110 Beaver Street Partnership v. Goffe, Inc. , 355 F. App'x 432 ( 2009 )

Not for Publication in West's Federal Reporter
United States Court of Appeals
For the First Circuit
No. 08-2408
IN RE 110 BEAVER STREET PARTNERSHIP,
Debtor.
____________
MARTHA JEAN EAKIN, PAUL MCGINTY, JEFF BUSTER,
Appellants,
v.
GOFFE, INC., DUFFY BROTHERS MANAGEMENT CO.,
NORMAN J. DUFFY, ROBERT L. DUFFY, KEVIN DUFFY,
HAROLD MURPHY,
Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. George A. O’Toole, Jr., U.S. District Judge]
Before
Torruella, Ripple,* and Boudin, Circuit Judges.
David J. Fine, with whom Law Office of David J. Fine, was on
brief for appellants.
John J. Monaghan, with whom Lynn B. Xerras, Diane N. Rallis,
and Holland & Knight LLP, were on brief for appellees Goffe, Inc.,
Duffy Brothers Management Co., Norman J. Duffy, Robert L. Duffy,
and Kevin Duffy.
*
Of the Seventh Circuit, sitting by designation.
Harold B. Murphy, with whom Andrew G. Lizotte and Hanify &
King, Professional Corporation, were on brief for appellee Harold
B. Murphy.
December 17, 2009
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Per Curiam. This is an appeal from the district court’s
affirmance of a bankruptcy court’s order that approved a settlement
between the bankruptcy trustee and certain defendants against whom
the debtor, 110 Beaver Street Partnership, had asserted legal
claims. The bankruptcy court approved the settlement, and the
district court affirmed. For the reasons set forth in this
opinion, we now affirm the judgment of the district court.
I. BACKGROUND
A.
In October 1994, the 110 Beaver Street Trust (the
“Trust”) purchased land and buildings located at 110 Beaver Street
in Waltham, Massachusetts (the “Property”) from George W. Moore,
Inc. (“Moore”). To finance the purchase, the Trust executed a
promissory note payable to Moore in the amount of $850,000. The
note was secured by a mortgage on the Property. The sole
beneficiary of the Trust is an entity called the 110 Beaver Street
Partnership (the “Partnership”). Martha Jean Eakin and Paul
McGinty (the “Partners”) are partners in the Partnership; Jeff
Buster is the former trustee of the Trust. We shall refer to Ms.
Eakin, Mr. McGinty and Mr. Buster collectively as the “Principals.”
In April 1996, the Duffy Brothers Management Company,
owner of a parcel of land next to the Property, filed a proposal
with the Waltham Conservation Commission to build a shopping mall
on its parcel. The Trust opposed the proposal on the ground that
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the project, if approved, would cause harm to the Property in
violation of the Massachusetts Wetlands Protection Act, Mass. Gen.
Laws ch. 131, § 40. In July 1996, the Commission nevertheless
approved the Duffy Brothers proposal. The Trust then filed an
appeal with the Department of Environmental Protection (“DEP”).
This appeal had the practical effect of postponing any development
until the Trust had exhausted its right to both administrative and
judicial review.1
On November 13, 1996, Moore commenced foreclosure
proceedings on the 110 Beaver Street property. Thirteen days
later, Moore sold and assigned the mortgage and the promissory note
to Goffe, Inc., a company controlled by the Duffys.2 In response
1
In August 1996, Mr. Buster and three other individuals also
filed an action in Superior Court in which they alleged that the
Commission’s approval of the project violated the state’s open
meeting law.
2
The facts found by the Superior Court, in the proceeding
that shall be discussed later in the text, provide a more complete
picture of this episode. They reveal that in August 1996, the
Duffys learned that the 110 Beaver Street property was “in
trouble.” Buster v. George W. Moore, Inc., No. 97-637-F, 2000 WL
576363, at *8 (Mass. Super. Apr. 28, 2000). They investigated the
situation, discovering that Mr. Buster was in default on Moore’s
note and that real estate taxes had not been paid for roughly two
years. Id. At the end of October, one of the Duffys called Moore
for the first time to discuss purchasing the note. Id. at *9.
