JAMES K. COACHYS, United States Bankruptcy Judge
This matter comes before the Court on the Trustee's Application to Compromise the FDCPA Claim of Judy Oyler Against Receivables Specialist (the "Application") and the Objection thereto filed by CW Asset Acquisition, LLC ("CW). The Court conducted a hearing on July 16, 2002, at which the Trustee appeared by special counsel Steven J. Halbert, and CW Acquisition, LLC by counsel Thomas J. Grau. The Court took the matter under advisement and now enters the following order, whereby it grants the Trustee's Application and overrules CW's Objection.
Facts
On February 8, 2001, Judy Ann Oyler ("Oyler") filed a voluntary petition under Chapter 7 of the United States Bankruptcy Code (the "Code"). Following the entry of the Court's "no asset" order, Oyler's attorney discovered that she had three potential Fair Debt Collection Practices Act ("FDCPA") claims. Her attorney then filed actions in federal district court, and Oyler's schedules were amended to include these assets. However, the Trustee did not get notice of the amendments and, instead, Oyler received her discharge and the case was closed.
Ultimately, the Trustee learned of the FDCPA claims, and, upon his motion, the case was reopened and notice of the assets, and their expected aggregate recovery to the estate of $3,000, was provided to all creditors. The Trustee then applied to hire special counsel Steven J. Halbert and David Phillips (collectively "Special Counsel") because of their experience in prosecuting FDCPA claims. In the application, the Trustee indicated that the attorney fees incurred by Special Counsel would be paid out of any award generated by the FDCPA claims and they would not diminish the benefit to the estate. The Trustee's application did not draw any objections and was thereby approved by the Court.
On May 3, 2002, the Trustee entered into a settlement agreement with Receivables Specialist, Inc., the defendant in Cause No. IP01-881-C-T/K, now pending before The Honorable John Tinder in the District Court for the Southern District of Indiana. Per the settlement, the estate is to receive $1,000, while Special Counsel are to receive $18,100 as a portion of their legal fees. The Trustee then filed his Application, seeking bankruptcy court approval of the settlement.
The Application was noticed to all creditors and drew an objection from CW, apparently as agent for creditor The Cadle Company ("Cadle"). In its Objection, CW revealed that an entity named New Falls Corporation ("New Falls") made an offer to purchase all three of Oyler's FDCPA claims for $6,000 by a letter to the Trustee dated April 23, 2002. CW takes issue with the fact that this alternative offer was not disclosed by the Trustee in his Application. Based on the assumption that New Falls' offer would lead to a $2,000 recovery for the estate, CW argues that the Trustee's Application should be denied.
Contrary to CW's argument, there is no evidence to suggest that New Falls' $6,000 offer represents a $2,000 valuation for each of the three FDCPA claims. Also, there was no evidence that the offer-which appears to have expired on April 26, 2002-is still even open.
The Trustee responded to the Objection, and informed the Court on a few rather interesting matters. First, the Objection noted that The Cadle Company, CW and New Falls may be the same entity, or in the very least, are related to one another. As mentioned above, Cadle is a creditor of Oyler's and just happens to be a defendant in one of the FDCPA cases. The Trustee's response further indicates that the lawsuit against Cadle has been very contentious and that a contempt motion is now pending in federal district court. Special Counsel understandably oppose the purchase offer because it makes no provision for the payment of their attorney fees and, just as significantly, would not ultimately yield a better return to Oyler's creditors.
The address listed in Cadle's proofs of claim, filed on their behalf by CW, and the address indicated on New Falls' letter to Trustee are identical. At the hearing, counsel for CW indicated that the entities are "contractually related."
Discussion and Decision
Per Bankruptcy Rule 9019, on "a motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement." To be approved, the settlement or compromise must be in the "best interest of the estate." In re Energy Co-op., Inc., 886 F.2d 921, 927 (7th Cir. 1989) ("The benchmark for determining the propriety of a bankruptcy settlement is whether the settlement is in the best interests of the estate."); In re American Reserve Corp., 841 F.2d 159, 161 (7th Cir. 1987) ("A bankruptcy judge may approve a settlement in a liquidation proceeding if the settlement is in the estate's best interests.").
These cases set forth a two-step methodology for determining whether a proposed settlement of claims held by the estate is in the estate's best interest. The first step is "a comparison of the settlement's terms with the litigation's probable costs and probable benefits." American Reserve, 841 F.2d at 161. This step requires the court to estimate both the value of the proposed settlement and the likely outcome of litigating the claims proposed to be settled. However, a precise determination of likely outcomes is not required, since "an exact judicial determination of the values in issue would defeat the purpose of compromising the claim." Energy Co-op., 886 F.2d at 929, quoting In re Penn Central Transp. Co., 596 F.2d 1102, 1114 (3rd Cir. 1979).
