Fry's Metals, Inc. v. Gibbons ( 2002 )

Opinions of the United
2002 Decisions States Court of Appeals
for the Third Circuit
3-8-2002
In Re: RFE Ind Inc
Precedential or Non-Precedential:
Docket 0-2184
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Recommended Citation
"In Re: RFE Ind Inc" (2002). 2002 Decisions. Paper 157.
http://digitalcommons.law.villanova.edu/thirdcircuit_2002/157
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PRECEDENTIAL
Filed March 8, 2002
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 00-2184
IN RE: RFE INDUSTRIES, INC.
FRY'S METALS, INC.;
CAMERON & MITTLEMAN
v.
JOHN J. GIBBONS, Trustee for the Estate of RFE
Industries, Inc.; ANTON NOLL, INC.; WESTBURY ALLOYS,
INC.; SPARFVEN & COMPANY, INC.; MICHAEL SPARFVEN
Fry's Metals, Inc.,
Appellant
On Appeal from the United States District Court
for the District of New Jersey
(D.C. Civ. No. 00-cv-01868)
District Judge: Hon. William H. Walls
Argued November 1, 2001
Before: SLOVITER, NYGAARD, and CUDAHY,*
Circuit Judges
(Filed: March 8, 2002)
_________________________________________________________________
* Hon. Richard D. Cudahy, United States Court of Appeals for the
Seventh Circuit, sitting by designation.
Jonathan I. Rabinowitz (ARGUED)
Henry M. Karwowski
Rabinowitz, Trenk, Lubetkin &
Tully, P.C.
West Orange, N.J. 07052-3303
Attorneys for Appellant,
Fry's Metals, Inc.
Lawrence K. Lesnick
(ARGUED)
Ravin Greenberg P.C.
Roseland, N.J. 07068
Attorney for Appellee,
RFE Industries, Inc.
OPINION OF THE COURT
Cudahy, Circuit Judge.
Fry's Metals, Inc. (Fry's) appeals from the judgment of the
district court affirming the order of the bankruptcy court,
which denied approval of a settlement between Fry's and
the former Trustee of RFE. We vacate and remand.
I.
On August 19, 1997, RFE Industries, Inc. (Debtor or
RFE) voluntarily filed a petition for relief under Chapter 11
of the United States Bankruptcy Code. On September 8,
1997, RFE received authorization to sell its MFE Division,
which processes and refines metals, to Anton Noll, Inc.
(Anton). Anton agreed to make an up-front payment of
approximately $400,000 and to pay "royalties" to RFE for
three years. RFE expected the royalty payments to be, at a
minimum, about $360,000 per year.
On November 10, 1997, John J. Gibbons was appointed
as Chapter 11 Trustee for Debtor's estate because of
allegations of "fraud or gross mismanagement of the affairs
of the Debtor by current management." On February 13,
1998, Anton agreed to sell the MFE assets to Fry's and
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Westbury Alloys, Inc. (now Sparfven & Company, Inc. or
Sparfven) for at least $950,000. After the sale, Anton failed
to remit any royalty to RFE, so Gibbons sued Anton,
Sparfven and Fry's for breach of contract and certain state
torts. After discovery, Gibbons and Fry's agreed to a
settlement of the estate's claims against Fry's (the
Settlement). The estate's claims against Anton and Sparfven
are unaffected by the Settlement.
Meanwhile, because RFE was successful in challenging
some claims by its creditors and in settling other claims,
RFE was able to pay all its creditors in full. Thus, Gibbons
and RFE moved to dismiss the bankruptcy case. Fry's then
objected, however, that the Settlement had not yet been
approved by the bankruptcy court. To satisfy Fry's
objections, the Dismissal Order stipulated that the
bankruptcy court would retain limited jurisdiction to
"enforce and consummate a previously agreed-upon
settlement between some of the parties thereto."
Notice of the Settlement was then sent to all parties and
a hearing date was set. At the hearing, Gibbons and Fry's
moved for approval of the Settlement. RFE objected. The
bankruptcy court initially approved the Settlement, holding
that RFE had waived any objections to it. Later, developing
some doubts about whether RFE had actually waived its
right to object to the Settlement, the bankruptcy court
asked the parties to file supplemental briefs on that issue.
After another hearing, the bankruptcy court vacated its
prior order and entered an order denying approval of the
Settlement. On July 18, 2000, the district court entered an
order affirming the bankruptcy court's order. Fry's appeals.
