Bankruptcy Case No. 10-267 Bankruptcy Case No. 10-268
The opinion of the court was delivered by: Signed by Royce C. Lamberth, Chief Judge,
Before the Court are two appeals from the bankruptcy court. In both cases, creditor Jennifer Thong entered into a settlement agreement with the debtor-Andre Chreky in one case and Andre Chreky, Inc. in the other case. After conducting a hearing and making findings of fact, Bankruptcy Judge Teel approved the settlement. Creditor Ronnie Barrett objected below to the Bankruptcy Judge's approval of the settlement, and she now appeals the Bankruptcy Judge's approval of the settlement. Specifically, in Civil Action No. 10-1963, Ms. Barrett appeals from the Bankruptcy Judge's approval of a settlement between Jennifer Thong and Andre Chreky, Inc. in Bankruptcy Case No. 10-267. In Civil Action No. 10-1965, Ms. Barrett appeals from the Bankruptcy Judge's approval of a settlement between Jennifer Thong and Andre Chreky in Bankruptcy Case No. 10-268.
The Court finds that these two appeals involve identical issues, so this opinion will address both appeals. The Court will address Ms. Barrett's third bankruptcy appeal-Civil Action No. 10-1964-in a separate opinion issued this same date.
In both Civil Actions No. 10-1963 and 10-1965, the Court finds that the Bankruptcy Judge's findings of fact were not clearly erroneous, and the Bankruptcy Judge's decision to approve the settlement was not an abuse of discretion. Accordingly, the Court will affirm the Bankruptcy Judge's approval of the settlement in both cases.
A.District Court Litigation in Barrett v. Chreky, Civil Action No. 07-250, and Thong v. Chreky, Civil Action No. 06-1807
In Civil Action No. 07-250, Ronnie Barrett sued Andre Chreky and Andre Chreky, Inc. for sexual harassment and retaliation. After a two-week trial in February and March 2010, a jury found for Ms. Barrett on these claims. In accordance with the jury verdict, the Court entered judgment for Ms. Barrett and found Mr. Chreky and Andre Chreky, Inc. jointly and severally liable for $2.3 million-$300,000 in compensatory damages, and $2 million in punitive damages.
In Civil Action No. 06-1807 before this Court, Jennifer Thong sued Mr. Chreky and Andre Chreky, Inc. for sexual assault, harassment, and retaliation. Trial in this case was scheduled to begin on March 22, 2010. On March 16, Ms. Thong made an offer to settle her case for $3 million, which Mr. Chreky and Andre Chreky, Inc. rejected.
On March 19, both Mr. Chreky and Andre Chreky, Inc. filed petitions for relief under Title 11 of the U.S. Bankruptcy Code in the above-captioned bankruptcy cases-Bankruptcy Case No. 10-267 for Andre Chreky, Inc., and Bankruptcy Case No. 10-268 for Mr. Chreky. As required by the bankruptcy code, the Court stayed Civil Actions No. 07-250 and 06-1807. Thus, at the time Mr. Chreky and Andre Chreky, Inc. filed for bankruptcy, Ms. Barrett had won a judgment of $2.3 million in damages, but the Court had not yet determined attorneys' fees and costs. Ms. Thong had not yet gone to trial. After the chapter 11 bankruptcy proceedings began, Ms. Barrett and Ms. Thong both initiated adversary proceedings against Mr. Chreky in the bankruptcy court in Adversary Proceedings No. 10-10038 and 10-10039. In those adversary proceedings, both Ms. Barrett and Ms. Thong allege that their claims against Mr. Chreky are non-dischargeable. On July 22, Ms. Thong filed proofs of claim against both Mr. Chreky and Andre Chreky, Inc. for $8.5 million plus attorneys' fees and costs. (Civil Action No. 10-1963 Record ("R.") 62 ¶4.)
On August 13, Mr. Chreky and Andre Chreky, Inc. made an offer to Ms. Thong to settle her claims for $7 million, subject to approval by the Bankruptcy Judge. (R. 36--37.) This sum would consist of all compensatory damages, attorneys' fees, expenses, and costs of suit, and $2 million would be declared non-dischargeable in Mr. Chreky's bankruptcy proceeding. (Id.) The settlement offer did not provide for punitive damages. (Id.) This settlement would resolve both Ms. Thong's district court litigation in Civil Action No. 06-1807 and her bankruptcy litigation in Adversary Proceeding No. 10-10039. (R. 24.) That same day, Ms. Thong accepted that settlement offer. (R. 33--34.) On November 8, after the Bankruptcy Judge had approved the settlement, Ms. Thong moved for final judgment in Civil Action No. 06-1807. (Mot., Nov. 8, 2010, ECF No. 158.) Without opposition, the Court granted the motion and entered final judgment for Ms. Thong for $7 million. (Order, Dec. 3, 2010, ECF No. 159.)
