Michael William Kenny v. Critical Intervention Services, Inc. ( 2022 )

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[DO NOT PUBLISH]
In the
United States Court of Appeals
For the Eleventh Circuit
____________________
No. 21-12295
____________________
In re: MICHAEL WILLIAM KENNY,
Debtor.
___________________________________________________
MICHAEL WILLIAM KENNY,
Plaintiff-Appellant,
versus
CRITICAL INTERVENTION SERVICES, INC.,
Defendant-Appellee.
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2 Opinion of the Court 21-12295
____________________
Appeal from the United States District Court
for the Middle District of Florida
D.C. Docket No. 8:20-cv-02458-KKM
____________________
Before WILLIAM PRYOR, Chief Judge, ROSENBAUM, and BRASHER,
Circuit Judges.
BRASHER, Circuit Judge:
This is an appeal from a settlement approval order in a Chap-
ter 7 bankruptcy proceeding. When Michael Kenny was hired by
Critical Intervention Services, Inc. (“CIS”), as a security guard, he
signed several restrictive covenants with the firm, including a non-
compete agreement. After less than a month on the job, Kenny re-
signed and joined another private security firm called Securitas.
When CIS notified Securitas of the non-compete agreement it had
with Kenny, Securitas terminated him. At that point, Kenny chal-
lenged CIS’s enforcement of the non-compete agreement in state
court. CIS countersued for breach of contract. While that litigation
was ongoing, Kenny filed a Chapter 7 bankruptcy petition.
A trustee administered Kenny’s estate in bankruptcy court.
Several of Kenny’s creditors, including CIS, filed claims on his es-
tate. The Trustee eventually proposed a settlement in which CIS
paid $30,000 into Kenny’s estate in exchange for dismissing the
state-court action. That money would then be used to pay Kenny’s
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21-12295 Opinion of the Court 3
other unsecured creditors in full. Any leftover funds would be di-
vided between Kenny and CIS. The bankruptcy court approved the
settlement over Kenny’s objection. Kenny filed a motion for recon-
sideration, which the bankruptcy court denied. He then appealed
to the United States District Court for the Middle District of Flor-
ida, which affirmed the approval of the settlement. He then filed a
secondary appeal with this Court. Reviewing for abuse of discre-
tion, we affirm.
I. BACKGROUND
CIS hired Kenny as a security guard under a non-compete
agreement. Kenny was initially assigned to work the night shift, but
after losing childcare for his daughter, he asked CIS if he could
move to the day shift. CIS could not accommodate his request, so
he resigned. Kenny’s time at CIS lasted less than one month. Most
of Kenny’s time at CIS was spent in state licensure courses, orien-
tation, and job-training. Three days were spent working field-train-
ing shifts.
After leaving CIS, Kenny began working for Securitas, a CIS
competitor, as a security guard. CIS considered Kenny’s employ-
ment with Securitas a violation of his non-compete agreement,
which prohibited Kenny from working for a CIS competitor for
two years after his employment with CIS ended. After learning
about Kenny’s new position, CIS notified Securitas that Kenny was
in breach of the non-compete agreement. Securitas then termi-
nated Kenny.
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Kenny sued CIS in Florida state court seeking (1) a declara-
tory judgment that the non-compete he signed with CIS was unen-
forceable, and (2) money damages based on tortious interference
leading to his termination by Securitas. Because the harm caused
by his termination was offset by unemployment benefits he re-
ceived, Kenny’s economic damages were capped at $10,000 in lost
wages. He also sought non-economic damages for emotional dis-
tress and punitive damages. CIS counterclaimed for breach of con-
tract, seeking liquidated damages and injunctive relief based on the
non-compete agreement. CIS later moved to disqualify Kenny’s
counsel.
Before the state court could rule on that motion, and as part
of his strategy, Kenny filed a petition for Chapter 7 bankruptcy.
Kenny’s petition listed $333,898 in total liabilities, mostly in the
form of non-priority, unsecured claims. His only meaningful assets
were his claims against CIS. Kenny listed CIS as a nonpriority, un-
secured creditor with a contingent and disputed claim stemming
from the state-court litigation. CIS filed a proof of claim for
$302,305.26 based on “[a]ttorney’s fees and costs incurred” in the
state-court litigation with Kenny. Kenny filed an objection to the
proof of claim. According to Kenny, CIS’s proof of claim was mer-
itless because CIS could not prevail in the state-court action against
Kenny.
