Doctors Hosp Hyde Pa v. LaSalle Bank Nat'l ( 2007 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 05-3502
IN RE:
DOCTORS HOSPITAL OF HYDE PARK, INC.,
Debtor-Appellee.
APPEAL OF:
LASALLE BANK NATIONAL ASSOCIATION, as Trustee.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 04 C 4319—Rebecca R. Pallmeyer, Judge.
____________
ARGUED APRIL 6, 2006—DECIDED JANUARY 12, 2007
____________
Before BAUER, WOOD, and SYKES, Circuit Judges.
SYKES, Circuit Judge. LaSalle Bank National Associa-
tion (“LaSalle”) appeals a district court order affirming
the bankruptcy court’s approval of a settlement of adver-
sary litigation in the bankruptcy of Doctors Hospital of
Hyde Park (“Doctors Hospital” or “the Hospital”). The
settlement releases Dr. James Desnick (“Desnick”) from
adversary claims the Hospital brought against him,
provides over $6 million in cash to the Hospital’s bank-
ruptcy estate, releases the Hospital from millions of
dollars in claims against it, and ends a complex litigation.
The Hospital, the bankruptcy trustee, Desnick, and the
creditors’ committee all agreed the settlement was in the
2 No. 05-3502
best interest of the estate. LaSalle disagreed and objected.
Following a lengthy hearing, the bankruptcy court held
the settlement was in the best interest of the estate and
approved it. The district court affirmed, and LaSalle has
appealed. We affirm.
I. Background
Desnick was the owner and sole shareholder of Doctors
Hospital and a number of other entities. One of his other
companies, HPCH LLC (“HPCH”), owned the land on
which the Hospital sat and collected monthly rent from it.
Another of his companies, Medical Management of Amer-
ica, Inc. (“MMA”), managed the Hospital and received fees
for these services. Desnick treated his companies like
personal bank accounts, sometimes withdrawing money
for himself, other times depositing money when his com-
panies’ coffers ran low.
Doctors Hospital guaranteed two loans that figure
prominently in this litigation, though it enjoyed the pro-
ceeds of only one. In March 1997 MMA Funding (99%
owned by Doctors Hospital) borrowed roughly $25 million
from Daiwa Healthco (the “Daiwa loan”). Because the
loan was, in practical effect, a loan to the Hospital, the
Hospital secured the loan by pledging its receivables. In
addition, Desnick personally guaranteed the loan. In
August 1997 Nomura Asset Capital Corporation loaned
HPCH $50 million (the “Nomura loan”). Although the
Nomura loan went ostensibly to HPCH, it was secured by
the Hospital’s equipment and (like the Daiwa loan) by
the Hospital’s accounts receivable. The Hospital also
executed a guaranty and suretyship agreement in favor
of Nomura. The Nomura loan proceeds did not go to the
Hospital, however. Instead, the proceeds—some $48.5
million after administrative fees—were deposited into an
No. 05-3502 3
account bearing the name of Desnick and his wife. Over
time LaSalle Bank came to control the Nomura loan.1
The Hospital filed for Chapter 11 bankruptcy protection
in April 2000. Daiwa filed a claim against the Hospital to
collect the outstanding portion of its loan, and Desnick
personally paid the debt of about $9 million. The Hospital
filed an adversary complaint against Desnick and numer-
ous other defendants. Twelve of the other defendants
were Desnick-controlled entities2 and four were former
corporate officers or directors3 of the Hospital whom
Desnick had effectively agreed to indemnify for their
losses.4 The gist of the complaint was that Desnick and
the other officers and directors caused the Hospital’s
bankruptcy through mismanagement and a series of
fraudulent transactions—to the tune of about $34 mil-
lion—which benefitted Desnick, his other companies, and
1
Nomura sold the loan to Asset Securitization Corporation
(“ASC”) in October 1997. ASC transferred the loan to a trust
for which LaSalle is the trustee.
2
These included: Barry Harlem Corp.; J.H. Desnick, M.D., Eye
Services Ltd.; James H. Desnick, M.D., S.C.; James H. Desnick,
M.D., P.A.; Desnick Descendants Irrevocable Trust; Desnick
Family Irrevocable Trust; HP Membership, Inc.; HPCH LLC;
HPCH Partners, L.P.; Leger Acquisition Corp.; Medical Manage-
ment of America, Inc.; Stoney Island Ventures, Inc.