B.Bankruptcy Court Litigation in In re Andre Chreky, Inc., Bankruptcy Case No. 10-267, and In re Andre Chreky, Bankruptcy Case No. 10-268
On August 18, in Bankruptcy Cases No. 10-267 and 10-268, Mr. Chreky and Andre Chreky, Inc. filed a joint motion for approval of their settlement. (R. 3--31.) On September 8, Ms. Barrett filed an objection to that motion, arguing that the settlement discriminated against her as a creditor, as further discussed below. (R. 54--58.) Ms. Thong filed a reply to that objection. (R. 61--66.)
On September 29, the Bankruptcy Judge held a hearing on the motion and orally granted the motion. (R. 67.) On October 29, the Bankruptcy Judge signed the order authorizing and approving the settlement. (Supplemental R. 3--5.)
At the September 29 hearing, the Bankruptcy Judge heard argument and testimony on the joint motion and Ms. Barrett's objection. Mr. Chreky, Andre Chreky, Inc., Ms. Thong, and Ms. Barrett were all represented by counsel at the hearing. (J.A. Tr. 9/29/10 ("Tr.") 1--2.) The Bankruptcy Judge heard testimony from one witness-Paul Kiernan, counsel to Andre Chreky, Inc.-who testified about his assessment of the settlement. (Tr. 24--55.) Counsel for Ms. Barrett had an opportunity to cross-examine him. (Tr. 35--45.) No party, including Ms. Barrett, produced any evidence other than Mr. Kiernan's testimony. (Tr. 55--56.) At the hearing, the Bankruptcy Judge orally approved the settlement. He signed a written order approving the settlement on October 29. (Supp. R. 3--5.)
C.The Bankruptcy Judge's Findings of Fact in Approving the Settlement
Based Mr. Kiernan's undisputed testimony, the Bankruptcy Judge made the following findings of fact at the hearing, on the basis of which he approved the $7 million settlement. In Ms. Thong's case, "if the litigation were to go forward, and if the jury believed Ms. Thong, and believed her expert witnesses, [the estates of Mr. Chreky and Andre Chreky, Inc. would be subject to] a judgment in excess of $10 million." (Tr. 75:18--23.) "Although punitive damages were sought in the matter, . . . the $7 million settlement . . . was a fair settlement of the compensatory damage issue alone." (Tr. 76:3--7.)
As to the issue of costs incurred if this case went to trial, the Bankruptcy Judge found that "[t]he two estates did indeed face extensive risk of an adverse judgment in the District Court if the Thong litigation went forward." (Tr. 76:11--14.) "The Defendants had no ability to call expert witnesses regarding emotional damages because prior counsel had failed to disclose any experts from the deadline set by the District Court with respect to emotional damage experts." (Tr. 76:15--19.) Further, "[t]he litigation avoids the necessity of Mr. and Mrs. Chreky participating in what threatens to be a three-week trial if the matter is not settled, and it exposes the Debtors to press coverage, which is obviously adverse to a beauty salon." (Tr. 77:6--10.) The settlement "saves substantial attorney's fees that would be incurred by the estates." (Tr. 81:23--24.) "[T]he litigation had dragged on and attorney's fees were being incurred, which obviously were increasing the amount that would be owed to Ms. Thong if she prevailed." (Tr. 79:22--80:1.)
As to the discrepancy between Ms. Thong's previous settlement offer of $3 million and her eventual acceptance of a $7 million settlement offer, the Bankruptcy Judge found that Ms. Thong's $3 million settlement offer "was for $3 million cash in hand, whereas the settlement being considered today is for her to have an allowed claim of $7 million against the estate. That does not equate to $3 million in hand." (Tr. 79:17--21.)
As to the fact that Ms. Thong's settlement provided for only compensatory damages-not punitive damages-the Bankruptcy Judge found that "[o]n the part of Ms. Thong, she would have had a reason not to press the recovery of punitive damages in the settlement negotiations, because such punitive damages are likely to receive less favorable treatment, and probably, practically a recovery of nothing [because i]n a Chapter 7 liquidation case, punitive damages would come last, behind a distribution of a liquidation of assets to unsecured creditors." (Tr. 78:8--19.)
As to the sufficiency of negotiations, the Bankruptcy Judge found that "[t]he negotiations were at arm's length. They were serious and hard fought. Both estates were ...