Yacovi v. Rubin & Rudman

Not for Publication in West's Federal Reporter
United States Court of Appeals
For the First Circuit
No. 10-1673
IN RE: NIR YACOVI,
Debtor.
NIR YACOVI,
Appellant,
v.
RUBIN AND RUDMAN, L.L.P.; PETER B. FINN;
HAROLD B. MURPHY, Chapter 7 Trustee,
Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Joseph L. Tauro, U.S. District Judge]
Before
Lynch, Chief Judge,
Souter, Associate Justice,*
and Stahl, Circuit Judge.
Valeriano Diviacchi on brief for appellant.
David C. Fixler and Rubin and Rudman, L.L.P. on brief for
appellees Rubin and Rudman L.L.P. and Peter B. Finn.
Harold B. Murphy, Christian J. Urbano and Hanify & King, P.C.,
on brief for trustee appellee Murphy.
March 18, 2011
*
Hon. David H. Souter, Associate Justice (Ret.) of the Supreme
Court of the United States, sitting by designation.
STAHL, Circuit Judge. Nir Yacovi, the debtor in a
Chapter 7 bankruptcy, appeals a decision approving the settlement
of legal claims held by his estate. Yacovi also asserts that the
bankruptcy court should have granted his motion to abandon those
claims. We affirm.
I. Facts & Background
On October 5, 2005, Yacovi resigned from his position
with URS Staffing Corporation and/or United Revenue Service, Inc.
(collectively "URS") to start his own tax preparation business,
IBTS, Inc., which was to provide services similar to those offered
by his former employer. Shortly thereafter, URS accused Yacovi of
violating the employment agreement he had entered into with URS,
and Yacovi retained Peter Finn, an attorney at Rubin and Rudman,
L.L.P. (collectively "R & R"), to advise him about this contractual
issue.
On October 3, 2006, an arbitrator concluded that Yacovi
had in fact breached the employment agreement and awarded URS
$226,000.1 Although the arbitrator did not find that Yacovi was
prohibited from competing with URS, he concluded that Yacovi
nonetheless violated the agreement by removing, and not timely
returning after his resignation, documents from URS (including
lists of URS's clients and the fees they paid); retaining the fees
1
The agreement specified that "for any CLIENT lost as a result
of Employee's breach of Paragraphs 22 through 26, Employee shall
owe . . . the greater of $2,000.00, or three times the annual gross
income derived from such CLIENT." The arbitrator found that
Yacovi's breach caused URS to lose 113 clients.
-2-
generated from some tax and financial services he provided while
employed at URS; soliciting URS's clients and prospective clients
for his own benefit prior to resigning; and, after leaving URS,
using his knowledge of URS's clients' identities and URS's rates
(that is, URS confidential information) to solicit business for
IBTS. The arbitrator also noted that Yacovi's account of some
facts lacked credibility.
Within weeks of the arbitration decision, Yacovi filed a
voluntary petition for Chapter 7 bankruptcy relief, and Harold B.
Murphy ("Trustee") of Hanify & King, P.C. ("H & K") was appointed
as the trustee. Yacovi's petition listed R & R as holding a claim
for legal fees and URS as holding a $226,000 claim for the
arbitration award. In early 2007, URS filed a complaint asserting
that the arbitration award was non-dischargeable in Yacovi's
bankruptcy because it was the result of fraud as a fiduciary,
embezzlement, and/or larceny. On March 13, 2008, the bankruptcy
court granted URS's motion for summary judgment on this issue. The
following year, the court granted Yacovi a discharge,2 relieved the
Trustee of his responsibilities, and closed the case.
However, on May 13, 2009, exactly one month after the
case was closed, Yacovi filed a motion to reopen the bankruptcy
proceedings to list various legal claims against R & R
2
In November 2006, the Trustee filed a "Report of No
Distribution," explaining that he had "received no property nor
paid any money on account of the estate except exempt property, and
diligent inquiry having been made . . . there is no nonexempt
property available for distribution to creditors."
-3-
(collectively "malpractice claims")3 as additional assets of the
estate. Specifically, Yacovi alleged that R & R had advised him
that, because the employment agreement lacked a non-compete clause
covering his post-employment activity, he could operate IBTS and
service URS's clients. In a complaint he sought to pursue against
R & R, Yacovi contended that a lawyer with appropriate experience
exercising the requisite standard of care, "would have advised
[him] . . . that any services provided to clients of [URS] would
most definitely result in expensive litigation . . . [and] that
there was a very real possibility in such litigation that there may
be an adverse finding against him." Yacovi moved for the
bankruptcy court to abandon the malpractice claims or, in the
alternative, "administer this asset to allow him to seek a recovery
of [the arbitration award]."
