In re ID Liquidation One, LLC, et al.

Case No. 13-3386 (3rd Cir. Feb. 19, 2014)
Third Circuit affirmed order entered by the district court affirming the Bankruptcy Court's order approving a settlement under Fed.R.Bankr. P. 9019
Procedural context:
Bankrupcty Court approved a settlement of a debtor under Rule 9019, involving a disputed administrative claim and certain counterclaims asserted by the debtor against the former managing company of the debtor's casino. Party objected on grounds that the bankruptcy court abused its discretion in approving the settlement because it did not have an adequate record to evaluate the merits and value of the counterclaims. The District Court and the Third Circuit affirmed the order entered by the Bankruptcy Court.
The Debtor operated a casino and racetrack in Indiana. It entered into an agreement with the Cordish Entities pursuant to which the Cordish Entities would build and manage the casino. At the same time, the Debtor entered into a trademark license agreement to use certain marks in connection with the casino. Prior to the filing of the bankruptcy case, the Debtor terminated the management agreement with Cordish, who challenged the termination and demanded arbitration. The Debtor asserted counterclaims in the arbitration against Cordish based on an alleged mismanagement of the casino. After the petition was filed, Cordish filed a motion for allowance of an administrative claim based on the Debtor's use of trademarks post-petition. The Debtor objected to the motion for the allowance of the administrative claim. Two days before the trial on the allowance of the administrative claim, the Debtor and Cordish settled all claims between them. The settlement allowed the administrative claim in the amount of $3.5 million ( the motion had requested an allowance of $33 million), reduced the unsecured claim that Cordish had filed, released the Debtor's counterclaims asserted in the arbitration, and provided for the rejection in the bankrupcy case of all contracts between the parties. The settlement was supported by parties representing the majority of the secured debt. The only parties to object to the settlement were the principals of the Debtor, who claimed that the bankruptcy court abused its discretion in approving the settlement because it did not have an adequate record to evaluate the merits and value of the counterclaims. The Third Circuit reviewed the decision under an abuse of discretion standard. Under Rule 9019, the bankruptcy court assesses whether to approve or disallow a settlement under a four prong test: 1) the probability of success in litigation, 2) the likely difficulties in collection, 3) the complexity of the litigation, the expense, inconvenience and delay in litigating and 4) the paramount interest of the creditors. The Third Circuit noted that the Bankruptcy Court considered an properly weighed each of the four factors, finding that a) the probability of success was complicated by numerous substantive and evidentiary issues, b) given the many claims between the parties, collection could be difficult, c) the litigation involved a great deal of time, multiple hearings and related proceedings, and was therefore complex, and d) the settlement was in the best interest of creditors and other interested parties because the litigation threatened the Debtor's ability to move forward with a plan of reorganization. The Third Circuit further noted that the Bankruptcy Court placed significant weight on the fact that the parties representing the overwhelming economic interests in the case supported the settlement. The Third Circuit rejected the argument that the Bankruptcy Court lacked an adequate record to evaluate the merits of the counterclaims. On the contrary, the Third Circuit noted the Bankruptcy Court familiarity with the counterclaims through several proceedings that had taken place during the course of the bankruptcy case. As such, the Third Circuit found that there was an adequate factual basis to approve the settlement.
McKee, Chagares and Shwartz

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