Harry Carlton Wiley and Virginia Ruth Wiley

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
HARRY CARLTON WILEY and
VIRGINIA RUTH WILEY,
Debtors. 	No. 7-07-13053 SL
MEMORANDUM OPINION ON TRUSTEE’S
MOTION TO COMPROMISE UNDER RULE 9019
This matter came before the Court to consider the Trustee’s
Motion to Approve Compromise under Rule 9019 (doc 50). 	The
Trustee appeared through his attorney Moore, Berkson & Gandarilla
(George Moore and Bonnie Gandarilla). 	Objecting creditor Tru-
Value Company appeared through its attorney Rodey, Dickason,
Sloan, Akin & Robb, P.A. (James Askew and Charles Hughson). 	For
the reasons set forth below, the Court finds that the Motion
should be denied without prejudice. 	This is a core proceeding.
28 U.S.C. § 157(b)(2)(A).
FACTS
Harry Wiley and Virginia Wiley filed a voluntary Chapter 7
petition on December 3, 2007. 	Philip Montoya was appointed as
Trustee (“Trustee”). 	On October 8, 2008, Trustee filed an
adversary proceeding against a bank and several relatives and
related businesses to recover preferential and fraudulent
transfers and for declaratory relief (98-1120, doc 1). 	Trustee
amended the complaint on March 10, 2009 to correct the identity
of two defendants. 	(98-1120, doc 11) 	Sometime thereafter the
Trustee and the Defendants engaged in a settlement conference.
On April 30, 2009 the bank was dismissed without prejudice so
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1Because the bank was dismissed, all references to the bank
and claims against it (i.e., Count 2) are omitted from this
opinion.
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that the preference action could be litigated in a separate
adversary proceeding (98-1120, doc 23). 	On May 22, 2009 Trustee
filed the Motion to Approve Compromise under Rule 9019 (doc 50).
Under the terms of the compromise, defendants would pay to the
Trustee $180,000 within one year, or $160,000 if paid within six
months, to be secured by a first mortgage on real estate owned by
the Charles Hayden Wiley and Elnora Williams Wiley Revocable
Trust (“Wiley Trust”). 	In return, the Trustee would dismiss the
adversary with prejudice but would retain all claims he has, if
any, against HRW of Las Cruces, Inc. (“HRW LC”). 	Tru-Value
Company, which holds approximately 94% of the unsecured claims,
objected (doc 52). 	Tru-Value claims that the Trustee has not
obtained appraisals or other opinions of value of HRW Family, LLC
or the Wiley Trust and therefore has no rational basis for
exercising his business judgment to settle the claims. 	It also
argues that the four creditors with timely proofs of claim were
not consulted on the mediation or on the terms of the settlement.
THE COMPLAINT
The complaint identifies the defendants 1 as: the Debtors,
HRW LC (a corporation wholly owned by Debtors, per Schedule B),
Virginia Oxford (Debtors’ daughter), Robert Wiley (Debtors’ son),
HRW Family, LLC (no ownership interest listed on Schedule B, but
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the complaint alleges that Debtor Harry C. Wiley is the sole
managing member), the Wiley Trust (the complaint alleges this
trust was created in 1988), and Oxford Investments, LLC (no
ownership interest listed on Schedule B, but the complaint
alleges that Virginia Oxford is the agent).
Count 1 seeks to recover a fraudulent transfer to HRW
Family, LLC or, alternatively, a declaration of ownership of
property held by the LLC. 	Trustee alleges that, within two years
of the bankruptcy filing, Debtors gave 50% of HRW Family, LLC to
each of their children Virginia Oxford and Robert Wiley with the
intent to hinder, delay or defraud creditors or for less than
reasonably equivalent value at a time when they were insolvent or
caused to become so by the transfer, or were engaged in a
business or transaction or about to engage in a business or
transaction for which their remaining property was unreasonably
small capital, or at a time when the Debtors intended to incur or
believed they would incur debts that would be beyond their
ability to pay as the debts matured. 	The complaint lists various
assets that HRW Family, LLC owns. 	No net value is ascribed to
the HRW Family, LLC interests; presumably the Trustee is unaware
of the value of assets owned by or extent of debts owed by the
entity. 	Alternatively, the complaint alleges that HRW Family,
LLC is a passive holding entity and the equivalent of a grantor
trust. 	And, alternatively, Plaintiff seeks to step into the
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shoes of the managing member of HRW Family, LLC. 	Plaintiff seeks
judgment on Count 1 as follows: 1) avoiding the transfer of 100%
of the interests in HRW Family, LLC; 2) for orders to Virginia
Oxford and Robert Wiley to turn over the assets of HRW Family,
LLC to Plaintiff; 3) for a money judgment against Virginia Oxford
for the value of fifty percent of the assets in the LLC; 4) for a
money judgment against Robert Wiley for the value of fifty
percent of the assets in the LLC; and 5) for a declaration that
the assets of HRW Family, LLC are property of the estate.
