In Re the Heritage Organization, L.L.C.

MEMORANDUM OPINION

BARBARA J. HOUSER, Bankruptcy Judge.

Before the Court is confirmation of the Second Amended Joint Plan of Liquidation (the “Second Amended Plan”) filed by Dennis Faulkner, as Chapter 11 trustee of The Heritage Organization, L.L.C. (the “Trustee”) and the Client Claimants (as defined hereinafter) (collectively, the “Plan Proponents”). Gary M. Kornman (“Kornman”) and GMK Family Holdings, LLC (“GMK”) (collectively, the “Kornman Parties”) object to confirmation of the Second Amended Plan.

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The Court has core jurisdiction over the confirmation hearing, which was commenced on June 11-15, 2007 (the “Original Hearing”)

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and concluded on July 31, 2007 (the “Supplemental Heari

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ng”),

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in accordance with 28 U.S.C. §§ 1334 and 157. This Memorandum Opinion contains the Court’s findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.

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I. FACTUAL AND PROCEDURAL BACKGROUND

A. Heritage’s Relationship with Its Clients In General

The Heritage Organization, L.L.C. (“Heritage”) is a Delaware limited liability company that was formed in 1994. Heritage filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on May 17, 2004, which was assigned Case No. 04-35574 (the “Case”). Prior to Heritage’s bankruptcy filing, Heritage provided various estate and tax planning strategies to extremely high net-worth individuals for a fee. Those individuals included the “Client Tax Claimants” and the “Sandwith Claimants.”

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In the Second Amended Plan, the Trustee seeks to (i) settle the pending objections to all of the Client Tax Claimants’ claims in the Case by allowing each of those claimants an allowed unsecured claim in the amount of 65% of the fees they paid to Heritage for the tax and/or estate planning strategies, (ii) settle the adversary proceedings pending against three of the Client Tax

Claimants

— ie., the Skinner Children’s Trust, the Skinner Trust No. 2 (collectively, the “Skinner Trusts”), and Love — by forgiving the notes payable to Heritage from those claimants, (iii) settle the adversary proceeding pending against Mikron in connection with the estate planning strategies provided to the Sandwith Claimants by accepting $2,750,000 in cash in satisfaction of the note payable to Heritage by Mi-kron, (iv) allow the Sandwith Claimants an unsecured claim of $3,250,000, and (v) cap the Heritage estate’s liability at $2,340,000 with respect to certain litigation in which damages of approximately $50,000,000 are sought. In short, as it relates to the Client Tax Claimants, the Sandwith Claimants (collectively, the

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“Client Claimants”), and Mikron, the Second Amended Plan presents a comprehensive, integrated settlement of (i) the Heritage bankruptcy estate’s claims against all of the Client Claimants and Mikron and (ii) all of the Client Claimants’ and Mi-kron’s claims against the Heritage bankruptcy estate. Because the Second Amended Plan contains a comprehensive, integrated settlement, the Court cannot approve the settlement terms as they may relate to individual Client Claimants and/or Mikron; rather, the Court must consider the proposed settlement with the Client Claimants and Mikron as a whole.

To put Heritage’s client relationships with the Client Claimants in perspective, a brief background of Heritage and its “typical” relationships with its clients will be helpful.

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In a typical Heritage client scenario, Heritage cold-called the prospective client. The Heritage employees who made these cold-calls were referred to as “Initiators.”

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If the prospective client was interested in learning more about Heritage’s tax and estate planning strategies, another Heritage employee, referred to as a “Contractor,” would meet with the prospective client, either in person or over the telephone. If the prospective client continued to express interest in learning more about Heritage’s tax savings strategies, a “Principal” would then make the sales pitch to the prospect and try to close the deal.

Heritage’s sales process had several common themes. First, Heritage provided a training manual to its employees, which contained scripts to be used in making cold-calls and other contacts with prospective clients. These scripts were to be used by employees when responding to difficult questions posed by prospective clients, and many of the scripts taught employees to use a diverting answer which sounded good, but which was truly unresponsive to the prospective client’s question.