3
They were: Willie T. Barrow, once a director of the Hospital;
Richard Felbinger, former executive vice president of finance;
Nelson Vasquez, financial officer for the Hospital from 1999 until
it closed; and Michael Nelson, former chief financial officer of
the Hospital.
4
Desnick agreed to indemnify American International Group
Technical Services, Inc., the Hospital’s directors and officers
insurer, for any losses it incurred under the policy covering
those four officers. Apparently, Desnick also agreed to indemnify
some of the officers and directors individually as well.
4 No. 05-3502
Hospital management.5 The complaint asserted twenty-
eight counts, including breach of fiduciary duties, conver-
sion, violation of the Illinois Uniform Fraudulent Transfer
Act, fraudulent transfers under the Bankruptcy Code,
improper distributions to the shareholder, and equitable
subordination of Desnick’s claims against the Hospital
(Desnick claimed the Hospital owed him roughly $16
million). The complaint also named LaSalle and sought to
void the guaranty on the Nomura loan.
After two years of litigation, the Hospital moved the
bankruptcy court for approval of a settlement agreement
that had been reached by the parties (except LaSalle).
Under the terms of the settlement, Desnick agreed to
pay the Hospital roughly $6.1 million and also agreed to
forfeit any subrogation rights he had to seek recovery of
the $9 million he personally paid to Daiwa on behalf of
the Hospital. He also agreed to withdraw any other claims
he filed against the Hospital. Moreover, Desnick promised
to use his best efforts to obtain dismissal or withdrawal of
a $13 million claim against the Hospital filed by the
Department of Health and Human Services (“DHHS”) for
Medicare/Medicaid reimbursements DHHS claimed were
improperly paid to the Hospital. If he could not secure
dismissal of the entire DHHS claim, Desnick agreed to
pay 15% of the claim, up to $1.5 million. Finally, Desnick
agreed to cooperate with the Hospital in its remaining
5
Specifically, the complaint alleged Desnick withdrew at least
$15 million from the Hospital and cost the Hospital millions in
fines, settlements, and legal fees because of Medicare overpay-
ments to the Hospital. The alleged fraudulent transactions
included the Nomura loan (through which Desnick tied up the
Hospital’s assets and future earnings as collateral without
any benefit to the Hospital), an overcharge by MMA of at least
$7 million for management fees in 1997, and overcharges for rent
by HPCH.
No. 05-3502 5
claims against other defendants, including LaSalle, by
(among other things) allowing the Hospital access to his
expert. In exchange, the Hospital agreed to release from all
claims Desnick, his companies, and the four individuals he
agreed to indemnify.
LaSalle objected, and the bankruptcy court conducted a
three-day evidentiary hearing on the Hospital’s motion.
The Hospital, Desnick, the bankruptcy trustee, and the
creditors’ committee all recommended that the settle-
ment would be the best way to avoid protracted, expensive,
complex, and uncertain litigation. The bankruptcy court
concluded that the best-case scenario for the Hospital
would be a $34 million victory and the worst case a
$1.8 million victory. (LaSalle had argued that the high end
was in excess of $80 million and the low end near
$34 million; the bankruptcy judge thought that was
unrealistic.) The court agreed with the Hospital and
Desnick that the high-end $34 million victory was the
least likely result because audited financials tended to
support Desnick’s position regarding the date of insol-
vency, which was critical to the bulk of the Hospital’s
claims. Given the range of litigation possibilities, the
bankruptcy court concluded the settlement was rea-
sonable because it would spare scarce resources, which
might be wasted on protracted litigation that would likely
yield mediocre results. LaSalle appealed to the district
court, which affirmed.
II. Discussion
Bankruptcy courts may approve adversary litigation
settlements that are in the best interests of the estate. In
re Energy Co-op., Inc., 886 F.2d 921, 927-29 (7th Cir.
1989); In re Am. Reserve Corp., 841 F.2d 159, 161 (7th Cir.
