IN RE YELLOWSTONE MOUNTAIN CLUB, LLC Nos. 08-61570-11, 08-61571-11, 08-61573-11, 08-61572-11.
460 B.R. 254 (2011)
In re YELLOWSTONE MOUNTAIN CLUB, LLC, Debtor. In re Yellowstone Development, LLC, Debtor. In re Yellowstone Club Construction Company, LLC, Debtor. In re Big Sky Ridge, LLC, Debtor.
United States Bankruptcy Court, D. Montana.
September 30, 2011.
Connie Sue Martin , Bullivant Houser Bailey PC, Seattle, WA, Craig D. Martinson , Billings, MT, David A. Ernst , Thomas L. Hutchinson , Bullivant Houser Bailey PC, Portland, OR, Gig A. Tollefsen , Berg Lilly & Tollefsen, Bozeman, MT, James A. Patten , Billings, MT, Lawrence R. Ream , Bullivant Houser Bailey PC, Seattle, WA, Richard G. Birinyi , Schwabe, Williamson & Wyatt, Seattle, WA, Stephen Deatherage , Troy Greenfield , Bullivant Houser Bailey PC, Seattle, WA, for Debtors.
MEMORANDUM of DECISION
RALPH B. KIRSCHER, Bankruptcy Judge.
The Court is tasked with writing yet another chapter in the Yellowstone Club bankruptcy saga, which has been ongoing for almost three years. If this were a book, the reader would most likely read the chapters of the saga in sequence and in a relatively compressed period of time. But this is not a novel and one cannot thumb through a prior chapter to glean a forgotten fact. Thus, the Court directs the reader to prior chapters (Memoranda of Decision and Orders) that provide some insight as to why another chapter is necessary. Relevant facts may be found in this Court's Memorandum of Decision and Order entered in this case at docket entry nos. 1025 and 1026. One may also look at the Memoranda of Decision, Order and Judgment found at docket entry nos. 292, 293, 575 and 582 in related Adversary Proceeding 09-00014, Timothy L. Blixseth v. Marc S. Kirschner, Trustee of the Yellowstone Club Liquidating Trust. Along these same lines, the Court also granted various requests for judicial notice found at docket entry nos. 2203, 2209, 2224 (including its attached Exhibit A summarizing the claims processed or prosecuted by the Liquidating Trustee under the plan), 2228 and 2240.
The matter presently before the Court stems from a Memorandum of Decision and Order entered by the Court in the above-referenced Chapter 11 bankruptcy cases on June 2, 2009, at docket entry nos. 1025 and 1026 approving the Yellowstone Club Settlement Term Sheet and confirming the Debtors' Third Amended Joint Plan of Reorganization filed May 29, 2009, at docket entry no. 995. Timothy L. Blixseth ("Blixseth") appealed this Court's June 2, 2009, Order to the United States District Court for the District of Montana on three separate grounds: (1) whether this Court erred in approving the Plan's exculpatory clauses and releases in favor of third parties in the Plan; (2) whether this Court erred in determining the Plan was proposed in good faith when the question
In an Order entered May 27, 2011, this Court scheduled a hearing for July 11, 2011,
1. To consider whether Debtor's Third Amended Joint Plan of Reorganization filed May 29, 2009, at docket entry no. 995 was proposed in good faith,
2. To identify and delineate those persons or representatives who are properly within the scope, under 11 U.S.C. § 524(e), of the exculpation and limitation of liability clause set forth in Section 8.4 of Debtor's Third Amended Joint Plan of Reorganization, and
3. To further consider approval of the Settlement Term Sheet found at docket entry no 947-12.
Upon motion of Blixseth, the Court entered an Order on June 16, 2011, continuing the July 11, 2011, hearing to July 25, 2011. By separate Order entered July 27, 2011, this Court vacated further hearing on whether the Debtors' plan was proposed in good faith, concluding nothing in Judge Haddon's November 2, 2010, Memorandum and Order required this Court to revisit the issue of good faith.
At the hearing held July 25 and 26, 2011, in Missoula, Blixseth was represented by Michael J. Flynn of Boston, Massachusetts ("Flynn"), Philip H. Stillman of Miami Beach, Florida ("Stillman"), Christopher J. Conant of Denver, Colorado and Patrick T. Fox of Helena, Montana; Debtors were represented by James A. Patten of Billings, Montana ("Patten") and Richard Birinyi and Larry Ream of Seattle, Washington; Credit Suisse, Cayman Island Branch ("Credit Suisse"), was represented by Evan Levy, Mark McDermott and Sean Marlaire of New York, New York and Richard J. Orizotti of Butte, Montana; the Ad Hoc Group of Class B Unit Holders was represented by Clark Whitmore of Minneapolis, Minnesota and Ronald A. Bender of Missoula, Montana; CrossHarbor Capital Partners LLC ("CrossHarbor"), New CH YMC Acquisition LLC, CrossHarbor Institutional Partners LP and CIP Yellowstone Lending LLC were represented by Paul D. Moore ("Moore") and Barry D. Green of Boston, Massachusetts and Benjamin P. Hursh of Missoula, Montana; Robert Sumpter ("Sumpter") was represented by Stephen Mackey of Billings, Montana; Normandy Hill Capital, LP was represented by Robert G. Burns of New York, New York and Quentin M. Rhoades of Missoula, Montana; Marc S. Kirschner, Trustee ("Liquidating Trustee") of the Yellowstone Club Liquidating Trust ("YCLT"), was represented by John Turner of Amarillo, Texas, Brian Glasser of Charleston, West Virginia and Shane Coleman
As noted earlier, certain matters are, at the direction of Judge Haddon's November 2, 2010, Memorandum and Order, once again before this Court. Judge Haddon's Memorandum and Order is clear, unambiguous and, in this Court's opinion, quite narrow. First, Judge Haddon held this Court erred when it proceeded to confirm the Debtors' Third Amended Joint Plan of Reorganization without appropriate notice and opportunity for all parties to object to the Yellowstone Club Settlement Term Sheet ("Settlement Term Sheet") filed May 22, 2009, at docket entry 947-12, which Settlement Term Sheet was incorporated into the Debtors' Third Amended Joint Plan of Reorganization. The Court's Orders of May 27, 2011, and June 16, 2011, setting approval of the Settlement Term Sheet for hearing on July 25, 2011, satisfy any notice required by F.R.B.P.2002 and F.R.B.P. 9019.
