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Bankruptcy Court’s Careful Consideration of Settlement’s Broad Benefit Recognized by District Court

CFI Class Action Claimants v. Singley (In re SCH Corp.), No. 12-1576 (SLR), 2014 WL 1340234 (D. Del. Apr. 2, 2014)

On April 2, 2014, the Honorable Sue L. Robinson of the District Court affirmed an oral ruling of the Bankruptcy Court, approving a post-confirmation settlement reached between SCH Corp., American Corrective Counseling Services, Inc., and ACCS Corp. (together, the “Debtors”) and Carl Singley (“Singley”) (the disbursing agent, litigation designee, and responsible officer for the Debtors), on one hand, and Levine Leichtman Capital Partners III, L.P. (“LLCP”) (the Debtors’ prepetition secured lender and acquirer of the Debtors’ assets), on the other.  In connection with the Debtors’ confirmed plan, LLCP agreed to provide certain post-confirmation funding to the estates.  However, disputes quickly arose between Singley and LLCP regarding the amount of such funding.  Following negotiations, a settlement was reached between the parties and approved by the Bankruptcy Court over the objection of certain class action plaintiffs (the “CFI Claimants”).

On appeal to the District Court, the CFI Claimants took issue with the Bankruptcy Court’s application of the four factor test applied by courts within the Third Circuit when analyzing settlements under Bankruptcy Rule 9019.  See Myers v. Martin (In re Martin), 91 F.3d 389, 393 (3d Cir. 1996) (“[W]e recognize four criteria that a bankruptcy court should consider in striking this balance: (1) the probability of success in litigation; (2) the likely difficulties in collection; (3) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; and (4) the paramount interest of the creditors.”). Specifically, the CFI Claimants alleged that the Bankruptcy Court did not adequately consider the “fair and equitable” nature of the settlement to them, as non-settling parties.  Moreover, the CFI Claimants challenged the Bankruptcy Court’s conclusion that the settlement did not result from collusion between Singley and LLCP.

The District Court disagreed with the CFI Claimants, holding that the Bankruptcy Court did not err in approving the settlement.  Importantly, the District Court did not question the analysis of the Bankruptcy Court, which examined the settlement’s benefit to all creditors – not just the CFI Claimants or unsecured creditors in general.  As is commonplace in appeals of settlement orders, the Court deferred to the record developed by the Bankruptcy Court, which consisted of live witness and deposition testimony as well as over one hundred exhibits, and the Bankruptcy Court’s application of that record to the Martin factors.  According to the District Court, the Bankruptcy Court “carefully considered” the interests of creditors and found that the settlement could lead to a greater recovery for them.  Moreover, the Bankruptcy Court reviewed the record and “specifically took into account” when rendering its decision the CFI Claimants’ challenges to the bona fides of the settlement.  For these reasons, the Bankruptcy Court’s decision to approve the settlement was upheld.