#2480        signed 7-29-99

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS

MEMORANDUM OF DECISION

This case is before the Court on the trustee's motion to settle a dispute and a creditor's

objection to the motion. The trustee appears by counsel Robert L. Baer of Cosgrove, Webb & Oman.

The creditor, the Cadle Company, appears by counsel Thomas J. Fritzlen, Jr., of Martin, Leigh &

Laws, P.C. The parties with whom the trustee has proposed to settle appear by counsel Terry L.

Malone of Martin, Pringle, Oliver, Wallace & Swartz, L.L.P. A hearing on the motion was held on

May 6, 1999. The parties other than the trustee filed supplemental briefs after the hearing. Having

considered the relevant materials, the Court is now prepared to rule on the motion.

FACTS

Before filing for bankruptcy, debtor Roddy Mac Stewart (“Stewart”) participated in a project

to build a low-income housing development in Beloit, Kansas. Duane Wadley d/b/a/ the Wadley

Company (“Wadley”), Wadley Homes, Inc. (“Wadley Homes”), and Kendrick and Associates, Inc.

(“Kendrick”), along with Beloit Development, L.P., and Beloit Industrial Development, Inc.

(collectively “the Beloit Entities”), also participated. The project ran into problems and was not

successfully completed as these parties had planned.

Attorney Terry L. Malone (“Malone”) had been representing Wadley and Wadley Homes for

some time under a retainer agreement. Stewart, Wadley, Wadley Homes, and Kendrick (“the

plaintiffs”) eventually sued the Beloit Entities and a number of individuals for damages under various

legal theories, and Malone represented them all in this lawsuit. He considered the plaintiffs to be jointly

and severally liable for his fees and expenses, but was aware that they had an agreement among

themselves to share his charges. The plaintiffs appear to have agreed to split Malone's bill three ways,

one-third to Stewart, one-third to Wadley and Wadley Homes, and one-third to Kendrick. Their

arrangement to divide any recovery is disputed. It appears that the most Stewart would have been

entitled to receive was one-third of the total recovery obtained; the evidence did not establish the least

portion that he might have been entitled to receive. Kendrick might also be entitled to receive up to

one-third of the total recovery.

This suit was tried in January 1998 in a Kansas state court. At the conclusion of the plaintiffs'

evidence, the court dismissed their claims based on promissory estoppel, negligent misrepresentation,

and fraud, and all their remaining claims against the individual defendants. The plaintiffs' claims against

the Beloit Entities based on breach of contract and quantum meruit were submitted to a jury for

resolution. The jury awarded Stewart, Wadley, and Wadley Homes damages of $576,072, and

Kendrick damages of $24,834.19. At that time, Malone had been paid about $5,000 (apparently by

Wadley or Wadley Homes) and had billed another $65,000.

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After the judgment was rendered, the plaintiffs appealed the trial court's dismissal of their

claims based on promissory estoppel, negligent misrepresentation, and fraud, and of their claims against

the individual defendants. The Beloit Entities cross-appealed. At some point, the plaintiffs determined

that the Beloit Entities had few or no assets beyond the housing project itself, which was already

encumbered for more than its probable value to secure construction loans, so collecting the judgment

from them was not likely. The appeal alone would generate additional legal expenses, and if the

plaintiffs won, the new trial they were seeking would add even more. If they won a retrial and obtained

a judgment against one or more of the individual defendants, the plaintiffs could not be certain of

collecting from them either. Because Stewart did not have enough money to pay the legal expenses

already incurred and did not want to obligate himself to pay more for the appeal and possible new trial,

he approached Wadley between the time the judgment was rendered in January and was reduced to

writing in March, and proposed to assign his interest in the suit in exchange for a release of his

obligation to pay a share of Malone's fees and expenses. Orally, Wadley, Wadley Homes, and

Kendrick agreed to release Stewart from his agreement to contribute to Malone's bill and Stewart

assigned his interest in the lawsuit to them. Malone also agreed not to try to collect from Stewart.

Thereafter, the other plaintiffs and Malone did not include Stewart in their correspondence about either

the appeal or the housing project.

In late April or early May of 1998, a third party took over the housing project. That party

contacted Malone, and they began negotiating the possible release of the Wadley-Wadley-Homes-

Kendrick judgment because it interfered with his successful completion of the project. Wadley Homes

drafted a written assignment for Stewart to sign to make sure a potential settlement could not be

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derailed by questions about the oral assignment. Wadley and Kendrick were not mentioned in this

document, which stated that Stewart was assigning his interest in the suit only to Wadley Homes in

return for its promise to pay his share of the litigation expenses. Stewart was not aware of the

settlement negotiations, but on May 6, 1998, he signed the document Wadley Homes had prepared.

Ultimately, after certain tax advantages were obtained for the housing project, the third party

agreed to pay Wadley, Wadley Homes, and Kendrick $150,000 in return for their dismissal of their

lawsuit and release of any claim they might have against the project or any entity involved with it.

