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In re 350 Encinitas Investments

September 6, 2007


The opinion of the court was delivered by: Hayes, Judge

Bankruptcy No. 01-01059-A11


The matter before the Court is the appeal of the Bankruptcy Court's "Orders (1) Overruling Objections to Proposed Settlement; and (2) Authorizing Reorganized Debtor to Enter into and Consummate Settlement Agreement," issued on September 12, 2006.

I. Background

On February 2, 2001, 350 Encinitas Investments, LLC ("Appellee" or "Debtor") filed its Voluntary Petition for reorganization under Chapter 11 of the United States Bankruptcy Code. (Appellee's Supplemental Designation of Items to Be Included in Record on Appeal ("Appellee's ROA") 1.1.) The case was filed in the United States Bankruptcy Court for the Southern District of California and assigned case number 01-01059-A11. (Id.)

While the Petition was pending, the Debtor's service station and convenience store business was sold to Satinder Uppal. This transaction was confirmed by the Bankruptcy Court on October 3, 2001. (Appellants' Record on Appeal ("Appellants' ROA") 10 at 2.)

On June 30, 2003, the First Amended Plan of Bankruptcy Reorganization (the "Plan") was approved by the Bankruptcy Court. (Appellants' ROA 2 at 1-3.) The Plan appointed Edward Z. Estrin as the "Responsible Person" and the "Disbursing Agent." (Id., Ex. A at 4, 7.) According to the Plan, "'Responsible Person' means . . . Edward Z. Estrin, CPA, or such other person as the Bankruptcy Court shall appoint to be responsible for the Debtor's performance under the Plan from and after the Confirmation Date." (Id., Ex. A at 7.) "'Disbursing Agent' means Edward Z. Estrin, CPA, or such other Person appointed by the Bankruptcy Court to make certain of the Distributions pursuant to the terms of the Plan." (Id., Ex. A at 4.) Appellants' projections showed that it would take 20 years to pay off the creditors. (Appellee ROA 1.21, Ex. A.)

The Plan further provides: "From and after the Confirmation Date, the Debtor shall have the right to enforce, prosecute, file, collect, settle or resolve any Causes of Action." (Appellants' ROA 2, Ex. A at 21.) "Causes of Action" is defined as "all rights exercisable by the Debtor as Debtor-in-Possession pursuant to Bankruptcy Code Sections 506, 510, 544, 547, 548, 549, 550 and 553."*fn1 (Id., Ex. A at 3.) The Plan also provides that "[t]he Debtor shall have the right to file, prosecute, litigate or settle any objections to Claims. . . ." (Id., Ex. A at 21.)

On February 9, 2005, the Bankruptcy Case was closed, but remained subject to being reopened pursuant to the Plan's reservation of jurisdiction, which states as follows: "The [Bankruptcy] Court shall retain jurisdiction over the Case subsequent to the Confirmation Date to the fullest extent permitted under Section 1334 of Title 28, United State[s] Code. . . ." (Id., Ex. A at 27; Appellants' ROA 10 at 5.)

On August 1, 2005, Satinder Uppal presented Estrin a claim for damages related to the business Uppal purchased from Debtor in 2001. (Appellents' ROA 13 at 2.) On August 3, 2005, Estrin, acting as Responsible Person for Appellee (i.e., the Reorganized Debtor), rejected the claim. (Id. at 3.) On October 10, 2005, Estrin, Uppal, Appellee and Appellants all participated in a formal mediation proceeding in an attempt to resolve the controversies raised by Uppal's claim. (Id.) The mediation ended in impasse. (Id.)

On October 25, 2005, Uppal filed a complaint against Appellee, Estrin, and Appellants in the Superior Court for the State of California, alleging violations of state law that occurred both before and after the date of Plan confirmation (i.e. June 30, 2003). (Id.; Appellents' ROA 3.) Estrin was served with the complaint both as an individual defendant, and on behalf Appellee, as its Responsible Person. (Appellents' ROA 13 at 3-4.) On November 4, 2005, counsel for Appellee, Scott Keehn (who was hired by Estrin) removed Uppal's complaint to Bankruptcy Court. (Id. at 4.) On November 25, 2005, on Estrin's authority, Keehn filed a motion to dismiss Uppal's complaint. (Id.) This motion was subsequently joined by Estrin (who was representing himself in the Uppal litigation) and Appellants. (Id.; Appellants' ROA 10 at 7-8; Appellee's ROA 2.8.)

