Stratesec, Inc.

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF COLUMBIA
In re
STRATESEC, INC.,
Debtor.
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Case No. 04-00696
(Chapter 11)
For Publication in West’s
Bankruptcy Reporter
MEMORANDUM DECISION RE DENIAL OF
CHAPTER 11 TRUSTEE’S MOTION TO AMEND ORDER APPROVING SETTLEMENT
This decision addresses the Expedited Motion to Amend Order
Approving Trustee’s Settlement With Louis B. Friedman, As Trustee
of the E.S. Bankest, L.C. Liquidating Trust and McGladrey &
Pullen, LLP (Docket Entry (“DE”) No. 233) filed by Stephen H.
Marcus, the chapter 11 trustee in this case. 	The motion seeks
this court’s entry of a Bar Order submitted with the motion.
Under the Settlement Agreement, Marcus granted releases of claims
against certain entities (the “released parties”). 	The Bar Order
would enjoin “all persons” from pursuing those released parties
on contribution or indemnity claims “arising out of or related to
the claims or allegations asserted by, or which could have been
asserted by [Marcus]” against the released parties, and would
deem such contribution or indemnity claims extinguished. 	On July
The decision below is signed as a decision of
the court.
Signed: September 04, 2007.
_____________________________
S. Martin Teel, Jr.
United States Bankruptcy Judge
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1 	Paragraph 3.1 of the Settlement Agreement required the
filing of a motion with the “Bankruptcy Court” (defined to mean
the United States Bankruptcy Court for the Southern District of
Florida) to approve the Settlement Agreement, along with a
proposed Bar Order; it did not call for the filing of the
proposed Bar Order with the motion to approve the Settlement
Agreement by the “Stratesec Court” (defined to mean this court).
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30, 2007, I issued an order directing Marcus to show cause, if
any he had, why I ought not deny his motion. 	Marcus has failed
to respond to that motion in a timely fashion. 	I will deny the
motion for the following reasons.
I
The Settlement Agreement does not appear to have required
the trustee to seek a Bar Order from this court. 	The trustee
asserts:
The Court-approved Settlement Agreement provided for
and contemplated the attachment of a proposed “Bar
Order” referenced in Paragraph 3.1. 	However, the
proposed Bar Order was inadvertently omitted when the
9019 Motion was filed with the Court.
(Mot. ¶ 4.) 	True, Paragraph 3.1 of the Settlement Agreement
referred to a Bar Order (which was supposed to be but was not
attached to the copy of the Settlement Agreement filed with the
court), but that Bar Order was to be submitted for consideration
not by this court but by the United States Bankruptcy Court for
the Southern District of Florida before which certain litigation
was pending that was also the subject of the Settlement
Agreement. 1 	Moreover, the so-called 9019 Motion (the motion
filed in this court to seek approval of the Settlement Agreement)
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2 	That the Settlement Agreement contemplated that the Bar
Order would be entered by the United States Bankruptcy Court for
the Southern District of Florida (the “Bankruptcy Court”) instead
of this court (the “Stratesec Court”) is made evident by other
provisions of the Settlement Agreement, and by the motion to
approve the Settlement Agreement.
Paragraph 1.1 of the Settlement Agreement called for the
Settlement Payment to occur after:
(i) the Bankruptcy Court’s approval of this Settlement
Agreement and entry of [the] Bar Order . . ., and (ii)
the Stratesec Court’s approval of this Settlement
Agreement . . . .
(Emphasis added.)
Paragraph 3.2 of the Settlement Agreement stated:
In the event that the Stratesec Court does not approve
this Settlement Agreement, or the Bankruptcy Court does
not enter the Bar Order in the form attached hereto as
Exhibit D, or if the Bankruptcy Court enters the Bar
Order but . . . the Bar Order is . . . reversed, then
this Agreement shall be canceled and terminated . . . .
(Emphasis added.)
Finally, the motion to approve the Settlement Agreement
noted that under the Settlement Agreement “[t]he Florida Court
will enter a Bar Order in the form attached hereto as Exhibit B,”
but it did not indicate that under the Settlement Agreement this
court was to enter a Bar Order.
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itself attached as Exhibit B the proposed Bar Order which, as
required by Paragraph 3.1, was captioned for entry by the United
States Bankruptcy Court for the Southern District of Florida (and
not by this court). 2 	Because the proposed Bar Order referred to
in Paragraph 3.1 to which the trustee alludes was to be filed
only with the United States Bankruptcy Court for the Southern
District of Florida, he has not established a need under the
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3 	For example, a sale order, even when made pursuant to a
confirmed chapter 11 plan, cannot declare that under 11 U.S.C. §
1146(a) (formerly § 1146(c)), the sale is exempt from recording
fees and transfer taxes. 	Even if that would be a collateral
consequence of such an order, the local tax authority would be
entitled to be sued in a procedurally correct fashion before the
purchaser may obtain a declaratory judgment that such a
prospective sale would be (or a completed sale was) exempt from
recording fees and transfer taxes.
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Settlement Agreement for him to request this court to issue a Bar
Order.
