PETER W. BOWIE, Chief
WRITTEN DECISION - NOT FOR PUBLICATION
ORDER ON DEBTOR'S MOTION TO
APPROVE SETTLEMENT WITH SZABO ESTATE
Debtor David Anderson and the late George Szabo were the sole members of two limited liability companies, 10B Investment, LLC and Stoneridge Development, LLC. Both entities borrowed money from Mile High Banks for real estate development, and both Mr. Anderson and Mr. Szabo executed guaranties of payment of the debt. Both 10B and Stoneridge gave Mile High trust deeds on the properties to secure the indebtedness.
Subsequently, Mile High sued to recover on the notes, and on the guaranties. Mr. Anderson and Mr. Szabo were named as defendants. While the matter was pending in the Colorado state court, Mr. Anderson filed the instant Chapter 11 case, giving rise to the automatic stay. Thereafter, Mile High's case proceeded to judgment against the defendants except Mr. Anderson. Final judgment was entered on or about May 25, 2012, in the total amount of $4,720, 640.00.
Following entry of judgment Mile High and the Szabo probate estate negotiated a settlement providing for payment by the Szabo estate to Mile High of $2,500,000 by September 30, 2012. That settlement is not before this Court, although it looks like an excellent resolution for the Szabo estate. What is before this Court is a proposed settlement between the Szabo probate estate and Mr. Anderson.
The gist of the proposed settlement between the Szabo estate and the Anderson bankruptcy estate is that the Anderson estate would pay the Szabo estate $900,000 in cash and provide an allowed general unsecured claim of $325,000 (some pleadings say $350,000, but the settlement agreement says $325,000). The core premise is that Mile High filed a proof of claim in the Anderson case for $4,505, 858.94 based on Mr. Anderson's guaranties. Since that filing, the judgment has determined the full amount due. The parties recognize that there are reciprocal contribution claims between Mr. Anderson and Mr. Szabo. The settlement is beneficial in that it, in effect, reduces the Anderson estate's liability to the Szabo estate on its contribution claim to almost 50% of what the Szabo estate would pay to Mile High. In addition, mutual releases would be exchanged between the parties. Moreover, the Szabo settlement with Mile High provides for transfer of the trust deeds on the Colorado properties to the Szabo estate, which may allow for marketing of the real property in non-fire sale circumstances, which may reduce the net liability of both estates.
The Court has been told that each settlement was negotiated as a stand-alone resolution. However, during proceedings before the California Probate Court they somehow were linked, and it was represented to the Court that the Probate Court's approval was conditioned on this Court's approval of the settlement between the Szabo and Anderson estates. As already noted the appropriateness of the settlement between Mile High and the Szabo estate is not before this Court, but is before the Probate Court. It would seem that settlement of a $4.7 million state court judgment (before interest) for $2.5 million is a good deal, unless there are problems with the judgment. But that is for the Probate Court to decide.
In a world where the Anderson estate has sufficient assets to satisfy all claims against it, the settlement between the Szabo estate and the Anderson estate would be approved in a flash. No argument has been made that the Szabo estate would not have an unsecured claim for contribution for any reasonable settlement it makes with Mile High, whether it is 50% of $2.5 million or some greater amount. Settlement of such a claim for $900,000 and an allowed unsecured claim for $325,000 (or $350,000) would appear advantageous where the Anderson estate had sufficient assets to make comparable distributions to all creditors of equal priority.
The difficulty in the present situation is that there are five proofs of claim filed with the Anderson estate. The IRS filed one for $100; Mile High Banks for $4.5 million; U.S. Bank for $268,000; Lessley and Victoria Place, $12 million; and the Szabo estate for contribution, in an amount to be determined. Against those claims, debtor scheduled assets that include the equity in his personal residence minus his homestead exemption, for a value of approximately $575,000 before costs of sale; a UBS Bond account, valued at approximately $1.1 million, which is pledged as collateral on a debt of about $267,000, for a net of about $833,000; a 2006 Land Rover and a 2 006 Lamborghini, valued at $111,696. Debtor amended Schedule B on or about February 9, 2012 to reflect an increase in the value of the UBS Bond account to $1,603, 329.47. In debtor's original Schedule B, he listed fractional interests in four LLCs and one general partnership, all with unknown values. In his draft Disclosure Statement, debtor listed values for all his non-exempt real and personal property assets at a total "gross estimated" value of $3,080,647. In the proposed settlement, debtor does not tell us where the $900,000 in cash would come from, nor does debtor tell us how liquid the remaining assets are.