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Second, the agreement which was ultimately executed between Heritage and its clients was very one-sided in Heritage’s favor. It was, for all practical purposes, a form contract that Heritage had developed over the years, and it was presented to the

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prospective clients on a take-it-or-leave-it basis. While some prospective clients were able to negotiate modifications to the agreement, most were not.

Third, a key component of the Heritage sales strategy was to separate the prospective client from his/her traditional legal and/or financial advisors, as is evident from the training manual itself.

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Once a “Principal” of Heritage was involved in the discussions, prospective clients were told that they would have to maintain strict confidentiality of Heritage’s tax and/or estate planning strategies if an agreement was signed and the strategies were revealed to the client.

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Under the terms of the client agreements, only “Authorized Advisors” or “Authorized Persons” could seethe “Strategies,” without the client becoming obligated to' pay Heritage an additional fee of at least $2 million. To become an “Authorized Advisor” or an “Authorized Person,” a separate agreement had to be signed with Heritage pursuant to which the “advisor” or “person” would agree to keep the “Strategies” confidential and would itself agree to pay Heritage a substantial fee for any breach of that agreement.

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The term “Strategies” was defined very broadly in the client agreements and typically included “the securities, contracts, Persons identified, facts, data, knowledge, documentation, opinions, combinations of concepts, ideas, techniques, methods, transactions, combinations, sequences of events, timing, financial models, diagrams, illustrations,

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and procedures divulged, described, communicated, detailed, arranged or identified by [Heritage], and all variations, modifications, sequences, rearrangements and re-combinations thereof.”

See, e.g.,

Ex. P 68-3 at APP 157 (¶ 10.18). The combined effect of these provisions was to discourage traditional advisors from getting involved in their client’s relationship with Heritage.

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Because the client’s receipt of a legal opinion from an independent advisor was a component of the implementation process for any of Heritage’s estate planning or tax strategies,

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Heritage would recommend certain “Authorized Advisors” to the prospective clients.

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Heritage told clients that these recommended lawyers were experienced, knowledgeable estate planning and/or tax specialists, who could give the independent advice about the validity of Heritage’s strategies that the clients desired. However, neither Heritage nor the law firms serving as “Authorized Advisors” disclosed the extent of the prior and ongoing relationships between them.

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Once the client agreement was signed, the client typically owed Heritage $22,500, which served to reimburse Heritage for its travel expenses in connection with meetings with the client. The client agreement

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did not obligate the client to use the Heritage strategies, but if the client elected to use the Heritage strategies, it owed a substantial fee to Heritage. Although the client agreement contained a detailed formula for calculating Heritage’s fee, an oversimplified statement is that the client would owe Heritage 25% of the anticipated tax savings. Because of the size of the anticipated tax savings, Heritage’s fee was usually several million dollars.

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Under the client agreement, a portion of the fee, usually one-half, was due when (or shortly after) the client orally advised Heritage that it intended to implement the strategies, with the balance of the fee due ten business days after the client implemented the strategies. However, it was not uncommon for Heritage to agree to accept a portion of the fee in cash and to accept a note, with varying terms, for the balance of the fee.

B. The Client Claimants at Issue in the Second Amended Plan

Returning to the specific Heritage clients at issue in the Second Amended Plan, in this Memorandum Opinion the Court will analyze, in detail, the relationships of four of the Client

Claimants

— i.e., the Jenkins Tax Claimants,

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Love,

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the Skinner Claimants,

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and the Sandwith Claimants, with Heritage. While there are several other Client Claimants whose claims are proposed to be settled in the Second Amended Plan, the Kornman Parties agreed that if the Court found that the proposed settlement as it relates to these four claimants satisfied the relevant legal test for the approval of settlements in accordance with Federal Rule of Bankruptcy Procedure 9019, the settlement would also satisfy that legal test as it relates to the remaining Client Claimants.