II.
This Court has jurisdiction under 28 U.S.C. S 1291. This
Court exercises plenary review of a district court's decision
in a bankruptcy matter. In re Gi Nam, 273 F.3d 281, 285
(3d Cir. 2001).
A.
The Dismissal Order of RFE's bankruptcy case provides:
"Notwithstanding the entry of this order, this Court shall
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retain jurisdiction of the pending adversary proceeding
captioned John J. Gibbons, Trustee v. Anton Noll, Inc., Fry's
Metals, Inc. v. Sparfven & Company., Inc. et al, adversary
proceeding number 99-2331 to enforce and consummate a
previously agreed-upon settlement between some of the
parties thereto." Fry's argues that the Dismissal Order
specifically limited the jurisdiction of the bankruptcy court
to the enforcement and consummation of the Settlement.
Hence, Fry's argues that the bankruptcy court had no
jurisdiction to review the merits of the Settlement. Here, we
review whether a bankruptcy court has subject-matter
jurisdiction de novo.
All parties agree that the bankruptcy court has
jurisdiction over the Settlement despite the case's being
dismissed. Fry's merely seeks to narrow the jurisdiction of
the bankruptcy court to the enforcement and
consummation of the Settlement. In this connection,
Federal Rule of Bankruptcy Procedure 9019(a) provides that
"[o]n motion by the trustee and after notice and a hearing,
the court may approve a compromise or settlement." Fed.
R. Bankr. P. 9019 (1993) (emphasis added). We note
particularly that the Bankruptcy Code uses the word"may"
and not "must." Thus, the bankruptcy court's jurisdiction
includes the power to disapprove a settlement. Allowing
dismissal orders to narrow the authority of the bankruptcy
court in the circumstances presented here would deny the
bankruptcy court power to consider such matters as
possible collusion between trustees and third-parties.
Hence, in the interest of preserving a meaningful level of
review, we hold that the bankruptcy court had power to
disapprove (as well as to approve) the Settlement. The
standard of review that the bankruptcy court must apply in
approving or in disapproving a settlement is a matter we
will discuss below.
B.
Gibbons, the Trustee, and Fry's entered into a settlement
of the estate's claims against Fry's. Because RFE did not
participate in the Settlement, Fry's argues that RFE had no
standing to object to the Settlement. We review the issue of
standing de novo.
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In order for a settlement to be approved by the
bankruptcy court, Federal Rule of Bankruptcy Procedure
9019(a) provides that "[n]otice [of the settlement] shall be
given to creditors, the United States trustee, the debtor, and
indenture trustees as provided in Rule 2002 and to any
other entity as the court may direct." Fed. R. Bankr. P.
9019 (1993) (emphasis added). It is implicit in the debtor's
being given notice in this fashion that the debtor may
object to a proposed settlement. Further, in this case, the
party most clearly adversely affected by the Settlement (and
perhaps, since there are no creditors, the only party
adversely affected by the Settlement) is RFE. Therefore, RFE
has standing to object to the Settlement even though it was
not a party to the Settlement.
C.
Gibbons and RFE moved to dismiss RFE's bankruptcy
case because RFE's creditors had been paid in full. Due to
Fry's objections, RFE included in its proposed Dismissal
Order the language about the bankruptcy court's retention
of jurisdiction over the Settlement. Thus, Fry's argues that
RFE, by agreeing to this restrictive language, waived its
right to object to the Settlement or should be equitably
estopped from objecting to the Settlement. The issues of
waiver and estoppel are reviewed de novo, although the
bankruptcy court's findings of fact are accepted unless
clearly erroneous. See In re New Valley Corp. , 89 F.3d 143,
148 (3d Cir. 1996).
Waiver is the "intentional relinquishment or
abandonment of a known right." United States v. Dispoz-O-
Plastics, Inc., 172 F.3d 275, 282 (3d Cir. 1999) (internal
quotations and citations omitted). Fry's argues that RFE
waived its rights to object to the Settlement when RFE
proposed the language in the Dismissal Order that provided
for the retention of what could be construed as limited
jurisdiction by the bankruptcy court. However, the
bankruptcy court found that RFE had not waived its rights.
Because the language of the Settlement had not been
disclosed to third parties, including the Debtor, RFE had no
idea what the Settlement entailed. RFE therefore could not
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have intentionally relinquished a known right when it did
not know what it was relinquishing.
