Munford v. Munford, Inc.

United States Court of Appeals,
Eleventh Circuit.
No. 94-9014.
Matter of MUNFORD, INC., d.b.a. Majik Market, Debtor.
Danné Brokaw MUNFORD, as Executrix of the Estate of Dillard
Munford; James M. Carroll; Russell Fellows; Joseph W. Hardin;
Jay Rubel; Winton M. Blount; Herbert J. Dickson; James L.
Ferguson; Robert M. Gardiner; Richard K. Leblond; Andrall E.
Pearson; S.B. Rymer, Jr.; DFA Investment Dimensions Group, Inc.;
PNC Bank, National Association; Boston Safe Deposit and Trust
Company; State Street Bank & Trust Company, Plaintiffs-Appellants,
Shearson Lehman Brothers, Inc., Plaintiff,
v.
MUNFORD, INC.; Valuation Research Corporation, Defendants-
Appellees.
Oct. 10, 1996.
Appeal from the United States District Court for the Northern
District of Georgia. (No. 1:94-00348-CV-GET), G. Ernest Tidwell,
Chief Judge.
Before HATCHETT, Chief Judge, CLARK, Senior Circuit Judge, and
MILLS*, District Judge.
HATCHETT, Chief Judge:
In this case arising in a bankruptcy context, the court
affirms the district court's ruling that 11 U.S.C. § 105(a) and
Federal Rules of Civil Procedure, Rule 16, authorize bankruptcy
courts to enter bar orders to facilitate settlements.
FACTS AND PROCEDURAL HISTORY
On June 17, 1991, Munford, Inc., acting as debtor in
possession under 11 U.S.C. §§ 544(b) and 1107(a), brought an
adversary proceeding in bankruptcy court in the Northern District
*
Honorable Richard H. Mills, U.S. District Judge for the
Central District of Illinois, sitting by designation.
of Georgia seeking to avoid transfers of property, disallow
contract claims, and recover monetary damages alleging that a
leverage buy out (LBO) that occurred in 1988 forced it into
bankruptcy. Munford, Inc. filed this action against Valuation
Research Corporation (VRC), Shearson Lehman Brothers (Shearson),
former officers and directors, and two of its largest groups of
shareholders seeking $68 million in damages. In its complaint,
Munford, Inc. alleged that VRC, a valuation and consulting firm,
failed to exercise reasonable care in issuing the solvency opinion
it rendered in connection with Munford, Inc.'s LBO. Munford, Inc.,
also alleged that its $75,000 payment to VRC for valuation services
rendered constituted a fraudulent conveyance under O.C.G.A. § 18-2-
22(3). In addition, Munford, Inc. asserted various claims of
breach of fiduciary duty, negligence, mismanagement, waste of
corporate assets, and fraudulent conveyance against the officers,
directors, shareholders and Shearson.
VRC denied liability arguing that it owed no duty of care to
Munford, Inc. because it only intended the LBO lender to rely on
its solvency opinion. Notwithstanding its denial of liability, it
offered to settle Munford, Inc.'s claims against it for $350,000 of
its $400,000 liability insurance policy, setting aside $50,000 of
its policy for attorney's fees. VRC, however, conditioned the
settlement offer upon the bankruptcy court's issuance of a
protective order permanently enjoining the officers, directors,
shareholders and Shearson (hereinafter the nonsettling defendants)
from pursuing contribution or indemnification claims against it.
On May 31, 1993, Munford, Inc. agreed to VRC's settlement
terms and submitted the proposed settlement agreement to the
bankruptcy court for approval as required under Rules of Bankruptcy
Procedure 9019(a).1 The bankruptcy court held a fairness hearing
on Munford, Inc.'s motion and found that the insurance policy
represented VRC's only substantial asset. On December 21, 1993,
the bankruptcy court approved the settlement agreement and issued
an order permanently enjoining the nonsettling defendants from
asserting contribution and indemnification claims against VRC
pursuant to 11 U.S.C. § 105(a) and Federal Rules of Civil Procedure
16. In that order, the bankruptcy court also held that the
nonsettling defendants would receive a dollar-for-dollar reduction
of the settlement amount for any judgment subsequently awarded
against them in the LBO litigation. On August 8, 1994, the
district court affirmed the bankruptcy court's order. The
nonsettling defendants filed this appeal.