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See

Audiotape: Hearing conducted

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06/15/07 at 1:33:40-1:35:32 p.m. (on file with the Court). Accordingly, each of these claimants’ relationship with Heritage and relevant factual contentions will be separately addressed below.

1. The Jenkins Tax Claimants

Turning first to the Jenkins Tax Claimants’ relationship with Heritage, Jenkins alleges that Heritage began providing financial, tax, and estate planning services to him and his family in 1994. Jenkins farther alleges that, as part of its services, Heritage advised Jenkins to form the Howard M. Jenkins Perpetual Asset Shield Trust I, Meralex, JBC, a general partner of Meralex, and certain other related entities (the “Jenkins-Related Entities”). Following the formation of the Jenkins-Related Entities, Jenkins alleges that Heritage continued acting as a “trusted fiduciary” for Jenkins and the Jenkins-Related Entities through August 2000. According to Jenkins, Kornman acted as an officer of JBC and took action on behalf of Meralex as an officer of JBC. Jenkins also alleges that Heritage managed the day-to-day affairs of the Jenkins-Related Entities from Heritage’s offices in Dallas, Texas.

It is undisputed that Jenkins was satisfied with the 1994 estate planning services provided by Heritage. In fact, Jenkins agreed to serve as a reference for Heritage in the 1995, 1996, 1997 time frame, signing glowing letters (ghost-written by Heritage) to prospective Heritage clients. Kornman Ex. 81, p. 54:7-55:13. Jenkins also spoke to several prospective Heritage clients by telephone, recommending Heritage’s services. Kornman Ex. 81, p. 278:9-11.

The Jenkins Tax Claimants’ claim in the Case arises from a different transaction. Specifically, in December 1998, Heritage presented a capital gains tax savings strategy (the “752 Strategy”) to Jenkins. According to Jenkins, Kornman and Canada told him that the 752 Strategy would allow Meralex, a partnership whose main asset was $300 million of nominal tax basis common stock of Publix Super Market, Inc., to avoid paying capital gains tax on future sales of that stock. Thereafter, on December 18,1998, Heritage, Jenkins, and Mera-lex entered into an agreement pursuant to which Heritage agreed to provide the 752 Strategy to Jenkins and Meralex for a fee (the “Meralex Agreement”).

See

Ex. P 68-2 at APP 125-132. Heritage recommended that Jenkins and Meralex hire A & D to advise them concerning the validity of the 752 Strategy, Kornman Ex. 81, p. 99:2, which Jenkins and Meralex did on or about December 21, 1998. Ex. P 68-54 at APP 1739.

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In its engagement agreement, A & D disclosed that “we have previously represented and continue to represent [Heritage], Further, we will receive payment from Heritage for using the capital gains strategy we have discussed.” Ex. P 68-54 at APP 1741.

After several presentations from Heritage and discussions with A

&

D, Jenkins and Meralex decided to implement the 752 Strategy in early May 1999. Under the Meralex Agreement, Meralex owed Heritage fees totaling $15,096,930. On May 12, 1999, Meralex paid the Heritage fee in full. In June 1999, Meralex paid A & D’s in

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voice for legal fees and expenses incurred to date of $178,511.61. Additional invoices from A & D were received and paid thereafter by Meralex.

In the late summer/fall of 2000, Jenkins alleges that he obtained, for the first time, a copy of the A & D opinion letter regarding the validity of the 752 Strategy. Upon receipt of the opinion letter, Jenkins alleges that he “concluded that the A & D Opinion Letter could not be used to support the [752 Strategy].” Plaintiffs’ Second Amended Complaint, Docket No. 117 in Civil Action No. 3:03-CV-0991-B (N.D.Tex.) (“Second Amended Complaint”) at ¶ 51. In essence, Jenkins alleges that the purported factual bases set forth in the A & D opinion letter for the 752 Strategy were fabrications. According to Jenkins, Meralex and he were faced with the “undesirable options of either filing the Meralex tax return prepared by A

&

D (that inaccurately reflected the substance of the transactions that comprised the [752 Strategy] ) or filing a Meralex tax return, contrary to A & D’s advice, that conflicted with [another related-entity’s] return.”