1987). The linchpin of the “best interests of the estate” test
is a comparison of the value of the settlement with the
6 No. 05-3502
probable costs and benefits of litigating. In re Energy Co-
op., 886 F.2d at 927. Among the factors the court considers
are the litigation’s probability of success, complexity,
expense, inconvenience, and delay, “including the possi-
bility that disapproving the settlement will cause wasting
of assets.” In re Am. Reserve, 841 F.2d at 161. As part of
this test, the value of the settlement must be reasonably
equivalent to the value of the claims surrendered. This
reasonable equivalence standard is met if the settlement
falls within the reasonable range of possible litigation
outcomes. In re Energy Co-op., 886 F.2d at 929; In re N.Y.,
New Haven & Hartford R.R. Co., 632 F.2d 955, 960 (2d
Cir. 1980); see also Protective Comm. for Indep. Stockhold-
ers of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414,
424-25 (1968); Depoister v. Mary M. Holloway Found., 36
F.3d 582, 586 (7th Cir. 1994). Because litigation outcomes
cannot be predicted with mathematical precision, only if
a settlement falls below the low end of possible litiga-
tion outcomes will it fail the reasonable equivalence
standard. In re Energy Co-op., 886 F.2d at 929.
The bankruptcy court’s approval of the settlement is
reviewed deferentially, for abuse of discretion. Depoister,
36 F.3d at 586. The bankruptcy court must indepen-
dently evaluate the settlement, not simply accept the
recommendation of the trustee. TMT Trailer Ferry, 390
U.S. at 424; Depoister, 36 F.3d at 586-87; In re Am. Re-
serve, 841 F.2d at 162. If the decision demonstrates a
command of the case, we will not engage in second-guess-
ing; the bankruptcy court is in a better position “to con-
sider the equities and reasonableness of a particular
compromise.” In re Am. Reserve, 841 F.2d at 162. Factual
findings are reviewed for clear error; legal conclusions
are reviewed de novo. FED. R. BANKR. P. 8013; In re
Crosswhite, 148 F.3d 879, 881 (7th Cir. 1998).
LaSalle complains of several errors, most having to do
with the value of the settlement to the estate and whether
No. 05-3502 7
it falls within the reasonable range of litigation outcomes.
First, LaSalle maintains the bankruptcy court clearly
erred in determining the value of the settlement to the
estate. LaSalle argues that some of the claims Desnick
gave up are worthless and that the settlement achieves
practically nothing for unsecured creditors. Second,
LaSalle contends the bankruptcy court miscalculated the
range of litigation outcomes. According to LaSalle, both the
low and high ends of possible outcomes are much higher
than the bankruptcy judge thought, and the settlement
does not fall within the range of LaSalle’s higher pro-
jected outcomes. Finally, LaSalle argues the bankruptcy
court did not make an independent evaluation of the
settlement, but instead rubber-stamped the misguided
recommendations of the trustee and the creditors’ com-
mittee.
A. Value of the Settlement
The bankruptcy court held that the settlement had
significant value to the estate. The Hospital released
Desnick, twelve Desnick-controlled entities, and four
former officers and directors of the Hospital from all
claims against them. In return, Desnick paid the estate
some $6.1 million cash. In addition, Desnick agreed to
waive his claim against the estate for the $9 million or so
he paid on the Daiwa loan. He also agreed to use his best
efforts to help resolve the $13 million Medicare/Medicaid
claim favorably to the estate. The settlement also made
Desnick’s financial expert available to the estate; he had
detailed knowledge of the Hospital’s books dating as far
back as 1992, which could help the estate in its claim
against LaSalle. Finally, the settlement narrowed the
scope of litigation and allowed the Hospital to focus its
resources on winning the few remaining claims rather than
battling on all fronts.
8 No. 05-3502
LaSalle takes issue with several of the bankruptcy
court’s conclusions. First, LaSalle argues that Desnick’s
forfeiture of his claim for the Daiwa loan is worthless.
LaSalle insists that when Desnick paid the Daiwa loan,
the loan was extinguished and Desnick obtained no
subrogation rights. LaSalle cites no law to support
this argument, and the position is not defensible. When a
guarantor pays a debt, he is subrogated to the rights of a
creditor against the corporation on whose behalf he paid
the debt. Weissman v. Weener, 12 F.3d 84, 87 (7th Cir.