Fry's also argues that RFE should be equitably estopped
from objecting to the Settlement. "Parties claiming equitable
estoppel must establish that (1) a representation of fact was
made to them, (2) upon which they had a right to rely, and
(3) the denial of the represented fact by the party making
the representation would result in injury to the relying
party." Wheeling-Pittsburgh Steel Corp. v. McCune, 836 F.2d
153, 162-163 (3d Cir. 1987). Fry's claims that, when RFE
proposed the language in the Dismissal Order, RFE
represented that it would not object to the Settlement. If
Fry's had known that RFE would object to the Settlement,
Fry's now claims that it would not have agreed to the
dismissal of the bankruptcy case. Thus, Fry's seek to estop
RFE from objecting to the Settlement. Fry's argument is
unpersuasive. First, even if the bankruptcy case had not
been dismissed, RFE would still have been able to make
objections at a hearing on the Settlement. More
importantly, RFE could not (and likely did not) make the
representation that Fry's alleges that it made. As previously
noted, the Dismissal Order gave the bankruptcy court
apparently limited jurisdiction to "enforce and
consummate" the Settlement. But because the power of the
bankruptcy court cannot be narrowed by the Dismissal
Order, that order can only be read to permit the
enforcement of a properly approved Settlement. Proper
approval of a settlement requires that the Debtor have an
opportunity to make any objections to the settlement. RFE
had not had any opportunity to make such objections to
the Settlement. Further, the language in the Dismissal
Order does not plainly state that RFE was waiving any such
opportunity. Therefore, RFE's proposal of the language in
the Dismissal Order was not a representation by RFE that
it would not object to the Settlement.
Thus, we hold that RFE had not waived its right to object
to the Settlement and is not estopped from objecting to the
Settlement.
D.
Turning to the merits, Fry's urges this Court to approve
the Settlement in light of In re Martin, 91 F.3d 389, 393 (3d
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Cir. 1996), or, in the alternative, remand to the bankruptcy
court for an analysis of the settlement under the Martin
factors. We review de novo whether the bankruptcy court
should have analyzed the Settlement under the Martin
analysis
In Martin, we held that a bankruptcy court should
examine four factors in deciding whether to approve or
disapprove a settlement. See Martin, 91 F.3d at 393. These
factors are: (1) the probability of success in litigation, (2)
the likely difficulties in collection, (3) the complexity of the
litigation involved, and the expense, inconvenience and
delay necessarily attending it; and (4) the paramount
interest of the creditors. See id.Here, the bankruptcy court did not make any findings of
fact on these four issues. Rather, it disapproved the
Settlement on the grounds that RFE had not waived its
objection to it, and the bankruptcy case no longer existed.
However, these grounds are insufficient under Martin and
cannot support the approval or the disapproval of a
settlement. For example, the failure to waive objections to
the Settlement goes to the question of standing or the
existence of affirmative defenses, not to the reasonableness
of the Settlement. Similarly, the dismissal of the
bankruptcy case goes to the question of the jurisdiction of
the bankruptcy court, not to whether the Settlement should
be approved or disapproved. We agree with Fry's that the
bankruptcy court should have examined the Settlement
under the Martin framework. Here, the bankruptcy court
retained jurisdiction over an unresolved matter of RFE's
bankruptcy case--the approval or disapproval of the
Settlement. Because the bankruptcy case is still ongoing as
to that matter, the bankruptcy court must examine the
Settlement using the Martin analysis. Hence, we remand for
an examination of the "fairness, reasonableness and
adequacy" of the Settlement in light of the factors listed in
Martin. In re Glickman, Berkovitz, Levinson & Weiner, P.C.,
204 B.R. 450, 455 (E.D. Pa. 1997). Because the situation
has changed drastically since Gibbons first negotiated the
Settlement, the bankruptcy court should examine the
Martin factors in light of the present circumstances. For
example, since there are no creditors involved, the fourth
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factor in Martin test will need to be modified. Substituting
the paramount interest of the shareholders of RFE for the
paramount interest of the creditors appears to be
consistent with the purpose of the Martin test--to maximize
the recovery of those to whom the company has obligations.
The judgment of the former Trustee, Gibbons, is also
entitled to less deference since RFE is no longer in
bankruptcy.
III.
For the foregoing reasons, we will reverse the judgment of
the District Court and remand for further proceedings.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
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