Id.

at ¶ 52 . According to Jenkins, he decided to contact the Internal Revenue Service “to resolve the quandary.”

Id.

And, according to Jenkins, thereafter various of the Jenkins-Related Entities, including Meralex, entered into a “closing agreement with the Internal Revenue Service whereby several of the transactions that comprise the [752 Strategy] were rescinded and Meralex paid the required capital gains tax on the August 1999 sale of Publix stock.”

Id.

On or about May 19, 2003, Meralex and Jenkins filed suit against Heritage, GMK, Kornman, Canada, A & D, and Ahrens in federal district court in the Northern District of

Texas

— i.e., Civil Action No. 3:03-CV-0991-B. By Memorandum Order signed January 4, 2005, the District Court granted, in part, motions to dismiss by the Heritage defendants (Heritage, Kornman, and GMK), A

&

D and Ahrens, thereby dismissing many of the claims pled in the plaintiffs’ First Amended Complaint. In addition, by Memorandum Order entered on February 17, 2005, the District Court dismissed with prejudice plaintiffs’ RICO claims, which were the sole source of the District Court’s original jurisdiction. The District Court held in abeyance its decision on whether to retain jurisdiction over the remaining state law claims pending a conference with the parties to discuss the effect, if any, of the pending Heritage bankruptcy on the state law claims. On May 27, 2005, the District Court entered an order referring the suit to this Court, for consideration in conjunction with the Case. It was subsequently assigned Adversary Proceeding Number 05-3699-BJH (the “Jenkins/Meralex Adversary”).

In light of the District Court’s dismissal orders, Meralex and Jenkins agree that the only “live claims” in the Jenkins/Mera-lex Adversary are their claims for fraud/fraudulent inducement

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and breach of fiduciary duty against Heritage, GMK, Kornman, A & D, and Ahrens.

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In vastly

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oversimplified terms, Meralex and Jenkins allege that they were fraudulently induced into implementing the Strategies by the defendants’ misrepresentations regarding the validity and legality of the 752 Strategy. Moreover, Meralex and Jenkins allege that the defendants failed to disclose the extent of the financial and other relationships between and among A & D, Ahrens, Heritage, and Kornman, and that the advice that Meralex and Jenkins received from A

&

D and Ahrens was not truly independent advice due to A & D’s and Ahrens’ undisclosed financial interest in the fee Meralex would pay to Heritage for implementing the 752 Strategy. According to Meralex and Jenkins, they were defrauded into implementing the Strategies, and have suffered damages in reliance upon the defendants’ misrepresentations and material omissions. Meralex and Jenkins also allege that the defendants breached fiduciary and confidential relationships by preparing and entering into the Meralex Agreement (i) without disclosing the alleged conflicts of interest, (ii) which contained terms less favorable than Jenkins and Meralex could have negotiated in an arm’s-length transaction, and (iii) which unduly restricted the ability of Jenkins and Meralex to seek independent professional advice.

On or about September 15, 2004, Mera-lex and Jenkins filed proofs of claim in the Case, seeking to recover on, among other things, the claims stated in the Second Amended Complaint.

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The Trustee’s objections to these claims were asserted in his answer to the complaint in the Jenkins/Meralex Adversary.

As noted previously, the Trustee proposes to settle the Jenkins Tax Claimants’ claims against Heritage for an allowed claim in the Case of 65% of the fees actually paid by Meralex to Heritage, or an allowed claim of $9,813,004.50.