I. The Settlement Term Sheet.
In response to this Court's notice and presumably in an effort to satisfy F.R.B.P. 9019, Debtors, CrossHarbor and New CH YMC Acquisition, LLC filed on June 10, 2011, a Joint Motion for Order Pursuant to Bankruptcy Rule 9019 Authorizing and Approving the Yellowstone Club Settlement Term Sheet Nunc Pro Tunc ("Rule 9019 Motion"). Sumpter (dkt 2186), Red Rock Investments, LLC (dkt 2189), Creditor
Sumpter objects to approval of the Settlement Term Sheet on three grounds. First, Sumpter argues that the Settlement Term Sheet vacates the Court's Partial and Interim Order in Adversary Proceeding 09-00014. Second, Sumpter takes issue with the composition of YCLT's liquidating trust board. Finally, Sumpter raises several arguments that challenge the Settlement Term Sheet's treatment of Class 4 claims. In particular, Sumpter argues the Settlement Term Sheet "is not fair and equitable or in the best interests of the estate" because of the treatment of Class 4 creditors who were not designated as trade creditors: "the unpaid, unsecured claim holders are now partially put into the fourth tranche on a pari passu basis with Credit Suisse and subordinate to the purchaser of the Trade Creditor claims." Red Rock Investments, LLC and K & L Gates LLP's skeletal objections echo Sumpter's objection that the Settlement Term Sheet provides for disparate treatment of Class 4 creditors. Creditor Liquidity, LP also objects to approval of the Settlement Term Sheet on grounds it violates the requirements of 11 U.S.C. § 1123(a)(4). In addition, Creditor Liquidity, LP argues the Settlement Term Sheet inequitably modified the Debtors' Second Amended Plan, the plan upon which ballots were cast. Finally, Creditor Liquidity, LP argues the Settlement Term Sheet does not result in each holder of an impaired class receiving or retaining equal or greater value than the holder would have received under a Chapter 7 liquidation in violation of 11 U.S.C. § 1129(a)(7)(A).
The Court notes that none of the aforementioned parties appeared at the duly noticed confirmation hearing held May 18, 2009. Moreover, Red Rock Investments, LLC, K & L Gates LLP and Credit Liquidity, LP did not, prior to these additional proceedings, oppose confirmation of the Debtors' plan and more importantly, were involved in subsequent proceedings that ratified the confirmation process and preclude said parties from taking a contrary position at this time. For instance, Red Rock Investments, LLC, through counsel, entered into a Stipulation dated May 27, 2010, with the Liquidating Trustee of YCLT, which Stipulation was intended "to completely resolve all claims of Red Rock in the Consolidated Cases and all objections to the Red Rock Claim by [YCLT]." Specifically, the parties stipulated post-confirmation that "Red Rock['s] Claim shall be allowed as a Class 4 General Unsecured Claim, pursuant to 11 U.S.C. § 502, in the Consolidated Cases in the amount of $136,174.00. The balance of the Red Rock Claim shall be denied. Red Rock shall have no further claims in the Consolidated Cases." In an Order entered May 28, 2010, the Court approved the stipulation between the Liquidating Trustee and Red Rock Investments, LLC.
Similarly, on December 21, 2009, the Liquidating Trustee objected to Proof of Claim No. 632 filed by K & L Gates LLP. The Liquidating Trustee and K & L Gates LLP subsequently entered into a stipulation on March 29, 2010, wherein they agreed:
The Court approved the stipulation between Marc S. Kirschner and K & L Gates LLP by Order entered March 29, 2010.
While Creditor Liquidity, LP did not, like Red Rock Investments, LLC or K & L Gates LLP, enter into any agreement with the Liquidating Trustee, it did not appear in this case until June 9, 2009, when it filed a Notice of Transfer of Claim, giving notice that it was the transferee of a claim held by Border States Electric Supply, Inc. Creditor Liquidity, LP filed similar notices on: (1) June 30, 2009, giving notice that it was the transferee of a claim held by Advanced Chemical Solutions; (2) July 13, 2009, giving notice that it was the transferee of a claim held by Cypress Hotel & Spa LLC; (3) July 16, 2009, giving notice that it was the transferee of claims held by PFG Ventures d/b/a Proforma Infosystems, Robert Marx, Fastenal Company, Brower Timing Systems and Okner Supply Co.; (4) July 17, 2009, giving notice that it was the transferee of claims held by Overland West, Inc., S. Claus Commercial, Ralph Dunning Design, Inc., and Smith & Tweed; and (5) July 28, 2009, giving notice that it was the transferee of a claim held by Hagen O'Connell LLP. Creditor Liquidity, LP purchased the claims of the above-referenced creditors after this Court confirmed Debtors' Third Amended Joint Plan of Reorganization. Creditor Liquidity, LP purchased said claims with full knowledge of the terms of the confirmed Third Amended Joint Plan of Reorganization. Additionally, on July 31, 2009, the Official Committee of Unsecured Creditors ("Committee") of Yellowstone Mountain Club, LLC, and its filed affiliates (collectively, the "Debtors"), and the "CrossHarbor entities," which included YC Holdings LLC, sought entry of an Order allowing certain "trade creditor claims." Creditor Liquidity, LP filed an objection to the request to allow certain trade creditor claims arguing "it would be an abuse of discretion for the Committee not to identify the claims of Boulder [sic] and Hagen to be paid from the Trade Creditor Fund." Following a hearing held September 15, 2009, the Court entered an Order on September 17, 2009, overruling Credit Liquidity, LP's objection and holding "the Committee shall not be obligated to pay Liquidity, LP any amount on its claims." Creditor Liquidity, LP did not appeal the Court's September 17, 2009, Order and such Order is now final.
