IN RE: JAMES VOSOTAS (2025)

Chapter 7

ORDER (1) DENYING TRUSTEE'S MOTION TO APPROVE STIPULATION FOR COMPROMISE AND SETTLEMENT AND (2) GRANTING DEBTOR'S REQUEST TO COMPEL ABANDONMENT

THIS CAUSE came before the Court for evidentiary hearing on December 4, 2024 at 9:00 a.m. (the “Evidentiary Hearing”) upon the Trustee's Motion to Approve Stipulation for Compromise and Settlement (ECF #195) (the “Settlement Motion”) filed by Barry Mukamal, the chapter 7 trustee (the “Trustee”), pursuant to Fed. R. Bankr. P. Rule 9019, seeking approval of the Stipulation of a Settlement between the Trustee and Greystone Holdco, LLC (“Greystone”) attached to the Settlement Motion as Exhibit “A” (the “Settlement Agreement”). The Court, having reviewed the Settlement Motion, the Settlement Agreement, the Objection to the Settlement Motion filed by the Debtor, James Vosotas (“Debtor”) (ECF #216) (the “Objection”)¹ , all evidence admitted by the Court at the Evidentiary Hearing, the live testimony of the Trustee and the Debtor, and all arguments presented by the Trustee, the Debtor, and Greystone, and having taken judicial notice of the procedural record and all pleadings filed in this proceeding and in the Indemnification Action (defined below), pursuant to Fed. R. Bankr. P. 7052, makes the following findings of fact and conclusions of law in support of the Court DENYING the Settlement Motion, SUSTAINING the Objection, and GRANTING the Debtor's request to compel abandonment contained within the Objection.²

FINDINGS OF FACT

A. This case commenced with the filing of a voluntary chapter 7 petition by the Debtor on October 3, 2023 (the “Petition Date”). Shortly thereafter, the Trustee was appointed chapter 7 trustee of the Debtor's bankruptcy estate (the “Estate”).

B. On June 20, 2024, the Trustee filed a notice of assets (ECF #126), which triggered a claims bar date of September 21, 2024, to file claims in this Estate (ECF #127). To date, $136,070,774.30 in claims have been filed. $134,198,145.73 of those claims, approximately 98.6% of the total claims filed, were filed by Greystone's owner and manager, BBM3, LLC (“BBM3”) and Branden Muhl (“Muhl”)³ , respectively, or other entities related to them (Claims Nos. 5 through 16 and 18) (collectively, the “Muhl Entities”). This includes the claim of BBM3 in the amount of $22,321,857.88, which arises from a pre-petition judgment BBM3 obtained against the Debtor in the Supreme Court of the State of New York, County of New York (the “NY Judgment”) (Claim No. 5).

C. Additionally, Greystone filed its own placeholder claim in the amount of $3.00 (Claim No. 17), which asserts, among other things, claims arising from a pre-petition indemnification action on the NY Judgment commenced by the Debtor against Greystone in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida, which was assigned Case No. 2022-002022-CA-01 (the “Indemnification Action”). In its claim, Greystone asserts that it possesses “claims for prevailing party fees and other amounts to which (Greystone) would be entitled to damages in the operative, underlying documents, as well as fees and sanctions pursuant to Fla. Stat. § 57.105 against the Debtor and Indemnification Action counsel.” (the “Indemnification Claims”).

D. Prior to the Petition Date, on March 6, 2023, the Debtor moved for partial summary judgment in the Indemnification Action (the “Debtor MSJ”), which was denied by the state court on July 16, 2023. Thereafter, Greystone filed its own motion for summary judgment (the “Greystone MSJ”) and a motion for sanctions pursuant to section 57.105 ⁴ against the Debtor and his counsel (the “57.105 Motion”).

E. Prior to a ruling on the Greystone MSJ and the 57.105 Motion, the Debtor commenced this case and filed a Suggestion of Bankruptcy in the Indemnification Action which resulted in the state court's entry of an order staying the Indemnification Action due to the automatic stay. Greystone later moved this Court for clarification that the automatic stay did not apply to the Indemnification Action, which relief Debtor agreed to, and resulted in this Court's entry of the Order Granting Creditors’ Motion for Clarification of the Automatic Stay (ECF #63) (“Stay Relief Order”). After obtaining the Stay Relief Order, Greystone moved the state court to lift the stay in the Indemnification Action, to which Trustee's counsel filed a limited objection, seeking additional time to review the docket in order to determine whether the Trustee was going to prosecute, settle, or abandon the Indemnification Action on behalf of the Estate.

