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In re Novapro Holdings, LLC

United States District Court, D. Delaware

March 25, 2019

CHARLES A. STANZIALE, JR., et al, Appellees. NEBO VENTURES, LLC, Appellant, Adv. No. 16-50435-LSS


         Pending before this Court is the appeal of Nebo Ventures, LLC ("Nebo") from a Memorandum Order (Adv. D.I. 68) ("Op."), [1] 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 affirmed.

         I. BACKGROUND

         This 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.

         NPR was 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.[2]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.[3] 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.

         In July 2011, while under Defendants' control, NPR sold 100% of its assets to Carl Warren & Co., which generated sale proceeds in excess of $7 million.[4] 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 longer operating.[5]

         On 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).

         The 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).

         On 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.

         In June 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.

         In 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).

         Nebo 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.[6]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).

         In 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.

         On 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).

         On May 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).


         A. Jurisdiction

         The Court has appellate jurisdiction over all final orders and judgments from the Bankruptcy Court. See 28 U.S.C. § 158(a)(1).

         B. Appellate Review of the Memorandum Order

          The 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. 2006).

         C. Bankruptcy Court's Approval of the ...

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