. (See Adv. D.I. 58). The
opposition outlined years of state court litigation Nebo
endured in obtaining its judgment against NPR, including
appeals to the Georgia Court of Appeal and Georgia Supreme
Court, which Nebo attributes to the litigation tactics and
gamesmanship of NPR and U.S. Risk. (See Id. at
1-11). Nebo argued that similar tactics were employed in the
course of Whitmarsh's employment claim against NPR for
its failure to honor the severance provisions in his
employment contract, and that the Chapter 7 filing was
another tactic.Nebo argued that the Bankruptcy Court
should not approve the settlement, because, despite having
engaged in "no discovery," Trustee sought approval
of a settlement in an amount that "does not even
represent the cost of defense," would result in only a
de minimis distribution to creditors, and would
benefit only Defendants, Trustee, and his law firm. (See
Id. at 1 -2). Nebo further argued that Trustee had
failed to carry his burden of establishing that the
settlement was fair and equitable. (Id. at 20-21).
reply, Trustee argued that the settlement should be approved
because it (i) includes a reduction in professionals'
administrative claims, (ii) provides a 10% return to
creditors in a no-asset case, (iii) deems withdrawn all of
Defendants' claims against the estates, totaling nearly
$1 million, and (iv) permits Trustee to close the Chapter 7
cases. (See Adv. D.I. 60). Trustee argued that
Nebo's opposition did not take into account Trustee's
position on litigation costs and risks, the probability of
success, and the merits of the Defendants' asserted
defenses, all of which support Trustee's business
judgment decision to settle. According to Trustee, Nebo did
not propose any counter settlement or offer to the estate.
Trustee argued that, while Nebo would obviously prefer that
Trustee "take a chance on litigation" and pursue
collection of Nebo's judgment solely on its behalf,
Trustee had a fiduciary duty to all creditors.
October 26, 2017, the Bankruptcy Court held an evidentiary
hearing on the Settlement Motion. At the hearing, Trustee
testified by way of proffer and on the witness stand. The
declaration of Michael Kupka (Adv. D.I. 60-1) ("Kupka
Decl."), Trustee's financial advisor, was also
admitted into evidence. The Bankruptcy Court took the matter
under advisement and issued its Memorandum Order on May 4,
2018, which granted the Settlement Motion and approved the
settlement. (Adv. D.I. 68).
17, 2018, Nebo filed a timely notice of appeal. (D.I. 1). The
appeal is fully briefed. (D.I. 9, 11, 12). On November 19,
2018, the Court held oral argument. (D.I. 16).
JURISDICTION AND STANDARD OF REVIEW
Court has appellate jurisdiction over all final orders and
judgments from the Bankruptcy Court. See 28 U.S.C.
Appellate Review of the Memorandum Order
Court reviews the Memorandum Order for abuse of discretion.
See Myers v. Martin (In re Martin), 91 F.3d 389,
391-93 (3d Cir. 1996) (“Martin")
("the ultimate issue on appeal is whether the bankruptcy
court abused its discretion when it disapproved the
compromise"). "In bankruptcy appellate litigation,
the abuse of discretion standard is highly deferential to the
judgment of the bankruptcy court." In re W.R. Grace
& Co., 475 B.R. 34, 74 (D. Del. 2012). Factual
findings underlying the Bankruptcy Court's review may be
set aside only if they are clearly erroneous. See,
e.g., In re Exide Techs., 607 F.3d 957, 961-62 (3d
Cir. 2010). Accordingly, courts "do not disturb an
exercise of discretion unless there is a definite and firm
conviction that the [bankruptcy] court.. . committed a clear
error of judgment in the conclusion it reached upon weighing
of the relevant factors." Will v. Northwestern Univ.
(In re Nutraquest, Inc.), 434 F.3d 639, 645 (3d Cir.
Bankruptcy Court's Approval of the ...