IN RE: WABA, INC., Chapter 7, Debtor.
Case No. 13-34110-dof.
United States Bankruptcy Court, E.D. Michigan, Southern Division, Flint.
October 23, 2015.
OPINION REGARDING TRUSTEE’S MOTION FOR APPROVAL OF SALE OF ASSETS AND SETTLEMENT OF CLAIMS
DANIEL S. OPPERMAN, Bankruptcy Judge.
Collene Corcoran, the Chapter 7 Trustee appointed in this case (the “Trustee”), seeks approval of the Court to sell assets and settle claims. Per the Trustee’s Motion, the assets that she seeks to sell are described as:
3. On the Petition Date, the Debtor held an interest in assets formerly owned by Hairy Entertainment, LLC it purchased through the filing of the Assignment for the Benefit of Creditors in and with the Fulton County, Georgia Superior Court Clerk. The Assignee for the Benefit of Creditors was Asset Recovery Associates, LLC. The assets purchased include Xeko digital art files, Xeko.com domain, Classic Xeko Website, retail inventory, and Xeko intellectual property collectively being referred to as the “Xeko Asset” which became property of the Estate. Debtor also held an interest in certain patents, copyrights and other intellectual property, and miscellaneous office equipment (any and all property of the Estate in possession of the Trustee or any other person or party shall be collectively referred to as “Assets”).
Likewise, the claims the Trustee seeks to settle are described as:
4. In addition, Trustee has asserted several potential claims in this bankruptcy proceeding. The claims include claims against Oomba on substantive consolidation and fraudulent transfer theories (“Oomba Claims”); potential claims against Michael Williams pursuant to 11 U.S.C. section 547(b) and breach of fiduciary duties owed to the Debtor (“Williams Claims”); potential claims against the officers and directors of Waba for breach of their fiduciary duties to Waba (“Officer & Director Claims”); and potential claims against purported recipients of Kickstarter funds (“Kickstarter Claims”)(the Oomba Claims, Williams Claims, Officer & Director Claims and Kickstarter Claims are collectively referred to as “Claims”).
The Trustee wishes to sell the Assets to Oomba, Inc. (“Oomba”) and settle the Claims as described by the Trustee, all for the amount of $75,000.00. Amy Tucker, a former employee of Waba, Inc. (“Waba”) has filed an unsecured claim in the amount of $129,461.00. Ms. Tucker initially offered $5,000.00 to purchase the Xeko Asset. After receiving this offer, the Trustee cast about for others interested in purchasing the assets and finally, after months of negotiations, procured an offer of $75,000.00 from Oomba. Oomba, however, seeks to purchase not only the Xeko Asset, but also all other assets of Waba and to settle any and all claims Waba may have against Oomba and its officers and employees. These are the claims described in the Trustee’s summary of claims that she wishes to settle.
Ms. Tucker objects to the Trustee’s proposed course of action for numerous reasons. The Court held hearings on June 24, 2015, and August 4, 2015, to allow the parties to develop the factual basis for their positions. Given the nature of this case, no party wished to submit proofs and all agreed that the pleadings, as well as statements and arguments of counsel, would form the sufficient factual basis for the Court to make its decision. Accordingly, the Court makes the following findings of fact.
Findings of Fact
Waba was created to acquire assets of Hairy Entertainment, LLC for $100,000.00 by way of a purchase through proceedings with the Fulton County, Georgia Superior Court Clerk. A primary asset of this purchase was the Xeko Asset. Xeko was developed primarily by Ms. Tucker and is a game played on a computer or like device. Shortly after Waba purchased these assets, it learned that the “Waba.com” domain was already taken. Accordingly, Waba assumed the name of Oomba  and it was this entity that began trying to develop the Xeko Asset, as well as other games. Waba, and later Oomba, Inc., were both created by Michael Williams. Mr. Williams, using the Waba and Oomba names, began efforts to raise funds to develop business. One of the efforts was a crowd funding campaign to develop the Xeko game. This effort was through Kickstarter.com and ultimately raised $257,870.00. The primary source of this fund was Sifaka, which agreed to fund $150,000.00. At this time, however, Mr. Williams decided not to continue this campaign because Waba/Oomba faced challenges from Ron Medinger and Ms. Tucker that he thought were insurmountable. In doing so, Mr. Williams created a new company, Oomba, Inc., and sought to acquire all of the assets of Waba with none of the liabilities. One of these assets is an intellectual property program called “Gamebux,” which Ms. Tucker argues was transferred from Waba to Oomba. The Trustee argues this asset was not transferred from Waba to Oomba, that it has little economic value, and is part of the proposed sale of the Waba Assets to Oomba. Waba filed a petition seeking relief under Chapter 7 with this Court on December 13, 2013.