1993); Mid-State Fertilizer Co. v. Exch. Nat’l Bank of Chi.,
877 F.2d 1333, 1336 (7th Cir. 1989); see also Mut. Serv.
Cas. Ins. Co. v. Elizabeth State Bank, 265 F.3d 601, 626
(7th Cir. 2001) (“[S]ubrogation can arise simply from the
fact of payment.”). LaSalle suggests that any subroga-
tion claim would be subject to equitable subordination
based on Desnick’s conduct, but it does not develop the
argument. In any event, the point is immaterial because
the bankruptcy court did not assume the value of the
released claim to be worth $9 million to the estate. Rather,
the court assumed that, if nothing else, the released
claim saved the estate the expense of litigating to deter-
mine whether the claim was valid. That is not error.
LaSalle also argues Desnick’s promise to use his best
efforts to defeat the Medicare/Medicaid claim is of no
value. By LaSalle’s reckoning, Desnick already had a duty
to obtain the release of the claim because of his position
as director and sole shareholder of the Hospital. Here
again LaSalle does not cite any legal authority for its
position. Corporate directors do not have continuing
fiduciary duties once they resign. See, e.g., Standage v.
Planned Inv. Corp.,772 P.2d 1140, 1144 (Ariz. 1988)
(noting there is no more fiduciary duty when director or
officer resigns); Microbiological Research Corp. v. Muna,
625 P.2d 690, 695 (Utah 1981) (“When a corporate officer
ceases to act as such, because of his resignation or re-
No. 05-3502 9
moval, the fiduciary relationship ceases.”); Renpak, Inc. v.
Oppenheimer, 104 So. 2d 642, 644 (Fla. Dist. Ct. App.
1958); WILLIAM MEADE FLETCHER, 3 FLETCHER CYC. CORP.
§ 860 (2002). Desnick resigned as director of the Hospital
in November 2000, so he had no continuing duty to right
the ship in 2004. Moreover, Desnick agreed to pay for the
filing of a report with DHHS regarding the Medicare/
Medicaid claim—a report that could cost $500,000—and
he had no duty to do so personally, even in a sole share-
holder situation (at least not without veil piercing, which
LaSalle has not pressed). Cf. Kelly v. Fahrney, 145 Ill. App.
80 (1908) (noting in the context of a closely held corpora-
tion that “there is no duty on the[ ] part [of shareholders]
to use individual pecuniary means to assist the corpora-
tion in its money difficulties or by use of such means
shield it from financial destruction”). Finally, Desnick
agreed to pay 15% of the claim, up to $1.5 million of his
own money, should he not secure its release. So even
assuming he had some sort of duty to help secure the
release of the Medicare/Medicaid claim, Desnick sweet-
ened the deal by offering to pay for the filing of the DHHS
report and a portion of any remaining claims. Desnick’s
promise was hardly illusory.
B. Range of Litigation Outcomes
The date the Hospital became insolvent was critical to
determining the range of possible litigation outcomes.
Most of the Hospital’s claims against Desnick centered
on allegations of breach of fiduciary duty, fraudulent
transfer, and conversion. Everyone agrees there are no
viable claims for any period during which the Hospital
was solvent; that is because as long as a corporation is
solvent, directors typically owe fiduciary duties only to
shareholders. Beach v. Miller, 22 N.E. 464, 466 (Ill. 1889);
Paul H. Schwendener, Inc. v. Jupiter Elec. Co., 829 N.E.2d
10 No. 05-3502
818, 828 (Ill. App. Ct. 2005). Because Desnick was the
sole shareholder of the Hospital, he can hardly have
defrauded himself or breached a fiduciary duty to himself.
See cf. In re Tufts Elecs., Inc., 746 F.2d 915, 917 (1st Cir.
1984) (holding that corporate opportunity doctrine does not
apply against sole shareholder who cannot defraud or
conceal information from himself ). If the Hospital was
insolvent, however, Desnick’s fiduciary duties extend to
the Hospital’s creditors. Paul H. Schwendener, 829 N.E.2d
at 828. Likewise, the Hospital’s fraudulent transfer and
conversion claims depend on insolvency. See 740 ILL.