II
Even if the Settlement Agreement had called for Marcus to
request this court to issue a Bar Order, the proposed issuance of
a Bar Order raises fundamental procedural issues
With exceptions of no applicability here, Federal Rule of
Bankruptcy Procedure 7001(7) requires that a proceeding seeking
an injunction be brought as an adversary proceeding, with a
requirement of service of a summons with the complaint to satisfy
the requirements of due process. 	Far too often attorneys include
in an order disposing of one proceeding a provision that must be
sought by a different type of proceeding. 3 	Injunctive relief
against entities who are not parties to a settlement agreement
ought not be included as part of an order granting a motion to
approve a settlement agreement.
Without an adversary proceeding having been commenced, a Bar
Order, if issued, would not be worth the paper it is written on,
except to use in an attempt to frighten off entities that might
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pursue claims for contribution and indemnification, and I will
not assist the parties in obtaining a Bar Order, utterly devoid
of legal authority, to utilize for that improper purpose.
Attorneys, who are officers of the court, similarly ought not
defeat the rule of law by seeking from the court an order that
they ought to well know has not been sought in a procedurally
correct fashion.
Beyond the requirement of commencing an adversary
proceeding, the trustee would be required in such an adversary
proceeding to establish that subject matter jurisdiction exists
to entertain a request for such injunctive relief. 	Marcus has
not shown that granting the requested Bar Order--enjoining third
parties (identified as only “all persons”) from pursuing claims
for contribution or indemnification from the released
parties--would have an impact on the administration of the
bankruptcy estate. 	Without any such impact on the estate, this
court would lack subject matter jurisdiction under 28 U.S.C. §
1334. 	Plainly, it does not suffice that a party, against whom a
trustee had a claim that has already been settled, would find it
attractive to obtain an adjudication of the collateral
consequences on third parties of its settlement with the
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4 	It does not appear that the released parties made the
granting of a Bar Order a condition to the settlement agreement
being effective. 	Instead, it appears that they desire a Bar
Order after the settlement was already approved.
I need not address whether the bankruptcy court would have
subject matter jurisdiction to entertain an adversary proceeding
to grant a Bar Order when the granting of a Bar Order is a
condition to the settlement agreement being effective.
Nevertheless, I raise a concern that such a proceeding may have
too weak a connection to the case to warrant finding that subject
matter exists. 	The consequences of a trustee’s settlement
agreement on third parties are external to the case itself, and
Congress may not have intended that bankruptcy courts adjudicate
such consequences. 	Congress arguably intended that the parties
settling disputes within the bankruptcy court’s jurisdiction must
assess the likely external consequences of their settlement vis a
vis third parties, and live with those consequences, without the
court being called upon to entertain an adversary proceeding, in
advance of approving the settlement agreement, to declare those
external consequences. 	But see 11 U.S.C. § 1146(b) (formerly §
1146(d)) (authorizing proponent of a plan to obtain an
adjudication of certain tax consequences of the plan).
Ultimately, the issue is likely largely academic because the
requirement that an adversary proceeding be pursued to obtain a
Bar Order will result in few such proceedings being brought: if
the releases granted under a settlement agreement have the effect
of barring claims for contribution and indemnification, then the
released parties will need to litigate the issue only with the
occasional errant third party who nevertheless sues on its barred
claims for contribution and indemnification. 	That makes the
expense of bringing an adversary proceeding against all such
third parties in advance, incident to the approval of a
settlement, an approach that is not cost effective.
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trustee. 4
III
Finally, the proposed Bar Order raises substantive issues
regarding the Court’s authority to issue the Bar Order.
First, Marcus has not shown that the releases under the
Settlement Agreement in favor of the released parties provide a
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5 	This reinforces the earlier point that an adversary
proceeding is required in order to obtain injunctive relief. 	In
an adversary proceeding the plaintiff would have to identify the
defendants in order for them to be sued for injunctive relief.
In turn, that would facilitate an identification of the
nonbankruptcy law governing the effect of the release on the
contribution and indemnification claims.
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basis for ruling that all contribution and indemnification claims
against them have been extinguished. 	Because the Bar Order would
enjoin “all persons,” and does not identify their contribution
and indemnification claims, the court would have to examine the
laws of all the states (indeed, of all the world) to ascertain
the effect of a release of claims against the released parties on
any possible contribution and indemnification claims of other
entities. 5
Second, even if the releases under the Settlement Agreement
bar those third parties from suing the released parties, there is
no showing of an imminent threat that those third parties will
sue the released parties, as required to establish a need for an
injunction. 	See City of Los Angeles v. Lyons, 461 U.S. 95, 105
(1983) (party seeking an injunction against police abuse must
show “real and immediate threat of again being illegally
choked”); Shapiro v. Cadman Towers, Inc., 51 F.3d 328, 332 (2d
Cir. 1995) (“actual and imminent” injury required); JSG Trading
Corp. v. Tray-Wrap, Inc., 917 F.2d 75, 80 (2d Cir. 1990).
Finally, if nonbankruptcy law does bar assertion against the
released parties of contribution and indemnification claims,
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there has been no showing why the ability to raise that bar as a
defense ought not be an adequate remedy at law, thus precluding
injunctive relief. 	See Cadman Towers, 51 F.3d at 332.
IV
In light of the foregoing, an order follows denying Marcus’s
motion.
[Signed and dated above.]
Copies to: Katherine Sutcliffe Becker, Esq.; Office of U.S.
Trustee.
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