F. Ultimately, the state court judge overruled the Trustee's objection, placed the Indemnification Action back on the active docket, and special set the Greystone MSJ for hearing on September 6, 2024, which required the Trustee to decide whether he was to prosecute, settle, or abandon the Indemnification Action.

G. In the meantime, on September 16, 2024 the Trustee sought to retain special counsel ⁵ to litigate a potential malpractice claim against the Debtor's former New York counsel for errors and omissions resulting in the entry of the NY Judgment against the Debtor (the “Malpractice Action”).

H. The Settlement Agreement proposes that the Trustee dismiss the Indemnification Action with prejudice, but that the state court retain jurisdiction over the 57.105 Motion filed against the Debtor and his professionals, in exchange for Greystone's waiver of any and all distributions in the bankruptcy case pursuant to its claims that arise in connection with the Indemnification Action. Other than Claim No. 17 filed by Greystone with respect to the Indemnification Action, all other claims were filed by the Muhl Entities.

I. The Trustee testified that prior to entering into the Settlement Agreement, his professionals reviewed the Indemnification Action, the docket activity, and the filings in that case. He also testified that the Indemnification Action was worthless, he did not want to step into the Indemnification Action for the risks and costs associated therewith, and was concerned with an unknown, unliquidated, and yet-to-be raised threat of a potential claim for sanctions against the Estate set forth in the pre-petition 57.105 Motion, possible exposure to a post-petition section 57.105 claim, and a possible administrative claim, the latter two apparently based on the limited objection filed in the Indemnification Action. Thus, the Trustee testified that, in his business judgment, this was a fair and reasonable settlement.

J. The Trustee testified that his counsel has not made a formal appearance in the Indemnification Action. The Trustee also testified that he has never been served with any kind of section 57.105 demand in the Indemnification Action. Neither the Trustee, nor his counsel could identify any articulated basis asserted by Greystone that would support any kind of administrative claim relating to the Indemnification Action, except that such a claim, like any section 57.105 claim, would be based on the Trustee's counsel's limited response in opposition to lifting the stay filed in the Indemnification Action. It is also undisputed that Greystone has not sought any kind of relief from this Court to proceed in state court against the Trustee, as required by the Barton doctrine.⁶ Finally, and not insignificantly, neither the Trustee nor his counsel ever consulted with the retained malpractice attorney to determine whether the Settlement Agreement, most importantly the mutual releases, would have any impact on the Malpractice Action.

K. Accordingly, on September 3, 2024, the Trustee, after negotiations with Greystone, agreed to settle the Indemnification Action (but not with respect to the Debtor or his professionals), the Indemnification Claims, and the potential administrative claim, in what the Trustee referred to as a “walkaway.”

L. The pertinent terms of the Settlement Agreement are: (i) the Trustee will dismiss the Indemnification Action; (ii) Greystone will waive any and all distributions in the bankruptcy case related to the Indemnification Action, including the Indemnification Claims and any potential administrative claims and section 57.105 claims against the Estate arising from the Indemnification Action; and (iii) the parties will exchange mutual limited releases.⁷ The Settlement Agreement also specifically provides that Greystone will continue to pursue relief against the Debtor and his professionals, primarily with respect to the 57.105 Motion.

M. No creditors objected to the Settlement Motion. The only objection to the Settlement Motion was the Objection filed by the Debtor on September 30, 2024.

N. In his Objection, the Debtor asserts he has standing to object to the Settlement Motion and the contemplated Settlement Agreement based on his asserted pecuniary interest in the outcome. The Trustee and Greystone dispute the Debtor's standing.

O. The Debtor further argues in the Objection that the Settlement Agreement provides “no consideration to the Estate”, cites to the Trustee's concession that the Indemnification Action has no value to the Estate, and primarily raises arguments as to why the proposed settlement is not in the best interests of the Debtor. These concerns include the adverse impact that the dismissal of the Indemnification Action by the Trustee could have on the pending complaint for non-dischargeability ⁸ that has been filed in this bankruptcy case by Greystone, Muhl, and the other Muhl Entities (the “Dischargeability Action”).

