Victor Kearney v. Unsecured Creditors Committee

Case Type:
Case Status:
19-2209 (10th Circuit, Feb 24,2021) Published
Affirming the Bankruptcy Appellate Panel (BAP), the U.S. Court of Appeals for the Tenth Circuit held: (1) the one-time distribution of assets of two spendthrift trusts (Trsts) for which the debtor (DR) was a lifetime beneficiary, done so as to fund a reorganization plan proposed by the unsecured creditors committee (UCC) after a state court had modified the trusts’ prepetition procedures, did not violate both prongs of § 1129(a)(3) of the Bankruptcy Code (Code); and (2) the bankruptcy court (BC) did not abuse its discretion by approving three settlements integrated into plan under Rule 9019.
Procedural context:
It was a battle over plans, presided over by the U.S. Bankruptcy Court for the District of New Mexico, the BC, with an assist from one or more judges of a New Mexico trial court (State Court). On June 12, 2018, long after negotiations between the DR and UCC as to a joint plan of reorganization had failed, the DR proposed his eighth plan of reorganization (DR’s 8th Plan). Exactly one month later, the UCC proposed its own plan (UCC Plan). While the UCC Plan inflamed the DR’s bile, its modifications to the Trusts’ organic documents were approved by the New Mexico trial court (State Court) in a case either reopened or newly initiated by the DR himself in the midst of his individual bankruptcy case (Chapter 11 Case). Once the UCC won this victory, the DR’s creditors voted on the two plans before them. Overwhelmingly favored by creditors and dollars, the UCC Plan was confirmed by the BC. The DR promptly appealed to the BAP. As set forth in its opinion in In re Kearney, No. NM-19-010, 2019 WL 6523171 (B.A.P. 10th Cir. Dec. 4, 2019), the BAP saw no merit in the DR’s every contention. First, it discerned no denial of due process in the rejection of the DR’s 8th Plan, as he had not served notice of intent to file it until ten days before the hearing, far less than the required twenty-eight-days. Next, it saw no merits to his § 1129(a)(3) attack, not only because the DR had failed to argue that the BC’s decision in error but also because the UCC Plan seemingly complied with New Mexico law and the Code’s applicable provisions post-modification. Finally, it found no error enfeebling the BC’s application of the circuit’s four-factor test for approval of settlements under Rule 9019(a). Specifically, the record supported the BC’s finding as to the first factor (likely success of underlying litigation), the DR having previously lost on those same claims, and the third factor (complexity and expense of litigation), future litigation likely to be costly based on the DR’s previously court-ordered payment of opposing counsel fees and the requirement for pre-judgment payments in the contingency fee agreement that the DR had struck. The DR appealed. He again damned the distributions from the Trusts central to the UCC Plan to have been violations of state and federal law and indicative of its bad faith and thus incompatible with § 1129(a)(3). He once more attacked the settlements crafted by the UCC and incorporated into the UCC Plan to be sufficiently offensive to Rule 9019(a)’s standard that their approval qualified as an abuse of discretion
First the trust. Alvarado Realty Company (ARCO), owned by Benjamin and Pat Abruzzo (Abruzzos), developed the Sandia Peak Ski Area and the Sandia Peak Tramway, eventually accumulating yet other real estate investments throughout Mexico, Colorado, and Arizona. When the Abruzzos passed in 1985, their four children, including Mary Pat (MP), took over the company’s management. MP married the DR, Victory P. Kearney, in 1988, but passed away in 1997. Her will and testament conveyed her 18.5% ownership interest in ARCO to the Trusts, with the DR named as the income beneficiary during his life. After the DR’s death, the Trusts’ corpus was originally scheduled to be distributed to her other siblings or their surviving issue. Two of her brothers (Abruzzo Bros.) and the DR were appointed as co-trustees. The DR’s relationship with his in-law soured over the next few years despite the Trusts’ success. Between 1997 and 2013, the Trusts’ distributions to the DR grew by 800% and totaled about $16 million. Still unhappy, the DR sued his in-laws, and the Abruzzo Bros. countersued, in the State Court in 2013. After much discovery, the trial formally commenced in June 2015. Eventually, the State Court granted the motion for directed verdict by the Abruzzo Bros., as well as an award of litigation costs. Afterwards, on December 6, 2016, the DR resigned as a trustee. The State Court was not quite done with him, however. First, it sanctioned him for his “affront to the integrity and processes of the Court” on April 7, 2017, particularly admonishing him for his lack of credibility when testifying and repeated violations of its confidentiality order and his discovery obligations. Next, it held a bench trial over the Abruzzo Bros.’ counterclaims. As it concluded (and as the record made obvious), the DR’s conduct had so poisoned the relevant persons’ relationship that the Abruzzo Bros. could no longer effectively function as trustees and the Trusts’ modification was essential. The State Court scheduled a hearing to appoint a successor trustee and to establish new directives for September 5, 2017. Only days before, on September 1, 2017 (Petition Date), the DR filed a petition for bankruptcy relief in the BC, with the State Court staying proceedings soon after the DR’s commencement of the Chapter 11 Case. As his papers showed, despite having received $800,000 per year since 1997 via the Trusts, the DR had somehow accumulated over $7 million in debts by the Petition Date. In implicit recognition that this discrepancy was due to the DR’s “pattern of . . . bad choices,” the United States Trustee, with the BC’s assent, appointed the UCC to negotiate a plan of reorganization with the DR. These negotiations ultimately failed, prompting the DR to propose eight plans and the UCC to offer up its own. Action then moved to the merits of these competing plans. Per the UCC Plan, ARCO was to buy the ownership interests held in it by the Trusts for $12,571,799, the Abruzzo Bros. would then pay $3 million to the DR to pay his creditors, and the Trusts would pay the IRS the $350,890.55 in taxes that the DR owed from his share of the income. Notably, despite the DR’s profligacy and misdeeds, the , the remaining Trusts’ corpus of approximately $8 million was set to continue generating income to the DR for his lifetime, all for the price of the settlement of his claims against the Abruzzo Bros., ARCO, and others. The DR responded with anger—and a second lawsuit for breach of fiduciary duties in the State Court. More responsibility, the Abruzzo Bros. won relief from the automatic stay from the BC. With this grant in hand, the State Court again got involved. On October 23, 2018, it held a contested evidentiary hearing. Roughly a week later, it ruled the proposed modifications to the Trusts to be proper and consistent with controlling New Mexico law. It therefore modified the Trusts “to allow the Trustees to make a one-time $3,000,000.00 distribution from principal to [the DR]. . . .” in order to pay off his creditors. This approval relit the Chapter 11 Case. Ultimately, the voting was not close: 71% of votes and 96% of the voting dollars voted against the DR’s Final Plan, while 84% of votes and 97% of the voting dollars voted for the UCC Plan. Confirmation of the latter followed, as did the DR’s subsequent appeals.
Stephanie K. Seymour; Jane L. Kelly; and Scott M. Matheson Jr.

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