In re Holly Marine Towing, Inc.

In re Holly Marine Towing, Inc., ---- WL ----, No. 11-1787 (7th Cir. Jan. 6, 2012)
The Court ruled that, notwithstanding the appellant's standing as the holder of an allowed Chapter 11 administrative claim against the now-converted debtor to seek to have an order approving a settlement amended, it would uphold the rulings below permiting non-debtor recipients of settlement funds to pay those funds over to the debtor's bankruptcy attorney without distributing those monies pro rata among all allowed Chapter 11 administrative claimants. The Court found that settlement funds paid out to the debtor's principals to resolve litigation regarding ownership of the real estate used by the debtor did not comprise property of the estate. As a result, the priority scheme of Code sections 726, 503 and 506 did not apply to require those funds to be paid out to all administrative claimants.
Procedural context:
Appeal from the District Court for the Northern District of Illinois affirming decision of Bankruptcy Court for the Northern District of Illinois denying Chapter 11 administrative creditor's motion under Federal Rule of Civil Procedure 59(e) (Federal Rule of Bankruptcy Procedure 9023) to amend order approving settlement of litigation regarding ownership of real estate between debtor and its prinicpals; approval of settlement reviewed for abuse of discretion with review for clear error on questions of fact and de novo on conclusions of law.
During the course of its Chapter 11 case, debtor used a financial services firm to provide it with professional services. Debtor's case converted to one under Chapter 7. In the Chapter 7 case, disputes arose over the distribution of the proceeds of the sale of the real estate where the debtor operated: one of the debtor's principals held title to that real estate, the other principal was in the process of a divorce from the first principal and claimed a martial interest in the real estate, and the debtor's trustee sued the title-holding principal for breach of fiduciary duty and misappropriating corporate opportunities and to bring the real estate into the bankruptcy estate. The parties settled the issues regarding ownership of the real estate by having half of the sale proceeds go to the estate, with the other half divided between the principals. As part of the approved settlement, the principals contributed funds from their portions of the settlement proceeds to pay the debtor's bankruptcy attorney. Thereafter, the holder of an allowed Chapter 11 administrative claim sought to have the Bankruptcy Court's order approving the sale amended so that it could receive a portion of the proceeds.
Bauer, Manion, Kane

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