COMP. STAT. 160/6 (1996); Nostalgia Network, Inc. v.
Lockwood, 315 F.3d 717, 719 (7th Cir. 2002) (“When a
person transfers money or other property to another
person without receiving anything in return, and the
transferor is insolvent (or made insolvent by the transfer),
the transfer is voidable . . . .”); Dannen v. Scafidi,
393 N.E.2d 1246, 1251 (Ill. App. Ct. 1979) (no liability
for converting corporate funds if all shareholders ratify
the act and creditors are not impaired).
The Hospital maintains that it became insolvent in
January 1997. Between January and August 28, 1997 (the
date of the Nomura loan), some $23 million in transfers
moved from the Hospital to Desnick. After August 1997, no
more than about $10 or $11 million in transfers occurred.
The bankruptcy court, sensibly enough, determined that
the upper limit of possible litigation outcomes was
about $34 million, assuming the Hospital could prove
insolvency as early as January 1997 and would prevail on
all of its claims.
LaSalle contends the bankruptcy judge’s upper limit
does not account for all of the Hospital’s claims. According
to LaSalle, the bankruptcy court should have included a
claim for the $48 million Nomura loan because Desnick
had pledged the Hospital’s assets to secure it. That
claim would have raised the upper limit of possible
No. 05-3502 11
outcomes to nearly $82 million, and LaSalle contends the
Hospital had a viable alter ego or “LBO-like” (leveraged
buyout) theory that would permit recovery of the amount
of the Nomura loan. The Hospital’s lawyer disagreed. He
testified that he entertained this theory, but ultimately
considered it too far-fetched.
The bankruptcy court did not clearly err by leaving
the Nomura funds out of the calculation. The court noted
that the adversary complaint did not actually make a
claim against Desnick for the $48 million Nomura loan.
The Hospital had only secured the loan; it never had a
right to the loan proceeds, which were given to HPCH. Nor
had the proceeds ever passed through the Hospital’s bank
accounts. The Hospital wanted only to be off the security
hook; it did not have a claim to recover the money from
Desnick.
From the estate’s perspective, trying to get the Nomura
money from Desnick on a novel legal theory would
have been more trouble than it was worth. To do so would
also run the risk of undercutting its claim against
LaSalle to void the Nomura guaranty; it would essentially
confirm LaSalle’s claim against the estate for the Nomura
funds. By disavowing any recovery against Desnick on the
Nomura loan and seeking only to void the guaranty, the
Hospital looked to knock out $48 million (or more) in
claims. Perhaps the estate could have pressed the legal
theories necessary to win the Nomura funds, but it
made the strategic decision not to. The bankruptcy
court’s exclusion of the Nomura loan amount was not
clearly erroneous.
The bankruptcy court determined the low end of pos-
sible outcomes by figuring the result if Desnick’s defenses
were established, which necessarily included an assess-
ment of whether those defenses were any good. Desnick
claimed the Hospital was not insolvent until September
12 No. 05-3502
1998. He also claimed to have given back to the Hospital
some of the funds he transferred out. If his theories
and proofs held up, Desnick maintained he could be liable
for no more than $1.8 million. The bankruptcy court thus
placed the low end of possible outcomes at $1.8 million.
LaSalle maintains the district court erred in this deter-
mination as well. At the low end, LaSalle argues, the
Hospital could have recovered at least the $34 million
because Desnick’s defenses are not viable. We disagree.
The parties do not dispute that insolvency is more diffi-
cult to prove further back in time, and the Hospital’s
position on insolvency is further back than Desnick’s.
LaSalle has effectively conceded that Desnick’s claims
have some merit—it asserted in the bankruptcy court
that the Hospital was solvent until at least August 28,
1997 (the date of the Nomura loan). By taking that
position LaSalle concedes some $23 million of the Hospi-
tal’s claims against Desnick are out, leaving claims for
only $10 to $11 million (the money transferred after the
date of the Nomura loan). LaSalle’s argument also makes
no allowance for Desnick’s transfers back to the Hospital.
