Christopher R. Barclay v. Adagio Trading et al

OCR transcription for search; preserved printed pages are authoritative

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UNITED STATES BANKRUPTCY COURT

CLERK, US GANKAUSTCY COURT
CENTRAL THSTRICT OF CALIFRNIA
ay Jepory Clerk

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Case No. SV 03-13981GM

[Includes cases previously
designated Bk. Case Nos. SV 03-
13982-AG, SV 03-13986-AG, SV 03-
13987-AG, SV 03-13989-AG]

Bank iptcy Estates of MIDLAND
EURO EXCHANGE INC.; MIDLAND EURO,

INC.; MIDLAND GROUP INC. ; MOSHE

LETCHNER AND ZVI LEICHNER Adv. No. AD 04-01390-GM
Chapter 7
MEMORANDUM OF OPINION RE

Debtors DETERMINATION OF GOOD FAITH OF

THE SETTLEMENT AGREEMENT
PURSUANT TO CALIFORNIA CODE OF

CHRISTOPHER R. BARCLAY , as

CIVIL PROCEDURE §877.6
trustee of the herein

Substantively Consolidated HEARING
Bankruptcy Estates, DATE: JUNE 7, 2006
TIME: 1:30 p.m.
PLACE : COURTROOM 303

Plaintiff, 21041 BURBANK BLVD.
Vv. WOODLAND HILLS, CA 91367
YOSSI ATTIA, et al.,

Defendants

I. INTRODUCTION

Moshe Leichner and Zvi Leichner pleaded guilty to felony fraud
and money-laundering charges and were sentenced to twenty years in

federal prison and a restitution judgment of $98 million.‘ The

charges against them stemmed from a Ponzi scheme run by the Leichners

beginning no later than 1999. At the time, the Leichners owned and

operated Midland Euro, Inc. (*MEI”), Midland Euro Bxchange, Inc.

("MGI"), (hereinafter

(“MEE”), Midland Group, Ine. and other entities

1
03-568,

United States v. Moshe Leichner and 4vVi_ Leichner, U.S.D.C. No.
U.S. District Court for the Central District of California.

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collectively referred to as “Midland Entities” or the “Debtors”).
Midland Entities raised millions of dollars from investors to invest
in foreign currency transactions, but instead diverted later proceeds
to repay earlier investors.’

Midland Entities’ Ponzi scheme unraveled in 2003. On May 8,
2003, involuntary Chapter 7 bankruptcy petitions were filed and, on
June 12, 2003, Messrs. Moshe and Zvi Leichner pleaded guilty to
felony charges filed against them. By the bankruptcy court's order
entered on May 16, 2003, the Debtors’ Estates were substantively
consolidated. Thereafter, on June 18, 2003, a Chapter 7 Trustee was
appointed by the Court. As of today, proofs of claim totaling more
than $100 million have been filed against the Debtors’ Estates,
including millions of dollars owed to investors.

This adversary proceeding is an attempt by the Trustee to set
aside fraudulent transfers allegedly initiated by the Debtors with
the intent to defraud Midland Entities’ creditors, including
investors. The Trustee alleges that the defendants in this adversary
proceeding engaged in a common scheme with the Debtors to
fraudulently acquire, transfer, and conceal Midland Entities’ assets.

After protracted negotiations, the Trustee entered into a
Settlement Agreement with some of the defendants. The motion by the
Trustee to approve the terms of the Settlement Agreement was filed on
May 11, 2006, and granted by the Court at the hearing on June 7,
2006. Simultaneously, the settling defendants filed a motion for
determination that the Settlement was entered into in good faith

within the meaning of the California Code of Civil Procedure §877.6

* Although the Leichners pleaded guilty in their criminal trial,
the existence of a Ponzi scheme is still a contested issue in this
adversary proceeding.

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(“CCP §877.6"). Such determination would bar the non-settling
parties from pursuing any contribution or indemnity claims against
the settling defendants. Thereafter, on May 24, 2006, three groups
of non-settling defendants filed motions opposing determination of
good faith.

A hearing on the motions was held on June 7, 2006. Based on
the evidence presented at the hearing, pleadings and declarations
filed with the Court, and for the reasons that follow, I deny the

settling defendants’ motion for determination of good faith.