P. The Debtor lastly suggests that the Settlement Agreement could possibly impact the Malpractice Action which is directly related to the Indemnification Claims.

Q. Finally, in light of the Trustee's acknowledgment that the Indemnification Action has no value to the Estate, the Debtor requests the Court compel the Trustee to abandon the Indemnification Action.

CONCLUSIONS OF LAW

1. The Bankruptcy Court has jurisdiction over this motion pursuant to 28 U.S.C. §§ 157 and 1334. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2).

2. Venue in this Court is proper pursuant to 28 U.S.C. §§ 1408 and 1409.

3. The statutory and legal predicates for the relief granted herein are 11 U.S.C. § 105(a) of the Bankruptcy Code and Fed. R. Bankr. P. 9019(a).

4. With respect to the Debtor's request for abandonment, the statutory predicate for the relief granted is 11 U.S.C. § 554(b).

5. Pursuant to Fed. R. Bankr. P. 2002 and 9019, the parties to the Settlement Agreement have complied with all notice requirements, which constitutes good and adequate notice, and no further notice is necessary.

The Debtor has standing to object to the Settlement Motion.

6. The Trustee's focus on the Debtor's standing is with respect to the resolution of the claim against the Estate. It is true, as the Trustee argues, that “(c)hapter 7 debtors generally do not have standing to object to claims or orders relating to them because these debtors typically lack any pecuniary interest in the trustee's disposition of property of the estate, since title to such property no longer resides in the debtor.” Schiano v. Salkin, 2019 WL 3997129, at *4 (S.D. Fla. 2019) (internal citations omitted).

7. The Trustee's approach to the Debtor's standing is myopic. The settlement is not only of a claim filed against the Estate, and standing by a debtor is not so narrow. In this instance, the Debtor has argued, without any contradiction, that the Indemnification Action provides a possible partial defense in the Dischargeability Action. See In re Allport, 2008 Bankr. LEXIS 3979 at *3-4 (Bankr. S.D. Fla. 2008) (“Courts recognize an exception to this rule, however, when the debtor has a non-dischargeable debt, for which the debtor will remain personally liable after the bankruptcy.”).

8. The focus for standing is whether there is a possible pecuniary impact on the Debtor. The Debtor has articulated a legitimate concern regarding the impact of the Settlement Agreement on his defenses in the Dischargeability Action. The Trustee did not provide any argument that would counter that position. Thus, the Debtor has standing to object to the Settlement Motion.

The Settlement Motion fails to meet the standard for approval.

9. This Court has stated time and again that the approval of a settlement reflecting the exercise of a trustee's business judgment is not a high bar to reach. But, unfortunately, in this case, and for the first time that this Court can recall, the Trustee has failed to meet his burden for approval.

10. A proposed settlement will be approved unless it “falls below the lowest point in the range of reasonableness.” In re Arrow Air, Inc., 85 B.R. 886, 891 (Bankr. S.D. Fla. 1988) (internal quotation and citations omitted). Further, in considering a proposed settlement, the bankruptcy court “may certainly give weight to the trustee's informed judgment that a compromise is fair and equitable.” In re S & I Investments, 421 B.R. 569, 584 (Bankr. S.D. Fla. 2009).

11. A trustee exercises sound business judgment when he evaluates “the strength and weaknesses of the potential claims and the cost and time it would take to litigate the claims.” See United States v. Hartog (In re Exporther Bonded Corp.), 597 B.R. 673, 679 (S.D. Fla. 2019), appeal dismissed sub nom., In re Exp. Bonded Corp., 2019 WL 4137769 (11th Cir. 2019).

12. In measuring whether the Trustee's business judgment has been appropriately exercised, the Court must consider the following factors: (i) the probability of success in litigation; (ii) the difficulties, if any, to be encountered in the matter of collection; (iii) the complexity of the litigation involved and the expense, inconvenience, and delay attending it; and (iv) the paramount interest of the creditors and a proper deference to their reasonable views in the premises. Wallace v. Justice Oaks II, Ltd. (In re Justice Oaks, II, Ltd.), 898 F.2d 1544, 1549 (11th Cir. 1990).