In proposing the settlement, debtor asserts that he has a contingent unsecured liability to the Szabo estate based on his guaranties of the debts owed to Mile High on both the 10B and Stoneridge borrowings. However, debtor does not cite to the source of that liability for contribution Is there a document, or state statute that gives rise to the liability?
In debtor's Motion, at p.2, debtor states, seemingly inconsistently:
Any and all claims against Anderson and the Szabo Probate Estate held by MHB [Mile Hile] will be discharged by the payment of $2,500,000 to MHB upon approval of the State Court in the Szabo Probate case. In the state court settlement between the Szabo Probate Estate and MHB, the Szabo Probate Estate will then be assigned and become the owner of MHB's claim against the Anderson Estate.
Which is it, and what does the Szabo Estate hold as claims against Anderson out of the Szabo-MHB settlement? If the Szabo estate steps into MHB's place, and therefore has a claim against Anderson for $4.7 million (minus any contribution rights), we need to know what Szabo is giving up in the proposed settlement with Anderson. In other words, in order to value the benefit of the proposed settlement, we need explication on the exposure of the estate to Szabo versus the cost of the settlement. If Szabo can only seek from Anderson one half of the $2.5 million it pays to Mile High, and it receives $900,000 in cash and a general unsecured claim of $325,000, those numbers would be assessed one way. If those numbers changed significantly, the analysis might be different. And the postures asserted appear inconsistent.
Further, the debtor recites that:
The Anderson Estate to proceed with the efforts to sell the real property of IOB Investments and Stoneridge Development, the distribution of the proceeds to be provided for in the present voluntary dissolution of IOB Investments and Stoneridge Development.
Debtor does not tell us how that happens, nor what it is worth to the Anderson estate. If Szabo acquires the promissory notes from Mile High, how does the Anderson Estate share in the proceeds? Moreover, if the promissory notes are retired by the MHB settlement, are the real properties no longer encumbered by them? If so, what is their value?
As expressed by the Court at oral argument, the Court's concern is fair treatment of the contested claim of Lessley and Victoria Place. If roughly one-third of the estate's assets are paid to Szabo in settlement of a claim the size of one-tenth in amount of Lessley and Victoria Place, then if the latter prevail on their claim as sought, there is no way the estate could pay them anything close to the ratio Szabo would receive under the settlement.
The debtor and the Szabo Estate have argued that the Court has authority to approve a settlement outside a plan of reorganization even when the result may be a disproportionate distribution. They cite to In re Intercontinental Energy Corp., 764 F.2d 1296 (9th Cir. 1985), which does support the concept embodied in their argument. In this proceeding, as debtor recognizes, the court is guided by In re A&C Properties, 784 F.2d 1377 (9th Cir. 1986). As noted at the hearing, and reiterated herein, the court is concerned about the imbalance in treatment of what would be the Szabo Estate's unsecured claim for contribution for $1.25 million, on which Anderson would pay $900,000 cash, now, plus a claim for $325,000, versus Lessley and Victoria Place's claim for $12 million, which if allowed would yield them a much smaller fraction of the estate's assets. Effectively, if they prevail, it would leave them the bulk of a diminished pot, yielding significantly less. Debtor has not proposed to use any of his exempted assets in payment of the Szabo settlement, which are funds not available to Lessley and Victoria Place. Whether such a proposal would alter the analysis sufficiently is not ripe for consideration.
So, as already noted, settlement between Mile High and the Szabo Estate is a matter for the California Probate Court. This Court is not clear on how that proposal wound up tied to the proposal between the Szabo Estate and Anderson's bankruptcy estate, but regardless, for the reasons stated on the record in open court and set out herein, the Court is unable to approve the settlement between the Szabo Estate and Anderson on the present record, with so many unanswered questions.
The Court recognizes the time sensitivity to approval of the Mile High and Szabo Estate settlement before the Superior Court. Despite a complicated and crowded schedule this Court will endeavor to make itself available on short notice if there is something more it can do to aid in the resolution process.
IT IS SO ORDERED.
______________________
PETER W. BOWIE, Chief Judge
United States Bankruptcy Court