Malone's bill was to be paid from the $150,000 and the balance was to be divided among Wadley,

Wadley Homes, and Kendrick.

On May 15, 1998, Stewart and his wife filed a joint chapter 7 bankruptcy petition. The

chapter 7 trustee asserted that Stewart's assignment to Wadley, Wadley Homes, and Kendrick of his

interest in the lawsuit constituted a transfer for less than reasonably equivalent value that could be

avoided under 11 U.S.C.A. §548, and claimed the bankruptcy estate was entitled to a share of the

$150,000 settlement. The trustee agreed to accept $7,000 from them to settle this claim and provided

notice of the intended settlement to the debtors' creditors. The Cadle Company (“Cadle”) is the only

creditor that objected. Cadle does not object to settlement of the state court lawsuit for the $150,000

paid by the third party in exchange for the release of the claims against the housing project and other

entities, but does object to the estate's receipt of only $7,000 from that amount.

DISCUSSION

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The trustee seeks to have his settlement with Wadley, Wadley Homes, and Kendrick approved

pursuant to Federal Rule of Bankruptcy Procedure 9019. He claims $7,000 is a reasonable amount for

the bankruptcy estate to receive considering the circumstances existing at the time Stewart assigned his

interest in the lawsuit and judgment, and the risk the estate would obtain little or no net recovery if the

trustee pursued a larger amount through litigation. In deciding whether to approve a proposed

settlement, the Court must objectively evaluate the facts surrounding the estate's claim. Reiss v.

Hagmann, 881 F.2d 890, 892 (10th Cir. 1989). The Court must consider: (1) the probability the

estate will succeed in litigation; (2) the collectability of any judgment the estate could obtain; (3) the

complexity of the required litigation; (4) the expenses, inconvenience, and delay that would be caused

by the litigation; and (5) the reasonable views of the debtors' creditors. Wallis v. Justice Oaks II, Ltd.

(In re Justice Oaks II, Ltd.), 898 F.2d 1544 (11th Cir. 1990); In re Flight Transp. Corp. Securities

Litigation, 730 F.2d 1128, 1135 (8th Cir. 1984) (same factors must be considered in approving

compromise of bankruptcy dispute and class action lawsuit); see also Protective Committee for

Independent Stockholders of TMT Trailer Ferry, Inc., v. Anderson, 390 U.S. 414, 424-25 (1968)

(identifying similar factors for approval of compromise under Bankruptcy Act).

In reaching its decision, the Court need not decide what factual assertions would be accepted

or what legal theories would prevail at a trial on the merits of the estate's claim, but only needs to

consider what the possible results of a trial might be and how likely each result appears to be. Since

Cadle does not object to the settlement of the state court litigation for $150,000, question Malone's

right to be paid $65,000 from that amount, or contend Stewart was entitled to more than one-third of

the settlement, it appears the most the estate could possibly receive through litigation with Wadley,

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Wadley Homes, and Kendrick is one-third of $85,000, or $28,333. Stewart's share in the lawsuit is

not evidenced by any writing and his fellow plaintiffs contend his share was something less than one-

third. At the time of the assignments, Stewart did not have the ability to pay his share of Malone's

current fees and expenses, and wanted to avoid incurring liability for future ones. The trustee proposes

settling for about one-quarter of the maximum amount that might have been Stewart's share. The value

of Stewart's share would have increased between the time of his oral assignment and his written one

because any benefit to be gained from the appeal was uncertain and the existing judgment appeared to

be uncollectible before the third party took over the project and agreed, before Stewart executed the

written assignment but still contingent on obtaining tax advantages, to pay $150,000 to resolve the suit.

Therefore, the trustee's chance of setting aside Stewart's assignment as one for less than reasonably

equivalent value would be slim if the oral assignment was effective, but greatly improved if it was not.

In this regard, Cadle contends that the oral assignment was void because it violated the Statute of

Frauds, and that the parol evidence rule would preclude presenting evidence of the oral assignment to

change the effective date of the written assignment. Even if the trustee could get the assignments set

aside, the litigation required to do so would generate expenses that would reduce the estate's net

recovery. Given all these circumstances and uncertainties, the Court is inclined to believe the trustee's

proposed resolution of the matter is reasonable.

Limited research into Cadle's assertion of the Statute of Frauds only strengthens the Court's

view of the trustee's position. The Kansas Statute of Frauds provides in pertinent part:

No action shall be brought whereby to charge a party upon any special promise to answer for the debt . . . of another person . . . unless the agreement upon which such action shall be brought, or some memorandum or note thereof, shall be in writing and signed by the

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party to be charged therewith, or some other person thereunto by him or her lawfully authorized in writing.