While Kenny’s objection was pending, the bankruptcy Trus-
tee negotiated a settlement agreement with CIS. Under the settle-
ment, CIS agreed to pay Kenny’s estate $30,000 in exchange for
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dismissing the state-court action with prejudice. CIS would receive
an allowed claim for $302,305.26—though it was to be subordi-
nated to all other unsecured claims. And CIS would assign thirty-
three percent of any funds it received for its claim (up to $10,000)
to Kenny. The upshot is that all of Kenny’s unsecured debts would
be paid, and Kenny would receive a discharge of his debts and up
to $10,000 cash.
The Trustee asked the bankruptcy court to approve the set-
tlement under 11 U.S.C. § 105(a) and Federal Rule of Bankruptcy
Procedure 9019(a). No creditor objected to the proposal, but
Kenny objected, arguing that settlement was not in his best inter-
ests. Specifically, Kenny argued that the settlement undervalued his
claims in the state-court action where he was seeking non-eco-
nomic and punitive damages. He also argued that CIS was not a
legitimate creditor and had no legal basis for recovery against
Kenny or the estate.
The bankruptcy court held a hearing on the proposed settle-
ment. The court analyzed the proposed settlement under the test
laid out by Wallis v. Justice Oaks II, Ltd. (In re Justice Oaks II, Ltd.),
898 F.2d 1544 (11th Cir. 1990), concluding that “each of the [four]
Justice Oaks factors weigh[ed] in favor of approving the compro-
mise.” First, it found that Kenny’s probability of success on the
merits of his state-court claims was doubtful. Though Kenny raised
several arguments against enforcing the non-compete agreement,
he overlooked the fact that CIS had successfully enforced similar
agreements twice in the six years leading up to the settlement. And
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even if Kenny prevailed, his economic damages against CIS were
capped at $10,000—significantly less than what the settlement
promised to pay into his estate—and his entitlement to non-eco-
nomic damages was uncertain. Second, potential difficulties in col-
lection meant that even if he won on the merits and obtained non-
economic damages, there could be delay in collecting from CIS.
Third, the state-court litigation was complex given the nature of
the claims, the pending motion to disqualify Kenny’s counsel, and
the difficulty of retaining replacement counsel if the motion were
granted. Indeed, Kenny’s counsel argued that he was uniquely
qualified to handle the non-compete litigation and could not be re-
placed if the state court disqualified him. Finally, the interest of
Kenny’s creditors weighed heavily in favor of the settlement, under
which all non-CIS creditors expected to be paid in full.
The bankruptcy court then approved the settlement. In do-
ing so it concluded that Kenny’s initial objection to CIS’s proof of
claim was “subsumed in the settlement” and therefore overruled.
Kenny filed a motion for reconsideration, which the bankruptcy
court denied.
Kenny then appealed to the U.S. District Court for the Mid-
dle District of Florida. He argued that because he was likely to suc-
ceed on the merits of his state-law claims, the bankruptcy court
should have recognized that CIS’s claim was meritless and re-
moved CIS as a creditor. And he argued that the bankruptcy court
erred in denying his motion for reconsideration because, again, it
underestimated the strength of his state-law claims, which biased
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its weighing of the Justice Oaks factors. After reviewing the record
and holding its own hearing, the district court affirmed the bank-
ruptcy court’s approval order. It held that the bankruptcy court did
not abuse its discretion by (1) approving the Trustee’s settlement
with CIS, (2) overruling Kenny’s objection to CIS’s proof of claim,
and (3) denying Kenny’s motion for reconsideration. Kenny then
filed a secondary appeal with this Court.
II. STANDARDS OF REVIEW
When reviewing a district court’s appellate review of a bank-
ruptcy court’s decision, we apply the same standards of review as
the district court. See Reynolds v. Servisfirst Bank (In re Stanford),
17 F.4th 116, 121 (11th Cir. 2021) (citing United Mine Workers of
Am. Combined Benefit Fund v. Toffel (In re Walter Energy, Inc.),
911 F.3d 1121, 1135 (11th Cir. 2018)). Accordingly, we review con-
clusions of law drawn by both the district court and the bankruptcy
court de novo. And we review factual findings for clear error. See
id. A factual finding is clearly erroneous if the reviewing court ex-
amines the evidence and is “left with the definite and firm convic-
tion that a mistake has been made.” Id. (quoting Feshbach v. Dep’t
of Treasury (In re Feshbach), 974 F.3d 1320, 1328 (11th Cir. 2020)).