CONTENTIONS
The nonsettling defendants contend that the bankruptcy court
erred in entering an order barring them from asserting state law
contribution and indemnity claims against VRC, a nondebtor, when it
approved Munford, Inc. and VRC's settlement agreement asserting
that: (1) the bankruptcy court lacks subject matter jurisdiction
over its unasserted state law contribution and indemnity claims
against VRC; and (2) that the bankruptcy court lacks legal
authority to enter such bar orders. Assuming the bankruptcy court
properly entered the bar order, the nonsettling defendants contend
1
Rules of Bankruptcy Procedure 9019(a) requires the trustee
of the estate to submit proposed settlement agreements for
approval.
that the bankruptcy court erred in ruling that a dollar-for-dollar
credit based on VRC's settlement amount rather than a relative
fault offset applies to any judgment rendered against the
nonsettling defendants. Specifically, they assert that such a
credit deprives them of their substantive rights of contribution
and indemnity because VRC's settlement amount represents only
one-half of a percent of the damages Munford, Inc. seeks.
VRC and Munford, Inc. contend that the bankruptcy court had
subject matter jurisdiction and legal authority to enter the bar
order because: (1) the bar order arose in and related to Munford,
Inc.'s motion to approve the settlement agreement with VRC; and
(2) the bar order facilitated its settlement. VRC and Munford,
Inc. also contend that the bankruptcy court's dollar-for-dollar
credit against any subsequent judgment entered against nonsettling
defendants constitutes a fair and equitable judgment offset
asserting that it does not have assets sufficient to satisfy a
larger judgment against it.
ISSUES
We address the following issues in this appeal: (1) whether
the bankruptcy court has subject matter jurisdiction over the
nonsettling defendants' unasserted state law contribution and
indemnity claims; (2) whether 11 U.S.C. § 105(a) and Federal Rules
of Civil Procedure 16 authorize bankruptcy courts to enter bar
orders to facilitate settlement; and (3) whether a
dollar-for-dollar credit against any subsequent judgment entered
against nonsettling defendants constitutes a fair and equitable
judgment offset.
DISCUSSION
A. Subject Matter Jurisdiction
We first address whether the bankruptcy court has subject
matter jurisdiction over the nonsettling defendants' unasserted
state law contribution and indemnity claims. This court reviews
questions of law de novo applying the same legal standards that
bound the district court. Infant Formula Antitrust Litigation v.
Abbott Laboratories, 72 F.3d 842, 843 (11th Cir.1995).
In this case, the nonsettling defendants contend that the
bankruptcy court lacks jurisdiction to enter an order barring their
state law claims of contribution and indemnity against VRC because
these claims were unasserted, against nondebtors, and not ripe.
The nonsettling defendants also contend that the bankruptcy court
lacks jurisdiction over their contribution and indemnity claims
because they could not have asserted these claims as cross-claims
in the adversary proceeding of the bankruptcy court's limited
jurisdiction under 28 U.S.C. §§ 157 and 1334. In response, VRC and
Munford, Inc. argue that the bankruptcy court has subject matter
jurisdiction to enter a bar order over these claims because the bar
order affecting these claims arose in and related to Munford,
Inc.'s motion to approve the settlement agreement with VRC under
the Rules of Bankruptcy Procedure 9019(a). For purposes of this
discussion, we address the nonsettling defendants' contentions in
reverse order.
Although bankruptcy courts have limited jurisdiction, each
district court may provide the bankruptcy court in that district
with subject matter jurisdiction on "any or all cases under title
11 and any or all civil proceedings arising under title 11 or
arising in or related to a case under title 11." 28 U.S.C. §
157(a) (1994). In order for the bankruptcy court to exercise
subject matter jurisdiction over a dispute, however, some nexus
between the civil proceeding and the title 11 case must exist.
Lemco Gypsum, Inc. v. Miller, 910 F.2d 784, 787 (11th Cir.1990).
" "[T]he test for determining whether a civil proceeding is related
to bankruptcy is whether the outcome of the proceeding could
conceivably have an effect on the estate being administered in
bankruptcy.' " Lemco Gypsum, Inc., 910 F.2d at 788 (quoting Pacor,
Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984)). In other words,
" "[a]n action is [sufficiently] related to bankruptcy if the
outcome could alter the debtor's rights, liabilities, options, or
freedom of action (either positively or negatively) and which in
any way impacts upon the handling and administration of the
bankrupt estate.' " Lemco Gypsum, Inc., 910 F.2d at 788 (quoting
Pacor, Inc., 743 F.2d at 994).
In order to apply the "nexus" test to the facts of this case,
we must treat the nonsettling defendants' contribution and
indemnity claims as though they had been in state court at the time
the bankruptcy court approved Munford, Inc. and VRC's settlement
agreement. Next, we must determine whether at the time Munford,
Inc. filed its motion to approve the settlement agreement in
bankruptcy court a state civil action based on claims of
contribution and indemnity from nonsettling defendants against VRC
could have conceivably altered Munford, Inc.'s rights, liability,
options, freedom of action and thereby impact upon the handling and
administration of the bankruptcy estate. This inquiry is not
difficult. As previously noted, VRC conditioned its settlement
offer on the bankruptcy court entering an order barring the
nonsettling defendants from asserting contribution and indemnity
claims against it. The parties do not dispute that without the
district court entering the bar order in this case Munford, Inc.