The Trustee conducted a first meeting of creditors on January 6, 2014, and continued that meeting several times. To date, only two creditors have filed proofs of claim: Mr. Medinger and Ms. Tucker. Through 2014, the Trustee sought more information from Mr. Williams and obtained an order from this Court to allow for the 2004 examination of Mr. Williams and others. Despite that order, the Trustee was required to file a motion for contempt against Mr. Williams, but that matter was ultimately resolved and information began flowing from Mr. Williams to the Trustee. During this time, the Trustee retained counsel, who began an investigation as to the value of all of the assets of the Debtor, as well as potential causes of action that the Debtor held. As part of this process, counsel was able to procure an offer from Ms. Tucker in the amount of $5,000.00 to buy the Xeko Asset. To that end, the Trustee filed a Motion for Approval of Sale of the Xeko Asset to Ms. Tucker on November 18, 2014. Mr. Medinger objected to that Motion on December 5, 2014, stating that he thought the $5,000.00 was too low and that he would consider making a higher offer. The Trustee withdrew this Motion on December 16, 2014, but Mr. Medinger has not made a higher offer. The Trustee offered all of the assets of the Debtor for sale and ultimately was able to obtain an offer from Oomba in the amount of $75,000.00, which included the Assets of the Debtor, including the Xeko Asset, as well as a settlement of the Claims that the Debtor may have.
Positions of Parties
The Trustee argues that she has investigated all of the claims that the Debtor may have and acknowledges the existence of those claims, but notes that the cost of prosecuting the claims is extremely high and the likelihood of success unknown with collectability suspect. The Trustee also argues that she has attempted to market the assets, including the Xeko Asset, for over one year and has only received one offer for the Xeko Asset as a standalone proposition, namely Ms. Tucker’s offer of $5,000.00. Oomba, Inc. offers a significantly higher amount, $75,000.00, but it requires Xeko Asset to be sold as a package to it.
Ms. Tucker objects to the Trustee’s proposed course of action, claiming that the cause of actions against various entities including Mr. Williams and Oomba are well founded and that significantly more money will be obtained if the causes of action are prosecuted to completion. Moreover, she should be allowed to purchase the Xeko Asset only. Finally, Ms. Tucker argues that the Trustee has a number of other viable claims such as substantial consolidation or piercing of the corporate veil.
This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 157, 28 U.S.C. § 1334, and E.D. Mich. LR 83.50. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) (matters concerning the administration of the estate).
Statement of Law
Sale of Assets — Section 363(b)
A trustee or debtor-in-possession is free to under Section 363(b) and as case law interpreting this section hold, in its sound business judgment, in good faith, and on fair and reasonable terms, enter into the sale agreement. See, e.g., Stephens Indus., Inc. v. McClung, 789 F.2d 386, 390 (6th Cir. 1986) .
Review of Proposed Settlement/Compromise — Bankruptcy Rule 9019
The law favors compromise, but any proposed compromise or settlement must be in the best interests of the estate. “In considering a proposed compromise, the bankruptcy court is charged with an affirmative obligation to apprise itself of the underlying facts and to make an independent judgment as to whether the compromise is fair and equitable. The court is not permitted to act as a mere rubber stamp or to rely on the trustee’s word that the compromise is `reasonable.'” Reynolds v. Commissioner of Internal Revenue, 861 F.2d 469, 473 (6th Cir. 1988) .
To analyze a proposed settlement or compromise, courts use the following factors: (1) the probability of success in the litigation; (2) the difficulties, if any, to be encountered in the matter of collection; (3) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; and (4) the paramount interest of the creditors and a proper deference to their reasonable views in the premises. Bauer v. Commerce Union Bank, 859 F.2d 438, 441 (6th Cir. 1988) (court must weigh all conflicting interests); In re Dow Corning Corp., 198 B.R. 214, 221-22 (Bankr. E.D. Mich. 1996) .
The Court analyzes the Trustee’s motion with the following parameters in mind. As held by the United States Supreme Court in the case of TMT Trailer Ferry v. Anderson, 390 U.S. 414 (1968), and the Sixth Circuit Court Appeals in the case of Reynolds, the Bankruptcy Court may approve a compromise or settlement only when it is “fair and equitable.” A bankruptcy court should “form an educated estimate of the complexity, expense, and likely duration of such litigation, the possible difficulties of collecting on any judgment which might be obtained, and all other factors relevant to a full and fair assessment of the wisdom of the proposed compromise.” TMT Trailer, 390 U.S. at 424 .