II. PROCEDURAL HISTORY
On September 30, 2004, the Trustee of substantively
consolidated Debtors’ Estates filed this complaint against 35
individuals and entities. The complaint pleaded 46 claims for relief
and sought to set aside fraudulent transfers in an amount exceeding
$10 million, to award breach of contract damages in excess of $5
million, and to obtain equitable relief from the Court.

The defendants vigorously opposed the Trustee’s claims. They
filed numerous motions to dismiss, over 100 interrogatories and
requests for production, and eight counter-claims seeking more than
$10 million in damages.

Beginning no later than November 2005, the Trustee entered
into settlement negotiations with the defendants, and in May 2006
reached an agreement with 21 individuals and entities (hereinafter
the “settling defendants” or the “ATTIA defendants”).

On May 11, 2006, the Trustee filed a motion for approval of
the Settlement Agreement with the settling defendants. Concurrently,

the ATTIA defendants filed a motion to determine that the Settlement

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Agreement is a “good faith settlement” within the meaning of CCP
§877.6 and to bar the non-settling defendants from pursuing
contribution or indemnity claims against them.

On May 24, 2006, the following three groups of non-settling

defendants filed oppositions to both the Trustee’s motion to approve

the settlement and the ATTIA defendants’ motion for finding of good
faith:
1. Blue Water Sunset, LLC ("“BWS” or “Blue Water”)
2. Josh Michaely; Cranks Road, Inc.; Chartwell Technology, Inc.;
Shiran Investments, Inc. (*“Michaely”)
3. Galina Kubrak; 18607 Ventura Associates, Ltd. (*Kubrak")

The ATTIA defendants responded to the non-settling defendants’
objections in a reply filed on May 31, 2006.

A hearing was held on June 7, 2006, where the non-settling
defendants had an opportunity to state their objections on the
record, and the Trustee clarified certain provisions of the
Settlement Agreement and responded to the non-settling defendants’
opposition. Based on the motions filed with the Court and the
information provided at the hearing, I granted the Trustee’s motion
for approval of the Settlement Agreement with ATTIA defendants. For
the reasons that follow, I am denying the settling defendants’ motion
for determination of good faith under CCP §877.6. This memorandum
constitutes my findings of fact and conclusions of law with regard to
the good faith of the Settlement Agreement between the Trustee and

the settling defendants.

III. STATEMENT OF FACTS

A. Claims Against the Estate Filed by the Settling Defendants

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The Trustee alleges that in order to interfere with
administration of the Estate, and to hinder, delay, and defraud
investor creditors, the settling defendants filed millions of dollars

in baseless claims, as follows:

A general unsecured proof of claim for approximately
$10,345,350 by Moshe Schnapp (based on an agreement
belonging to Glendon Advisors);

Proofs of claim for $2,200,000 by Galina Kubrak and Josh
Michaely;

A general unsécured proof of claim for $1,347,371 by
American Realty Group, Inc. (ARGI);

A general unsecured proof of claim for $1,196,093 by AS
Holdings;

A general unsecured proof of claim in an unspecified amount
filed jointly by Yossi Attia, Moshe Schnapp, ARGI, Bonanza,
Inc., Bonanza, LLC, and unnamed “affiliated companies,”
including Glendon Advisors;

An administrative claim in an unspecified amount filed
jointly by Yossi Attia, Moshe Schnapp, A S$ Holdings, ARGI,
Bonanza, Inc., Bonanza, LLC, and Van Nuys Plaza, LLC;

A general unsecured proof of claim for at least $397,789
filed jointly by Yossi Attia, Moshe Schnapp, and Elite
Seafood and Provisions, LLC;

A secured proof of claim for $324,000 filed jointly by AS
Holdings, Bonanza, Inc., and Bonanza, LLC;

A general unsecured proof of claim for $90,967 by ARGI;

A general unsecured proof of claim for $70,618 by Moshe

Schnapp;

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11. A secured proof of claim for at least $55,000 by AS
Holdings; and
i2. A proof of claim in an unspecified amount by Blue Water

Sunset, LLC.

B. The Trustee’s Complaint

Debtors’ Estates filed a complaint against the following 35
individuals and entities (hereinafter “the Complaint”):

1. Yossi Attia a.k.a. Yossef Attia

2. Adagio Trading, Ltd.

3. A S Holdings, LLC

4, Aerial Development, Inc.