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Even if the Second Amended Plan is confirmed, the Court will have to resolve the non-Heritage estate claims pending in the Jenkins/Meralex Adversary. Specifically, the Court will have to resolve Jenkins’ and Meralex’s claims against Kornman, GMK, A & D, and Ahrens.

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The Jenkins/Mera-lex Adversary is specially set for trial for two weeks beginning on November 5, 2007.

2. Love

Love also implemented a Heritage 752 Strategy, which was subsequently disal

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lowed by the IRS. According to Love’s affidavit, he received a cold-call from a Heritage representative within days of the announcement of a prospective merger between Blue Chip Broadcasting, Inc. (“Blue Chip”), a company that Love and his family were substantial shareholders of, and Radio One, Inc. (“Radio One”). Pursuant to the proposed merger, Love and his family were to receive low tax basis shares of Radio One in exchange for their Blue Chip stock. Love states in his affidavit that the Heritage representative who called told him that Heritage had a capital gains tax strategy which would reduce or eliminate capital gains on the anticipated sales of Radio One stock. Ex. P 87, ¶ 3, at APP 2. Love apparently agreed to meet with a Heritage representative in Cincinnati a few days later.

Id.

Thereafter, Love met with a Heritage principal, Anthony Bird (“Bird”) and/or certain other Heritage representatives. Throughout these discussions and meetings, Love claims he was told that Heritage had developed proprietary tax strategies which had “a solid legal foundation,” but that Heritage “would not allow [him] to learn anything about those strategies unless [he] signed an agreement with Heritage agreeing not to disclose or use them.” Ex. P 87, ¶ 6 at APP 3. Love also claims that he was “told that [he] could not disclose any such strategies to my personal attorneys or accountants unless they also signed confidentiality agreements.”

Id.

According to Love, prior to signing any agreement with Heritage, Bird told him that the strategies which would be disclosed to him

had a strong or solid legal and technical basis; that Heritage had been in business for thirty (30) years and that none of its clients had ever lost any money as a result of implementation of its strategies; that all of Heritage’s clients are satisfied and have had positive results; that [Love] should trust [Bird]; [and] that if the IRS rejected the desired tax effect of the strategies, Heritage would return to [Love] the portion of the implementation fee that [Love] had paid and Heritage would not sue [Love] for the unpaid portion of the implementation fee....

Ex. P 87, ¶ 8 at APP 3-4.

Love signed an agreement with Heritage on or about May 16, 2001 (the “Love Agreement”) and paid $22,500 to Heritage in accordance with the Love Agreement to cover Heritage’s travel expenses for meetings between Heritage representatives and Love. Ex. P 87, ¶ 10 at APP 4; Ex. P 68-3, Art. Ill, at APP 152. Thereafter, Heritage revealed the 752 Strategy to Love.

Unbeknownst to Love, Heritage had been notified by the IRS on May 2, 2001 by hand-delivered letter

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that the IRS was “concerned” that Heritage’s tax strategies “lack economic substance and that investors in such transactions may claim

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artificial tax losses.”

See

Ex. P 68-80 at APP 1976. Moreover, the IRS asked Heritage to identify all of its clients who had entered into any of the transactions described in the letter within fourteen days. The IRS also asked Heritage to provide all memoranda, correspondence, and any other documents related to any transaction described in the letter, including promotional and marketing material, and other, similar documents.

Id.

at APP 1979.

Still without knowledge of the IRS’ concerns about the 752 Strategy, Love elected to implement the 752 Strategy, and the calculated fee due to Heritage was in excess of $2.3 million. Under the Love Agreement, one-half of the Heritage fee was due within five business days after Love orally advised Heritage that he intended to implement the 752 Strategy, and the remainder of the fee was due before the expiration of ten business days after the actual implementation of the 752 Strategy. Ex. P 68-3, ¶ 4.4 at APP 153.