Sumpter's opposition to approval of the Rule 9019 Motion suffers from a similar defect in that Sumpter entered into a stipulation of settlement and allowance of claim with the Liquidating Trustee dated February 1, 2010, which stipulation of settlement provides in relevant part:
The above settlement was approved by the Court on February 2, 2010. Sumpter's claim to the 2004 Porsche Cayenne was resolved in a Memorandum of Decision and Judgment entered June 20, 2010, in Adversary Proceeding No. 09-00098. Sumpter did not appeal that decision. Finally, the Court entered a Memorandum of Decision and Order on October 14, 2010,
While the Court has entered post-confirmation decisions involving Sumpter, such decisions do not necessarily preclude Sumpter from pursuing his objections to approval of the Rule 9019 Motion. However, Sumpter's arguments fail to consider another post-confirmation decision this Court entered in Adversary Proceeding 09-00014 wherein the Court determined that Blixseth was required to pay: "(1) all allowed claims of Class 1 (priority non tax claims), Class 2 (other secured claims), Class 4 (general unsecured claims, except claims attributable to the First Lien Lender, if any), Class 5 (convenience claims), Class 6 (intercompany claims), Class 9 (pioneer/frontier member rejection claims), Class 10 (American bank claims), Class 11 (allowed Prim secured claims), Class 12 (honorary member rejection claims), Class 13 (founder's circle member rejection claims), Class 14 (company member rejection claims) and those claims that Blixseth identifies as "not classified" on Exhibit A attached to his Post-Trial Brief filed March 19, 2010, at docket entry no. 571, and (2) YCLT for the fees and costs it has incurred, and will incur, objecting to and liquidating such claims." Based upon a subsequent pleading, the Court entered an amended judgment concluding that the sum of all claims previously mentioned was $40,067,962.43. Sumpter should receive payment in full of all his allowed claims when Blixseth pays the foregoing judgment.
Blixseth raises four objections to approval of the Rule 9019 Motion. Blixseth first argues the Debtors are no longer debtors-in-possession and therefore, are precluded from filing the pending Rule 9019 Motion. Blixseth next argues Judge Haddon's Memorandum and Order of November 2, 2010, requires the Debtors to "amend the Plan, revise the Disclosure Statement, and set a confirmation hearing, at which time the settlement can potentially be incorporated into a Fourth Amended Plan." Third, Blixseth asserts that the existing Settlement Term Sheet can not be approved because Judge Haddon rejected this Court's approval "of an `extraordinarily broad' exculpation clause contrary to 11 U.S.C. § 524(e)[.]" Finally, Blixseth argues the Debtors "failed to meet their burden of demonstrating that the Settlement Term Sheet is reasonable, equitable and in the best interests of the estate and its creditors[.]"
Relevant exhibits identified by the parties with respect to the Rule 9019 Motion included CrossHarbor's Exhibits 16, 32, 33, 41, 45, 52, 58, 59, 60, 64, 65, 66, 67, 68, 69, 70, 71, 72, 73, 74, 75, 76, 77, 78, 79, 80, 81, 82, 83, 84, 85, 86, 87, 88, 89, 90, 96, 99, 106, 107, 109, 110, 112, 113, 114 and 118, Sumpter's Exhibits 2, 3, 5, 7, 8, 9, 11, 12, 13, 16, 17, 18, 19, 20, 21, 23, 24, 25, 26, 27, 29, Exhibits 1000, 1001 and 1002, along with docket entry 299 in Adversary Proceeding 09-00014 and docket entry nos. 908, 1049 and 1411 in this case. The Court also took judicial notice of the documents filed at docket entry nos. 2199-1, 2199-3, 2240-1 and 2240-2 in this case.
The Court has no doubt that this Court's June 2, 2009, Confirmation Order and the Third Amended Joint Plan of Reorganization have been substantially consummated.
First, the Settlement Term Sheet was part of and incorporated into the Debtors' Third Amended Joint Plan of Reorganization. The Settlement Term Sheet with the attached Credit Agreement was filed as a standalone and complete pleading on May 28, 2009, at docket entry no. 985. Further consideration of the Settlement Term Sheet is before this Court as a result of Judge Haddon's decision entered November 2, 2010. Consequently, the Rule 9019 Motion filed on June 10, 2011, is irrelevant and unnecessary. Blixseth's argument that no party exists to file the Rule 9019 Motion, or defend confirmation for that matter, elevates form over substance.