Count 3 seeks to recover a fraudulent transfer to Oxford
Investments, LLC. 	Trustee alleges that, within 30 days of the
bankruptcy filing the Debtors transferred substantial assets of
HRW LC to Oxford Investments, LLC for $8,000 down and $171,009 to
be paid over fifteen years at 8% interest per annum, with the
intent to hinder, delay or defraud creditors or for less than
reasonably equivalent value at a time when they were insolvent or
caused to become so by the transfer, or were engaged in a
business or transaction or about to engage in a business or
transaction for which their remaining property was unreasonably
small capital, or at a time when the Debtors intended to incur or
believed they would incur debts that would be beyond their
ability to pay as the debts matured. 	Plaintiff seeks judgment on
Count 3 as follows: 1) a judgment avoiding the transfer by
Debtors of their interests in HRW LC; 2) an order directing
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2Count 4 also seeks a turnover of nonexempt property from
the Debtors in the amount of $3,488.
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Oxford Investments, LLC to turn over the assets of HRW LC to
Plaintiff, 3) for a money judgment against Oxford Investments,
LLC for the value of HRW LC’s assets, and 4) for a declaration
that the HRW LC assets are property of the estate.
Count 4 seeks to collect a debt from the Wiley Trust 2 . 	The
complaint alleges that Debtors guaranteed a debt of the Wiley
Trust to Farm Credit of New Mexico and then paid the loan in full
in the amount of $307,639. 	Therefore, Plaintiff claims that
Debtors are subrogated to Farm Credit of New Mexico and are due
$307,639 from the Wiley Trust. 	Plaintiff seeks judgment on Count
4 for either a turnover of the $307,639 or a money judgment in
that amount.
Count 5 seeks to recover a fraudulent transfer from the
Wiley Trust. 	Using the same facts as set forth in Count 4,
Plaintiff seeks a judgment that the $307,639 was a fraudulent
transfer for the benefit of the Wiley Trust.
Count 6 seeks a determination that the Wiley Trust is part
of Debtors’ bankruptcy estate. 	It lists various assets believed
to be owned by the trust and certain expenditures from the trust.
The key allegations, however, are 1) that Debtor Harry C. Wiley
is a trustee and a beneficiary of the Wiley Trust and has had and
continues to have unregulated dominion and control over the
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corpus of the Wiley Trust; and 2) that the Wiley Trust is the
equivalent of a grantor trust. 	Count 6 seeks a declaration that
the Wiley Trust is property of the bankruptcy estate and an order
to turnover the Wiley Trust assets to Plaintiff.
DISCUSSION
Settlements in bankruptcy are governed by Federal Rule of
Bankruptcy Procedure 9019(a), which states:
(a) Compromise
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.
Rule 9019 does not state the standards under which the Bankruptcy
Court approves the compromise or settlement. 	Therefore, Courts
have devised various tests over the years to determine whether a
settlement is in the best interests of the estate and creditors.
For example, in Protective Committee for Independent Stockholders
of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424-25
(1968), the United States Supreme Court stated:
There can be no informed and independent judgment as to
whether a proposed compromise is fair and equitable
until the bankruptcy judge has apprised himself of all
facts necessary for an intelligent and objective
opinion of the probabilities of ultimate success should
the claim be litigated. 	Further, the judge 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. 	Basic to this process in every instance,
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of course, is the need to compare the terms of the
compromise with the likely rewards of litigation.
Another example is the test adopted by the Second Circuit in
In re Iridium Operating LLC, 478 F.3d 452, 462 (2 nd Cir. 2007):
(i) the balance between the litigation's possibility of
success and the settlement's future benefits;
(ii) the likelihood of complex and protracted
litigation, with its attendant expense, inconvenience,
and delay, including the difficulty in collecting on
the judgment;
(iii) the paramount interest of the creditors,
including each affected class' relative benefits, and
the degree to which creditors do not object to or
affirmatively support the proposed settlement;
(iv) whether other parties in interest support the
settlement;
(v) the competence and experience of counsel supporting
the settlement; and
(vi) the extent to which the settlement is the product
of arm's length bargaining.
In re Stone Barn Manhattan, LLC, 405 B.R. 68, 75 (Bankr. S.D.
N.Y. 2009).
Yet another example is the test set forth in In re Jackson
Brewing Co., 624 F.2d 599, 602 (5 th Cir. 1980):
[The bankruptcy judge] must evaluate and set forth in a
comprehensible fashion:
(1) The probability of success in the litigation, with
due consideration for the uncertainty in fact and law,
(2) The complexity and likely duration of the
litigation and any attendant expense, inconvenience and
delay, and
(3) All other factors bearing on the wisdom of the
compromise.