Group, Inc.
6. Attia Gardens, Ltd.
7. Attia Gardens, LLC
8. Moshe Har Adir
9. Blue Water Sunset, LLC
10. Bonanza Realty, Inc.
11. Bonanza Realty, LLC
12. Cecile Street, Inc.
13. Chartwell Technology, Inc., d.b.a. First Stop Last Stop
14. Cranks Road, Inc.
15. Elite Seafood and Provisions, LLC
16. Amotz “Bobby” Frenkel
17. Nili Frenkel

18. Glendon Advisors, Inc.

On September 30, 2004, the Trustee of substantively consolidated

5. American Realty Group, Inc., a.k.a. Nevada American Realty

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19.

20.

21.

22,

23.

24.

25.

26.

27.

28.

29.

30.

31.

32.

33.

34,

35.

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Highlander Financial Group, d.b.a. Highlander Financial
Group, J&J Seafood of Las Vegas

Highlander Financial Group, J&J Seafood of Las Vegas
Galina Kubrak

LNSA, LLC

Yehoshua Michaely, aka Shuki Michaely, aka Josh Michaely,
aka Galina Kubrak, aka Lidia Perez, aka Zvi Shapiro, aka
Herbert Frey

Tania Noval a.k.a. Tania Nasehipour

Victor Jesus Noval

Pacific Crest Bank

Q Boy Ltd., a.k.a. Q Boy Investments, Ltd.

Q Boy Ltd.

Moshe Jacob Schnapp

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Shiran Investments, Inc., d.b.a. R&R Gas Station

Van Nuys Plaza, LLC

Westlock Holdings, Ltd.

18607 Ventura Associates, Ltd.

The Complaint alleges that the Defendants engaged in a common
scheme with the Debtors to fraudulently transfer Debtors’ assets with
intent to hinder, delay, and defraud Midland Entities’ creditors,
including investors.

The Complaint pleaded 46 claims for relief, seeking to set aside
fraudulent transfers in the amount exceeding $10 million, to award
breach of contract damages in excess of $5 million, and to obtain

several kinds of equitable relief from the Court.

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On
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damages

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May l2, 2005, the settling defendants filed an Answer,
the substantive allegations in the Complaint, setting forth
affirmative defenses, and asserting eight counterclaims for

in the amount exceeding $10 million.

C. Proposed Settlement Agreement

Beginning in November 2005, the Trustee engaged in extensive

negotiations with the Defendants, resulting in a Settlement Agreement

with the following 21 individuals and entities}:

1.

2.

1a.

11.

12.

13.

14.

15.

16.

Yossi Attia a.k.a. Yossef Attia

Adagio Trading, Ltd.

A S Holdings, LLC

Aerial Development, Ine.

American Realty Group, Inc., a.k.a. Nevada American Realty
Group, Inc.

Moshe Har Adir

Bonanza Realty, Inc.

Bonanza Realty, LLC

Elite Seafood and Provisions, LLC

Amotz “Bobby” Frenkel

Nili Frenkel

Glendon Advisors, Inc.

Q Boy Ltd., a.k.a. Q Boy Investments, Ltd.
Q Boy Ltd.

Moshe Jacob Schnapp

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* ALO, Holdings, LLC and Ilan Kenig were not named in the original
complaint.

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17. & S WP, Lue

18. Van Nuys Plaza, LLC

19. Westlock Holdings, Ltd.

20. A.O. Holdings, LLC

21. Ilan Kenig

The proposed settlement provides:

1. The Trustee will receive $2,000,000 within 15 days of the
Order approving the settlement, of which $50,000 has
already been deposited in the Trustee’s account;

2. If the ATTIA Defendants fail to pay the remaining $1,950,000
within 15 days, a judgment will be entered against them in
the amount of $5,000,000;

3. The Trustee and the ATTIA Defendants will execute mutual
releases of all claims against each other;

4. Upon receipt of the settlement payment, the Trustee will
release and quitclaim interests in:

1. A $475,000 trust deed on real estate located at the
corner of Bonanza and Main in Las Vegas, NV,

2. Shares of stock and assets of ADI, and

3. The Trustee will remove all lis pendens and any
other filings recorded against the Bonanza property
(Las Vegas, NV) and the Van Nuys property (6931 & 6939

Van Nuys Boulevard, Van Nuys, CA).