would have lost its "option" to settle its claims against VRC and
the right to receive $350,000 for the estate. Because the
nonsettling defendants' assertion of their contribution and
indemnity claims would have an effect on Munford, Inc.'s estate
being administered in bankruptcy, we hold that a sufficient nexus
exists between this title 11 adversary proceeding and the
nonsettling defendants' contribution and indemnity claims. In so
holding, we do not dispute the nonsettling defendants contention
that non-debtors in an adversary proceeding cannot assert state
cross-claims of contribution and indemnity because such claims
standing alone fail the nexus test—i.e., "could not conceivably"
have an effect on the debtor's estate in an ordinary bankruptcy
case. In this case, however, the nonsettling defendants'
contribution and indemnity claims affect the debtor's estate
because VRC would not settle Munford, Inc.'s claims against it
without the bankruptcy court entering a bar order. The nonsettling
defendants respond arguing that the "bar order" condition is in
effect "subject matter jurisdiction by consent." We disagree with
the nonsettling defendants' characterization noting that "[s]ubject
matter jurisdiction can never be waived or conferred by the consent
of the parties." Latin American Property & Casualty Ins. Co. v.
Hi-Lift Marina, Inc., 887 F.2d 1477 (11th Cir.1988). It is not the
language of the settlement agreement that confers subject matter
jurisdiction in this case. Rather, it is the "nexus" of those
claims to the settlement agreement—an agreement, we emphasize, that
the bankruptcy court must approve pursuant to Rules of Bankruptcy
Procedure 9019(a).
In addition, we reject the nonsettling defendants'
contentions that the bankruptcy court lacks subject matter
jurisdiction to enter the bar order because these claims were
unripe and between nondebtors. First, a claim is ripe for
adjudication, regardless of whether it is asserted, when "the claim
is sufficiently mature, and the issues sufficiently defined and
concrete, to permit effective decisionmaking by the court."
Restigouche, Inc. v. Town of Jupiter, 59 F.3d 1208, 1212 (11th
Cir.1995). Second, for purposes of subject matter jurisdiction the
civil proceedings related to bankruptcy " "need not ... be against
the debtor or against debtor's property.' " Lemco Gypsum, Inc.,
910 F.2d at 788 (quoting Pacor, Inc., 743 F.2d at 994). We
therefore hold that the bankruptcy court has jurisdiction over the
nonsettling defendants' claims to enter a settlement bar order.
B. Settlement Bar Orders
Next, we address whether the bankruptcy court has legal
authority to enter the order barring the nonsettling defendants
from asserting claims of contribution and indemnity against VRC.
In entering the bar order, the bankruptcy court concluded that 11
U.S.C. § 105(a) along with Federal Rules of Civil Procedure 16
granted it authority to enter the bar order in aid of settlement.
The nonsettling defendants contend that the bankruptcy court
misapplied rule 16 arguing that rule 16 does not grant courts the
right to enter bar orders.2
Section 105(a) of the Bankruptcy Code provides that "[t]he
court may issue any order, process, or judgment that is necessary
or appropriate to carry out the provisions of this title." 11
U.S.C. §§ 105(a) (1994) (emphasis added). Rule 16 which is
incorporated in adversary proceedings under Rules of Bankruptcy
7016, states in pertinent part:
At any [settlement] conference under this rule consideration
may be given, and the court may take appropriate action, with
respect to
....
(9) settlement and the use of special procedures to assist in
resolving the dispute when authorized by statute or local
rule.
Fed.R.Civ.P. 16(c)(9). We conclude that section 105(a) and rule 16
taken together provide ample authority for the bankruptcy's court
action. Section 105(a) clearly provides that the bankruptcy court
can enter "any order" necessary or appropriate to carry out the
provisions of the Bankruptcy Code, while rule 16 authorizes the use
of special procedures to assist the parties in reaching a
settlement. Several justifications for entering bar orders in
bankruptcy cases exist. First, public policy strongly favors
pretrial settlement in all types of litigation because such cases,
depending on their complexity, "can occupy a court's docket for
2
The nonsettling defendants also contend that O.C.G.A. § 51-
12-32 which provides that a settling tortfeasor retains its right
to contribution against a nonsettling tortfeasor prohibits the
bankruptcy court from entering its bar order. This argument
lacks merit and does not warrant further discussion.
years on end, depleting the resources of parties and the taxpayers
while rendering meaningful relief increasingly elusive." U.S. Oil
& Gas v. Wolfson, 967 F.2d 489, 493 (11th Cir.1992). Second,
litigation costs are particularly burdensome on a bankrupt estate
given the financial instability of the estate. Third, "bar orders
play an integral role in facilitating settlement." U.S. Oil & Gas,
967 F.2d at 494. This is because "[d]efendants buy little peace
through settlement unless they are assured that they will be
protected against codefendants' efforts to shift their losses
through cross-claims for indemnity, contribution, and other causes
related to the underlying litigation." U.S. Oil & Gas Litigation,
967 F.2d at 494. But for the bankruptcy court's bar order in this
case, for example, VRC would not have entered into the settlement
agreement with Munford, Inc. For these reasons, we hold that
section 105(a) and rule 16 authorize bankruptcy courts to enter bar
orders where such orders are integral to settlement in an adversary
proceeding.