On June 24, 2009, the bankruptcy court granted Yacovi's
motion to reopen, but denied his motion to abandon without
prejudice. Accordingly, the Trustee began investigating the
malpractice claims and requested all relevant documents in Yacovi's
possession. The Trustee also successfully applied to the
bankruptcy court to have H & K employed as his own counsel to,
among other things, advise on the merits of the malpractice claims.
On September 29, 2009, the Trustee moved for approval of
a settlement he had reached with R & R. In exchange for the estate
releasing all claims against R & R, the settlement required R & R
3
These claims were breach of contract/warranty, legal
malpractice, and negligent infliction of emotional distress.
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to pay $25,000 and waive any claims it may have had against the
estate. In his motion to approve, the Trustee asserted that his
investigation of the malpractice claims consisted of the following:
discussing the claims and defenses with Yacovi's counsel and with
R & R, reviewing the arbitration opinion (which included a detailed
analysis of the employment agreement), reviewing filings in URS's
state court petition to confirm the arbitration award, reviewing
Yacovi's proposed complaint against R & R, and reviewing Yacovi's
letter demanding relief from R & R for the purported malpractice.
Based on this work, the Trustee believed that there was a "real
risk" that litigating the malpractice claims would be unsuccessful,
and therefore concluded that the proposed settlement was in the
best interest of the estate. The Trustee explained that the
arbitrator had found that the employment agreement did not prohibit
Yacovi from competing with URS, and therefore it would be difficult
to prove that advising Yacovi about IBTS's ability to compete with
URS constituted negligence or was the cause of the arbitration
award. Moreover, the Trustee found "little support for the
allegation" that R & R told Yacovi that he could solicit URS's
customers without running afoul of the agreement.
Yacovi opposed the motion to approve, arguing that the
Trustee's investigation was inadequate and consisted primarily of
discussions with R & R. Although acknowledging that the Trustee
procured the relevant documents, Yacovi's counsel swore in an
affidavit that he was never consulted by the Trustee about the
merits of the malpractice claims. Yacovi's counsel also expressed
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his willingness to pursue the claims on a contingency basis with a
percentage allocated to the estate, which was an offer he had
previously proposed in conversations with the Trustee.
At the conclusion of a hearing held on October 14, 2009,
the bankruptcy court granted the motion to approve, explaining its
decision with only a few sentences:
It's always a tough call when you've got a
disputed piece of litigation that the Trustee
thinks is not worth pursuing and somebody else
thinks is worth pursuing. My obligation
generally speaking is to rely on the expertise
of the Trustee. In this particular matter I
have no reason to doubt the amount of due
diligence Mr. Murphy performed in evaluating
the claim. I am going to grant the motion.
The district court subsequently affirmed. See In re Yacovi, No.
09-11988, 2010 WL 2106171, at *3 (D. Mass. May 24, 2010).
II. Discussion
A. The Bankruptcy Court Did Not Abuse Its Discretion in
Approving the Settlement
"Bankruptcy court orders endorsing settlements are
reviewed for manifest abuse of discretion."4 Hicks, Muse & Co. v.
4
There may be a question as to whether Yacovi has standing to
pursue this appeal. See Spenlinhauer v. O'Donnell, 261 F.3d 113,
117-20 (1st Cir. 2001) (discussing bankruptcy code's limitations on
a debtor's appellate standing). Because neither party briefed
this issue and we can dispose of Yacovi's appeal on the merits, we
do not address the standing question. Greenwood ex rel. Estate of
Greenwood v. N.H. Pub. Utils. Comm'n, 527 F.3d 8, 13 (1st Cir.
2008) ("This court has consistently interpreted [Steel Co. v.
Citizens for a Better Env't, 523 U.S. 83 (1998)] as applying in its
strict form only to issues going to Article III requirements. . .
. [W]here any concerns over jurisdiction are a matter of statutory
interpretation and not an Article III issue, we may bypass the
jurisdictional inquiry." (internal citation omitted)).
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Brandt (In re Healthco Int'l, Inc.), 136 F.3d 45, 50 n.5 (1st Cir.
