Midway Airlines Corp.

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
MIDWAY AIRLINES CORPORATION,
DEBTOR
CASE NO.
01-02319-5-ATS
JOSEPH N. CALLAWAY, Chapter 7
Trustee for MIDWAY AIRLINES
CORPORATION,
Plaintiff
v.
FLEISCHMAN & WALSH, LLP,
Defendant.
ADVERSARY PROCEEDING NO.
S-05-00109-5-AP
ORDER APPROVING COMPROMISE AND SETTLEMENT
Pending before the court is the motion, pursuant to Rule 9019 of
the Federal Rules of Bankruptcy Procedure, to approve the compromise
and settlement proposed by the chapter 7 trustee, Joseph N. Callaway,
and claimant Fleischman & Walsh, LLP ("F&W"). An objection to the
motion was filed by CIT Communications Finance Corporation ("CIT"),
which like F&W is a chapter 11 administrative claimant. A hearing was
held in Raleigh, North Carolina on November 29, 2005. For the reasons
that follow, the motion will be allowed, and the trustee will be
authorized to compromise and settle F&W’s administrative claims.
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This matter is a "core" proceeding pursuant to 28 U.S.C.
§§ 157(b)(2)(A), (B), (E), and (O), which this court may hear and
determine. Venue is proper in this district pursuant to 28 U.S.C.
§ 1409(a).
Midway Airlines Corporation ("Midway") filed a voluntary petition
for relief under chapter 11 of the Bankruptcy Code on August 13, 2001.
After an unsuccessful effort to reorganize and rehabilitate its
business, the court converted the debtor’s case to a case under chapter
7 of the Bankruptcy Code on October 30, 2003. The trustee is the duly
appointed and acting chapter 7 trustee for the debtor.
Fleischman & Walsh, LLP is a limited liability partnership located
in Washington, D.C. F&W provided legal services to the debtor as a
chapter 11 professional beginning in September 2001. Pursuant to
interim fee applications and orders approving them, F&W was allowed and
paid a chapter 11 administrative claim in the debtor’s case in the
amount of $99,856.19, which represents the full amount of its allowed
administrative claim under 11 U.S.C. § 503(b)(4).
On June 9, 2005, the chapter 7 trustee filed a Complaint for
Disgorgement of Professional Fees and Expenses against F&W. The
complaint stated that the trustee would not have sufficient funds to
pay all chapter 11 administrative claims in full, and that F&W
therefore should be required under 11 U.S.C. § 736(b) to disgorge the
fees it received in order to share equally in a distribution on its
claim with other chapter 11 administrative claimants. F&W filed an
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answer seeking to keep the fees. F&W and the trustee subsequently
entered into settlement negotiations, resulting in the trustee’s
filing of the instant motion. The proposed compromise and settlement
requires F&W to pay $47,000 to the trustee, and to retain approximately
$52,000 in full satisfaction of its almost $100,000 chapter 11
administrative claim.
CIT filed an objection to the motion on grounds that the
compromise gives favorable treatment to F&W at the expense of other
similarly situated chapter 11 administrative claimants, although 11
U.S.C. § 507(a) requires equal treatment of these claimants. CIT
argues further that F&W should be required to disgorge all fees and
thereafter to share equally with other chapter 11 administrative
claimants when final pro rata distributions are made. The disgorgement
issue raised by the trustee’s complaint is not now formally before the
court for decision, though it is, practically speaking, a component of
the court’s consideration of the settlement itself.
The trustee anticipates that payouts to chapter 11 administrative
claimants will be in a range of 20 to 40%, and his best, most specific
estimate at this time is a 35% payout. This estimate is subject to
change depending on the outcome of litigation related to the
administrative claim of ALPA, which currently is estimated at
approximately $10 million. The proposed compromise would allow F&W to
retain approximately 53% of its chapter 11 administrative claim, or
approximately $15,000 more than it likely would receive if the trustee
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ultimately issues payouts at the anticipated 35%. The amount
currently at issue, therefore, is in the range of $15,000.