D. Apportionment of Settlement Proceeds to Non-Settling Defendants
The proposed Settlement Agreement contained the following
language apportioning the Trustee's recovery to the action against

the non-settling defendants:

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({ 2.6) The [$2,000,000] SETTLEMENT PAYMENT is hereby allocated
aS a pro rata recovery by the Trustee on account of the
ADVERSARY DEFENDANTS’ disputed liability to the TRUSTEE for all
the damages and/or transfers alleged in the COMPLAINT against
the ADVERSARY DEFENDANTS. All the parties to this AGREEMENT
hereby acknowledge that the total recovery by the TRUSTEE
pursuant to this AGREEMENT constitutes a recovery of less than

20% of the total amount of damages and/or transfers that the

TRUSTEE seeks to recover from the ADVERSARY DEFENDANTS.

Several non-settling defendants filed their objections with the
Court alleging that this language is unclear, vague, and ambiguous as
to the precise amount and method by which the settlement proceeds
would be allocated to reduce the non-settling defendants’ liability.

At the hearing held on June 7, 2006, the Trustee stated on the
record his clarification of the proposed apportionment methodology.
Non-settling defendants’ total cumulative liability is to be reduced
by the amount actually collected by the Trustee, which can be
anywhere from the $50,000 already deposited to full collection on a
$5 million judgment if the settling defendants fail to pay the
settlement amount within 15 days of the Order approving the
settlement and the Trustee is able to collect the entire judgment.
If the Agreement is performed by the settling defendants, the non-
settling defendants’ cumulative liability will be reduced by $2
million, the amount of the settlement. Each of the claims asserted
by the Trustee will be reduced by an equal amount calculated as the
“amount actually recovered from the settling defendants” divided by
the “total amount of claims asserted by the Trustee.” Hypothetically,

if the Trustee recovers $1 million from the settling defendants, and

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the total amount of claims asserted is $10 million, then the
proportionate reduction in non-settling defendants’ potential
liability is 10% ($1 million divided by $10 million). Therefore, a
claim of $500,000 will be given credit of $50,000, and the Trustee’s
total recovery at trial on that claim could not exceed $450,000.
This methodology is further explained in the Supplemental
Declaration of Christopher R. Barclay, the Trustee, filed on June 9,
2006 on request of the Court at the June 7, 2006 hearing. The Court
found this allocation methodology to be fair to all parties. The
Court’s Order approving the terms of the Settlement Agreement,
entered on June 16, 2006, explicitly incorporates the allocation

provision as described in the Supplemental Declaration.

E. Collection Issues

The Trustee repeatedly indicated that the primary impetus for
entering into the Settlement Agreement is the difficulty if not
impossibility of collection on any future judgment.

If the allegations of the Trustee have any merit, the defendants
are a group of extremely sophisticated individuals who engaged in an
elaborate scheme to transfer and conceal millions of dollars in
assets both in the United States and throughout the world. The
Trustee stated on the record that the defendants have stayed “three
or four steps ahead of the Trustee” in the past and “if history is
any teacher, they are going to stay several steps ahead” in the
future when it comes to hindering the collection efforts by the
Trustee,?*

Furthermore, there is a real credibility issue with these

“As stated at the hearing on June 7, 2006.

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defendants. There are allegations that the ATTIA defendants have
submitted false financial information in the past (such as, for
instance, in connection with getting a loan from Pacific Crest Bank

in 2001) and would not hesitate to do so in the future.

F. Opposition by Blue Water Sunset, LLC

On May 24, 2006, non-settling defendant Blue Water Sunset, LLC
(“BWS”) filed a motion in opposition to determination of good faith
of the proposed Settlement Agreement.

The thrust of BWS’s argument is that it is the owner of a 25%
interest in A S Holdings, LLC ("ASH"), one of the settling
defendants; that ASH sold valuable property and failed to distribute
any proceeds to BWS; that a lawsuit was filed in California Superior
Court seeking BWS’s share of sale proceeds; and that BWS believes
that ASH is using funds that belong to BWS to pay its part of the
settlement amount.

Furthermore, BWS objects to the proposed apportionment of the
settlement proceeds to the non-settling defendants because it does
not take into account the proportionate liability of various
defendants, and because the remaining defendants are not joint

tortfeasors on each individual series of transfers.

