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In re NW Investors II

July 30, 2007

IN RE NW INVESTORS II, LLC DEBTOR.


The opinion of the court was delivered by: Spatt, District J.

MEMORANDUM OF DECISION AND ORDER

This case comes before the Court on an appeal filed by David Slyman ("Slyman") and Slyman International ("Slyman International") (collectively, the "appellants" or the "Slyman Creditors") from two orders of United States Bankruptcy Judge Dorothy Eisenberg. The appellants seek review of (1) an Order, dated April 27, 2006, Approving a Settlement Agreement; and (2) that part of an Order dated August 1, 2006 that, after granting reconsideration, adhered to the Bankruptcy Court's decision in the April 27, 2006 Order and makes the August 1, 2006 Order effective upon entry.

I. BACKGROUND

The following facts are derived from the parties' briefs and the bankruptcy record on appeal, and are not in dispute unless specifically noted. Because of the clarity of the parties' submissions on this appeal, the Court has adopted much of the following facts as presented in the parties' briefs on appeal.

A. The Debtor's Bankruptcy Case

On February 2, 2000, certain creditors who are not parties to this appeal filed an involuntary petition under Chapter 7 of the Bankruptcy Code against NW Investors II, LLC ("NW II" or the "Debtor"). Neil Wager was NW II's principal. On March 2, 2000, the Bankruptcy Court entered an order appointing Neil H. Ackerman as the Chapter 7 trustee for the estate of NW II. By proof of claim filed on May 15, 2001, Slyman International asserted an unsecured claim against the Debtor's estate in the amount of $2,327,780.40. By proof of claim filed on May 15, 2001, Slyman himself asserted an unsecured claim in the amount of $2,000,000 against the Debtor's estate. It is undisputed that these claims were timely filed, and were not objected to by Ackerman as Trustee. In sum, the appellants filed general, unsecured claims against NW II in the aggregate amount of $4,327,780.40.

B. Procedural History

By motion dated March 29, 2006, Trustee Ackerman sought the Bankruptcy Court's approval of a settlement agreement he entered into with Richard C. Breedon, the Chapter 11 trustee of The Bennett Funding Group, Inc. ("Bennett Funding"), whose bankruptcy case was pending in the United States Bankruptcy Court for the Northern District of New York (the "Settlement Agreement").

The appellants filed papers opposing the motion to approve the Settlement Agreement, but did not appear at the hearing on the motion before Judge Eisenberg held on April 25, 2006. At the hearing, the Bankruptcy Court heard arguments from those who were present and approved the Settlement Agreement. Judge Eisenberg issued an order to that effect on April 27, 2006.

On May 8, 2006, the appellants made a motion for reconsideration of the order of the Bankruptcy Court approving the Settlement Agreement. A hearing was held on July 18, 2006. By order dated August 1, 2006, the Bankruptcy Court granted the motion for reconsideration, but ultimately adhered to her original determination that the Settlement Agreement would be approved. This appeal followed.

C. The Settlement Agreement

The Settlement Agreement is a result of negotiations between the Trustee for the Debtor's estate, and the Chapter 11 Trustee of Bennett Funding, and is related to the companies' competing claims for ownership of 126,657 shares of stock in a company called Mid-State Raceway ("Mid-State").

In a complicated transaction, on March 1, 1996, the Debtor purchased from Patrick R. Bennett, the principal of Bennett Funding, a promissory note issued by Standardbred Enterprises, Inc. ("Standardbred"), dated December 28, 1995, in the principal amount of $1,950,000 (the "Standardbred Note"). The Debtor raised the capital to purchase the Standardbred Note through investors. It is undisputed that the appellants did not contribute any of the funds that the Debtor used to purchase the Standardbred Note.

On or about November 1, 1996, in consideration for the Debtor's agreement to extend the due date of the Standardbred Note, Standardbred granted the Debtor a security interest in 126,657 shares of Mid-State stock. Standardbred later defaulted on the Standardbred Note, and the Debtor demanded possession of the Mid-State stock. However, the escrow agent holding the Mid-State stock refused to deliver it to the Debtor, ostensibly because of the competing claim of ownership of the Bennett Funding Trustee.

The Bennett Funding Trustee contended that the funds used to purchase the Mid-State Stock were fraudulently transferred by Bennett from other Bennett companies, and that the Standardbred Note was a sham that Bennett used to transfer the Mid-State Stock to an entity controlled by his wife. The Bennett Trustee further contended that Wager, the Debtor's principal, was involved with Bennett in perpetrating the fraud, and that Standardbred's grant of a security interest in the Mid-State Stock to the Debtor was also a sham in furtherance of the fraud. Thus, according to the Bennett Trustee, the Debtor was not entitled to ownership of the Mid-State Stock, nor to a claim in the Bennett Bankruptcy for the amount of the Standardbred Note. Ultimately, the dispute resulted in competing claims being filed by the Debtor and Bennett Funding in each other's bankruptcy proceeding.

In an effort to resolve these competing claims, the Trustee for the Debtor's Estate and the Bennett Trustee entered into the Settlement Agreement which provided, in part, that: (1) the Debtor's estate relinquished all ownership claims to the Mid-State Stock; (2) the Mid-State Stock would be turned over to the Bennett Trustee, who could sell the stock; (3) the Debtor was permitted a non-priority, general unsecured claim in the Bennett Bankruptcy in the amount of $1,950,000; (4) the Debtor's estate was also permitted to share in a portion of the proceeds from the Bennett Trustee's sale of the Mid-State Stock; and (5) the Bennett Trustee agreed to withdraw the Bennett Companies' $650 million claim against the Debtor in this bankruptcy case.

An issue arose with respect to the Settlement Agreement because some of the NW II investors that funded the purchase of the Standardbred Note filed claims in the Bennett Funding bankruptcy case. Although these investors gave money to NW II, it was their understanding that they were investing in Bennett Funding through the NW II ...


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