Moreover, the bankruptcy court concluded Desnick’s
litigation position was not only arguably defensible, but
supported by audited financial statements. LaSalle’s
argument rings hollow in the face of its own concession
on insolvency dates and its failure to account for money
Desnick already repaid. It was not clear error to con-
clude that the lowest possible outcome for the Hospital was
a recovery of $1.8 million.
As we have already noted, so long as the settlement falls
within the reasonable range of litigation possibilities, it
meets the reasonable equivalency standard. In re Energy
Co-op., 886 F.2d at 929. Litigation outcomes are uncertain,
not reducible to mathematical formulas. All kinds of
variables can lead to all kinds of results. The sum certain
of $6.1 million, plus the release of claims by Desnick
No. 05-3502 13
against the Hospital, even if small compared to the best
possible litigation outcome, reasonably represents a
positive outcome for the estate in light of the risks,
specifically the possibility that the Hospital would be
found solvent up until late August 1997. This settlement
falls squarely within the reasonable range of litigation
outcomes.
As a last resort, LaSalle argues that the proponents of
the settlement did not actually prove the range of possible
outcomes because they did not present final insolvency
analyses. Instead, Desnick and the Hospital presented
only estimates and preliminary solvency evaluations.
LaSalle argues the bankruptcy court could not have made
an informed decision on the limits of litigation. But
estimates are acceptable in this context; no one would
ever settle a case if the claim and amount of recovery
could be established with 100% certainty. By settling the
parties have concluded that a definite amount today
is more valuable than the risk and expense of trying the
case in the future. Parties assess settlement offers by
taking stock of the information they have, even if pre-
liminary, and considering whether the possibility the
case will improve is worth the risk of losing the settle-
ment offer. In this case, the bankruptcy court considered
the preliminary insolvency reports and noted that the
audited financials lent support to Desnick’s position. That
is enough to show the settlement was good for the
estate—it was more than three times higher than the
worst-case scenario for the estate, to say nothing of the
value of the claims Desnick surrendered and the money
saved by foregoing additional litigation.
LaSalle’s position, if accepted, would encourage waste.
Preliminary evidence suggested the viability of some of
Desnick’s positions. Suppose the bankruptcy court had
refused to approve the settlement until the parties
brought in their final reports on insolvency. It is unrealis-
14 No. 05-3502
tic to think that positions would have changed significantly
(Desnick’s expert was not likely to come back to court and
say that after further research he realized the Hospital
was insolvent in January 1997). The parties would have
spent more time and money in litigation, and Desnick may
have become less willing to settle for $6.1 million because
his expert report and the audited financials supported his
case. The Hospital would have spent more to gain less.
And if the case should go to trial, all bets would be off; one
side stands to lose nearly everything. The point of a
settlement is that everyone stops gambling and walks
away from the table with some winnings (or at least fewer
losses). Estimates and preliminary solvency reports were
sufficient to support the bankruptcy court’s conclusion that
this settlement was within the reasonable range of litiga-
tion outcomes.
C. Value of the Settlement v. Costs and Benefits of
Litigation
At bottom, the best-interests-of-the-estate test is a
comparison between the value of the settlement and the
probable costs and benefits of litigating. In re Energy Co-
op., 886 F.2d at 927. As we have noted, in making this
comparison, the bankruptcy court considers the litiga-
tion’s probability of success, complexity, expense, inconve-
nience, and delay, including the wasting of assets that
comes from extended litigation. In re Am. Reserve, 841
F.2d at 161. We have already touched on most of these
factors. We must also be satisfied that the bankruptcy
judge independently evaluated the settlement and did not
simply accept the recommendation of the trustee.
Depoister, 36 F.3d at 587.
LaSalle argues the bankruptcy court could not have
independently concluded the settlement was in the best
interests of the estate because the court was not given
No. 05-3502 15
the proper information. LaSalle contends the Hospital
improperly compared the value of the settlement to the
value of the creditors’ claims against the estate (between
$10 and $14 million). With improper comparative infor-
mation, LaSalle argues, the bankruptcy court could not
have properly exercised its discretion.