Later, the Duffys began to insist that Moore commence foreclosure
proceedings before the sale. Id. Moore was resistant, but the
disagreement became moot when the parties learned that Sherburne,
Powers & Needham, the law firm that had represented both the Duffys
and Moore but was not representing either of them in this
transaction, had already filed a complaint to foreclose the
mortgage in Moore’s name. Id. at *10. The Superior Court found
that the Duffys had paid the law firm to prepare the foreclosure
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to the foreclosure, Mr. Buster filed an action in Massachusetts
Superior Court, to which the other Principals were later joined.
The complaint in this action alleged two sets of claims relevant to
this discussion. It alleged that Goffe had undertaken the
foreclosure to prevent the Principals from exercising their First
Amendment right to petition by prosecuting the DEP appeal (the
“Civil Rights Claims”), and that Moore had refused to remove its
inventory from the Property in a timely manner (the “Storage
Claims”). See R.App. 791-801.
Once they had taken ownership of the mortgage through
Goffe, the Duffys met with the Principals and offered to allow them
to deed the Property in lieu of foreclosure or to negotiate a
forbearance. Buster v. George W. Moore, Inc., No. 97-637-F, 2000
WL 576363, at *11 (Mass. Super. Apr. 28, 2000). Both options
required, however, that the Principals withdraw the DEP appeal and
dismiss the Superior Court action. The Principals refused.
B.
Goffe then scheduled a foreclosure sale for February
1997. However, on the day of the sale, the Partnership filed a
petition in the United States Bankruptcy Court for the District of
papers, but that the actual filing was the result of a
miscommunication within the firm. Id. In any case, once the
papers had been filed, nothing stood in the way of the transfer of
the note to Goffe. The Superior Court found that the Duffys’s
primary motivation in this purchase was to induce Mr. Buster to
withdraw his DEP appeal and open meeting law action. Id. at *14.
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Massachusetts, seeking relief under Chapter 11 of the Bankruptcy
Code. The commencement of this bankruptcy action triggered the
automatic-stay provision of 11 U.S.C. § 362(a), barring Goffe from
proceeding with the foreclosure sale.
In April 1997, Goffe, hoping to foreclose on the
Property, moved for relief from the automatic stay. It argued
that, because there was no equity in the Property and the Property
was not necessary for effective reorganization, relief from the
stay was justified under 11 U.S.C. § 362(d)(2).3 R.App. 57. Goffe
also argued that the Partnership had violated zoning, environmental
and building regulations, which threatened the insurability,
marketability and value of the collateral, justifying relief under
11 U.S.C. § 362(d)(1). R.App. 61, 64.
On May 30, the Duffys met with the Mayor of Waltham and
told him that they believed that there were safety violations at
110 Beaver Street. Subsequently, a comprehensive fire inspection
3
11 U.S.C. § 362(d) provides in pertinent part:
On request of a party in interest and after notice and a
hearing, the court shall grant relief from the stay provided under
subsection (a) of this section, such as by terminating, annulling,
modifying, or conditioning such stay--
(1) for cause, including the lack of adequate protection of an
interest in property of such party in interest;
(2) with respect to a stay of an act against property under
subsection (a) of this section, if--
(A) the debtor does not have an equity in such property;
and
(B) such property is not necessary to an effective
reorganization[.]
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of the Property took place. The violations uncovered were
sufficiently serious to result in the issuance of a cease and
desist order. Buster, 2000 WL 576363, at *14; In re 110 Beaver St.
P’ship, 244 B.R. 185, 189 (Bankr. D. Mass. 2000); R.App. 256.4
Shortly thereafter, the Partnership and Goffe entered
into an agreement that would have put in place a Goffe-supported
reorganization plan, released the Principals from any liability on
the note and released all claims against Goffe. Mr. Buster signed
the agreement on behalf of the Principals, but then subsequently
opposed it. Mr. Buster claimed that the agreement was “done under
duress,” R.App. 383, and involved risk, R.App. 384. When asked by
the court to identify the aspect of the agreement with which he
disagreed, Mr. Buster responded only that “it says something to the
tune of ‘not then perform.’” R.App. 385. The bankruptcy court
characterized these complaints as “vague and unintelligible.”