Blixseth also maintains that Patten is no longer the Debtors' counsel and has no authority to act on the Debtors' behalf. Debtors filed an application to employ Patten and the law firm of Patten, Peterman, Bekkedahl & Green on November 10, 2008, to serve as attorneys for the Debtors. Absent an objection, the Court entered an Order on November 26, 2008, approving the Debtors' employment of Patten and the law firm of Patten, Peterman, Bekkedahl & Green. Patten is still listed as the Debtors' counsel of record in this case. The Debtors, who were the debtors-in-possession prior to substantial consummation of the Third Amended Joint Plan of Reorganization are now the Reorganized Debtors, as that term is defined in ¶ 1.107 of the Third Amended Joint Plan of Reorganization, and are entitled to representation. As one would expect, the Reorganized Debtors are represented at this time by the same attorney who represented them from their petition date through substantial consummation of the Plan.
As noted above, the Settlement Term Sheet was part of the Debtors' Third Amended Joint Plan of Reorganization. As such, the Court's June 2, 2009, Memorandum of Decision and Order not only approved the Settlement Term Sheet, but also confirmed the Debtors' Third Amended Joint Plan of Reorganization. Unfortunately, while concluding that the Settlement Term Sheet was proposed in good faith and not by any means forbidden and that its provisions were reasonable and represented an appropriate compromise of disputed matters and should be approved pursuant to the provisions of Bankruptcy Rule 9019, the Court did not provide any meaningful discussion to support such ruling. Nevertheless, this Court did consider all "factors relevant to a full and fair assessment of the wisdom of the proposed compromise." Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424, 88 S.Ct. 1157, 20 L.Ed.2d 1 (1968).
In reaching its June 9, 2009, decision, the Court considered the factors articulated in Martin v. Kane (In re A & C Properties), 784 F.2d 1377, 1381 (9th Cir.1986):
As explained in A & C Properties:
Id. at 1380-81 (citations omitted). Considering all relevant factors, this Court found that the Settlement Term Sheet was "fair and equitable" as required by In re A & C Properties.
As aptly explained by the proponents of the Settlement Term Sheet, the fact that the settlement was finally reached in the early hours of May 18, 2009, the date of the confirmation hearing, after around the clock negotiations during the preceding 48 hours, is symptomatic of the obstacles and disputes that had to be resolved if the Debtors were to achieve a successful reorganization.
Absent the settlement, the Debtors in all likelihood would not have survived as going concerns. In the face of those daunting threats to confirmation, and indeed to the Debtors' very existence as going concerns, the settlement forged a consensual resolution among all of the Debtors' principal constituencies. Among other things, the Settlement Term Sheet paved the way to confirmation of the Debtors' Third Amended Join Plan of Reorganization which: (i) increased payments by CrossHarbor for payment of administrative expenses and to Credit Suisse; (ii) doubled the amount of the Trade Creditor Fund from $7.5 million to $15 million; and (iii) provided a $2 million increase, from
As discussed above, rather than an exhaustive investigation or a mini-trial on the merits, this court need only find that the settlement was negotiated in good faith and is reasonable, fair and equitable. A & C Properties, 784 F.2d at 1381. The testimony elicited with respect to the Settlement Term Sheet prior to the Hearing, at earlier hearings before this Court, and during Greenspan's deposition demonstrates that the Settlement Term Sheet was, and remains, fair and equitable. The Court, therefore, once again approves the Settlement Term Sheet in all respects.
II. Identification and delineation of those persons or representatives within the scope of ¶ 8.4 of the Debtors' Third Amended Joint Plan of Reorganization.
In addition to requiring proper notice under the Bankruptcy Rules, Judge Haddon reversed and remanded confirmation of the Debtors' Third Amended Joint Plan of Reorganization so this Court could, "to the extent feasible . . . explicitly identify and delineate those persons or representatives determined to be within the scope of the release parameters of Section 524(e) and to state the reasons why it reached such conclusions." Relevant exhibits identified by the parties with respect to the exculpation clause found in the Debtors' Third Amended Joint Plan of Reorganization included CrossHarbor's Exhibits 1, 2, 3, 4, 5, 32, 44, 50, 56, 118, the Debtors' Exhibits 1 and 3, Beckett and Parsons Behle & Latimer's Exhibit 1, along with the Orders and pleadings found at docket entry nos. 220, 494, 591, 596, 1186, 1224, 1612 and 1702 in this case, and docket entry no. 292 in Adversary Proceeding 09-00014.
A recurring argument raised by Blixseth in written pleadings and during oral argument is that this Court could not conduct the hearing as scheduled because, according to Blixseth, some party would have to file a "mysterious and as-yet undisclosed new exculpation clause[.]" Blixseth argues in an objection to the July 25, 2011, hearing, that Debtors were required to first submit a new disclosure statement and further amended plan: "Because at the very least, ¶ 8.4 of the Third Amended Plan must be changed, the Third Amended Plan can no longer be the operative plan for the Court to confirm." Objection of Timothy Blixseth to July 25, 2011 Hearing, dkt 2198, p. 5. Continuing, Blixseth asserts: "Instead of "patching up" the existing, defective Plan, a new plan must be proposed that complies with the appellate court's mandate." Id., p. 7. In that same Objection, p. 6., Blixseth offers the following argument in support of his contention that the Debtors' Third Amended Joint Plan of Reorganization is a nullity that cannot be modified:
After much deliberation, I see nothing in the record that requires this Court to, as Blixseth suggests, put the tooth paste back in the tube. First, as Blixseth correctly acknowledges, the Debtors' plan is substantially consummated and the Court sees no conceivable or equitable way to put the parties back to their pre-confirmation position. See In re BearingPoint, Inc., 453 B.R. 486, 495 (Bankr.S.D.N.Y.2011) ("the Trustee is also correct in pointing out that the request for modification of the Confirmation Order here would have no adverse effect on creditor expectations under the plan, or raise issues as to the unscrambling of eggs that often are a concern (typically considered in mootness analysis) in modifying confirmation orders after the fact"); and In re Public Service Co. of New Hampshire, 963 F.2d 469, 475 (1st Cir. 1992) ("unraveling the substantially consummated. . . reorganization plan would work incalculable inequity to many . . . who have extended credit, settled claims, relinquished collateral and transferred or acquired property in legitimate reliance on the unstayed order of confirmation").
