, [5]     

Decided: January 8, 1998


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In Re Ibi Security Service Inc., 133 F.3D 205 (2d Cir. 01/08/1998)


No. 539

Docket No. 97-5014

133 F.3d 205, 1998.C02.0000021 <http://www.versuslaw.com>

Decided: January 8, 1998


Before: FEINBERG, CARDAMONE and WALKER, Circuit Judges.


Corrected Opinion


Argued: October 27, 1997

BII, INC., Appellant, v.


Appeal from order of United States District Court for the Eastern District of New York, Spatt, J., affirming orders of the Bankruptcy Court, Cyganowski, J., allowing Chapter 7 trustee to surcharge proceeds of asset of the estate under 11 U.S.C. Section(s) 506(c) for expenses related to liquidation of asset despite settlement agreement with secured creditor that appeared to provide for different allocation of proceeds.


GARY S. JACOBSON, Westfield, NJ (Farer Siegal Fersko, James S. Friedman, of Counsel), for Appellant.

ANDREW M. THALER, Garden City, NY (Goldman Horowitz & Cherno, of Counsel), for Appellee.

FEINBERG, Circuit Judge:

Plaintiff BII, Inc. (BII), a secured creditor in the Chapter 7 bankruptcy of IBI Security Service, Inc. (IBI), appeals from an order of the United States District Court for the Eastern District of New York, Arthur D. Spatt, J. That order affirmed orders of the Bankruptcy Court, Melanie J. Cyganowski, J., holding that a settlement agreement between BII and the Trustee did not prevent the Trustee from using 11 U.S.C. 506(c) to surcharge the proceeds of a litigation belonging to the estate. *fn1 For reasons set forth below, we reverse the judgment of the district court.

A. Background

IBI, a provider of armored car services, filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code in June 1991. On February 1, 1993, the case was converted to a Chapter 7 liquidation, and Andrew Thaler was appointed as Chapter 7 trustee (the Trustee). Before conversion, IBI's largest secured creditor, Glenfed Financial Corporation (Glenfed), had charged that the estate had been improperly using proceeds from accounts receivable and other assets that were supposed to be held as cash collateral to secure loans that had been made to IBI by Glenfed. In March 1992, the bankruptcy court had supplemented Glenfed's remaining collateral by granting Glenfed a replacement lien in the amount of $574,583.79 on substantially all of IBI's assets, including the proceeds of any causes of action belonging to IBI. One of the few significant assets of the IBI estate was a complex litigation including claims by IBI against National Westminster Bank USA and Revere Armored, Inc., among other defendants, as well as various cross and counterclaims (the NatWest litigation).

On February 5, 1993, Glenfed assigned its total secured claim of $720,000 to BII for $200,000. Michael Shields, the president and one of two stockholders of BII, is the son of Harold Shields, the president and principal of IBI. Subsequently, a controversy developed between the Trustee and BII. The Trustee believed that BII was attempting to continue IBI as a business, rather than simply waiting for the Trustee to liquidate IBI's assets in satisfaction of the claims held by BII and other creditors. For example, BII had sent a letter to IBI's former clients telling them, among other things, that BII had "purchased" IBI's assets, had hired IBI's former drivers and would operate from the same facility, and would continue to use the IBI trade name. The Trustee viewed this conduct as an actionable violation of the automatic stay, 11 U.S.C. Section(s) 362, as well as grounds for equitable subordination of BII's claim. BII felt that its conduct was a lawful attempt to preserve the value of IBI's assets, especially given the large size of BII's secured claim in relation to the assets available to satisfy that claim.

The Trustee and BII eventually agreed that "[t]he Trustee's ability to recover on the Natwest litigation . . . will be substantially enhanced by the full cooperation and assistance of . . . BII," and settled their dispute in an agreement (the Settlement Agreement) approved by Bankruptcy Judge Cyganowski in September 1993. Paragraphs 11 and 12 provided for a complete cross-release of "any and all claims and causes of action of any kind or nature whatsoever" against each other. Paragraph 11 also provided that "[e]xcept for the payments to be made herein," BII and associated individuals agreed to "withdraw any and all claims each has asserted or may assert in the bankruptcy case." The Settlement Agreement stipulated that BII would hold a valid secured claim for $480,000. The parties arrived at this net claim amount by reducing the $720,000 secured claim BII purchased from Glenfed by $280,000 (representing the value of assets that BII had allegedly already received or appropriated), and then augmenting it by $40,000 (representing $40,000 that BII would receive from a customer for post-conversion services and then pay to the Trustee).