13. “The role of the bankruptcy judge is not to decide the numerous questions of law and fact raised by appellants but rather to canvass the issue and see whether the settlement falls below the lowest point in the range of reasonableness.” Pullum v. SE Prop. Holdings, LLC (In re Pullum), 598 B.R. 489, 492 (Bankr. N.D. Fla. 2019) (internal citations omitted). Likewise, a bankruptcy court “need not find facts, draw legal conclusions, or otherwise adjudicate the merits of underlying litigation.” In re Kenny, 2022 WL 2282843, at *3 (11th Cir. 2022).

14. This settlement is dressed as a resolution of the Indemnification Action – but what it really is is a resolution of illusory claims relating to unsubstantiated and legally unsupportable potential claims against the Estate, without any analysis by the Trustee or his counsel regarding the impact of such a settlement on what has been billed as a potential significant Estate asset – a possible malpractice claim arising from the NY Judgment. These illusory and unsupportable claims, plus the waiver of a $1 claim against the Estate, is all the consideration that the Estate is receiving in the settlement in exchange for possible compromise of an asset, the potential for which neither the Trustee nor his counsel ever evaluated.

15. Probability of Success. The Court was not presented with any evidence or argument regarding the Indemnification Action, except that it had no value to the Estate. In other words, the evidence shows that, after an initial review, the Trustee had determined that he is not pursuing the Indemnification Action, so probability of success on the merits is not even a relevant factor. What the evidence does show is that Greystone and Muhl had suggested that somehow, without meeting any of the requirements of Florida or bankruptcy law, the Trustee and his counsel MIGHT be exposed to liability under section 57.105, or expose the Estate to an administrative claim. Under Florida law, Greystone would first have to send the Trustee a section 57.105 demand letter, and of course, could only do that after seeking leave from this Court to take such action, relief that this Court would not grant. See Barton v. Barbour, 104 U.S. 126 (1881).

16. The potential administrative claim is similarly not well-founded. There are two types of administrative claims, those meeting the requirements of 11 U.S.C. § 503(b)(1) of “actual, necessary costs and expenses of preserving the estate”, and, at least in the Eleventh Circuit, the “Reading” administrative claim.

The Eleventh Circuit has held that section 503(b) requires an actual concrete benefit to the estate before a claim is allowed as an administrative expense. Broadcast Corp. of Ga. v. Broadfoot (In re Subscription Television of Greater Atlanta), 789 F.2d 1530, 1531 (11th Cir.1986). In addition to the statutory definition of administrative claim, there is what has been called the “Reading” administrative claim. In Reading Co. v. Brown, 391 U.S. 471, 88 S.Ct. 1759, 20 L.Ed.2d 751 (1968), the Supreme Court held that innocent third parties who suffered losses from a fire at a plant operating under Chapter XI of the Bankruptcy Act were entitled to assert administrative claims. The Supreme Court in Reading described the statutory objective of bankruptcy as “fairness to all persons having claims against an insolvent.” 391 U.S. at 477, 88 S.Ct. 1759.

There has been some debate amongst the circuits whether and to what extent Reading survived the enactment of the Bankruptcy Code in 1978. That issue is settled in the Eleventh Circuit. In Alabama Surface Mining Commission v. N.P. Mining Company Inc. (In re N.P. Mining Co., Inc.), 963 F.2d 1449 (11th Cir.1992) (“N.P.Mining ”), the Eleventh Circuit held that Reading is still good law. Citing to controlling and persuasive authority, the Eleventh Circuit held that even if that which gives rise to an expense does not confer a benefit on the estate, the estate may still be liable for attorney fees, costs, and expenses under one of the following three circumstances: (1) the expenses are to compensate a victim of the estate's tortious conduct; (2) the expenses are for, or related to environmental cleanup; or (3) the charges are civil penalties incurred due to the debtor's failure to comply with state law. N.P. Mining 963 F.2d at 1456–58.

In re ER Urgent Care Holdings, Inc., 474 B.R. 298, 301–02 (Bankr. S.D. Fla. 2012). Even if the Trustee's limited objection filed in the Indemnification Action was a basis for any claim, it certainly doesn't fall into any category of potential administrative claim. Thus, the Court finds there is virtually no probability of success on the merits with respect to an administrative claim.