Second, the exculpation clause was not a last minute provision added to the Debtors' Third Amended Joint Plan of Reorganization without notice to all parties. Debtors filed their first Chapter 11 Plan on February 13, 2009, at docket entry no. 384. The Plan filed February 13th contained the following Exculpation and Limitation of Liability clause:
Debtors' First Amended Joint Plan of Reorganization filed March 3, 2009, at docket entry no. 516, and Debtors' Second Amended Joint Plan of Reorganization filed April 3, 2009, at docket entry no. 691 contained the same exculpation clause found in the Plan filed February 13, 2009, except that the acronym "LLC" was added as follows: "(f) CrossHarbor Capital Partners LLC and all affiliates thereof[.]" The exculpation clause was finally amended in the Third Amended Joint Plan of Reorganization filed May 29, 2009, at docket entry no. 995 to read as follows:
The latter amendment to ¶ 8.4 was specifically highlighted in a redline version of the Third Amended Joint Plan of Reorganization filed May 22, 2009, at docket entry no. 945-1.
Blixseth first objected to confirmation of the Debtors' Second Amended Joint Plan of Reorganization on May 11, 2009, at
Blixseth's response filed May 24, 2009, at docket entry no. 956, p. 12.
Contrary to Blixseth's argument, the exculpation clause, which was a "highly negotiated" component of the resolution between the Debtors, the Committee, Credit Suisse and CrossHarbor, does not violate Ninth Circuit precedent. The Ninth Circuit, in In re American Hardwoods, Inc., 885 F.2d 621, 626 (9th Cir. 1989), and Resorts Int'l, Inc. v. Lowenschuss (In re Lowenschuss), 67 F.3d 1394 (9th Cir.1995), held that under § 524(e), a bankruptcy court does not have the authority to permanently enjoin a creditor from continuing with and enforcing a state court judgment against non-debtor guarantors.
In American Hardwoods, a chapter 11 debtor sought to permanently enjoin a creditor from enforcing a state court judgment against the debtor's guarantors, who also happened to be the debtor's president and vice president. The Ninth Circuit held that the bankruptcy court lacked jurisdiction and power to permanently enjoin a creditor, beyond confirmation of the plan, from enforcing a state court judgment against the nondebtor guarantors. In reaching its decision, the Ninth Circuit explained:
American Hardwoods, 885 F.2d at 624-25. The analysis in American Hardwoods focused on § 105 of the Bankruptcy Code, which the Court concluded "does not authorize relief inconsistent with more specific law." Id., at 625, citing with approval In re Golden Plan of California, Inc., 829 F.2d 705, 713 (9th Cir.1986); and Johnson v. First National Bank of Montevideo, Minnesota, 719 F.2d 270, 273 (8th Cir. 1983), cert. denied 465 U.S. 1012, 104 S.Ct. 1015, 79 L.Ed.2d 245 (1984). The Court rejected the semantic distinction between a permanent injunction and a discharge and viewed a permanent injunction of actions against the debtor's guarantors as being contradictory to the specific provisions of § 524(e). The Court in American Hardwoods thus concluded the court had no power to issue the injunction sought by the debtor:
As we succinctly explained in Underhill v. Royal, 769 F.2d 1426 (9th Cir.1985):
Id. at 625-26. At that time, the Ninth Circuit reasoned, in dicta, that adoption of the rationale discussed in Menard-Sanford v. Mabey (In re A.H. Robins Co.), 880 F.2d 694 (4th Cir.), cert. denied, 493 U.S. 959, 110 S.Ct. 376, 107 L.Ed.2d 362 (1989), would not dictate a different result because the facts in American Hardwoods were distinguishable from the unusual facts found in A.H. Robins. Id. at 626. In so stating, the Ninth Circuit enumerated five factors which it considered critical to the A.H. Robins holding:
American Hardwoods, 885 F.2d at 626.
Six years later, in In re Lowenschuss, 67 F.3d 1394, the Ninth Circuit again revisited the scope of § 524(e) and reiterated "that bankruptcy courts do not have the equitable power under § 105(a) to discharge the liabilities of nondebtors through chapter 11 plan confirmation, contrary to the provisions of § 524(e)." Id. at 1401-02. The Ninth Circuit clarified that in American Hardwoods, it "expressly declined to adopt the approach set forth in In re A.H. Robins[.]"
This court is bound by, and does not dispute the legal precedent established in Lowenschuss, American Hardwoods, and Underhill, that liabilities of nondebtors cannot be discharged through a plan. Such legal precedent, however, is inapplicable here because, unlike in Lowenschuss, American Hardwoods, and Underhill, ¶ 8.4 of the Debtors' Third Amended Joint Plan of Reorganization is not a broad sweeping provision that seeks to discharge or release nondebtors from any and all claims that belong to others.
Blixseth's counsel disputes that ¶ 8.4 contains a temporal component.
The Court agrees with Beckett's observation that ¶ 8.4 only protects those acts that occurred in connection with the Debtors' Chapter 11 cases between November 10, 2008, and July 17, 2009. Acts falling outside the foregoing dates are not protected.