G. Opposition by Kubrak Defendants
Galina Kubrak and 18607 Ventura Associates, Ltd. (*Kubrak
Defendants”) filed a motion in opposition to determination of good
faith of the proposed settlement on May 24, 2006.
The argument made by the Kubrak Defendants is that the proposed

settlement agreement does not fit within the good faith determination

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parameters established in the leading case of Tech-Bilt, Inc. v.
Woodward-Clyde & Assoc., 38 Cal. 3d 488 (1985). The objections are
three-fold: (a) $2 million is a low amount to settle $10 million in
liability, (b) there is no evidence to substantiate why such a low
number is being paid or how it was derived, (c) the Trustee’s
collection concerns are overstated given that he has liens on
valuable assets, which he is planning to release as part of the
settlement.

Furthermore, the Kubrak Defendants allege that the settling
parties failed to meet their burden of explaining to the court and to
all other parties the evidentiary basis for the proposed allocation

to the non-settling defendants, as required by L.C. Rudd & Son, Inc.

v The Superior Court of Alameda County, 52 Cal. App. 4th 742, 750

(1997). The Kubrak Defendants allege that the Settlement Agreement
is “at best vague and ambiguous and at worst, totally
incomprehensible.”

Finally, the Kubrak Defendants allege that the Settlement is
unfair to the Estate, because the Trustee is giving up valuable
assets in exchange for a $5 million judgment, which will be difficult

to collect.

H. Opposition by Michaely Defendants
On May 24, 2006, Josh Michaely, Cranks Road, Inc., Chartwell
Technology, Inc., and Shiran Investments, Inc. {“Michaely
Defendants”) filed a motion in opposition to determination of good
faith of the settlement.
The Michaely Defendants’ motion has two premises: (a) the

proposed allocation provision in the settlement is not clear, and (b)

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an allocation of 50% to claims against Michaely and Kubrak Defendants
is more reasonable.

The second premise is based on the notion that there are
basically two sets of defendants’ in this matter - the settling
defendants and the non-settling Michaely / Kubrak Defendants. Both
are sued on the following claims:

1. $1,000,000 - 4 Claim for Relief in the Complaint;

2. $331,000 - 4°" Claim for Relief in the Complaint;

3. $886,543 - 16" Claim for Relief in the Complaint;

4. $225,000 - 16° Claim for Relief in the Complaint;

5. $535,122 - 17" Claim for Relief in the Complaint.

The total amount of damages sought jointly against the
Kubrak/Michaely Defendants and the Schnapp/Attia defendants is
$2,977,665.* Michaely Defendants argue that because there are only
two groups of related defendants who are potentially liable for this

amount, each group’s pro rata share of liability is 503%.

IV. DISCUSSION
A. Good Faith Determination Under CCP 8877.6
In a motion filed on May 11, 2006, the settling defendants asked
the Court to determine that the settlement is a “good faith
settlement” pursuant to CCP §877.6.

CCP §877.6 provides that a determination by the Court that the

° There are additional joint claims against the ATTIA Defendants
and the Michaely / Kubrak defendants. For instance, 36%, 37%, and 3ath
Claims for Relief are asserted against A §$ Holdings, LLC, one of the
settling defendants, and Michaely, Kubrak, and 18607 Ventura Assoc.,
non-settling defendants. It is unclear why Michaely Defendants’ motion
does not discuss these claims.

6 See id.

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settlement was made in good faith bars the non-settling joint
tortfeasors or co-obligors from pursuing any claims for contribution
or indemnity against the settling defendants. CCP §877.6{c). The
settling defendants are entitled to a hearing on this issue. CCP
§877.6(a) (1). In rendering a decision, the Court may rely on
affidavits by the settling defendants, any counteraffidavits filed in
response, and other evidence provided at the hearing. CCP §877.6(b).
The party asserting the lack of good faith bears the burden of proof

on this issue. CCP §877.6({d).