We review a bankruptcy court’s order approving a settle-
ment for abuse of discretion. See Chira v. Saal (In re Chira), 567
F.3d 1307, 1311 (11th Cir. 2009) (citing Christo v. Padgett (In re
Christo), 223 F.3d 1324, 1335 (11th Cir. 2000)). Under this standard,
we “must affirm unless we find that the lower court has made a
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clear error of judgment, or has applied the wrong legal standard.”
In re Walker, 532 F.3d 1304, 1308 (11th Cir. 2008) (per curiam)
(cleaned up). Finally, we review a bankruptcy court’s denial of a
motion for reconsideration for abuse of discretion. See Fed. R.
Bankr. P. 9024 (incorporating Fed. R. Civ. P. 60(b)); Big Top Kool-
ers, Inc. v. Circus–Man Snacks, Inc., 528 F.3d 839, 842 (11th Cir.
2008) (holding that we “review the district court’s denial of a Rule
60(b) motion for an abuse of discretion”).
III. DISCUSSION
A. The Bankruptcy Court Did Not Abuse its Discretion in Ap-
proving the Trustee’s Settlement Proposal
The main issue on appeal is whether the bankruptcy court
abused its discretion by approving the proposed settlement. Under
Federal Rule of Bankruptcy Procedure 9019, a bankruptcy court
may approve a settlement of controversies “[o]n motion by the
trustee and after notice and a hearing.” Fed. R. Bankr. P. 9019(a).
We have recognized a strong public policy in favor of settlements.
Fla. Trailer & Equip. Co. v. Deal, 284 F.2d 567, 571 (5th Cir. 1960).
Nonetheless, before approving a settlement, a bankruptcy court
must determine that the settlement does not “fall below the lowest
point in the range of reasonableness.” Martin v. Pahiakos (In re
Martin), 490 F.3d 1272, 1275 (11th Cir. 2007).
The bankruptcy court here considered four factors in evalu-
ating the reasonableness of the proposed settlement: “(a) [t]he
probability of success in the litigation; (b) the difficulties, if any, to
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be encountered in the matter of collection; (c) the complexity of
the litigation involved, and the expense, inconvenience and delay
necessarily attending it; (d) the paramount interest of the creditors
and a proper deference to their reasonable views in the premises.”
In re Justice Oaks II, Ltd., 898 F.2d at 1549 (quoting Martin v. Kane
(In re A & C Props.), 784 F.2d 1377, 1381 (9th Cir. 1986)). The bank-
ruptcy court found that all four Justice Oaks factors favored ap-
proving the settlement.
First, the bankruptcy court found that Kenny’s probability
of success in state court favored settlement. To enforce its non-
compete agreement, CIS must show that the agreement is justified
by a “legitimate business interest.” See Fla. Stat. § 542.335(b). Sec-
tion 542.335(b) provides a non-exhaustive list of such interests, in-
cluding protection of confidential information, substantial cus-
tomer relationships, or an extraordinary investment in the em-
ployee’s education or training. Id. Beyond what is enumerated in
the statute, a legitimate business interest is “a business asset that, if
misappropriated, would give its new owner an unfair competitive
advantage over its former owner.” White v. Mederi Caretenders
Visiting Servs. of Se. Fla., LLC, 226 So. 3d 774, 784–85 (Fla. 2017)
(quoting John A. Grant, Jr. & Thomas T. Steele, Restrictive Cove-
nants: Florida Returns to the Original “Unfair Competition” Ap-
proach for the 21st Century, 70 Fla. B.J. 53, 54 (Nov. 1996)).
Kenny argues that he is likely to succeed in state court be-
cause CIS’s non-compete agreement is unenforceable. He contends
that CIS lacks a legitimate business interest in enforcing the
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10 Opinion of the Court 21-12295
agreement against a security guard who earned slightly more than
minimum wage, worked at CIS for less than a month, and spent
most of his time with CIS in licensure courses, training, and orien-
tation. He also contends that CIS lacks an interest in keeping its
training materials confidential because a significant amount of CIS
training material is publicly available either in print or online. Fur-
thermore, if Kenny is correct that CIS cannot tie its non-compete
agreement to a legitimate business interest, then it cannot prevail
in its counter-claim against Kenny—the sole basis for CIS’s claim
on Kenny’s estate.