On March 8, 2006, the Bankruptcy Court entered an order granting the motions to dismiss with prejudice with respect to all claims related to conduct of Appellee that occurred prior to the date of Plan confirmation (i.e., June 30, 2003). (Appellee's ROA 2.16.) The Bankruptcy Court remanded to state court all remaining claims for post-confirmation conduct. (Id.) No appeal was taken from this March 8, 2005 order. (Appellants' ROA 10 at 9.)

On March 16, 2006, Uppal's attorney made a settlement proposal to Appellee, Appellants and Estrin. (Appellants' ROA 14 ¶ 20, Ex. 19.)

Estrin authorized Keehn to proceed with legal actions necessary to recover from Uppal and/or his attorneys the money expended in responding to the Uppal claims by initiating contempt proceedings for violating the discharge injunction. (Appellants' ROA 13 at 5.) In response, Uppal "threatened to expand the litigation, both in state court and the bankruptcy court (threatening, among other things, [to] challeng[e] the validity of the Confirmation Order based on [Uppal's] 'lack of notice')." (Id.)

On April 21, 2006, Estrin and Keehn and the attorney representing Appellants conferred regarding a "walk-away settlement" that had been proposed by Uppal's attorney. (Id.) According to Estrin's affidavit:

Although I personally do not believe that Uppal . . . would ever succeed in any of [his] claims--expanded or otherwise--I was, and remain concerned that the litigation cost of defeating the claims could completely consume every asset available to the Reorganized Debtor, leaving nothing for creditors at the end of the day. . . . I believe that would be true even if we fully recovered all of the costs, expenses, and attorneys fees incurred from the time that the Uppal . . . demands were originally made, through and including the time when the bankruptcy court entered its orders on the Rule 12 Motion. It was with those thoughts in mind that, when presented with the opportunity to simply end the litigation and its cash drain on the Reorganized Debtor, I concluded that the settlement would be in the long-range best interests on the Reorganized Debtor and its creditors. (Id.)

On April 24, 2006, Appellants' attorney wrote to Keehn communicating Appellants' position that Appellee should not give up any right to recover attorneys fees against Uppal. (Appellants' ROA 14 ¶ 21, Ex. 20.) On April 24, 2006, Keehn responded by summarizing the arguments in favor of a "walk away settlement." (Id. ¶ 22, Ex. 21.)

On May 8, 2006, Appellants' attorney responded with a letter, stating in part: In reviewing the Plan of Reorganization, it appears that Mr. Estrin has no authority to hire counsel on behalf of 350 Encinitas and, consequently, had no authority to pay any money for fees, even if those assets were not already committed to pay the preconfirmation creditors of 350 Encinitas as we know they are. Thus, in addition to refusing to act as required by the charge conferred upon him in the Plan, Mr. Estrin has also acted in excess of the limited ministerial disbursing authority he did have. It also appears that, if any judgment ever resulted from Mr. Uppal's claim, this liability would have gone to the end of the line, after the disbursements to scheduled creditors required by the Plan were concluded many years hence. . . . Needless to say, under the Plan and the law, Mr. Estrin has no authority to seek the Court's approval of any compromise of the Reorganized Debtor's claims. (Id. ¶ 24, Ex. 23.) This letter is the first time Appellants communicated their position that Estrin did not have authority to hire counsel on behalf of Appellee.

On May 26, 2006, a settlement agreement was executed between Estrin, on behalf of himself and on behalf of Appellee, and Uppal ("Settlement Agreement"). (Appellants' ROA 5, Ex. A.)