However, Love did not pay the fee in accordance with the written terms of the Love Agreement. According to Love, that is because Bird and he subsequently agreed to different payment terms. Specifically, Love contends that

[a]t various times between May 16, 2001 and early August 2001 when I was considering whether to implement the Heritage tax strategies, I was told by Anthony Bird that if the IRS later rejected the desired tax treatment from the implementation of the strategy for any reason, Heritage would return the portion of the implementation fee that I had paid and would not sue me for any unpaid portion of the implementation fee. I specifically relied upon this representation and promise which was material to my decision to implement the strategies in order to achieve the business and tax avoidance purpose.

I signed a Promissory Note for the implementation fee. There are several written versions of the Promissory Note. The version that Heritage has produced in this litigation that appears to contain my signature is dated September 15, 2001, but I do not remember when it was signed.... I do not remember why there were three different versions of the Promissory Note submitted to me by Heritage, but I have a firm recollection that Mr. Bird told me that if the IRS rejected the tax strategy, Heritage would not sue me on the Promissory Note.

Ex. P 87, ¶¶ 17-18 at APP 6-7. Further, Love contends that

[a]t the time that the documents were prepared for implementation of the tax strategy in July and August 2001, I had been told by either Mr. Bird or Mr. Czerwinski [another Heritage employee] that I would receive a formal legal opinion from Lewis Rice & Fingersh. The opinion that I received from that firm is a comprehensive 70-page document dated December 28, 2001. I believed that such opinion confirmed the previous Heritage representations that the tax strategies were legitimate and had a solid legal and technical basis.

I caused shares of Radio One to be sold in 2001 and subsequent years, and signed tax returns in 2002 and subsequent years ... claiming the desired tax treatment as represented to me by Heritage. I believed those tax returns to be based on a solid legal foundation as represented by Heritage.

At no time throughout my dealings with Heritage from 2001 to date did Heritage tell me that it had been notified by the IRS that the IRS questioned Heritage’s strategies or that Heritage was being investigated in connection with the tax

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strategies that it disclosed to me or caused to be implemented.

Ex. P 87, ¶¶ 20-22 at APP 7-8.

Love alleges that he made various payments totaling $1,091,881 on the $2,334,288 note he signed to pay the implementation fee due to Heritage (the “Love Note”).

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The principal balance allegedly due on the Love Note after application of payments on the Love Note is $1,289,404.87.

Love ultimately entered into a closing agreement with the IRS whereby he agreed to reverse the tax benefits he had claimed by implementing the 752 Strategy. Love calculates his damages against Heritage to be $2,708,940, the amount asserted in his amended proof of claim (the “Love Claim”).

The Love Note was turned over to the Trustee after his appointment. Based on the records then-available to the Trustee, on July 18, 2005, the Trustee filed an adversary proceeding against Love (Adversary Proceeding No. 05-3568 (the “Love Adversary”)), objecting to the Love Claim and seeking to recover the outstanding balance due on the Love Note. On August 18, 2005, Love filed his initial answer to the Trustee’s complaint in the Love Adversary, asserting numerous defenses to the Trustee’s efforts to collect the Love Note. Specifically, Love pled defenses of failure to state a claim, statute of limitations, breach of the agreement, un-eonscionability, fraudulent inducement, unclean hands, lack of consideration, unen-forceability due to a right to rescission, setoff, unauthorized practice of law, unen-forceability due to excessive fees, waiver, estoppel, subsequent oral modification, ambiguous written document, mutual mistake, and negligent misrepresentation.

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Love also asserted counterclaims for breach of contract, fraud, negligence/negligent misrepresentation, and rescission.

On January 6, 2006, the Trustee filed a motion for partial summary judgment in the Love Adversary. In his motion for partial summary judgment, the Trustee sought partial judgment disallowing the Love Claim in full. Love responded to the summary judgment motion, attaching numerous documents and affidavits in support of his opposition. In essence, Love contends that (i) he was fraudulently induced into entering into the Love Agreement by both affirmative misrepresentations by Heritage and material omissions by Heritage, (ii) the Love Agreement was modified orally after its execution to include the terms that Heritage would refund fees already paid and not attempt to collect any balance owing on the Love Note if Love were audited by the IRS and the IRS disallowed the 752 Strategy, and (iii) the provisions of the Love Agreement do not bar either

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the Love Claim or Love’s defenses to the Trustee’s efforts to collect the Love Note.