C. The Dollar-for-Dollar Offset
Finally, the nonsettling defendants argue on appeal that the
dollar-for-dollar reduction based on VRC's settlement amount
against any judgment rendered jointly against nonsettling
defendants does not sufficiently protect their interest.
When determining whether to enter a bar order against
nonsettling defendants, the court must make a reasoned
determination that the bar order is fair and equitable. U.S. Oil
& Gas Litigation, 967 F.2d at 496. In making such a determination,
courts consider the interrelatedness of the claims that the bar
order precludes, the likelihood of nonsettling defendants to
prevail on the barred claim, the complexity of the litigation, and
the likelihood of depletion of the resources of the settling
defendants. U.S. Oil & Gas Litigation, 967 F.2d at 493-96.
The nonsettling defendants contend that VRC's solvency opinion
gave them an assurance that Munford, Inc. would survive the LBO
transaction and that they reasonably relied on the opinion in
approving the LBO transaction. They therefore assert that VRC's
$350,000 settlement amount constitutes an inequitable settlement
because it represents only one-half of a percent of the $68,000,000
Munford, Inc. seeks to recover from the nonsettling defendants.
Instead, the nonsettling defendants argue, the court should have
reserved its approval of the settlement agreement to include a
credit based on the relative fault of VRC and not the
dollar-for-dollar settlement credit. The nonsettling defendants
also argue that the dollar-for-dollar settlement credit deprives
them of their substantive rights of contribution and
indemnification, noting that but for the settlement agreement they
would receive a dollar-for-dollar credit and retain the right to
pursue actions for contribution and indemnity against VRC under
state law. See O.C.G.A. § 51-12-32. The nonsettling defendants
therefore assert that the reasonable price for taking away their
rights to contribution and indemnification is to allow a credit
against any subsequent judgment based on the proportionate fault of
VRC.
In response, VRC and Munford, Inc. contend that the district
court's application of a dollar-for-dollar credit against any
subsequent judgment entered against nonsettling defendants
constitutes a fair and equitable judgment offset. They assert that
the record demonstrates that the settlement affords nonsettling
defendants a far greater benefit than they would receive from their
prospective contribution and indemnity claims. VRC and Munford,
Inc. base this assertion on several facts. First, VRC asserts that
its greatest asset is a $400,000 insurance policy, and without the
settlement it will exhaust this policy in litigation costs in
defending itself in this action. Second, it asserts that it is
unlikely that the nonsettling defendants would prevail against VRC
in a contribution or indemnity action based on an allegation that
the nonsettling defendants relied on VRC's solvency opinion
because: (1) the solvency opinion included disclaimers which
stated the solvency opinion was limited in scope and only intended
to be relied upon by Citibank, the LBO lender; and (2) "none of
the [nonsettling] defendants saw or reviewed the opinion prior to
consummation of the LBO." In re Munford, Inc., 172 B.R. 404, 413
(N.D.Ga.1993). Finally, VRC and Munford, Inc. assert that the
offset as provided in the bankruptcy court's order ensures that
Munford does not enjoy a double recovery against nonsettling
defendants in any subsequent litigation. We agree.
In this case, VRC's settlement offer constitutes $350,000 of
its $400,000 insurance liability coverage. The remaining $50,000
is reserved for attorney's fees and other litigation cost related
to this action. On appeal, the nonsettling defendants do not argue
that VRC has the ability to pay more than the $350,000 it offered
in settlement. Rather, they argue that VRC may obtain assets in
the future increasing its net worth. It is more likely, however,
that the LBO litigation will deplete the assets VRC presently owns
and any future assets they obtain. This viewed together with the
fact that VRC included disclaimers in its solvency opinion supports
the finding that the bankruptcy court's dollar-for-dollar credit
constitutes a fair and equitable offset. We therefore conclude
that the bankruptcy court did not abuse its discretion in ruling
that a dollar-for-dollar credit will be applied against judgment
subsequently rendered against the nonsettling defendants.
Accordingly, we affirm the bankruptcy court's grant of a
dollar-for-dollar reduction against any judgment ultimately
rendered against the nonsettling defendants. In reaching this
holding today, we decline to adopt a per se method for offsetting
settlement amounts.
CONCLUSION
For the above stated reasons, we affirm the district court.
AFFIRMED.