In Re Rfe Industries, Inc. Fry's Metals, Inc. Cameron & Mittleman v. John J. Gibbons, Trustee for the Estate of Rfe Industries, Inc. Anton Noll, Inc. Westbury Alloys, Inc. Sparfven & Company, Inc. Michael Sparfven. Fry's Metals, Inc.
Docket: 00-2184
Court: Court of Appeals for the Third Circuit; March 7, 2002; Federal Appellate Court
Fry's Metals, Inc. appeals a district court judgment affirming a bankruptcy court order that denied approval of a settlement between Fry's and the former Trustee of RFE Industries, Inc. (RFE). RFE, which filed for Chapter 11 bankruptcy on August 19, 1997, sold its MFE Division to Anton Noll, Inc. for approximately $400,000, expecting yearly royalty payments of about $360,000. After allegations of mismanagement led to John J. Gibbons being appointed as Trustee on November 10, 1997, Anton sold the MFE assets to Fry's and Sparfven for at least $950,000. Anton failed to pay the expected royalties, prompting Gibbons to sue Anton, Sparfven, and Fry's for breach of contract.
Fry's and Gibbons later reached a settlement regarding the estate's claims against Fry's, while claims against Anton and Sparfven remained unaffected. Despite RFE successfully managing to pay all creditors in full and moving to dismiss the bankruptcy case, Fry's objected to the settlement's lack of bankruptcy court approval. To address Fry's concerns, the dismissal order stipulated that the bankruptcy court would retain jurisdiction to enforce the settlement. Initially, the bankruptcy court approved the settlement, but after questioning whether RFE had waived objections, it vacated the approval and denied the settlement. The district court affirmed this denial, leading Fry's to appeal. The appellate court has jurisdiction under 28 U.S.C. § 1291 and will review the district court's bankruptcy decision de novo.
The Dismissal Order of RFE's bankruptcy case establishes that the bankruptcy court retains jurisdiction over the adversary proceeding involving John J. Gibbons, Trustee, and Anton Noll, Inc., specifically to enforce and consummate a previously agreed-upon settlement. Fry's contends that this jurisdiction is limited solely to enforcement and consummation, arguing that the court lacked authority to review the merits of the settlement. However, there is consensus among the parties that the bankruptcy court retains jurisdiction over the Settlement, despite the case's dismissal. Fry's aims to restrict this jurisdiction, but Federal Rule of Bankruptcy Procedure 9019(a) allows the court to approve or disapprove settlements, indicating that the court has the authority to deny a settlement to prevent issues like collusion.
Gibbons, the Trustee, and Fry's reached a settlement concerning claims against Fry's, but RFE, which did not participate in the Settlement, asserts it lacks standing to object. The court reviews standing de novo, noting that notice of the settlement must be given to relevant parties, including the debtor, who can object. RFE, being the party most adversely affected by the Settlement, is deemed to have standing to object, despite not being a party to it.
RFE and Gibbons moved to dismiss RFE's bankruptcy case after its creditors were fully paid. Fry's objected, leading to the inclusion of language in the Dismissal Order that the bankruptcy court retains jurisdiction over the Settlement. Fry's argues that RFE waived its right to object or is equitably estopped from doing so due to this language. Issues of waiver and estoppel are reviewed de novo, while factual findings by the bankruptcy court are upheld unless clearly erroneous.
Waiver is defined as the intentional relinquishment of a known right. Fry's contends that RFE waived its right to object to a Settlement when it proposed language in the Dismissal Order suggesting limited jurisdiction for the bankruptcy court. However, the bankruptcy court determined that RFE did not waive its rights, as the Settlement's details were undisclosed to RFE and other parties, preventing RFE from knowingly relinquishing any rights.
Fry's also claims RFE should be equitably estopped from objecting to the Settlement, asserting that RFE's proposal indicated it would not object. Fry's argues that had it known RFE would object, it would not have agreed to the dismissal. This claim is rejected on two grounds: even without the dismissal, RFE could still object during Settlement hearings, and RFE did not make the representation Fry's alleges. The Dismissal Order's language does not explicitly indicate RFE waived its right to object, allowing for the interpretation that RFE's proposed language did not signify a waiver.
Ultimately, it is concluded that RFE has not waived its right to object to the Settlement and is not estopped from doing so. Regarding the Settlement's merits, Fry's requests Court approval based on the precedent set in In re Martin, or alternatively, a remand for analysis under the Martin factors, which include: the probability of success in litigation, difficulties in collection, complexity and costs of litigation, and the interests of creditors. The court reviews whether the bankruptcy court should have applied these factors de novo.
The bankruptcy court failed to make factual findings on four key issues regarding the Settlement and instead disapproved it based on RFE's lack of waiver of objection and the dismissal of the bankruptcy case. These reasons are inadequate according to the Martin framework, as the waiver of objections relates to standing rather than the reasonableness of the Settlement, and the dismissal pertains to jurisdiction rather than the Settlement's approval. The court should have evaluated the Settlement under the Martin criteria, particularly since it retained jurisdiction over the unresolved approval of the Settlement despite the bankruptcy case's dismissal. The court is directed to reassess the "fairness, reasonableness, and adequacy" of the Settlement considering current circumstances, including the absence of creditors, which necessitates adjusting the fourth Martin factor to prioritize the interests of RFE's shareholders. Additionally, the former Trustee Gibbons' judgment should receive less deference due to RFE's non-bankruptcy status. The judgment of the District Court is reversed, and the case is remanded for further proceedings.