Paragraph 5 of the Settlement Agreement provided that BII could collect IBI's pre-petition accounts receivable (the Accounts). Subsequently, BII retained the law firm of Mangone & Schnapp *fn2 to collect the Accounts. The parties signed a retainer agreement (the Accounts Retainer) that listed the Accounts and made BII responsible for the fees, costs and expenses incurred in collecting the specified Accounts. The retainer agreement was approved by the bankruptcy court in March 1994.

Finally, and most significantly for this appeal, the Settlement Agreement allocated any proceeds from the NatWest litigation (and from the Accounts) as between the Trustee and BII. Paragraph 8 provided that the "first $150,000.00 shall be paid to BII . . . [t]he next $100,000.00 . . . to the estate [and] [a]ll sums collected thereafter shall be paid to BII until payment in full of . . . the BII Secured Claim." (emphasis added). Paragraph 8 made no provision for the payment of fees, costs and expenses. On the apparent assumption that the NatWest litigation might yield more than enough to pay BII's secured claim in full, the parties agreed in Paragraph 9 that "[i]n addition to payment of the BII Secured Claim, BII shall receive 25% of the net proceeds recovered in the Natwest litigation after payment of all attorneys fees, costs and expenses . . . ." (emphasis added). While Paragraph 9 provided for the payment of fees, costs and expenses incurred in connection with the NatWest litigation, it did not provide for payment of fees, costs and expenses incurred in pursuing the Accounts. *fn3

The Trustee prosecuted the NatWest litigation, with BII's cooperation. In August 1994, the bankruptcy judge approved a partial settlement of the NatWest litigation (the NatWest Settlement) for $375,000. The settlement provided for dismissal of all claims asserted by or against IBI, with the exception of a large remaining claim by IBI against National Westminster Bank USA and Armored Revere, Inc., for tortious interference with IBI's business.

At the same time, the Trustee sought the bankruptcy court's permission to surcharge the NatWest Settlement proceeds under Section(s) 506(c) to pay the related fees of Goldman, Horowitz & Cherno (Counsel to the Trustee), Mangone & Schnapp (Special Counsel), and Sandler, Rosengarten, Denis & Berger (Accountants for the Trustee), as well as the related costs and expenses (collectively, the Expenses), before distributing the NatWest Settlement proceeds pursuant to the Settlement Agreement between BII and the Trustee. BII generally approved of the NatWest Settlement, but ultimately took the position that it was entitled to its share of the proceeds from the NatWest Settlement without any deductions for the Expenses until its secured claim was paid in full.

Judge Cyganowski held that the Settlement Agreement did not prevent the Trustee from surcharging the NatWest Settlement proceeds, and found that the Trustee had stated a valid claim under Section(s) 506(c). However, the judge allowed the Trustee to surcharge only an amount equal to half of the Expenses ($95,878.56). Under this decision, BII would receive $179,121.44 towards payment of its secured claim, as opposed to the $275,000 it claims to be entitled to under the Settlement Agreement. BII appealed, and in March 1997 Judge Spatt affirmed the bankruptcy court. This appeal followed.

B. Analysis BII argues primarily that the plain language of the Settlement Agreement between BII and the Trustee compels distribution of the NatWest Settlement amount to BII free and clear of any administrative claims. BII also characterizes the $140,000 ($100,000 under Paragraph 8 and the $40,000 paid by BII) as a "carve-out" for payment of the Expenses. *fn4 The Trustee emphasizes that Bankruptcy Judge Cyganowski approved the Settlement Agreement in the first place and argues primarily that her findings and interpretation of that agreement and of the effect of Section(s) 506(c) are correct and certainly not clearly erroneous.

Turning to the meaning of the Settlement Agreement, a party to a court-approved settlement must be able to rely on the plain language of such an agreement, at least in cases where relief from the order approving the settlement would be inequitable because a party has reasonably relied on the settlement and cannot be restored to its pre-settlement position. See In re Texlon Corp., 596 F.2d 1092, 1100-01 (2d Cir. 1979); Feldman v. Trans-East Air

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