Searching over 5,500,000 cases.

Buy This Entire Record For $7.95

Official citation and/or docket number and footnotes (if any) for this case available with purchase.

Learn more about what you receive with purchase of this case.


United States District Court, S.D. New York

May 19, 2004.


The opinion of the court was delivered by: DENISE COTE, District Judge

This is an appeal from the Bankruptcy Court's approval of a settlement of an adversary proceeding. For the following reasons, the decision below is affirmed and the appeal is denied.


  Appellants Smart World Technologies, LLC, Freewwweb, LLC and Smart World Communications, Inc. (collectively, "Smart World") filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code on June 29, 2000. Smart World was in the business of providing free internet access to its subscribers and had attempted to locate a purchaser for its assets, which were essentially a list of subscribers. Juno Online Services, Inc. ("Juno") was the only bidder and through a term sheet, also executed on June 29, agreed to pay for each Smart World subscriber who became a "Qualified Subscriber", which was a subscriber defined in the term sheet as a person who, among other things, remained a Juno subscriber for at least a 90 day period. Smart World was required by its agreement with Juno to file for bankruptcy. On July 19, the Bankruptcy Court approved the sale to Juno.

  Almost immediately, Juno and SmartWorld accused each other of wrongdoing. On August 16, Juno commenced an adversary proceeding seeking a declaration, inter alia, that it had done no wrong and that Smart World had breached its obligations under the term sheet. On December 22, Smart World answered and filed counterclaims. Juno exercised its right under the term sheet to cease accepting referrals of subscribers as of December 31.

  On February 28, 2001, the Bankruptcy Court stayed the adversary proceeding upon being advised that a potential settlement was under consideration. A certain amount of discovery had already occurred by that time. When the settlement did not materialize, the parties were referred to mediation. Eventually a settlement was reached between Juno and almost all of Smart World's creditors.

  There are two groups of creditors endorsing the settlement. MCI WorldCom Network Services, Inc. and UUNET Technologies, Inc. (collectively "WorldCom") asserts that it has a perfected, senior secured claim against Smart World of over $10.9 million, and unsecured claims of approximately $14 million. The Official Committee of Unsecured Creditors ("Committee") estimates claims of at least $20 million. Under the settlement Juno would pay these creditors $5 million.

  Smart World objected to the settlement and has filed this appeal from the Bankruptcy Court's September 11, 2003 approval of the settlement. As the foregoing claims of the creditors illustrate, for Smart World's shareholders to begin to receive any payment whatsoever from Juno, the litigation between Juno and Smart World would have to yield close to $45 million.


  A district court "may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree." Rule 8013, F.R.Bankr.P. The Court must review the Bankruptcy Court's findings of fact for clear error and its legal conclusions de novo. In re Robert N. Kornfield, 164 F.3d 778, 783 (2d Cir. 1999).

  Rule 9019(a), F.R.Bankr.P., provides that

On motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement. Notice shall be given to creditors, the United States trustee, the debtor, and indenture trustees as provided in Rule 2002 and to any other entity as the court may direct.
Id. A bankruptcy court has broad discretion to approve settlements reached under Rule 9019, and need only satisfy itself that the settlement is "within the range of reasonableness." In re Best Product Co., Inc., 68 F.3d 26, 33 (2d Cir. 1995). A court should affirm the bankruptcy court's decision unless it falls below the "lowest point in the range of reasonableness." In re Teletronics Services, Inc., 762 F.2d 185, 189 (2d Cir. 1985) (citation omitted).

  The Bankruptcy Court's decision was reasonable. Should Smart World lose the adversary proceeding, Juno may be relieved of responsibility to pay anything to the estate and its creditors. Smart World acknowledges that if it is successful in the litigation it may be entitled to as little as $4 million. The fact that creditors, who are represented by experienced counsel and who have substantial claims, are willing to accept $5 million from the only viable source of recovery is substantial evidence in favor of the settlement. Finally, the settlement was the result of significant negotiation.

  Smart World contends principally that any motion to settle claims under Rule 9019(a) must be brought by the bankruptcy trustee or the debtor-in-possession. As the debtor-in-possession, its consent to the settlement was required and was not given. It argues, therefore, that the settlement must be vacated.

  None of the parties have been able to point to any case law addressing this precise point. It is axiomatic, however, that bankruptcy courts are "courts of equity, empowered to invoke equitable principles to achieve fairness and justice in the reorganization process." In re Momentum Mfg. Corp., 25 F.3d 1132, 1136 (2d Cir. 1994); see also In re Dairy Mart Convenience Stores, Inc., 351 F.3d 86, 92 (2d Cir. 2003). Specifically, Section 105(a) of the Bankruptcy Code grants bankruptcy courts the equitable power to


issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.
11 U.S.C. ยง 105 (a).

  Smart World had a fiduciary obligation to protect the interests of its creditors and maximize recovery for the estate. See In re Commodore Intern. Ltd., 262 F.3d 96, 99 (2d Cir. 2001); In re Cybergenics Corp., 226 F.3d 237, 243 (3d Cir. 2000). When it fails to act as it should, others may act in the best interest of the estate, even in the absence of explicit authorization in the Bankruptcy Code. For example, in In re Housecraft Indus. USA, Inc., 310 F.3d 64 (2d Cir. 2002), the Second Circuit reaffirmed that "an unsecured creditor may initiate an adversary proceeding in the name of a debtor-in-possession if the debtor-in-possession unjustifiably refuses to bring suit." Id. at 70. See also Official Comm. of Unsecured Creditors of Cybergenics Corp. ex rel. Cybergenics Corp. v. Chinery, 330 F.3d 548, 568 (3d Cir. 2003) (creditor's committee has derivative standing to bring an action to benefit the estate when the debtor who had a fiduciary duty to the estate refused to do so).

  When Smart World opposed the settlement, it put at risk the concrete opportunity for its creditors to obtain some recovery, acting on what must be characterized as an unrealistic hope that continued litigation would be so wildly successful that it might yield some recovery for its equity holders. In these circumstances, the Bankruptcy Court was entitled to act and to approve the settlement even without any motion from or the consent of the debtor-in-possession.

  The remaining claims of Smart World have been considered and are rejected. Conclusion

  The September 11, 2003 approval of the settlement of the adversary proceeding in this matter is affirmed. The appeal is denied.



© 1992-2004 VersusLaw Inc.

Buy This Entire Record For $7.95

Official citation and/or docket number and footnotes (if any) for this case available with purchase.

Learn more about what you receive with purchase of this case.