The second step is a determination of "whether or not the terms of the proposed compromise fall within the reasonable range of litigation possibilities." Id., quoting In re New York, N.H. H.R., 632 F.2d 955, 960 (2d Cir. 1980), cert. denied, 449 U.S. 1062, 101 S.Ct. 786, 66 L.Ed.2d 605 (1980). This determination is weighted in favor of settlement, since "a challenged settlement fails this test only if it `falls below the lowest point in the range of reasonableness.'" Id., 886 F.2d at 929, quoting In re W.T. Grant Co., 699 F.2d 599, 608 (2d Cir. 1989).
Putting aside for the moment the issue of New Falls' purchase offer, the settlement proposed by the Trustee clearly satisfies both prongs of the above test. In awarding damages when a successful action is brought under the FDCPA, the court is to award actual damages plus "such additional damages the court may allow, but not exceeding $1,000." 15 U.S.C.A. § 1692k(a)(1), (a)(2)(A). As indicated by Special Counsel at the Court's hearing, Oyler sustained no actual damages and, thus, the most the bankruptcy estate could receive, under either the proposed settlement agreement or upon adjudication by the district court, is $1,000. As such, the Court easily concludes that the proposed settlement agreement achieves the maximum possible benefit to the estate and is in the estate's best interest.
CW claims, however, that the Application should be denied because New Falls' offer to purchase all three FDCPA claims for $6,000 would yield a better recovery to the estate. Even taking as true CW's assumption that $2,000 of the purchase price is attributable to the claim against Receivables Specialist, the Court must disagree that the Application should be denied by virtue of the purchase offer.
CW seems to take great issue with the fact that Special Counsel stands to recover $18,100 in fees as part of the settlement agreement when the estate is only recovering $1,000. There is absolutely nothing untoward about Special Counsel being paid this amount as part of the settlement. The FDCPA provides for an award of costs and attorney's fees to a successful plaintiff. See 15 U.S.C. § 1692k(a). The statute makes an award of attorney fees mandatory. The threat of this award provides the real incentive for debt collectors to comply with the FDCPA, as well as the incentive for consumers to sue in the event of a violation. See Graziano v. Harrison, 950 F.2d 107, 103 (3d Cir. 1991). Also, it is generally understood that the attorney fees awarded in a successful FDCPA action typically far exceed the amount of damages awarded to the plaintiff.
It should be noted that Special Counsel is taking a significant cut in its attorney fees by virtue of the settlement agreement. To date, they have incurred approximately $29,000 in fees.
CW's concern over maximizing the value of the FDCPA claims for the benefit of all creditors is rather disingenuous. As previously stated, CW, New Falls and Cadle appear to be related entities. This does not strike the Court as merely coincidental. It would appear that CW's "preference" for the purchase offer is nothing more than a thinly-veiled attempt to avoid the imposition of liability against Cadle. The Court presumes that were these claims actually purchased from the estate, they would not be prosecuted any further. Thus, Cadle could successfully avoid further litigation, liability for contempt and the imposition of damages and attorney fees, all at the expense of Special Counsel and, as explained more fully below, the estate.
Furthermore, CW's Objection incorrectly assumes that the Trustee would voluntarily agree to sell the claims to New Falls should the Application be denied and that the Court would approve of the sale. Were the estate to receive the $6,000 from the sale, it seems clear that Special Counsel could successfully recover all of the sale proceeds as an administrative expense pursuant to Sections 330 and 503 of the Code, thereby leaving creditors with nothing. This hardly seems to be in the best interest of the estate and, as such, the Court will not deny the Application with the "hope" that the Trustee will then somehow feel compelled to sell the FDCPA claims to New Falls. No party, other than Cadle, would benefit under that scenario.
These sections, taken together, give administrative priority expense status to "reasonable compensation for actual, necessary services rendered by the . . . attorney" and to "actual and necessary expenses." Based on the nature and value of the services rendered by Special Counsel, there is nothing in the record to suggest that their fees would not be entitled to payment as an administrative expense, assuming that such a claim was filed with the Court. Because Special Counsel's fees far exceed the $2,000 recovery suggested by the purchase offer, there would be no funds left to distribute to Oyler's other creditors.
Based on the foregoing, the Court grants the Trustee's Application to Compromise the FDCPA Claim of Judy Oyler Against Receivables Specialist and overrules the Objection thereto by CW Asset Acquisition, LLC.
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