The exculpation clause is also narrow in scope. The following colloquy between Beckett and Flynn highlights the limited scope of the exculpation clause:
Blixseth disagrees that the exculpation clause is limited in scope, arguing ¶ 8.4 impermissibly releases claims belonging to both the Debtors and Blixseth. Blixseth's belief that Debtors are seeking to impermissibly release claims belonging to the Debtors is evidenced by Blixseth's motions for derivative standing filed July 19 and 20, 2011, wherein Blixseth seeks leave of this Court to pursue alleged claims belonging to the Debtors against Credit Suisse and CrossHarbor. Notwithstanding what claims ¶ 8.4 may or may not release, 11 U.S.C. § 1123(b)(3)(A) permits a plan to settle or adjust any claim belonging to the debtor or to the estate. Subsection 524(e) does not come into play with respect to any claims belonging to the Debtors or the bankruptcy estates that may have been released by ¶ 8.4 of the Plan against Credit Suisse or CrossHarbor.
Blixseth's counsel also elicited testimony at the hearing held July 25th and 26th suggesting that ¶ 8.4 of the Debtors' Plan impermissibly releases claims Blixseth may have against certain of the parties, including CrossHarbor, Credit Suisse and Brown. After Blixseth intervened in Adversary Proceeding 09-00014, he steadfastly maintained that the Debtors' bankruptcy filings were orchestrated by his ex-spouse, Edra, and CrossHarbor. Blixseth likewise contends he has claims against Credit Suisse stemming from a 2005 loan agreement between Blixseth, on behalf of the Debtors, and Credit Suisse.
Finally, Blixseth takes issue with the actions of Brown, who admittedly served as counsel for both the Debtors and Blixseth prior to November 10, 2008. Brown is a partner in the law firm of Garlington, Lohn & Robinson. Garlington, Lohn & Robinson was owed in excess of $300,000 by the Debtors on their petition date. Because of the substantial unsecured claim owed Garlington, Lohn & Robinson, Brown agreed to and in fact did serve as chairman of the Committee.
Blixseth contends Brown breached Blixseth's attorney-client privilege when Brown divulged information, protected by Blixseth's attorney-client privilege, to the Committee. Blixseth complains that ¶ 8.4 of the Debtors' Plan now exculpates Brown and that Blixseth is foreclosed from pursuing a claim against Brown for breach of Blixseth's attorney-client privilege. Blixseth also takes issue with advice Brown provided to Credit Suisse in 2005 with respect to the Credit Suisse loan transaction and advice Brown provided to Blixseth prior to August 2008 in connection with Blixseth's marital settlement agreement.
While the Court cannot anticipate every claim Blixseth may have against the parties involved in this case, the specific claims discussed during testimony are outside the scope of the release provision at issue. The release provision in this case is narrow in both scope and time, and applies only to an "act or omission in connection with, relating to or arising out of the Chapter 11 cases, the formulation, negotiation, implementation, confirmation or consummation of this Plan, the Disclosure Statement, or any contract, instrument, release or other agreement or document entered into during the Chapter 11 Cases or otherwise created in connection with this
The parties in this case, including the Debtors, Credit Suisse, CrossHarbor, Blixseth and others, all had a lot at stake. According to Larry Ream, "[a]ll of the interested parties in this case had significant issues and important positions, and they were all taken vigorously." The vigorous jockeying by the parties created an oftentimes contentious environment. Attorney Larry Ream referenced two pre-confirmation threats made by Credit Suisse against various of the professionals involved in this case, wherein Credit Suisse alleged that the Debtors and their professional were mismanaging this case and allowing value to dissipate.
In another situation and prior to Blixseth's active involvement in either this case or any associated adversary proceeding, Beckett, who served as lead counsel for the Committee, sent Flynn a courtesy email to advise Flynn and Blixseth that Blixseth was named in a complaint the Committee had drafted, but not yet filed. Flynn responded to Beckett by email on February 7, 2009: "I strongly urge you NOT to file a lawsuit that will generate publicity that will potentially kill the deal that Tim has put together to insure full payment to the unsecured creditors comprised of the vendors, workers, contractors." Attached to Flynn's email to Beckett was correspondence between Blixseth and Flynn in which Blixseth told Flynn if the UCC filed its complaint and thereby killed Blixseth's almost completed deal, Flynn was instructed to "commence legal action against each and every person responsible, regardless of who they are." As a result of Flynn's email, the Committee removed Blixseth's name from the Complaint, leaving Credit Suisse as the sole named Defendant. However, Blixseth never proposed a deal to provide full payment to the unsecured creditors and in fact, subsequently requested leave to intervene in the Debtors and Committee's action against Credit Suisse. That action evolved into an action between Blixseth and the Liquidating Trustee. The Court eventually entered Judgment against Blixseth directing him to provide sufficient funds to pay the unsecured creditors.
An exculpation clause in this case was certainly advisable given the litigious posture of the parties. The only issue was who could legally be included in such a clause. During cross-examination, counsel for Sumpter specifically asked Beckett what "should an exculpation clause be?" Beckett responded:
Beckett continued by providing additional justification for inclusion of the exculpation clause in Debtors' Third Amended Joint Plan of Reorganization:
This Court agrees that the exculpation clause in this case does nothing more than provide quasi-judicial immunity to the Debtors, the Committee and their professionals.
Beckett also explained why it was necessary to include Credit Suisse and CrossHarbor:
The Court agrees that CrossHarbor should be included in the exculpation clause because of its involvement in this case by providing debtor in possession financing and because it served as the stalking horse bidder. Credit Suisse is also an expected candidate for coverage because it was, coming into this case, by far the largest creditor with a claim of $375 million. Credit Suisse was also seeking to appeal a partial and interim order entered by this Court on May 12, 2009. Credit Suisse had the ability to single-handedly disrupt the entire confirmation process.