On May 31, 2006, Appellee filed and served a Notice of Intended Action ("NOIA") with the Bankruptcy Court, seeking approval of the Settlement Agreement. (Appellants' ROA 5.) The NOIA provides, in part: "The Responsible Person has determined, in the exercise of his business judgment, that the terms of the [Settlement] Agreement, which terminate all proposed litigation in its entirety, is in the best economic interest of the Reorganized Debtor and the estate." (Id.) The Settlement Agreement is referenced in, and attached to, the NOIA. According to the Settlement Agreement, one of the claims being settled is the aforementioned contempt action "to recover the approximately $50,000.00 [Appellee] has expended on attorneys' fees and costs incurred by the [Appellee] dealing with, and defending against the Discharged Claims pursued and prosecuted by [Uppal]." (Id., Ex. A at 4.) Another of the claims being settled is summarized in the Settlement Agreement as follows:

Plaintiffs [i.e., Uppal and his company] have now asserted that the [Appellee] obtained the order confirming its Chapter 11 Plan without having provided the necessary notice to Plaintiffs, that the Confirmation Order was fraudulently obtained, and that Plaintiffs have claims sounding in 'set-off' and 'Recoupment' substantially in excess of the amounts claimed by the [Appellee] to be recoverable as a contempt sanction. Plaintiffs also have disclosed to [Appellee and Estrin] their intention to seek to have the Confirmation Order vacated based upon the alleged fraudulent manner in which it was obtained. (Id.)

The Settlement Agreement also attaches "conditions to finality of this settlement," which include the following:

2.1.1 Final Approval of the Bankruptcy Court The Bankruptcy Court acting in the Bankruptcy Case shall have entered an order approving the compromise embodied in this Agreement, and the order has become a final order which is no longer subject to appellate review. This condition is imposed for the benefit of both of the 350 Parties [i.e., Appellee and Estrin].

2.1.2 Final Approval as a 'Good Faith Settlement' The Superior Court acting in the State Court Action shall have entered its order approving the compromise embodied in this Agreement as a Good Faith Settlement based on the Plaintiffs' motion made pursuant to California Code of Civil Procedure § 877.6, and served upon all defendants named in the Original Complaint; and, that order has become a final order which is no longer subject to appellate review. This condition is imposed for the benefit of all parties to this Agreement. (Id., Ex. A at 6 (emphasis in original).)

On July 5, 2006, Appellants filed two declarations, additional evidence and a brief in opposition to the NOIA, arguing that: the Bankruptcy Court did not have jurisdiction to approve the Settlement Agreement; Estrin did not have authority under the Plan to bind Appellee to the Settlement Agreement; Estrin has a conflict of interest; and the Settlement Agreement constitutes "both an illegal Post-Confirmation amendment of the Plan, and an unpalatable one-sided deal whose only 'virtue' is that it protects Estrin from his own mismanagement." (Appellants' ROA 7 at 4; Appellants' ROA 8-9.)

On July 20, 2006, Keehn, on behalf of Appellee, filed three declarations, additional evidence and "Reorganized Debtor's Memorandum of Points and Authorities in Response to Opposition to Settlement Agreement." (Appellants' ROA 10-14.)

On August 31, 2006, the Bankruptcy Court issued a tentative ruling overruling the objection to the Settlement Agreement and stating that "Debtor is authorized to pursue settlement by obtaining state court determination that this is a good faith settlement between the debtor and Uppal, et al." (Appellee's ROA 1.41.) The tentative ruling further states:

Court has reviewed the lengthy history of this case [see Reorganized Debtor's points and authorities in response to opposition], reviewed terms of confirmed plan of reorganization [especially Sec. 5.6, 5.7, 5.8 and 10.1] and concludes as follows:

1. Court has jurisdiction to approve this settlement [even though we declined to exercise jurisdiction over the post-confirmation claims asserted in this action] by reason of 28 USC 1334(b) and Section 10.1 of the plan.

2. Estrin has authority to request this court authorize the settlement. The history of the negotiation of this ultimately consensual plan makes it clear that Estrin was to succeed Barry Stone and Gas Plus in management of the debtor until plan terms had been performed. Given Estrin's extensive participation in the litigation with Uppal--all without protest by Stone/Gas Plus--even if the full extent of Estrin's authority was not entirely clear, Stone/Gas Plus' post-confirmation conduct waives any claim that he is without authority to settle the litigation. (Id.) After issuing the tentative ruling, the Bankruptcy Court conducted oral argument on the NOIA. (Supplement to Transmittal of Appeal, Doc. # 9.) At the conclusion of oral argument, the Bankruptcy Court stated: "The tentative [ruling] . . . will be approved or confirmed as a final ruling . . . . [T]he Court has looked at the Plan, has looked at the rationale for ...

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