1998). In deciding whether to approve a settlement pursuant to
Federal Rule of Bankruptcy Procedure 9019, "The bankruptcy court
essentially is expected to assess and balance the value of the
claims being compromised against the value of the compromise
proposal." Id. at 50 (internal marks omitted) (quoting Jeffrey v.
Desmond, 70 F.3d 183, 185 (1st Cir. 1995)). The factors the
bankruptcy court should consider include:
(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.
Jeffrey, 70 F.3d at 185; accord Ars Brook, L.L.C. v. Jalbert (In re
Servisense.com, Inc.), 382 F.3d 68, 72 (1st Cir. 2004).
In addition, "[T]he trustee's judgment is to be accorded
some deference." In re Healthco Int'l, Inc., 136 F.3d at 50 n.5
(internal marks omitted) (quoting Hill v. Burdick (In re Moorhead
Corp.), 208 B.R. 87, 89 (B.A.P. 1st Cir. 1997)). Moreover,
"'compromises are favored in bankruptcy.'" In re Servisense.com,
Inc., 382 F.3d at 71 (quoting LeBlanc v. Salem (In re Mailman Steam
Carpet Cleaning Corp.), 212 F.3d 632, 635 (1st Cir. 2000)). In
short, "'The responsibility of the bankruptcy judge, and ours on
review, is . . . to . . . see whether the settlement falls below
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the lowest point in the range of reasonableness.'" Id. at 71-72
(quoting In re Healthco Int'l, Inc., 136 F.3d at 51).
We conclude that the settlement in this case fell within
the "range of reasonableness" and the bankruptcy court did not
abuse its discretion in approving it. To be sure, $25,000 amounted
to only a fraction of the damages5 that Yacovi alleges resulted
from what he claims was R & R's malpractice. Nonetheless, the
settlement constituted a "definitive, concrete and immediate
benefit[]" that the Trustee reasonably concluded outweighed the
uncertainty and delay of litigation. See In re Healthco Int'l,
Inc., 136 F.3d at 50. The Trustee was appropriately apprehensive
about litigating the malpractice claims in light of (1) the fact
that the arbitrator did not find that the employment agreement
prohibited Yacovi from competing with URS, (2) the arbitrator's
judgment that Yacovi's account of some relevant facts lacked
credibility, and (3) the dearth of evidence that R & R actually
advised Yacovi that he could solicit URS's clients without any
legal repercussions. Although the Trustee made this decision using
counsel from his own law firm, there is no indication that H & K
offered deficient advice or otherwise undermined the Trustee's
ability to analyze the malpractice claims.
We are mindful of our instruction that a court approving
a settlement must set forth its rationale "in sufficient detail
5
Yacovi asserts that the damages include the arbitration
award, which has a present value, with interest, in excess of
$300,000.
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[such] that a reviewing court [can] distinguish it from 'mere
boilerplate approval' of the trustee's suggestions." In re Boston
& Providence R.R. Corp., 673 F.2d 11, 12 (1st Cir. 1982) (quoting
Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc.
v. Anderson, 390 U.S. 414, 434 (1968)); see also Jeremiah v.
Richardson, 148 F.3d 17, 23 (1st Cir. 1998) ("The court's
consideration . . . should demonstrate whether the compromise is
fair and equitable, and whether the claim the debtor is giving up
is outweighed by the advantage to the debtor's estate."). In this
case, the bankruptcy court offered only four sentences to explain
its decision. Providing a more detailed statement would have been
preferable, and under different circumstances a somewhat succinct
explanation might prevent affirmance. However, where, as here, an
experienced trustee conducts an adequate investigation of the
claims and offers a satisfactory explanation for his settlement
decision, the record supports the reasonableness of that decision,
and the bankruptcy court receives briefing on the motion and holds
a hearing, a cursory explanation, in and of itself, does not rise
to the level of an abuse of discretion.6 Cf. In re Boston &
Providence R.R. Corp., 673 F.2d at 12-13 (remanding where
6
This is not to say that a bankruptcy court's failure to
independently judge a settlement can be saved by a particularly
persuasive explanation or thorough investigation by the trustee.
To the contrary, we remind bankruptcy courts that they are required
to independently analyze and judge all proposed settlements before
granting approval pursuant to Bankruptcy Rule 9019. See Jeremiah,
148 F.3d at 23 (noting "the requirement that the court's judgment
be independent").
