Digital Media Solutions, LLC, et al. v. S. Univ. of Ohio, LLC, et al.
- Summarized by David Treacy , U.S. Bankruptcy Court, Eastern District of Kentucky
- 10 months 15 hours ago
- Case Type:
- Business
- Case Status:
- Reversed
- Citation:
- No. 21-4014 (6th Circuit, Feb 07,2023) Published
- Tag(s):
-
- Ruling:
- Tracing equity receivership principles back to the High Court of Chancery in England in the 18th century, the Sixth Circuit held a district court in a receivership case erred by approving a settlement and entering a bar order that prevented third parties from pursuing claims against entities not in receivership. To support its conclusion, the panel distinguished receivership principles from bankruptcy law and explained Sixth Circuit precedent stating bankruptcy courts have authority to issue injunctions, including non-debtor releases, in rare situations under 11 U.S.C. § 105(a).
- Procedural context:
- Two rulings were on appeal. First, the district court approved a receiver's proposed settlement concerning director and officer insurance policy proceeds as reasonable and in the best interests of the receivership estate. Second, it entered a bar order as a "mandatory condition" of the settlement and as "an appropriate exercise of the court's sound discretion to facilitate settlements[.]" The Sixth Circuit had jurisdiction to review the rulings under 28 U.S.C. § 1292(a)(1) and applied an abuse of discretion standard--explaining that "a district court unquestionably abuses its discretion if its decision rests on a legal mistake."
- Facts:
- Dream Center Education Holdings, LLC acquired three university systems in 2018. It failed to operate them successfully, leading to multiple lawsuits. Students at the Illinois Institute of Art filed one such lawsuit, a proposed Illinois state court class action suit alleging fraud-based claims against Dream Center, its parent entity, and their respective directors and officers. Despite mounting liabilities, Dream Center did not want to declare bankruptcy. So, when plaintiff Digital Media Solutions sued Dream Center and its university systems in the U.S. District Court for the Northern District of Ohio alleging a failure to pay invoices, Dream Center consented to the appointment of a receiver under Fed. R. Civ. P. 66. The district court granted the receiver the authority to manage Dream Center and control its property (including its claims against other parties), and the receiver operated Dream Center and several universities and subsidiaries for over two years. In the meantime, the district court stayed pending actions to obtain Dream Center's property. The students in the Illinois state court thus filed a notice of stay of their claims against Dream Center--but not against the other defendants. While the receiver operated Dream Center, significant liabilities continued to accrue. Among Dream Center's assets were primary and excess insurance policies, including two policies that provided coverage for Dream Center and its parent's officers and directors, though the policies did not protect Dream Center itself. The receiver sent a demand letter to the directors and officers that asserted he had covered claims against them. He reached a settlement with the directors and officers, Dream Center's parent entity, and its insurer to bring proceeds from the two D&O policies into Dream Center's receivership estate. Among its terms, the settlement required the district court to enter a bar order prohibiting third parties (such as the Illinois Institute of Art students) from pursuing claims against Dream Center, its parent, all the officers and directors, and the insurer--even though only Dream Center was in receivership. Over the students' objection, the district court approved the settlement and entered the bar order.
- Judge(s):
- Gibbons, Rogers, Murphy
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