B. Applicability of CCP §877.6 to the
Settlement of the Trustee’s Claims

Of the 46 claims for relief in the Trustee’s complaint, five are
based exclusively on California law (Claim Nos. 21, 38, 39, 40, 46),
29 on federal law (Claim Nos. 2, 3, 5, 6, 8, 9, 11, 12, 14, 15, 18,
19, 20, 23, 24, 26, 27, 29, 30, 32 - 7, 41 - 4), and 12 on both
California and federal law (Claim Nos. 1, 4, 7, 10, 13, 16, 17, 22,
25, 28, 31, 45). The courts have established that state settlement
law should be applied to state causes of action and federal
settlement law must be applied to federal causes of action. See

Slaven v. BP America, Inc., 958 F.Supp. 1472, 1478-79 (C.D. Cal.

1997); Kirkorian v. Borelli, 695 F, Supp. 466, 452 (N.D. Cal. 1988)

(holding that federal courts should rely on CCP §877.6 in determining
the good faith of a partial settlement of claims arising under
California state law, and should utilize a federal rule to evaluate
the good faith of a partial settlement of federal law claims); Nelson
v. Bennett, 662 F. Supp. 1324, 1338 (E.D. Cal. 1987) (articulating a
uniform rule to evaluate the good faith of a partial settlement of

federal claims).

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Thus, an appropriate question to be asked is whether a uniform
federal rule should be used to evaluate the good faith of the
settlement, at least with respect to the Majority of the claims that
are being settled. The Court does not resolve this question,
however, because the settling defendants have only moved for
determination of the good faith of the Settlement under CCP §877.6.
The discussion herein is based on the relevant provisions of

California law only.

C. The Standard for Determination of Good Faith
Good faith of the settlement agreement is a question of fact to

be resolved at the discretion of the trial court. See, @.g., Owen v.

United States,713 F.2d 1461, 1466 (9th Cir. 1983). The Supreme Court
of California articulated a series of factors to be relied upon in

determining good faith. See Tech-Bilt, Inc. v. Woodward-Clyde &

Assoc,, 38 Cal. 3d 488, 502 (1985). The factors are

1. A rough approximation of plaintiffs’ total recovery and the
settler’s proportionate liability;

2. The amount paid in settlement;

3. The allocation of settlement proceeds among plaintiffs;

4. A recognition that a settlor should pay less in settlement
than he would if he were found liable after trial;

5. The financial conditions and insurance policy limits of
settling defendants; and

6. The existence of collusion, fraud or tortuous conduct aimed
to injure non-settling defendants’ interests. Id. at 499.

The Court explained that the party asserting the lack of good

faith should be permitted to demonstrate, if he can, that the

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settlement is so far “out of the ballpark” in relation to these
factors as to be inconsistent with the equitable objectives of the
Statute. Id. at 499 - 500. Such objectives are two-fold: the
equitable sharing of costs among the parties at fault and the

encouragement of settlements. Id. at 493 - 94.

D. Application of the Tech-Bilt Factors

The Trustee’s claims exceed $10 million, the amount of
fraudulent transfers pleaded in the complaint. The Trustee believes
that he would be successful at trial in proving that the defendants
received the alleged fraudulent transfers. The settling defendants
are named in all 46 claims for relief, and are likely to be at least
jointly liable for most of the damages if the Trustee succeeds in
proving his claims.

The proposed settlement amount is a $5 million judgment that can
be satisfied by paying $2 million within 15 days of the Order
approving the settlement. Thus, the proposed settlement is
approximately 50% of the settling defendants’ potential liability, to
be discounted to 20% if the settling defendants fully comply with the
Settlement Agreement within 15 days of the Order. In addition, the
settling defendants agree to dismiss their claims against the estate
in the amount exceeding $10 million. The Trustee disputes the
validity of these claims, and their precise value has not been
determined.

The Court recognizes that a settlor should pay less in
settlement than he would if he were found liable after trial. The
non-settling defendants failed to show that either the $2 million

cash payment or the $5 million judgment combined with the withdrawal

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of the proofs of claim totaling millions of dollars is so far “out of
ballpark” in relation to the potential $10 million liability as to be
inconsistent with the equitable objectives of the statute.

There is no suggestion of collusion, fraud or tortious conduct
between the settling parties and the Trustee. The evidence indicates
that the settlement was negotiated at arm's length. The non-settling
parties offered no proof to contradict the settling defendants’ claim
that there is no insurance coverage due to the intentional nature of
the alleged acts.