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"trustee's petition and supporting affidavit gave only the most
cursory description and conclusory evaluation" and the lower
court's "findings and order do not demonstrate an independent
evaluation"). Indeed, in the very case this court relied on in
issuing its caution against "boilerplate approval" of settlements,
the Supreme Court acknowledged:
If . . . the record contained adequate facts
to support the decision of the trial court to
approve the proposed compromises, a reviewing
court would be properly reluctant to attack
that action solely because the court failed
adequately to set forth its reasons or the
evidence on which they were based. The
deficiency in this case, however, is not a
merely formal one.
Anderson, 390 U.S. at 437.
B. Yacovi Waived His Challenge to the Denial of the Motion
to Abandon
In addition to his objection to the settlement, Yacovi
contends that "equity demands that the malpractice claims be
abandoned."
On June 24, 2009, the bankruptcy court denied, without
prejudice, Yacovi's motion to abandon. Over three months later, on
September 29, the Trustee filed a motion to approve the settlement.
Yacovi filed an opposition brief to this motion, which included two
sentences again requesting that the malpractice claims be
abandoned.7 After a hearing on October 14, 2009, the bankruptcy
7
These sentences read: "[A]bandonment of the malpractice claim
is the only fair, equitable result and is in the best interest of
the estate. THEREFORE, Debtor asks that the Motion be denied and
that given the Trustee's lack of any interest in seriously pursuing
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court granted the Trustee's motion to approve. The next day,
October 15, Yacovi filed a notice of appeal, pursuant to Federal
Rule of Bankruptcy Procedure 8002(a), characterizing his appeal to
the district court as "from the Order entered in this Action on 14
October 2009 granting the Motion filed by the Trustee to Approve
Settlement." Also on October 15, Yacovi filed a Statement of
Issues and Designation of Record on Appeal ("Statement of Issues on
Appeal"). See Fed. R. Bankr. Pro. 8006. This filing failed to
mention abandonment and framed the appellate issue solely as
"[w]hether the Court erred in granting the Motion filed by the
Trustee to Approve [S]ettlement." On appeal, the district court
declined to address Yacovi's abandonment argument, saying the
following:
As set forth in the Debtor's Statement of
Issues, the only question on appeal is whether
the Bankruptcy Court erred in allowing the
Trustee's Motion to Approve . . . . To the
extent that the Debtor also seeks to reargue
his Motion to Abandon the Malpractice Claim,
that issue is not properly before this court.
On June 24, 2009, the Bankruptcy Court denied
the Debtor's Motion to Abandon . . . . The
Debtor did not appeal that Order, and the time
to appeal it has since passed.
In re Yacovi, 2010 WL 2106171, *3.
the malpractice claim that it be abandoned."
Yacovi contends that this passage constituted a cross-motion
to abandon, and therefore the October 14 settlement approval also
"acted as a denial of [that] cross-motion." Even if we accept this
characterization of Yacovi's opposition brief, however, it would
not explain his failure to mention abandonment in his Statement of
Issues on Appeal and it would not materially impact our analysis of
the waiver question. See infra.
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There is a circuit split about whether the failure to
list an issue in the statement of issues on appeal pursuant to
Bankruptcy Rule 8006 results in a waiver of that issue. Compare
Zimmerman v. Jenkins (In re GGM, P.C.), 165 F.3d 1026, 1032 (5th
Cir. 1999) ("We . . . hold that, even if an issue is argued in the
bankruptcy court and ruled on by that court, it is not preserved
for appeal under Bankruptcy Rule 8006 unless the appellant includes
the issue in its statement of issues on appeal."), and Snap-On
Tools, Inc. v. Freeman (In re Freeman), 956 F.2d 252, 255 (11th
Cir. 1992) ("An issue that is not listed pursuant to [Bankruptcy
Rule 8006] and is not inferable from the issues that are listed is
deemed waived and will not be considered on appeal."), with Office
of the U.S. Tr. v. Hayes (In re Bishop, Baldwin, Rewald, Dillingham
& Wong, Inc.), 104 F.3d 1147, 1148 (9th Cir. 1997) (per curiam)
("We hold that Bankruptcy Rule 8006 does not limit a party's
ability to appeal from a bankruptcy court's judgment. This
document, filed with the trial court clerk, does not impact upon
issue statements required by the court of appeals.")
We do not state a position on this circuit split. In his
briefing to this court, Yacovi has presented neither adequate
argument nor any citation to caselaw or even to a learned treatise.
As a result, he has waived the issue in this court.
III. Conclusion
For the foregoing reasons, we affirm.
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