(Citation omitted). 	The Fifth Circuit expanded upon this test in
Connecticut General Life Ins. Co. v. United Companies Financial
Corp. (In re Foster Mortgage Corp.), 68 F.3d 914, 917 (5 th Cir.
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1995)(“While this Circuit has not elaborated on the ‘other
factors bearing on the wisdom of the compromise’, we do so now.
One such factor [is] ... the paramount interest of creditors with
proper deference to their reasonable views.”)(citing Drexel v.
Loomis, 35 F.2d 800, 806 (8 th Cir. 1929)) and 918 (“Another
factor bearing on the wisdom of the compromise at hand is the
extent to which the settlement is truly the product of arms-
length bargaining, and not of fraud or collusion.”)(Citations
omitted.)
In In re Kopexa Realty Venture Co., 213 B.R. 1020, 1022
(10 th Cir. BAP 1997) the Bankruptcy Appellate Panel for the Tenth
Circuit adopted a four part test derived from Trailer Ferry for
evaluating the circumstances of a proposed compromise: (1) the
chance of success of the litigation on the merits; (2) possible
problems in collecting the judgment; (3) the expense and
complexity of the litigation; and (4) the interest of the
creditors. 	Korngold v. Loyd (In re Southern Medical Arts Co.,
Inc.), 343 B.R. 250, 256 (10 th Cir. BAP 2006).
Any decision to approve a settlement must be an informed one
based upon an objective evaluation of developed facts. 	Reiss v.
Hagmann, 881 F.2d 890, 892 (10 th Cir. 1989). 	The Court does not
substitute its own judgment for that of the Trustee. 	In re 110
Beaver Street Partnership, 244 B.R. 185, 187 (Bankr. D. Mass.
2000). 	Nor is it sufficient for the Court to rely solely on the
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trustee’s business judgment; rather, the Court must take evidence
and make its own findings of fact and conclusions of law. 	Kopexa
Realty, 213 B.R. at 1023-24 (remanding the case for findings and
conclusions.) 	See also LaSalle Nat’l Bank v. Holland (In re
American Reserve Corp.), 841 F.2d 159, 162 (7 th Cir. 1987)(The
bankruptcy judge “may not simply accept the trustee’s word that
the settlement is reasonable, nor may he merely ‘rubber stamp’
the trustee’s proposal.”) 	A mini-trial is not required; instead
the Court must “canvas the issues” raised by the parties. 	Stone
Barn, 405 B.R. at 75 (quoting Cosoff v. Rodman (In re W.T. Grant
Co.), 669 F.2d 599, 608 (2 nd Cir.), cert. denied, 464 U.S. 822
(1983)). 	See also Official Committee of Unsecured Creditors v.
Cajun Electric Power Cooperative, Inc. (In re Cajun Electric
Power Cooperative, Inc.), 119 F.3d 349, 356 (5 th Cir. 1997)(“[I]t
is unnecessary to conduct a mini-trial to determine the probable
outcome of any claims waived in the settlement.”) Finally, a
Trustee seeking approval of a compromise bears the burden of
establishing that the factors support a finding that it is in the
best interest of the estate. 	In re High Tech Packaging, Inc.,
397 B.R. 369, 372 (Bankr. N.D. Ohio 2008); In re Roqumore, 393
B.R. 474, 480 (Bankr. S.D. Tex. 2008); 110 Beaver Street
Partnership, 244 B.R. at 187.
The settlement presented to the Court proposes that all
counts and claims among and between the parties will be settled
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3In all fairness to Trustee and his counsel, it would have
been impossible at this stage of the proceedings for Trustee to
be fully aware of the extent of net assets in HRW Family, LLC or
the Wiley Trust.
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(except for any claims against HRW LC, which are not involved in
this adversary proceeding in any event). 	It is an all or nothing
proposition. 	The Court has reviewed the presentations of the
parties, reviewed the exhibits, consulted its notes, and
researched the applicable authorities, and cannot find that it
has sufficient information on whether to approve the compromise
or not. 	Plaintiff’s attorney argued that the issue is one of the
Trustee’s business judgment, and presented the case in that
light. 	However, as discussed above, the Court must undertake an
independent review of that business decision. 	Plaintiff’s
attorney also argued that the burden shifted to the objectors to
demonstrate that the Trustee had missed assets. 	Also as
discussed above, the burden remained with the Trustee.
On direct testimony, the Trustee testified that the overall
expected success of the case was “ambiguous.” 	He did not place a
value on Count 1, 3 or 6 3. 	Regarding Count 6, the Trustee stated
that his conclusion, as well as the mediator’s, was that Count 6
would be an uphill battle. 	On cross examination, Tru-Value
elicited testimony from the Trustee that there was a possible
amendment to the complaint for commercial real property
transferred to Oxford, LLC which he had been informed was worth
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4In its written submission, Tru-Value supplied various
theories under which the Trust might have some liability under
Count 6. 	The Court does not need to address these issues because
it already finds that the Trustee has not met his burden.