The financial condition of the settling defendants is a key
factor in determining whether a settlement was made in good faith.
See Tech-Bilt, 38 Cal. 3d at 499, Even where the claimant’s damages
are obviously great and the liability therefor is certain, a
disproportionately low settlement figure is often reasonable in the
case of a relatively insolvent joint tortfeasor. Id. In this case,
however, the Court has no evidence of the financial condition of the
settling defendants. None of the parties proffered this evidence,
despite the Trustee’s indication that such information was available
for their inspection. Therefore, this factor is presumed irrelevant,
and, based on the indiscriminate application of the Tech-Bilt
factors, the Court could find that the settlement was entered into in

good faith.

E. Tech-Bilt is Not Dispositive on the Issue of Good Faith
The criteria set forth in the Tech-Biit case, however, are not

seen by this Court as exclusive. See Brehm Communities v. Superior

Court, 88 Cal. App. 4th 730, 737 (2001) (“It is well possible that

the court will determine other criteria are more appropriate; if so,

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such criteria should be used.”). To make an informed and intelligent
decision, the Court must first understand who benefits from the
proposed settlement.

This case is about the Trustee's ability to collect and to do so
within a reasonable period of time. The Trustee alleges that the
settling defendants, the non-settling defendants, and the Debtors
engaged in an elaborate scheme to defraud the Debtors’ investors by
transferring and hiding the Debtors’ assets. [In doing so, they
allegedly did not hesitate to provide misleading and inaccurate
financial data. They created a complex web of shell entities,
offshore structures, and foreign bank accounts that make any tracing
and recovery of the assets extremely difficult. They made it clear
to the Trustee that any judgment he obtains against them would be
hard if not impossible to collect.

The Trustee was forced to enter into this settlement, because,
in his own words, the “untrustworthiness and dishonesty of the
Attia/Schnapp Group” is a precursor of “extraordinarily difficult
collection problems” in executing a future judgment.’ There are no
assurances that if the settling defendants fail to make the required
$2 million payment, the Trustee will see anything of the $5 million
settlement, and obtaining a $10 million judgment does not make
collectibility more certain. The true value to the Estate comes from
the Trustee’s possible receipt of $2 million and, if not, his ability

to start immediate execution on a $5 million judgment. And although

’ See Supplemental Declaration of Christopher R. Barclay filed on
June 9, 2006, p. 2. At the hearing on June 7, 2006, the counsel for the
Trustee repeatedly made representations to this effect, without
eliciting any objections from the settling defendants. At the request
of the Court to submit further documentation on the mechanics of the
allocation process, the Trustee followed up with his Supplemental
Declaration which re-affirmed the Trustee’s position on this issue.

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there are serious doubts that he would be able to collect even part
of the $5 million, the sooner he starts, the better his chances are.
Thus, the Trustee acted in good faith in negotiating and accepting
the terms of the Settlement Agreement.

However, if the good faith determination is granted to the
settling defendants, the Agreement would be prejudicial and harmful
to the non-settling parties. Assuming that the settling defendants
actually pay $2 million, the Trustee was forced to settle for far
less than the settling defendants’ potential liability, and he has
preserved the right to pursue the remainder of his claims against the
non-settling defendants. Thus, if the Trustee succeeds in proving
his claims, the non-settling defendants could end up being liable for
approximately $8 million, an amount disproportionate to their role in
the scheme.

To ensure that the settlement is fair to the non-settling
parties, the Court could adopt an approach delineated by the federal

court in Franklin v. Kaypro, 884 F.2d 1222, 1225 (9th Cir. 1989).

Pursuant to Kaypro, when the courts limit the non-settling parties’
ability to pursue contribution and indemnity claims against the
settling defendants, they should simultaneously limit liability
exposure of the non-settling defendants to their actual percentage of
fault. In other words, at trial, “the jury is asked... to
determine... the percentage of culpability of each of the non-
settling defendants,” and plaintiffs’ recovery is limited to that
percentage.