The trustee readily agrees that the relevant statutes do require
equal treatment of similarly situated claimants, and that he could
marshal a strong argument in support of the complaint seeking
disgorgement of fees. However, even if the trustee were to prevail in
summary judgment litigation or at trial, and throughout a subsequent
appeal by F&W, the trustee--and therefore the estate-- would enjoy only
a Pyrrhic victory. The estate would spend far more on litigation (with
those expenses to be absorbed by all of the chapter 11 administrative
claimants, not just CIT) than the $15,000 at issue in the proposed
settlement. CIT would be treated equally, which it cites as its
motivating factor, but the end result would be an equally diminished
payout for CIT and the other chapter 11 administrative claimants as
well.
It is well-established that bankruptcy courts may, in the exercise
of sound discretion, approve a settlement between a creditor and a
trustee. In re ASI Reactivation, Inc., 934 F.2d 1315, 1323 (4th Cir.
1991); St. Paul Fire & Marine Ins. Co. v. Vaughn, 779 F.2d 1003, 1010
(4th Cir. 1985); see also In re Thompson, 965 F.2d 1136, 1141 (1st Cir.
1992) ("Although a creditor has the right to object to a proposed
compromise, objection will not preclude court approval."). The
settlement must be fair, equitable, reasonable under the circumstances,
and in the best interests of the estate as a whole. 10 Collier on
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Bankruptcy ¶ 9019.02 (15th ed. rev. 2005). The court must form an
"educated estimate" of the costs and other circumstances of any likely
litigation, and generally assess "all other factors relevant to a full
and fair assessment of the wisdom of the proposed compromise."
Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v.
Anderson, 390 U.S. 414, 424, 88 S. Ct. 1157, 1164 (1968); see also 10
Collier ¶ 9019.02 (discussing Anderson and other decisions generating
the basic standards of reasonableness).
In this case, it appears that the trustee has a strong likelihood
of success on the merits if F&W continues to oppose the trustee’s
complaint seeking disgorgement. However, F&W appears willing to commit
more of its own time and legal resources to an energetic effort to
retain the fees, if the alternative is full disgorgement. It would not
be difficult to collect from F&W if the trustee ultimately did prevail,
but the expense in reaching that point would far outpace the $15,000 at
stake here, to say nothing of the attendant delays in the progress of
the case. Thus, the trustee’s likelihood of success is countered by
the virtual certainty of the estate incurring litigation costs that
exceed any savings realized by limiting F&W’s payout to the currently
estimated pro rata amount. Based on the court’s familiarity with the
issues in this case and the likely path the case will take if the
settlement is not approved, it is abundantly clear that the proposed
compromise and settlement are in the best interests of the estate.
Further, though CIT cites the importance of equal treatment of all
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chapter 11 administrative claimants, the court observes that no other
creditor objected to the proposed compromise and settlement although
all were given notice. This suggests that other creditors similarly
situated to CIT probably consider the settlement terms reasonable and
fair under the circumstances, or at least consider its terms
sufficiently satisfactory to forego any objection.
The court gives no weight to the fact that other, comparable
settlements have previously been approved in this case. The trustee
must determine whether to seek approval of a compromise and settlement
with a creditor based on the terms of each individual agreement and its
value to the estate. The court likewise assesses any proposed
compromise and settlement on its own terms, and in light of the
existing circumstances of the case.
The court concludes that the proposed compromise and settlement
with F&W, which will enable F&W to retain approximately $15,000 more
than it otherwise might if the currently projected payout actually
occurs as projected, is extremely reasonable. The Settlement
Agreement, which is attached to the trustee’s motion for approval of
the compromise and settlement, appears to be fair, equitable, and to
serve the best interests of the estate. It is therefore ORDERED that
the trustee is authorized to compromise the claim against F&W as set
forth in the trustee’s Motion to Approve
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Trustee’s Compromise and Settlement with Fleischman & Walsh, LLP and
the Settlement Agreement attached thereto.
SO ORDERED.
DATED: December 2, 2005
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