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January 28, 2003


The opinion of the court was delivered by: Ronald L. Ellis, United States Magistrate Judge:



On September 4, 2002, plaintiff The Mediators, Inc. ("the Mediators") and defendants Richard Manney, Gloria Manney, and Patricia Manney (collectively, "the Manneys") agreed by stipulation to proceed before this Court with what can best be described as a "binding settlement arbitration." Pursuant to the agreement, each party was required to submit a written proposal of the terms of the settlement. They also were required to respond to each other's proposals and appear for a conference. The Court, in turn, would select the proposal found to be most reasonable in light of the parties' submissions and comments. The parties stipulated that they would be bound by the full terms of the proposal selected by the Court, and they would execute the final settlement agreement within forty-five days of the selection.

The Court has reviewed the written submissions of the parties and taken into account oral comments made at the December 16, 2002 conference. For the reasons which follow, IT IS HEREBY ORDERED THAT the parties execute a settlement agreement including the full terms contained in the proposal submitted by the Manneys.


The Mediators and the Manneys have been involved in this litigation over the course of nearly ten years. The action was filed on April 9, 1993, against the Manneys and various other named defendants. The claims against the non-Manney defendants were eventually dismissed by the district court, and on November 5, 1998, the case was assigned to this Court. For approximately four years the parties have inched toward settlement. At several points in the past, it appeared that settlement was imminent. Unfortunately, there always seemed to be some detail which had to be worked out. Periodically, the Court brought in the parties and helped forge a consensus. Alas, each of these agreements proved ephemeral. Finally, after myriad stops and starts, the Court informed the parties that they would settle or get ready for trial. The Court also stated that it would not participate in further settlement conferences unless the parties agreed that they would be bound by the Court's recommendation.

Prior to agreeing to the arbitration, and after many negotiation sessions, the parties had agreed that the Manneys would pay the Mediators a sum of $4,000,000 for distribution to its creditors. This sum was a fraction of the amount the Mediators asserted was due. If this amount were paid in full by the due date, the case would go away. Where the parties went astray was in trying to negotiate the terms for the contingency of the Manneys not making full payment by the agreed-upon date. They argued over such issues*fn1 as (1) what would happen to the proceeds if the Manneys sold one of their condominiums; (2) what amount of periodic payments would be acceptable from the Manneys; (3) what interest rate should apply to the outstanding balance; (4) under what circumstances would the Manneys be required to sell artwork and what would happen to the proceeds; (5) what would constitute a breach, and what would happen if there was a breach of the agreement.

The end result of all this haggling is that the goal line seemed always to shift. Finally, on June 18, 2002, the parties identified just two issues that remained to be resolved: (1) the creditors' request to participate in the net proceeds, or the "upside interest," of the sale of items from the Manney's collection of art, antiques, and other collectible items; and (2) the creditors' requirement that the Manneys execute a confession of judgment. Each side expressed a distrust in the other. While the Court could do little to assuage the subjective desire of the parties to feel completely protected, it informed the parties that it could assess whether their proposals were objectively reasonable, and thus proposed its "baseball arbitration." In a July 10, 2002 telephone conference with the Court, the parties agreed to proceed with the settlement arbitration to resolve the disputed issues. Rather than selecting terms from each side's proposal, the Court would select in toto the proposal which was most reasonable. By the stipulation signed on September 4, 2002, the Mediators and the Manneys agreed that the settlement proposal chosen by the Court would be binding.


A. Upside Interest

Both proposals include a provision entitling plaintiffs to the net proceeds from, or upside interest in, the Manneys' art sales. Settlement Proposal Submitted by the Manney Defendants ("Manney Proposal"), dated October 9, 2002, at 5; Settlement Proposal Submitted by the Official Committee of Unsecured Creditors of The Mediators, Inc. ("Mediators Proposal"), dated October 9, 2002, at 2. The purpose of the upside interest provision is that if some of the Manneys' art assets prove to have an unexpectedly high value, the creditors can capture a portion of it, while the Manneys will have enough incentive to maximize the value of their assets.*fn2 Mediators Proposal at 14.

Despite the Manneys' contention that this issue had been abandoned by the parties, they now agree that the net proceeds of sales of art collateral will be divided in the following manner: 75% will be applied as a prepayment of the settlement amount, and 25% will be retained by the Manneys. Manney Proposal at Exh. 2; Mediators Proposal at 4-5. In the event of a default, the Manneys' 25% portion will be held in escrow as additional collateral until such default is cured. Manney Proposal at Exh. 2; Mediators Proposal at 5. The proposals of both parties provide that if an item of art collateral is sold for less than its "reference amount," all of the proceeds will be applied toward prepayment of the settlement amount. Id. If an item of art collateral is sold in the enforcement of remedies under the settlement, "the Manneys would not be entitled to receive any of the proceeds until the entire indebtedness secured thereby . . . has been satisfied." Id. In sum, the two proposals are virtually identical with regard to the distribution of net proceeds from the Manneys' art sales.

B. Confession of ...

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