R.App. 428. The court approved the settlement and appointed a
bankruptcy trustee, Harold B. Murphy, who filed a motion to compel
the Principals to comply with the agreement. R.App. 820-24.
At a hearing on the motion in October 1997, the court
said, “I think the settlement is a good one,” but nevertheless
concluded that, in light of Mr. Buster’s “absolutely outrageous”
4
The Superior Court found that the primary motivation of the
Duffys in their meeting with the Mayor was to “trigger
administrative action by the City of Waltham that would strengthen
their argument for lifting the automatic stay[.]” Buster, 2000 WL
576363, at *17.
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conduct, the cost of enforcing the settlement would be too high to
justify. Rather than enforce the settlement, the court opted to
grant Goffe relief from the automatic stay. The court stated that
Goffe was entitled to such relief “because it [Goffe] lacks
adequate protection due to the fact that the property has been the
subject of cease and desist orders by the City of Waltham which
impair, potentially seriously hurt Goffe’s ability to realize on
its collateral.” R.App. 451-52. The court’s action allowed the
foreclosure sale to proceed, and the Property was sold in 1998 for
approximately $1.3 million.5 Also in 1998, the bankruptcy case was
converted to Chapter 7. Beaver St., 244 B.R. at 190.
After his appointment, Trustee Murphy took up the
prosecution of the Superior Court action as well as two additional
claims: that Goffe had violated the automatic stay by informing
Waltham officials of code violations at the Property (the “Stay
Claim”), and that Goffe had overstated its claim to the foreclosure
proceeds (the “Proceeds Claim”).
The year 2000 was a significant year for this case.
First, the bankruptcy court declined to approve a settlement that
Trustee Murphy had reached with Goffe. The court believed that the
compromise was deficient with respect to all of the claims that we
have mentioned. Second, following that rejection, the Civil Rights
5
The Partnership had claimed that the fair market value of
the Property was $1.1 million. R.App. 364.
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Claims were tried in Superior Court, and the court found no
liability. Buster, 2000 WL 576363, at *27. The decision was
affirmed subsequently by the Supreme Judicial Court. Buster v.
George W. Moore, Inc., 783 N.E.2d 399, 403 (Mass. 2003).
Consequently, only the Stay Claim, the Storage Claim and the
Proceeds Claim remained unresolved.
C.
After quite a few years with little significant activity,
in 2007, Trustee Murphy and Goffe negotiated the settlement at
issue in this case. The settlement resolved the Proceeds Claim,
the Storage Claim and the Stay Claim--the last remaining assets of
the estate--for $125,000. R.App. 598, 612-16. The Principals
opposed the settlement. They also asked the bankruptcy court for
an evidentiary hearing on their allegation that Goffe had violated
the automatic stay.
The court held that the settlement was reasonable. It
noted that, in light of the resolution of the Civil Rights Claims
by the Supreme Judicial Court of Massachusetts and the accrual of
increased legal fees, the Partnership’s prospects of recovering
significantly more than the settlement amount were “at best, very
uncertain.” Appellant’s Addendum 13-14. Also, continued
litigation would involve additional expense, inconvenience and
delay. Id. The court also pointed out that no non-insider
creditor had voiced any objection to the settlement, and that
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“where[, as here,] administrative and non-insider unsecured claims
will not be fully paid, the interest of the principals is more
attenuated than before[.]” Id. The court also denied the
Principals’ motion for an evidentiary hearing on the Stay Claim,
saying that “[l]itigating causes of action to assess their outcome
is precisely what the reasonableness standard for compromises is
intended to avoid.” Id.Following the approval of the settlement, the Principals
filed an adversary complaint in the bankruptcy court. The
complaint outlined the Duffys’s alleged violation of the automatic
stay and attempted to frame the Duffys’s conduct as a broader
pattern of wrongdoing: fraudulently obtaining the cease and desist
orders, failing to disclose their conduct to the court and using
the orders to argue impairment of their collateral, “when the real
reason they wanted to foreclose was to silence the Debtor’s
petitioning activities[.]” R.App. 1209-10. The complaint sought
monetary sanctions pursuant to 11 U.S.C. § 105(a) and the
bankruptcy court’s inherent powers. The district court dismissed
this complaint sua sponte. R.App. 1172.