Though it acknowledged that Kenny raised “a number of ar-
guments that call into question the enforceability of the non-com-
pete,” the bankruptcy court identified several considerations that
cast doubt on Kenny’s likelihood of success in the litigation. First,
the bankruptcy court considered CIS’s successful enforcement of
two similar non-competes against past employees in state court.
Kenny contends that CIS’s past success in enforcing its non-com-
pete agreements came via consent orders and that the merits of
those disputes were not fully litigated. The bankruptcy court
acknowledged that fact, but still found it noteworthy that state
courts had enforced CIS’s non-compete agreements at least twice.
Second, the bankruptcy court considered that even if Kenny pre-
vailed in state court, his economic damages were capped at
$10,000—significantly less than what his estate received under the
settlement. Third, though CIS’s claim on the estate totaled more
than $300,000, that figure was immaterial because (1) CIS’s claim
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was subordinated to the claims of all other creditors and (2) CIS
funded the settlement by paying $30,000 into the estate to satisfy
Kenny’s debts, splitting any remainder with up to $10,000 going to
Kenny. Finally, the bankruptcy court noted Kenny’s inability to
support, with relevant authority, his argument that he was entitled
to additional non-economic damages.
Second, the bankruptcy court found that the difficulties in
collection favored settlement. Kenny argues that there are no
known difficulties with collecting a judgment from CIS. He con-
tends that collecting any judgment always involves some amount
of delay, and that the efficiency gained by settling his claims does
not outweigh the potential benefits of allowing him to litigate. The
bankruptcy court considered that even if Kenny prevailed and re-
covered non-economic damages from CIS, collecting them would
necessarily take longer than the quick payout to creditors under the
settlement. It reasonably concluded that an immediate payout to
Kenny’s estate and a discharge of his debts outweighed the possi-
bility of collecting a larger judgment sometime in the future.
Third, the bankruptcy court found that the complexity of
the litigation favored settlement. Kenny argues that discovery in
the state-court litigation was nearly complete and that the case was
ready for trial. And he contends that the pending motion to disqual-
ify his counsel should be disregarded as a “delay tactic.” The bank-
ruptcy court considered that non-compete litigation is “highly spe-
cialized.” It reasoned that if the Trustee declined to settle, he would
need to defend against the motion to disqualify Kenny’s counsel.
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And it relied on Kenny’s own statement that his current counsel
was the only lawyer who could adequately represent him, conclud-
ing that finding replacement counsel would be difficult if the mo-
tion to disqualify were granted.
Finally, the bankruptcy court considered the interests of
Kenny’s creditors. No creditor objected to the proposed settle-
ment, and the $30,000 in settlement proceeds was expected to be
enough to cover administrative expenses and to pay every unse-
cured creditor other than CIS in full.
We cannot say the bankruptcy court abused its discretion in
concluding that the Justice Oaks factors favor settlement. The pro-
posed settlement paid Kenny more than he could have recovered
in economic damages from the litigation, which were capped at
$10,000. And it paid in full each unsecured creditor other than CIS.
Rather than guarantee his creditors a quick payout, Kenny asks for
an opportunity to fully litigate his state-court claims in search of
non-economic damages. The bankruptcy court reasonably rejected
that request.
Kenny complains that the bankruptcy court, in weighing the
factors, did not itself fully adjudicate the merits of his state-law
claims. But it was not required to. In evaluating a settlement pro-
posal, a bankruptcy court need not find facts, draw legal conclu-
sions, or otherwise adjudicate the merits of underlying litigation.
See In re Justice Oaks II, Ltd., 898 F.2d at 1549. The nature of a
settlement is that no court rules on the merits of the settled claims.
Because the trustee’s proposed settlement was well above the
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“lowest point in the range of reasonableness,” the bankruptcy court
did not abuse its discretion in approving it. See In re Martin, 490
F.3d at 1275.
B. The Bankruptcy Court Did Not Abuse its Discretion in Al-
lowing CIS’s Claim
Kenny argues that the bankruptcy court erred in overruling
his objection to CIS’s proof of claim. He contends that, if the court
had ruled on his objection before approving the settlement, it
would have concluded that CIS’s state-court claim lacked merit,
disqualifying CIS as a creditor and altering the Justice Oaks analysis
in his favor. He contends that if the bankruptcy court had ruled
separately on his objection to CIS’s claim, that would have ren-
dered him “the prevailing party on his claim for declaratory judg-
ment [in state court] . . . and entitle him (and the Estate) to signifi-
cant fees.”