K.S.A. 33-106. In this case, Wadley, Wadley Homes, and Kendrick are the parties who allegedly

orally promised to pay Stewart's debt to Malone. Under 33-106, they—not a stranger to the

transaction like Cadle—would be the parties entitled to claim the protection of the Statute of Frauds,

which would protect them from being forced to honor their promise. Of course, they want to fulfill

their promise, not avoid it. The wording of 33-106 indicates Cadle is not a proper party to raise the

Statute of Frauds in this case. Even if it were, the Court doubts that the Statute is applicable here in

any case. Cadle has not contested Malone's assertion that the plaintiffs in the state court lawsuit were

jointly and severally liable for his bill. Although the plaintiffs had agreed to split that bill three ways,

Malone had not agreed to be bound by that split. Thus, under the oral assignment, Wadley, Wadley

Homes, and Kendrick simply agreed to release Stewart from his obligation to contribute to Malone's

bill, not to pay a debt of Stewart's that they themselves did not owe. In fact, if the oral assignment was

not effective, the written assignment does not appear to release Stewart from his contribution obligation

to Wadley or to Kendrick; only Stewart and Wadley Homes were parties to it. The written assignment

does express Wadley Homes' promise to pay Stewart's contribution obligation, so it might conceivably

qualify as a promise to pay the debt of another even though Wadley Homes was already liable to

Malone for his full bill. Considering all these circumstances, the Court believes that the applicability of

the Statute of Frauds is at least highly questionable in this case. Consequently, although the Court is not

resolving the Statute of Frauds dispute, the Court is convinced it should consider evidence of the

alleged oral assignment and its impact on the trustee's decision to settle.

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When Stewart made the oral assignment, the plaintiffs did not believe they could collect their

judgment against the Beloit Entities because the Entities did not have unencumbered assets. The

plaintiffs believed they had valid claims against the individual defendants, but would have to win their

appeal before they could have the chance to try those claims. The outcome of their appeal was, of

course, unknown, and the Beloit Entities' cross-appeal at least made it possible the judgment the

plaintiffs had already obtained could be lost as well. The appeal was generating additional attorney fees

and expenses, as would the new trial that would follow if the appeal succeeded. Such a new trial could

be lost, and even if it were won, the plaintiffs did not know whether they could collect a judgment from

the individual defendants. Stewart did not have the money to pay his share of Malone's bill to that time,

or to pay additional charges in the future. Stewart's share of the $70,000 already incurred was one-

third. He thought he would also receive one-third of any recovery, but Wadley contends Stewart's

share would be less than that. When Stewart signed the written assignment, none of these

circumstances had changed except that a third party had become involved who might pay the plaintiffs

some money to settle the claims they were making in the lawsuit. However, at that time, the third

party's payment was still contingent on securing tax advantages for the project, an event that occurred

later.

If the trustee were to pursue litigation against Wadley, Wadley Homes, and Kendrick, the most

he could recover would be $28,333. The third party has now paid the $150,000, and the maximum

recovery available to the estate has been reserved. The trustee has already incurred some litigation

expenses and would undoubtedly incur more if he had to continue to litigate. The Court is convinced

that the probability of a successful maximum recovery is less than 50%, and that there is a substantial

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possibility of no recovery. The trustee will be entitled to a trustee fee from whatever amount he

receives, and would probably incur a substantial attorney's fee in further litigation, successful or not.

Although all the debtors' unsecured creditors would share in the fruits of the litigation, only one of them

has objected. Cadle's claim is a substantial one and its opinion is entitled to some deference, but the

Court notes Cadle's view is apparently not shared by the other unsecured creditors.

Having carefully considered all the circumstances, the Court concludes that the trustee has met

his burden of proof, and that the settlement should be approved.

The foregoing constitutes Findings of Fact and Conclusions of Law under Rule 7052 of the

Federal Rules of Bankruptcy Procedure and Rule 52(a) of the Federal Rules of Civil Procedure. A

judgment based on this ruling will be entered on a separate document as required by FRBP 9021 and

FRCP 58.

Dated at Topeka, Kansas, this ____ day of July, 1999.

_________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE

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IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS

JUDGMENT ON DECISION

This case was before the Court on the trustee's motion to settle a dispute and a creditor's

objection to the motion. The trustee appeared by counsel Robert L. Baer of Cosgrove, Webb &

Oman. The creditor, the Cadle Company, appeared by counsel Thomas J. Fritzlen, Jr., of Martin,

Leigh & Laws, P.C. The parties with whom the trustee proposed to settle appeared by counsel Terry

L. Malone of Martin, Pringle, Oliver, Wallace & Swartz, L.L.P. A hearing on the motion was held on

May 6, 1999. The parties other than the trustee filed supplemental briefs after the hearing. Having

considered the relevant materials, the Court has now issued its Memorandum of Decision resolving this

dispute.

For the reasons stated in that Memorandum, judgment is hereby entered approving the trustee's

settlement.

IT IS SO ORDERED.

Dated at Topeka, Kansas, this _____ day of July, 1999.

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__________________________________ 
JAMES A. PUSATERI CHIEF BANKRUPTCY JUDGE

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