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In Re Ambac Financial Group, Inc v. Ambac Financial Group

December 29, 2011


The opinion of the court was delivered by: Naomi Reice Buchwald United States District Judge


Appellant Police and Fire Retirement System of the City of Detroit ("PFRS" or "Appellant") appeals from a decision of the United States Bankruptcy Court (Chapman, J.) (the "Bankruptcy Court"), approving a settlement agreement (the "Settlement") pursuant to Bankruptcy Rule 9019 between Ambac Financial Group, Inc. ("Ambac") and plaintiffs in two shareholder class action lawsuits. For the reasons set forth below, the Bankruptcy Court's order is affirmed.


On November 8, 2010, Ambac filed a voluntary petition under Chapter 11 of the Bankruptcy Code. (PFRS Br. at 5.) Upon the filing of this petition, a mandatory stay was imposed pursuant to Section 362 of the Bankruptcy Code on all actions then pending against Ambac and its officers and directors. (Id.) The actions filed prior to the bankruptcy petition included two shareholder derivative actions -- one filed by Appellant in the Chancery Court of Delaware (the "Delaware Action") and one filed in the Southern District of New York*fn2 (the "New York Action" and collectively, the "Derivative Actions") -- and two shareholder class actions.*fn3 All of these actions asserted claims in connection with losses suffered by Ambac as a result of its exposure to the subprime mortgage financial crisis.
In May 2011 -- following a year of mediation efforts led by retired District Judge Nicholas Politan - plaintiffs in the securities class actions entered into a Stipulation of Settlement with Ambac. (Ambac Br. at 4-5.) See also Bench Decision, 457 B.R. at 307. The Settlement resolved the parties' claims, but it was conditioned on receiving an order from the Bankruptcy Court releasing and barring the claims asserted in the shareholder derivative actions against Ambac's officers and directors.*fn4 (Ambac Br. at 4-5.) On June 28, 2011, Ambac filed a motion requesting that the Bankruptcy Court enter an order under Bankruptcy Rule 9019 approving the Settlement with the above stated conditions ("9019 Order").*fn5 (Id. at 5.)

On July 27, 2011, PFRS filed an objection to the proposed order. (PFRS Br. at 5-6.)*fn6 On August 10, 2011, the Bankruptcy Court held a hearing at which PFRS requested that it be afforded an opportunity to conduct discovery and present evidence as to why the Settlement should not be approved. Bench Decision, 457 B.R. at 301. The Bankruptcy Court granted PFRS's request, and, a month later, the Court held a two-day evidentiary hearing on the motion. Id. at 302. At the hearing, Ambac's general counsel, Stephen Ksenak, testified as to the reasons Ambac felt the settlement terms were appropriate, and PFRS presented expert testimony from Dr. Lawrence Weiss as to the potential damages underlying the released claims. (Ambac Br. at 6.) Notably, counsel for the Official Committee of Unsecured Creditors ("Creditors Committee") participated at the hearing and expressed support for entry of the requested order. (Id.)

On September 13, 2011, the Bankruptcy Court entered the 9019 Order over PFRS's objections. Applying the seven-factor test outlined by the Second Circuit in Motorola, Inc. v. Official Committee of Unsecured Creditors (In re Iridium Operating LLC) ("Iridium"), 478 F.3d 452 (2d Cir. 2007), the Court found that the Settlement fell "well above the lowest point in the range of reasonableness" and its approval was thus warranted. Bench Decision, 457 B.R. at 308. The instant appeal followed.*fn7


We review de novo the Bankruptcy Court's articulation of the legal standards applicable to evaluation of a settlement under Rule 9019. Krys v. Official Comm. of Unsecured Creditors of Refco Inc. (In re Refco Inc.), 505 F.3d 109, 116 (2d Cir. 2007). However, we review the Bankruptcy Court's application of those legal principles to the settlement in question for abuse of discretion. Id.; see also Iridium, 478 F.3d at 461 n.13. The Bankruptcy Court "will have abused its discretion if no reasonable man could agree with the decision to approve [the] settlement." Kenton Cnty. Bondholders Comm. v. Delta Air Lines, Inc. (In re Delta Air Lines, Inc.), 374 B.R. 516, 522 (S.D.N.Y. 2007) (internal quotation marks omitted).

In engaging in this review, we are mindful that settlements are strongly favored in the bankruptcy context, as they "help clear a path for the efficient administration of the bankrupt estate." Iridium, 478 F.3d at 455; see also O'Connell v. Packles (In re Hilsen), 404 B.R. 58, 69 (Bankr. E.D.N.Y. 2009). Thus, courts are to upset such settlements only in the face of considerable evidence suggesting that the agreement is unreasonable. See In re Hilsen, 404 B.R. at 70 ("[T]he court must do neither more nor less than canvass the issues and see whether the settlement falls below the lowest point in the range of reasonableness from the perspective of the bankruptcy estate." (internal quotation marks omitted)).


I.Scope of Release

PFRS contends that Ambac did not have the authority to release the derivative claims as part of the Settlement with the class action plaintiffs. We find this argument to be without merit.

Pursuant to Section 541 of the Bankruptcy Code, all causes of action held by the debtor become the exclusive property of the bankruptcy estate upon commencement of bankruptcy proceedings. See 11 U.S.C. ยง 541(a); see also Seinfeld v. Allen, 169 F. App'x 47, 49 (2d Cir. 2006). Any derivative claims held by individual shareholders therefore accrued to Ambac, in its role as debtor-in-possession, upon the filing of the bankruptcy petition. See iXL Enters., Inc. v. GE Capital Corp., 167 F. App'x 824, 826 (2d Cir. 2006). That the ...

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