In determining whether a proposed compromise of settlement is “fair and equitable,” this Court also considers the factors articulated by the Court in the Dow Corning Corp. case.
(1) The balance between the likelihood of the plaintiff’s or defendant’s success should the case go to trial compared to the present and future benefits offered by the settlement;
(2) The prospect of complex, costly and protracted litigation if the settlement is not approved;
(3) The proposition of class members who do not object or who affirmatively support the proposed settlement;
(4) The competency and experience of counsel who support the settlement;
(5) The relative benefits to be received by individuals or groups within the class;
(6) The nature and breadth of releases to be obtained by officers and directors; and
(7) The extent to which the settlement is the product of arm’s length bargaining (i.e., whether the agreement was reached between insiders without creditor participation).
The Court has carefully reviewed the pleadings and transcripts submitted by the parties in this action and concludes that the Trustee has properly identified the viable causes of action and analyzed that certain causes of action, such as the consolidation theory, may not be successful. Other causes of action, however, such as the claims regarding the actions of Mr. Williams and the Kickstarter Claims, however, are much stronger and viable. In short, the package of claims described by the Trustee in her motion are viable causes of action that are worth pursuing and therefore, from the Defendant’s side, worth settling.
Applying the Bauer factors, the Court finds that the Trustee enjoys a substantial probability of success in certain claims, most notably those involving Mr. Williams and the Kickstarter Claims. The others, while perhaps not as clear at this time, can be supported by the Trustee and prosecuted. As for the difficulties encountered in the matter of collection, the Court has no evidence before it that would suggest that the Trustee would either be extremely successful in collecting any judgment or face insurmountable obstacles. What the Court does see as a major factor in this matter, however, is the complexity of the litigation involved, as well as the expense, inconvenience, and delay necessary in attending the litigation. While Ms. Tucker states with certainty the nature of the claims and her steadfast belief that these claims could be litigated to success, she does not sufficiently acknowledge the cost and the delay in doing so. The litigation described by Ms. Tucker and adopted for the most part by the Trustee, is complex commercial litigation that takes years to take to trial. Moreover, even though certain causes of action appear strong, any trial results in cases like these is difficult, if not impossible to predict. As to this factor, the Court agrees with the Trustee’s assessment that litigating these claims to completion is such that an early resolution, as proposed by the Trustee, is preferable. As for the fourth factor, the Court acknowledges that Ms. Tucker holds one of two claims in this case and that she vehemently opposes settlement as proposed by the Trustee. On the other hand, Mr. Medinger, who holds a claim of almost the same amount, has not objected to the Trustee’s course of action. This is notable because Mr. Medinger did object to the original motion for sale filed by the Trustee, which sought to sell the Xeko Asset to Ms. Tucker.
Applying the Dow Corning factors, the Court balances the likelihood of success compared to the present and future benefits offered by the settlement by concluding that the offer to settle the litigation accepted by the Trustee outweighs the likelihood of success for the Trustee if litigation were to continue. Likewise, the second factor of the prospect of complex costs and protracted litigation is extremely high in that the continuation of the causes of action by the Trustee will result in long drawn-out discovery and pretrial matters with a trial being concluded within a few years, as opposed to the immediate payment as proposed by the Trustee. As for the issue of class members, the Court will assume here that the two claims are the two classes involved. Here, the two claimants appear to take diametrically opposed views: Ms. Tucker is against the settlement; Mr. Medinger voices no objection.  As such, the Court gives no weight to this element for either side. The same is true as to the fifth element as articulated by Dow Corning, the relative benefits to be received by individuals within a class.
As for the competence and experience of counsel who support settlement, the Court acknowledges that the Trustee’s counsel is very experienced in litigation, including commercial litigation as described by the parties in this action. In doing so, the Court also acknowledges that Ms. Tucker’s counsel has significant experience in this area as well, and that counsel disagree as to their respective views of this case. In this matter, however, the Court weighs this factor in favor of the Trustee.
The Court finds that the nature of the releases to be obtained by the officers and directors in this matter is broad in that the Trustee is settling all claims against Oomba, Inc. and Mr. Williams, as well as others. The nature of the releases, however, is commensurate with the type of litigation involved and is given a neutral rating by the Court.