This argument fails. First, nothing requires a bankruptcy
court to rule on a proof of claim or an objection to a proof of claim
before the claim can be settled. See Ga. Dep’t of Revenue v. Mou-
zon Enters., Inc. (In re Mouzon Enters., Inc.), 610 F.3d 1329, 1334
(11th Cir. 2010). Such a rule would defeat the purpose of settle-
ment. Second, the bankruptcy court analyzed and overruled
Kenny’s objection in the process of approving the settlement. The
bankruptcy court explained that Kenny’s objection to CIS’s proof
of claim was “subsumed” into its settlement analysis. Because the
bankruptcy court did not abuse its discretion in approving the
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settlement, it did not abuse its discretion in overruling Kenny’s ob-
jection under that settlement.
C. The Bankruptcy Court Did Not Abuse its Discretion in
Denying Kenny’s Motion for Reconsideration
Kenny filed a motion for reconsideration of the bankruptcy
court’s order approving the settlement and overruling his objec-
tion to the proof of claim. The bankruptcy court denied Kenny’s
motion for reconsideration, and the district court affirmed. On ap-
peal, Kenny argues that the bankruptcy court abused its discretion
because it relied on two prior instances of CIS successfully enforc-
ing its restrictive covenants against past employees in court. Kenny
contends that the orders resolving these cases were stipulated and
say nothing about the merits of his own claims against CIS. This
argument fails.
Kenny sought reconsideration under Fed. R. Bankr. P. 9024,
which borrows standards from Fed. R. Civ. P. 60. Specifically,
Kenny sought reconsideration under Rule 60(b)(3), which author-
izes relief in the case of fraud, misrepresentation, or misconduct by
an opposing party. Fed. R. Civ. P. 60(b)(3). To obtain relief under
this provision, a movant must prove by clear and convincing evi-
dence that the opposing party obtained the order through fraud,
misrepresentations, or other misconduct. See Waddell v. Hendry
Cnty. Sheriff’s Off., 329 F.3d 1300, 1309 (11th Cir. 2003).
As evidence of misconduct, Kenny cites the bankruptcy
court’s reliance on two prior state-court orders enforcing non-
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compete agreements between CIS and its former employees. In his
motion for reconsideration, Kenny argued that CIS “misrepre-
sented the nature” of the orders “to mislead the [c]ourt” as to
Kenny’s probability of success in state court. Kenny appears to
abandon that argument on appeal, never mentioning any misrep-
resentation by CIS. In any event, he falls far short of establishing by
“clear and convincing evidence” any misconduct by CIS or the
Trustee. In fact, CIS provided the bankruptcy court with copies of
the orders so that the bankruptcy court could make its own deter-
mination of their relevance. Accordingly, the bankruptcy court did
not abuse its discretion in denying reconsideration under Rule
60(b)(3).
Alternatively, Kenny sought reconsideration under Rule
60(b)(6), which allows reconsideration of an order for “other rea-
sons justifying relief.” Fed. R. Civ. P. 60(b)(6). But Rule 60(b)(6) is
an “extraordinary remedy which may be invoked only upon a
showing of exceptional circumstances” including “unexpected
hardship.” Griffin v. Swim-Tech Corp., 722 F.2d 677, 680 (11th Cir.
1984) (quotation omitted). Kenny’s only argument that he is enti-
tled to relief under this provision is—again—that the bankruptcy
court should have adjudicated the merits of his state-court claims
and ruled that CIS’s non-compete agreement was unenforceable.
As we explained above, the bankruptcy court need not make a mer-
its determination before approving a settlement. Kenny also fails to
show that his case features “exceptional circumstances” that justify
relief under Rule 60(b)(6). Far from it—despite Kenny’s uncertainty
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of success in state court, the approved settlement awards Kenny a
sum greater than the amount of economic damages he could re-
cover if he succeeded in state court.
IV. CONCLUSION
For the reasons stated above, we affirm the district court’s
decision affirming the bankruptcy court’s order approving the
Trustee’s proposed settlement and overruling Kenny’s objection to
CIS’s proof of claim.
AFFIRMED.