There is no basis in the record to support LaSalle’s
argument. The bankruptcy court’s opinion discusses at
length the possible outcomes of the litigation between the
Hospital and Desnick without reference to the validity or
value of the creditors’ claims against the estate. The
bankruptcy court specifically disclaimed any considera-
tion of the creditors’ claims: “[T]he court need not deter-
mine whether . . . claims [filed by creditors against the
Hospital] are valid or not. It must determine the reason-
able range of likely outcomes of the litigation against these
settling parties . . . .” (emphasis added).
LaSalle also notes that only about $1.7 million of the
settlement will be available to pay unsecured creditors
and argues that such a paltry sum can hardly be in the
best interests of the estate when the Hospital stood to
recover over $80 million. We have already rejected
LaSalle’s contention that the Hospital could have recov-
ered over $80 million; the bankruptcy court reasonably
concluded that even $34 million was a stretch. The prelim-
inary solvency reports and audited financials tended to
support Desnick’s position. Given the expense and uncer-
tainty of litigation and the possibility of a poor outcome,
this settlement is hardly bad for the unsecured creditors.
There is now $1.7 million more for them to recover, and
the estate still had live claims to press against other
defendants.6
6
The Hospital still had separate claims against LaSalle,
Stephen Weinstein (President of the Hospital from 1993 through
(continued...)
16 No. 05-3502
LaSalle cites In re Remsen Partners, Ltd., 294 B.R. 557
(Bankr. S.D.N.Y. 2002), to support its argument about
the effect of the settlement on unsecured creditors. But
Remsen does not stand for the proposition that courts
should reject out of hand settlements that leave little
for unsecured creditors. Id. at 566-67 (“This does not
mean that a settlement must be denied if it would not
result in a recovery by general unsecured creditors.”). The
Remsen opinion merely noted that little or no benefit for
unsecured creditors will cause a court to look more care-
fully at the trustee’s recommendation. Id. at 567. In
Remsen, the trustee had not alerted creditors that they
would receive no benefit from the proposed settlement. The
bankruptcy court concluded that the trustee’s failure to
provide this information gave rise to an inference that
more creditors would have objected had they been in-
formed. Id. The same inference does not arise here. The
creditors’ committee, whose views count but are not
controlling, see In re Am. Reserve, 841 F.2d at 161-62,
was satisfied with this settlement even knowing only
$1.7 million would be available to unsecured creditors.
LaSalle also attacks the settlement for releasing the
sixteen other defendants (besides Desnick) when none of
them paid a penny. Of the sixteen other defendants,
however, twelve were Desnick-controlled entities and
the other four were former directors or officers of the
Hospital whom Desnick had agreed to indemnify for their
losses. Not surprisingly, release of these sixteen other
defendants was one of Desnick’s terms for settling. The
claims against the four officers and directors of the
Hospital were identical to the claims against Desnick. If
the estate won on its claims against Desnick and the
6
(...continued)
part of 1998), and Robert Krasnow (a former hospital employee
with managerial responsibilities) for fraudulent transfers, and
a claim against Weinstein for breach of fiduciary duties.
No. 05-3502 17
officers, it would recover only once, likewise if it won
against either Desnick or the officers. Desnick could
hardly be expected to settle the claims against himself
and remain on the hook for the same claims against the
others.
Moreover, like the claims against Desnick, the claims
against the officers and directors depended on proof of
insolvency, and the bankruptcy court’s evaluation of the
apparent strength of Desnick’s defenses applies equally
to the four officers and directors. There was no significant
additional recovery to be had against the sixteen addi-
tional defendants released, and if it had not released
them, the Hospital could not have settled with Desnick.
Finally, LaSalle contends the bankruptcy court relied too
heavily on the trustee’s recommendation and that of the
creditors’ committee. That is simply not true. The bank-
ruptcy court’s decision reflects a command of the facts
and the law and an independent and informed decision
about the value of the claims surrendered and the likeli-
hood of success in litigation. Although the judge com-
mented on the recommendations of the trustee and the
creditors’ committee, there is nothing in the record to
support LaSalle’s assertion that the court simply “rubber-
stamped” those recommendations. The bankruptcy court’s
approval of the settlement was not an abuse of discretion.
AFFIRMED.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—1-12-07