The Principals appealed the bankruptcy court’s decisions to
the district court, which affirmed. They now appeal to this court.
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II. DISCUSSION
A.
In reviewing this matter, we must confine ourselves to
the same record that was before the bankruptcy court and the
district court. We review independently the bankruptcy court’s
determination. With respect to that court’s findings of fact, we
apply the clearly erroneous standard; with respect to its
conclusions of law, we apply a de novo standard of review. Jeffrey
v. Desmond, 70 F.3d 183, 185 (1st Cir. 1995). Our case law
establishes that, in deciding whether to accept a compromise
proposal that discharges legal claims held by the debtor, the
bankruptcy court should consider the following factors:
(i) the probability of success in the litigation
being compromised; (ii) the difficulties, if any,
to be encountered in the matter of collection;
(iii) the complexity of the litigation involved,
and the expense, inconvenience and delay attending
it; and, (iv) the paramount interest of the
creditors and a proper deference to their
reasonable views in the premise.
Id. at 185. In applying these factors, the trustee is accorded a
significant range of discretion in the prudent exercise of business
judgment. We also must keep in mind the general principle that
“compromises are favored in bankruptcy.” In re Mailman Steam
Carpet Cleaning Corp., 212 F.3d 632, 635 (1st Cir. 2000) (internal
quotation marks and citation omitted). Consequently, our task is
to determine whether the settlement meets the “lowest point in the
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range of reasonableness.” In re Healthco Int’l, 136 F.3d 45, 51
(1st Cir. 1998) (internal quotation marks and citation omitted).
The Principals’s opening brief in this court makes no
focused argument with respect to the Proceeds Claim and the Storage
Claim. Accordingly, these issues are waived. See Playboy Enters.
v. Pub. Serv. Comm’n of Puerto Rico, 906 F.2d 25, 40 (1st Cir.
1990) (“An appellant waives any issue which it does not adequately
raise in its initial brief[.]”). The brief provides scant
information, and it is not our role to make arguments not presented
by the parties at the appropriate time. Suffice it to say that the
Principals would be hard-pressed to show that these claims would
add value to the estate, given the very significant administrative
expenses amassed during the course of these bankruptcy proceedings.
There is substantial reason to believe that the
Partnership would not prevail on the Stay Claim. In In re
McMullen, 386 F.3d 320, 328 (1st Cir. 2004), we held that, for
public policy reasons, courts should be circumspect about
construing a “private party’s reporting of wrongful conduct to
governmental regulatory authorities” as a violation of the
automatic stay. The Principals seek to distinguish McMullen by
claiming that it does not apply in cases of bad faith. However,
even if the Principals were successful in proving bad faith (and it
is clear that proving this point would be a substantial
undertaking), we have expressed skepticism in both McMullen and In
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re Spookyworld, Inc., 346 F.3d 1 (1st Cir. 2003), that an
allegation of bad faith makes any difference in the valuation
process. In Spookyworld, for example, we expressed concern that
inquiring into the legitimacy of the regulatory claims would mire
the bankruptcy courts in “mini-trials of purely state regulatory
issues.” Id. at 10 (internal quotation marks and citation
omitted). In McMullen, we cited Spookyworld in noting “the
tenuousness of the arguments for engrafting such a ‘bad faith’
exception . . . noting the emergent rule that bankruptcy courts
should not inquire into the legitimacy of ongoing administrative
enforcement proceedings in determining whether the police power
exception applies to them.” 386 F.3d at 328 (internal quotation
marks and citation omitted).
Moreover, even if the Partnership prevailed on this
claim, it is questionable whether it would be able to collect much
in the way of damages. See 11 U.S.C. § 362(k)(1);6 Spookyworld,
346 F.3d at 7 (holding that a debtor that is a corporation cannot
sue under § 362(h) for a violation of the automatic stay).
Furthermore, any recovery likely would be offset by the fees and
costs incurred in pursuing litigation.7
6
Before recent amendments to the Bankruptcy Code, the
relevant provision appeared as § 362(h).