Given the unique facts of this case, however, following the
Kaypro approach would be unjust to the Estate. The Trustee would end

up, in all likelihood, with a $5 million practically uncollectible

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judgment against the settling defendants, and a judgment against the
non-settling defendants that would be substantially reduced to
reflect their share of fault. For instance, if the non-settling
parties are found 10% liable for the fraudulent transfers totaling
$10 million, the Trustee would have a Judgment against them for
approximately $1 million. This would be unfair to the Estate because
the non-settling defendants are much more likely than the Trustee to
get satisfaction of their claims against the settling defendants with
whom they chose to do business. They were part of the common scheme
with the settling defendants; they were sophisticated businesspeople
who would not have entered in dealings with each other without
knowing the real financial condition of their partners; they are
undoubtedly more familiar than the Trustee with the methods and
tactics used to transfer and hide the assets. It would only be fair
to let the Estate sue the non-settling defendants for the remainder
of fraudulent transfers and let them, and not the Trustee, play the
collection games with the settling defendants.

Thus, denying the good faith motion is the only way to
accomplish the equitable goals of the statute. It preserves fairness
to the non-settling parties who, in the event that a disproportionate
judgment is entered against them, can turn around and sue the
settling defendants for contribution. It preserves fairness to the
Trustee, who can start his collection efforts against one group of
defendants immediately, keep pursuing his claims against the other
group, and hopefully be able to collect something from one or the
other. It would also be fair to the settling defendants, because
their intentional behavior forced the Trustee to enter into an

inadequate settlement, and created this Situation in the first place.

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Finally, it does not interfere with the settlement, since a good
faith finding is not a condition to that agreement.

Based on the foregoing, the Court finds that good faith
bargaining is a prerequisite to a good faith settlement. Where the
settling defendants engaged in intentional conduct damaging to the
Estate and, thereafter, sought protection from the Court that would
inflict further damage on the Estate or the non-settling parties, the
Court cannot find that the settlement was entered into in good faith

under CCP 8877.6.

V. CONCLUSION
Based on the memoranda and declarations submitted by the
parties, the pleadings on file with the Court of which the Court took
judicial notice, and the oral offer of proof presented at the
hearing, I find that the settling defendants did not act in good
faith in reaching the Settlement Agreement with the Trustee.
Therefore, the motion for determination of good faith pursuant to CCP

§877.6 is denied.

DATED: 7/¢/e¢

GERALDINE MUND
United States Bankruptcy Judge

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CERTIFICATE OF MAILING
I, PHILIP HARRAWAY , @ regularly

appointed and qualified clerk of the United States Bankruptcy Court for the Central
District of California, do hereby certify that in the performance of my duties as
such clerk, I personally mailed to each of the parties listed below, at the
addresses set opposite their respective names, a copy of the

MEMORANDUM OF OPINION RE DETERMINATION OF GOOD FAITH OF THE
SETTLEMENT AGREEMENT PURSUANT TO CALIFORNIA CODE OF CIVIL PROCEDURE
§877.6

in the within matter. That said
envelope containing said copy was deposited by me in a regular PA fies OHRAR
mailbox in the City of Los Angeles, in said District, on

Chapter 7 Trustee

Christopher Barclay, Trustee
Mack | Barclay, Inc.

600 Anton Boulevard, Suite 1350
Costa Mesa, CA 92626

Leonard I. Gumport

Aleksandra Zimonjic

Gumport | Reitman

550 South Hope Street, Suite 825

Los Angéles, CA 90071

Attorneys for Christopher Barclay, Chapter 7 Trustee

Robert M. Yaspan, Esq.

Law Offices of Yaspan & Thau

6931 Van Nuys Boulevard, Second Floor
Van Nuys, CA 91405

Attorney for Movants

Timothy R. Harrigan

Lang, Harrigan & Carvalho, LLP
21021 Ventura Boulevard, Suite 4590
Woodland Hills, CA 91364

Andrew Goodman, Esq.

Greenberg & Bass, LLP

16000 Ventura Blvd., Suite 1000
Encino, CA 91436

Philip D. Dapeer, Esq.

Philip D. Dapeer, a Law Corp.

5670 Wilshire Boulevard, Suite 1470
Los Angeles, CA 90036

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Tania Noval, In Pro Per
24389 Avenida de Los Ninos
Laguna Niguel, CA 92677-3516

c/o Amotz “Bobby” Frenkel
5707 Starwood Court
Thousand Oaks, CA 91362

c/o Victor Jesus Noval
13600 Marina Pointe #1915
Marina Del Rey, CA 90292

U.S. Trustee - Interoffice Mail
c/o Jennifer Braun

{Clerk)

4 J

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