In support of his position, Blixseth's counsel invited the Court to review In re Lighthouse Lodge, LLC, (slip opinion) 2010 WL 4053984 (Bankr.N.D.Cal. 2010), for "a very good analysis of just how limited these exculpation clauses need to be." Lighthouse Lodge provides support for approval of the instant exculpation clause. In Lighthouse Lodge, the court endorsed a bifurcated approach to examining release clauses contained in chapter 11 plans. Id. *8. According to the court in Lighthouse Lodge, the first prong of the analysis treats the release as "a settlement or adjustment of claims belonging to the debtor and the estate within the meaning of § 1123(b)(3)(A)" and examined such settlement or adjustment of claims under the factors articulated in A & C Properties, 784 F.2d 1377 (9th Cir. 1986). Id., quoting Edgewood Centre v. Flash Island, Inc. (In re Whispering Pines Estates, Inc.), 370 B.R. 452 (1st Cir. BAP 2007). The second part of the analysis looks at the release as "`a release (or limitation of liability, or grant of immunity) of a party responsible for implementing the plan.'" Id. In reaching its decision to endorse the bifurcated approach, the court in Lighthouse Lodge explained,
Applying that Lighthouse Lodge analysis to the facts of this case, this Court finds, for the reasons discussed earlier, that any release of claims by the Debtors was, and remains, fair and equitable and indeed, permissible under 11 U.S.C. § 1123(b)(3)(A). As for release of liability, the Court finds that the specific facts of this case compel approval of the exculpation clause as drafted and originally approved in the Third Amended Joint Plan of Reorganization. The Debtors, Committee, Credit Suisse and CrossHarbor were all major stakeholders in this case and each party was vigorously negotiating issues they deemed signification and positions important to the respective parties. The Plan in this case was originally proposed almost exclusively by the Debtors. However, during the countless hours of negotiations between 5:00 p.m. on Friday, May 15, 2009, and 9:00 a.m. on Monday, May 18, 2009, it is clear that the Third Amended Joint Plan of Reorganization and the incorporated Settlement Term Sheet became a collaborative effort of the Debtors, Committee, Credit Suisse and CrossHarbor, who all became, in essence, plan proponents. Because the Settlement Term Sheet and exculpation clause were the cornerstones of the Plan and were highly negotiated, the ruling in Lighthouse Lodge would suggest that the plan proponents, namely the Debtors, the Committee, CrossHarbor and Credit Suisse, should be released pursuant to ¶ 8.4 of the Plan.
Unlike the exculpation clauses in American Hardwoods and Lowenschuss, the exculpation clause in the Debtors' confirmed Third Amended Joint Plan of Reorganization does not implicate 11 U.S.C. § 524(e). The exculpation clause in the case sub judice is not barred by Ninth Circuit Law. The exculpation clause is temporal in nature and covers those parties who were closely involved with drafting the Settlement Term Sheet, which became the cornerstone of the Debtors' Third Amended Joint Plan of Reorganization. As the testimony clearly shows, without the Settlement Term Sheet, it is doubtful the Debtors could have achieved confirmation of a Chapter 11 plan, and indeed it is very likely the Debtors' bankruptcies would have been converted to Chapter 7 and the assets liquidated.
Given the foregoing discussion, this Court need not correct an existing judgment or enter a new ruling and the Debtors need not start the confirmation process anew. The Court adopts in total and ratifies its earlier ruling on approval of the Settlement Term Sheet. The Rule 9019 Motion is technically irrelevant and unnecessary. The matter came before the Court, irrespective of the Rule 9019 Motion, as a result of Judge Haddon's ruling and to the extent feasible, this Court has defined the scope of the exculpation clause and the parties covered thereby.
III. Blixseth's pending Motion for Relief From Order Confirming Third Amended Plan of Reorganization.
Also pending is Blixseth's Motion for Relief From Order Confirming Third Amended Plan of Reorganization filed at docket entry no. 2054, together with the objections by the Liquidating Trustee at docket entry no. 2164, the Debtors, CrossHarbor and New CH YMC acquisition, LLC at docket entry no. 2184 and the Ad Hoc Group of Class B Unit Holders at docket entry no. 2191. Blixseth subsequently filed a related Motion to Strike YCLT's Opposition to Motion for Relief From Order Confirming Third Amended
In the motion for relief, Blixseth requests that the Court void in its entirety and nunc pro tunc all downstream effects of the Debtors' Third Amended Joint Plan of Reorganization. Blixseth argues that such request is proper because the "Plan has now been reversed by the U.S. District Court for multiple `plain errors' including the denial of Mr. Blixseth's fundamental due process rights." For the reasons discussed earlier in this Memorandum of Decision, the Court denies Blixseth's Motion for Relief From Order Confirming Third Amended Plan of Reorganization. Blixseth's motion to strike is similarly denied.
The Court would note that in a supplemental brief filed August 8, 2011, at docket entry no. 2295, Blixseth relies solely on Stern v. Marshall, ___ U.S. ___, 131 S.Ct. 2594, 2608, 2615, 2620, 180 L.Ed.2d 475 (2011) and In re BearingPoint, 453 B.R. 486, in support his request for relief from the Order confirming the Debtor's Third Amended Joint Plan of Reorganization. More to the point, Blixseth contends this Court lacks the constitutional authority to approve the Debtors' plan because "the Exculpation Clause approved by order of this Court acted as a final order dismissing all common law causes of action against the Exculpated Parties." For reasons discussed below, the Court finds it has authority to enter binding decisions with respect to confirmation of a chapter 11 plan.