7
We also note that it would have been very difficult for the
Principals to argue that this case is controlled by our decision in
In re Lloyd, Carr & Co., 617 F.2d 882 (1st Cir. 1980). In Lloyd,
Carr, we held that “where . . . a settlement rewards a bankrupt for
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The fourth prong of the Jeffrey analysis requires that
the bankruptcy court recognize “the paramount interest of the
creditors and a proper deference to their reasonable views in the
premise.” 70 F.3d at 185. Notably, none of the non-insider
creditors objected to the settlement, which provided a payment of
thirty-two cents on the dollar to the unsecured creditors. Had the
Trust been required to litigate these claims, there is a good
his contumacious refusal to comply with the Bankruptcy Act itself,
more is required than a simple showing of marginal benefit. Public
policy forbids a settlement of this character without, at least, a
powerful showing of such potential detriment to the estate that no
other course is reasonably available.” Id. at 891. The debtor,
who was being held on charges of fraud in the sale of stock
options, had stashed $1.75 million in banks in Bermuda. The
bankruptcy court ordered him to have those funds transferred to an
American bank and placed under the control of a receiver. The
debtor refused to comply with the court’s order and in fact
strenuously resisted attempts in Bermudan courts to have the funds
transferred to the United States. After its attempts to obtain the
money by other means were thwarted, the receiver reached a
settlement with the debtor. The agreement called for the debtor to
transfer $207,000 from Bermuda to the United States. Half of that
money would go to the receiver; the debtor would retain the other
half and would use it to post bail. All of the major creditors
opposed this proposed settlement. The district court nevertheless
approved the settlement, but we reversed. We noted that the debtor
was required by law to transfer the money even in the absence of
the agreement; thus, he provided no consideration for the
agreement. Id. at 890. We further concluded that the bankruptcy
code did not permit the disbursement of funds from the bankruptcy
estate to allow a debtor to post bail. Id. at 889. We also noted
that the compromise had been actively opposed by the major
creditors and affirmatively approved by none. Id. at 892. In sum,
we held that the agreement was contrary to public policy because
the debtor would give up nothing and would get a benefit to which
he was not legally entitled.
Here, by contrast, the allegations involve alleged wrongdoing
by a third party and, as we have shown, it may well be that a trier
of fact would not decide that there was a showing of bad faith.
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chance that these creditors would have received a great deal less,
assuming there had been some recovery. In that respect, we give
substantial deference to a bankruptcy court’s decision to approve
a proposed settlement.
The Principals, therefore, have not carried their burden
of showing that the bankruptcy court’s determination falls below
the bottom of the range of reasonableness. Even if the claims have
merit, the amount that the Trust might collect is so uncertain as
to make the bankruptcy court’s decision to approve the settlement
reasonable. We have no difficulty in determining that the judgment
of the trustee was well within the range of reasonableness and that
the bankruptcy court correctly approved the settlement. The
strength of the Partnership’s remaining claims was indeed
questionable, and the offer of settlement approved by the
bankruptcy court was a very realistic one.
B.
In its ruling on the motion to reconsider approval of the
settlement, the bankruptcy court dismissed sua sponte an adversary
complaint filed by the Principals. Its discussion of the matter
was brief:
The partners’ rights (including any rights of
the 110 Beaver Street Trust) to relief in the
adversary proceeding are subject to the terms
of the settlement, which was approved before
the filing of the adversary proceeding.
Moreover, the demands for relief in the
adversary proceeding are predicated entirely
on rights of the debtor and of the bankruptcy
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estate, which rights have now been settled by
the agreement. Therefore, the adversary
proceeding too must be dismissed.
R.App. 1172.
A sua sponte dismissal “without prior notice to plaintiff
may be proper in relatively egregious circumstances.” Martinez-
Rivera v. Sanchez Ramos, 498 F.3d 3, 7 (1st Cir. 2007). In such
cases, it is “crystal clear that the plaintiff cannot prevail and
that amending the complaint would be futile[.]” Gonzalez-Gonzalez
v. United States, 257 F.3d 31, 37 (1st Cir. 2001). These cases
have “incurable defects that are evident from the face of the
complaint - e.g., claims based on indisputably bogus legal theories
or delusional factual scenarios.” Green v. Concord Baptist Church,
No. 08-1977, 2009 WL 580813, at *2 (1st Cir. Mar. 9, 2009) (citing
Martinez-Rivera, 498 F.3d at 7-9).