Finally, all of the evidence before the Court is that the proposed settlement is the result of arms length bargaining between the Trustee and the potential defendants. What is not clear, however, is the addition of the sale of the Assets that was requested by Oomba, all with what appears to be no or little involvement of Ms. Tucker.
In this regard, Mr. Medinger’s objection is instructive. He objected to Ms. Tucker’s offer to buy the Xeko Asset because he argued she did not have a legitimate proof of claim in the Waba bankruptcy and her offer to withdraw that claim was worthless. He then continued to state that he thought the $5,000.00 offer by Ms. Tucker was insufficient and that he would make an offer to purchase the Xeko Asset. To date, however, he has not done so.
The last Dow Corning factor also influences the Court’s review of the proposed sale of the Assets, including the Xeko Asset. By December 16, 2014, Ms. Tucker should have been aware that her proposed offer for the Xeko Asset was rejected because the Trustee withdrew her motion seeking approval of that sale. What is not clear, however, is the involvement, if any, that Ms. Tucker had in regard to the negotiations for the sale of the Assets, as well as the settlement of the Claims. The pleadings and statements of her counsel suggest that she was not included in this process, but the Trustee’s response suggests otherwise.
The Court must consider the silence of Mr. Medinger in regard to the settlement of the cause of action in contrast to his previous objection to the sale of the Xeko Asset to Ms. Tucker, especially in the context that the proposed sale of the Xeko Asset was never brought to the Court for consideration. The Court gleans from Mr. Medinger’s actions or silence the conclusion that $75,000.00 is an acceptable amount for the Claims and the Assets, but that $5,000.00 for the Xeko Asset is too low.
The Court concludes the Trustee has properly exercised her judgment as to the compromise of the claims, but not as to the sale of the Xeko Asset. Because Ms. Tucker is willing to buy the Xeko Asset for $5,000.00 with a withdrawal of her claim, the Court would authorize a sale procedure to allow open bidding of the Xeko Asset starting with Ms. Tucker’s offer of $5,000.00 and withdrawal of her claim. Any other entity or individual, including Oomba or Mr. Medinger, may bid in $500.00 increments.
Since the proposed Xeko Asset sale would be for at least $5,000.00, the amount Oomba would pay to compromise the Claims is $70,000.00. In the event Ms. Tucker does not wish to purchase or anyone fails to complete a purchase of the Xeko Asset, then Oomba may do so for $5,000.00. Under either scenario, the remaining assets, except for the Xeko Asset, may be sold to Oomba as part of the $70,000 transaction to settle the Claims. Also, if Ms. Tucker is not the purchaser of the Xeko Asset, she would not be required to withdraw her claim and the Trustee would have the right to object to her claim.
The Court’s analysis depends upon whether Ms. Tucker still remains ready, willing, and able to tender $5,000.00 to the Trustee and withdraw her proof of claim. The Court will allow Ms. Tucker fourteen (14) days to indicate to the Trustee that she wishes to proceed with that purchase. If so, then the Court would approve the sale procedure of the Xeko Asset and allow the sale of the remaining assets and the settlement of all Claims as proposed by the Trustee for the sum of $70,000.00.
If Ms. Tucker does not indicate her willingness to purchase the Xeko Asset for $5,000.00 and the withdrawal of her claim within fourteen (14) days, then the Court concludes that her offer was illusory and that the only remaining viable offer for the Trustee to accept is the one as initially proposed by Oomba in the amount of $75,000.00 for the purchase of the Assets and the settlement of the Claims.
Counsel for the Trustee is instructed to prepare an order consistent with this Opinion and the presentment of order procedures of this Court.
 The use of the name “Oomba” by Waba could cause confusion, so unless the text of a sentence identifies Oomba as a name used by Waba, reference to Oomba is to the corporation created by Mr. Williams and the entity offering to pay money to the Trustee.
 The Trustee has responded to Ms. Tucker’s objection by noting that Ms. Tucker has filed a claim with the State of California seeking recovery of the same amount of monies as those stated in her proof of claim in this action. As the Trustee argues, Ms. Tucker is pursuing two alternative courses of action that are mutually exclusive. The Trustee may be correct on this issue, but as the case is currently presented, Ms. Tucker’s claim is deemed valid until objected to by the Trustee. The Trustee has rightfully decided to not object to Ms. Tucker’s proof of claim at this time because of cost issues. Accordingly, the Court will assume, for purposes of this matter only, that Ms. Tucker has a proof of claim and standing to raise her objections.
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