17. Difficulties in Collection. There are no difficulties in collection because the Trustee testified he was not going to pursue the Indemnification Action. There was no evidence presented whether Greystone's efforts to seek an administrative claim against the Estate would entitle the Estate to seek sanctions under Fed. R. Bankr. P. 9011, but the Court notes the evidence does show that Greystone had no bank account nor cash flow, which presumably hampers collectability. Of course, Muhl and BBM3 are also included the release, and the record of the case in toto indicates that both Muhl and BBM3 have the financial wherewithal to pay for any sanctions awarded under Rule 9011 were any of them to seek such relief.

18. Complexity of the Litigation and the Expense, Inconvenience, and Delay Attending to it. Since the Trustee testified the Indemnification Action is worthless, the time and expense and complications associated with the Indemnification Action are not relevant. The pursuit by Greystone or Muhl of any administrative claim would not be that complex. The Trustee's counsel appears to have filed one, maybe two pleadings, and appears to have attended one, maybe two hearings in the Indemnification Action. The case law regarding the entitlement to an administrative claim against the Estate is very clear and very narrow.

19. Paramount Interest of the Creditors. Since the Muhl Entities hold over 98% of the claims in this Estate, there is no question that this Settlement Agreement benefits them, not so much as creditors, but rather as litigants against the Debtor, since, as the evidence shows, with respect to the Estate, any recovery in the Indemnification Action would be circular. The Muhl Entities may be absolutely entitled to prevail in the Dischargeability Action, as the allegations included in that complaint are significant and very concerning if proven.⁹ However, that position does not make this settlement “paramount” for purposes of the Justice Oaks factors, particularly in light of the fact that the settlement may adversely impact a potentially significant asset of the Estate.

20. When determining whether it is appropriate to compel abandonment of an asset the asset must either be burdensome to the estate or of inconsequential value and benefit to the estate. See 11 U.S.C. § 554(b).

21. In light of the Trustee's testimony that the Indemnification Action has no value to the Estate, and because there is no benefit to the Estate in entering into the Settlement Agreement, the Debtor's request to compel abandonment is well-founded and is granted. While the Trustee argues that abandonment represents the lowest point of reasonableness—leaving the Estate with nothing—and therefore any consideration received by the Trustee exceeds that minimal threshold, the only tangible consideration is the waiver of a $1 claim. And the potential loss to the Estate of a possible asset is, presumably, potentially worth more than $1. Accordingly, for the reasons set forth herein, it is

ORDERED as follows:

1. The Settlement Motion (ECF #195) is DENIED.

2. The Debtor's Objection (ECF #216) is SUSTAINED.

3. The Debtor's request to compel abandonment (ECF #216) is GRANTED.

FOOTNOTES

1.   Debtor's Objection to Trustee's Motion to Approve Stipulation for Compromise and Settlement; and, Otherwise Compel Abandonment (ECF #216).

2.   To the extent any of the following findings of fact constitute conclusions of law, they are adopted as such. To the extent any of the following conclusions of law constitute findings of fact, they are adopted as such.

3.   See Claim No. 17 signed by Muhl as manager of Greystone.

4.   A “57.105 demand” refers to a legal motion filed in Florida courts under Florida Statute 57.105, which allows a party to request that the court award them attorney fees if the opposing party raises a claim or defense that is considered frivolous, baseless, or not supported by law or facts, essentially acting as a sanction against the other party for bringing a meritless claim to court.

5.   Trustee's Ex Parte Application to Employ Special Litigation Counsel (ECF #211); Order Granting Trustee's Ex Parte Application to Employ Special Litigation Counsel (ECF #226).

6.   The Barton Doctrine is derived from a United States Supreme Court ruling that protects court-appointed receivers and other estate fiduciaries from lawsuits without the appointing court's permission. See Barton v. Barbour, 104 U.S. 126 (1881).

7.   At the Evidentiary Hearing, the Trustee and Greystone announced they had reached agreement to limit the releases such that that the GHLLC Released Parties (as defined in the Settlement Agreement) are limited to Greystone, BBM3, and Muhl.

8.   Adv. Case No. 24-01277-LMI.

9.   The Court notes there is a pending motion to dismiss the second amended complaint (ECF #33 in Adv. Case No. 24-01277-LMI)..

Laurel M. Isicoff, Judge United States Bankruptcy Court