5See In re Flores of New Mexico, Inc., 134 B.R. 433, 437
(continued...)
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$60,000 to $75,000. 	This claim would be settled by the
compromise. 	On cross, the Trustee also testified that at the
mediation, he believed the value of the assets recoverable was
$260,000 plus any equity in an apartment building. 	He now
believed that there was little or no equity in any of the assets.
He believed Count 3 had little value because the defendant had
massive debt. 	He did not remember how he came to know this. 	He
also testified that after reviewing Count 4 and 5 regarding the
Farm Credit Loan, he believed it had a value of maybe $10,000.
On cross, he also testified that he had discounted Count 6 to
zero.
Trustee’s attorney Bonnie Gandarilla also testified. 	She
testified mainly regarding the legal obstacles with Count 6 4.
She did not, however, estimate a probability of success or
suggest a possible recovery amount.
Neither the Trustee or his attorney testified about the
value of Count 4 or 5, the subrogation or fraudulent transfer
actions against the Wiley Trust regarding payoff of the Farm
Credit Loan. 	Without conducting a mini-trial, the Court finds
that the legal theories involved are plausible 5 and the facts
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5(...continued)
(Bankr. D. N.M. 1991)( “The familiar rule is that, instanter upon
the payment by the guarantor of the debt, the debtor's obligation
to the creditor becomes an obligation to the guarantor, not a new
debt, but, by subrogation, the result of the shift of the
original debt from the creditor to the guarantor who steps into
the creditor's shoes.” Putnam v. Commissioner, 352 U.S. 82, 85
(1956)); State Farm Mut. Auto. Ins. Co. v. Foundation Reserve
Ins. Co., 78 N.M. 359, 363, 431 P.2d 737, 741 (1967)(“ The remedy
[of subrogation] is for the benefit of one secondarily liable who
has paid the debt of another and to whom in equity and good
conscience should be assigned the rights and remedies of the
original creditor.”)(Citation omitted.)
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susceptible to rather easy proof. 	Cf. Reiss, 881 F.2d at 892
(“Had the [bankruptcy] court properly evaluated the bankruptcy
trustee’s chances of reaching the assets in the Reiss Trust to
pay the bona fide debts of the bankruptcy estate, it surely would
have evaluated those chances of success at nearly one hundred
percent.”) 	The Court also gathers that, of all the defendants in
this case, the Wiley Trust appears the most solvent. 	If the
Trustee could collect $307,639 from the Trust and recover the
commercial building, the estate would be better off not accepting
this compromise.
In summary, the Court has been unable to determine the
strengths and weaknesses of the various claims as a whole. 	The
Trustee has not sufficiently addressed the Kopexa Realty factors
for the Court to find that settlement is in the best interests of
the estate.
As a final note, Kopexa Realty requires the Court to
consider the interests of the creditors. 	“[T]he interests of the
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creditors–and their perspectives on a proposed settlement are of
critical importance.” 	In re Vazquez, 325 B.R. 30, 37 (Bankr.
S.D. Fla. 2005). 	No case holds that the creditors have an
absolute “veto power.” 	Id. 	Instead, the court should consider
the creditors’ reasonable views. 	Id. (citing Foster Mortgage, 68
F.3d at 917.) 	In this case, the single creditor holding 94% of
the unsecured claims objected and represented to the Court that
neither it or any of the other three creditors with claims were
consulted regarding the mediation or proposed settlement. 	In
other words, the only support for this settlement is found in the
Trustee and his attorneys. 	Under these facts, the Court finds
that it should require rather strict compliance with the Kopexa
Realty factors to approve the settlement. 	See also Foster
Mortgage, 68 F.3d at 918:
Our concern is that the courts below gave no
consideration to issues we find dispositive: that
nearly all creditors in interest opposed this
settlement and that the settlement was reached between
insiders without the participation of the creditors. In
our estimation, the court abused its discretion by not
showing proper deference to the views of the creditors.
An Order will be entered denying the motion without
prejudice.
Honorable James S. Starzynski
United States Bankruptcy Judge
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Date Entered on Docket: 	March 11, 2010
Copies to:
Bonnie Bassan Gandarilla
Moore, Berkson & Gandarilla, P.C.
PO Box 7459
Albuquerque, NM 87194
Donald Provencio
1721 Carlisle Blvd NE
Albuquerque, NM 87110-5621
Charles R. Hughson
Rodey, Dickason, Sloan, Akin & Robb, P.A
P.O. Box 1888
Albuquerque, NM 87103-1888
Samuel Herman Simon
Houston Harbaugh, PC
Three Gateway Center
401 Liberty Ave, 22nd Floor
Pittsburgh, PA 15222
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