When a partnership enters bankruptcy, the partnership’s
claims become property of the bankruptcy estate, and the partners
may not bring them.8 Acknowledging this rule, the Principals
8
See In re Seven Seas Petroleum, Inc., 522 F.3d 575, 584
(5th Cir. 2008) (“If a claim belongs to the estate, then the
bankruptcy trustee has exclusive standing to assert it.”); DiMaio
Family Pizza & Luncheonette, Inc. v. Charter Oak Fire Ins. Co., 448
F.3d 460, 463 (1st Cir. 2006) (“‘[A]ll legal or equitable
interests...in property as of the commencement of the case’ and
‘any interest in property that the estate acquire[d] after the
commencement of the case’ became the property of their respective
bankruptcy estates” and “their bankruptcy trustees acquired
exclusive standing to assert those claims.”) (quoting 11 U.S.C. §
541(a)(1),(7)); In re Pentell, 777 F.2d 1281, 1285 (7th Cir. 1985)
(stating that partnerships are “separate ‘persons’ for purposes of
the Bankruptcy Code”); Turner v. Cent. Nat’l Bank of Mattoon, Ill.,
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submit that they are asserting claims that are “different and
distinct” from those resolved by the settlement, Appellant’s Br.
35, and predicated on a “different and distinct” factual and legal
basis. Appellant’s Br. 38. On the basis of our own review of the
complaint, we cannot accept this argument. The complaint presents
a fundamental problem on its face that makes clear the correctness
of the bankruptcy court’s decision. The complaint simply does not
state a claim for damages that is separate, as a matter of fact and
law, from damage to the Partnership. The Principals’s allegations,
as well as their arguments in their briefs, make clear that
whatever injury they might be able to show would constitute injury
468 F.2d 590, 591 (7th Cir. 1972) (per curiam) (noting that “for
bankruptcy purposes partnership property is to be distinguished
from property of the individual partners”); Thomasson v. Mfrs.
Hanover Trust Co., 657 F.Supp. 448, 452 (S.D. Tex. 1987) (“If the
claims do in fact remain partnership claims, when the partnership
is also, as it is here, the debtor in bankruptcy, those claims
would be property of the estate, and Plaintiffs would be unable to
assert them.”); In re Hopkins, 346 B.R. 294, 304 (Bankr. E.D. N.Y.
2006) (“Moreover, courts have consistently held that only the
trustee and not a debtor has standing to pursue causes of action
that belong to the bankruptcy estate.”); In re Gainesville Venture,
Ltd., 159 B.R. 810, 811 (Bankr. S.D. Ohio 1993) (“When the limited
partnership is a chapter 11 debtor, however, any causes of action
or defenses of the limited partnership...are property of the
partnership’s bankruptcy estate[.]”); In re Equidyne Props., Inc.,
60 B.R. 245, 248 (Bankr. S.D. N.Y. 1986) (“Thus the Partnerships,
not the [limited partners], appear to be the holders of the claims
the [partners] assert. Accordingly, it would appear to be the
province of the trustee or someone authorized to act on the
estate’s behalf to pursue the claims against the general
partner.”); see also 4 William L. Norton, Jr. & William L. Norton
III, Norton Bankr. L. & Prac. 3d § 61:4 (2009) (“Code § 541(a)(1)
includes every conceivable interest of the debtor in the
estate[.]”); id. § 61:1 (“[T]he estate includes all property of the
debtor[.]”).
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to the Partnership. Such alleged injuries suffered by the
Partnership are precisely the matters that were compromised by the
settlement agreement.9
III. CONCLUSION
For the foregoing reasons, the judgment of the district
court is affirmed.
Affirmed.
9
We are aware that the Court of Appeals for the Fifth
Circuit has held explicitly that a creditor has standing to bring
an action for damages under 11 U.S.C. § 362(k) for a violation of
the automatic stay provision. See St. Paul Fire & Marine Ins. Co.
v. Labuzan, 579 F.3d 533 (5th Cir. 2009). However, as that case
makes clear, the creditor must be able to allege an injury as a
creditor from the violation of the automatic stay. Here, the
plaintiffs can allege no injury to themselves; they simply allege
an injury to the partnership estate.
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