IV. Subject matter jurisdiction.
As just mentioned, Blixseth argues this Court lacks subject matter jurisdiction to hear the matters set on July 25 and 26, 2011, based upon the United States Supreme Court's recent ruling in Stern v. Marshall, ___ U.S. ___, 131 S.Ct. 2594, 180 L.Ed.2d 475. The "jurisdiction of the bankruptcy courts, like that of other federal courts, is grounded in, and limited by, statute." Battle Ground Plaza, LLC v. Ray (In re Ray), 624 F.3d 1124, 1130 (9th Cir. 2010) (quoting Celotex Corp. v. Edwards, 514 U.S. 300, 307, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995)). A bankruptcy court's jurisdiction is, generally, prescribed by 28 U.S.C. § 1334(b). In addition to granting jurisdiction to bankruptcy courts over bankruptcy cases, the statute provides that "the district courts [and by reference pursuant to 28 U.S.C. § 157, the bankruptcy courts] shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11."
In recent years, various courts of appeal have articulated the limits on bankruptcy court jurisdiction over matters arising after confirmation of a debtor's reorganization plan. See, e.g., In re Resorts Int'l, Inc., 372 F.3d 154, 166-67 (3d Cir. 2004) ("the essential inquiry appears to be whether there is a close nexus to the bankruptcy plan or proceeding sufficient to uphold bankruptcy court jurisdiction over the matter"); Bank of La. v. Craigs Stores of Tex., Inc., 266 F.3d 388, 390-91 (5th Cir. 2001) (post-confirmation bankruptcy jurisdiction limited to matters pertaining to implementation or execution of the plan). The Ninth Circuit has adopted the "close nexus" test of Resorts Int'l for measuring post-confirmation related to bankruptcy court jurisdiction. In re Pegasus Gold Corp., 394 F.3d 1189, 1194 (9th Cir. 2005) (reasoning that while this test "recognizes the limited nature of post-confirmation jurisdiction, [it] retains a certain flexibility...."). In Resorts Int'l, the Third Circuit considered what it perceived to be problems in its existing precedent, Pacor v. Higgins, 743 F.2d 984 (3d Cir. 1984). In Pacor, the court had held that "the test for determining whether a civil proceeding is related to bankruptcy is whether the outcome
The Ninth Circuit most recently visited related to jurisdiction after confirmation in a chapter 11 case in In re Ray, 624 F.3d at 1124. In Ray, the bankruptcy court had approved the sale of a parcel of property owned by the debtor and his nondebtor co-owner, free and clear of the first refusal rights previously granted by them to Battle Ground Plaza, LLC. After the debtor's plan was confirmed and the bankruptcy case was closed, Battle Ground Plaza sued the reorganized debtor, the nondebtor co-owner, the purchaser, and the purchaser's successor in state court for breach of its contractual right of first refusal. Because the sale was originally authorized under a bankruptcy court order, the state court, in its words, "remanded" the action to the bankruptcy court, and stayed proceedings in state court pending the bankruptcy court's determination whether it retained jurisdiction over the transaction and dispute. In re Ray, 624 F.3d at 1129. The bankruptcy court assumed jurisdiction and proceeded to construe the sale order and resolve the parties' claims.
When the dispute finally reached the Ninth Circuit, the court decided that the bankruptcy court lacked jurisdiction to decide a dispute between two nondebtors
This Court distills an important lesson from these decisions for application of the close nexus test as developed in Resorts Int'l, and as adopted and refined by the Ninth Circuit. In particular, to support jurisdiction, there must be a close nexus connecting a proposed post-confirmation proceeding in the bankruptcy court with some demonstrable effect on the debtor or the plan of reorganization. Applying the Ninth Circuit case law to the facts of this case, it is clear that consideration of the Settlement Term Sheet and defining the scope of the exculpation clause in the Debtors' Third Amended Joint Plan or Reorganization directly impact the Debtors, the bankruptcy estates and implementation of the Debtors' Third Amended Joint Plan of Reorganization. This Court's retention of jurisdiction in this instance is appropriate, notwithstanding the decision in Stern v. Marshall. Therefore, Blixseth's standing objection to this Court's subject matter jurisdiction is overruled.
For the reasons discussed above, the Court will enter a separate order providing as follows:
IT IS ORDERED that Blixseth's Request for Judicial Notice filed July 22, 2011, at docket entry no. 2268 is granted.
IT IS FURTHER ORDERED that the Court adopts and ratifies its Memorandum of Decision and Order entered June 2, 2009, approving the Settlement Term Sheet and confirming the Debtors' Third Amended Joint Plan of Reorganization.
IT IS FURTHER ORDERED that Blixseth's Motion for Relief From Order Confirming Third Amended Plan of Reorganization filed at docket entry no. 2054, is denied.
IT IS FURTHER ORDERED that Blixseth's Motion to Strike YCLT's Opposition to Motion for Relief From Order Confirming Third Amended Plan of Reorganization Filed at Docket No. 2164 filed June 10, 2011, at docket entry no. 2167, is denied.
IT IS FURTHER ORDERED the Joint Motion for Order Pursuant to Bankruptcy Rule 9019 Authorizing and Approving the Yellowstone Club Settlement Term Sheet Nunc Pro Tunc filed by the Debtors, CrossHarbor Capital Partners, LLC and New CH YMC Acquisition, LLC on June 10, 2011, at docket entry no. 2165 is denied as moot.
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