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While hearings have been set on the Trustee’s motion for partial summary-judgment at least twice, those hearings were continued, initially due to discovery problems precipitated by the Kornman Parties’ failure to turn over documents to the Trustee,

see infra

at pp. 254-56, and later because the Trustee reached an agreement with the Client Claimants and Mikron on the material terms of a Chapter 11 plan which, if confirmed, would resolve much of the litigation, and the parties wanted the opportunity to pursue confirmation of the plan before proceeding with the summary judgment hearings.

See

Docket No. 1012 in 04-35574-BJH. The Trustee’s motion for partial summary judgment and Love’s opposition to that motion remain pending.

In the Second Amended Plan, the Trustee proposes to settle the Love Claim against Heritage by allowing Love an unsecured claim in the Case of 65% of the fees actually paid by Love to Heritage, or an allowed claim of $709,722.65. Moreover, the Trustee proposes to forgive the Love Note.

3. Skinner Trusts

The Skinner Trusts

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also implemented a Heritage 752 Strategy, which was subsequently disallowed by the IRS. According to the Declarations of Carl Behnke (“Carl Behnke Declaration”) and John S. Behnke (“John Behnke Declaration”), trustees of the Skinner Trusts, Heritage representa-fives (Canada and Vernon Lee) met with representatives of the Skinner Trusts, including Carl and John Behnke, in Seattle, Washington. Ex. P 95-1, ¶ 3 (Carl Behnke Declaration); Ex. P 95-2, ¶ 3 (John Behnke Declaration). During this initial meeting, Carl and John Behnke claim that the Heritage tax savings strategies were discussed in “general concepts,” and that the Heritage representatives stressed that the ideas and strategies could not be shared with anyone else and that “severe monetary penalties would apply for any unauthorized disclosure.” Ex. P 95-1 at ¶4 (Carl Behnke Declaration); Ex. P 95-2 at ¶ 4 (John Behnke Declaration).

A second meeting apparently occurred around November 16, 2001 in Seattle at which Heritage again

repeated the same concerns for secrecy regarding the tax strategies. They told us that if we communicated the strategies with anyone without Heritage’s pri- or approval, Heritage would demand payment in full of its entire multi-million dollar fee and would impose a $2 million penalty for each disclosure. This prohibition on disclosure included our attorneys, accountants, and financial planners .... Heritage presented a written agreement to us on a ‘take it or leave it’ basis.

Ex. P 95-1 at ¶ 5 (Carl Behnke Declaration); Ex. P 95-2, at ¶ 5 (John Behnke Declaration).

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Carl Behnke further declares that certain power point presentations were made at the second meeting that “described the tax saving concepts.” Ex. P 95-1 at ¶ 6. According to Carl Behnke, “[t]he Heritage presentations included a section described as ‘Summary of IRS Positions and Court Decisions.’ The Heritage representatives described various legal cases, including a factual description of the cases, the position of the ... IRS, and the court’s ruling. .."

Id.

Carl Behnke further declares that the Skinner Trusts’ representatives “repeatedly asked the Heritage representatives whether [the] IRS had ever questioned any of Heritage’s tax strategies.”

Id.,

¶ 7 . And that in response,

The Heritage representatives assured us ‘it was legal’ and the ‘strategies were legal.’ The Heritage representatives denied that the IRS had questioned the strategies and gave no indication the IRS was in anyway skeptical or interested in the legitimacy of Heritage’s strategies. The Heritage representatives never told us that the IRS had notified Heritage that Heritage was required to divulge the names of any customers who implemented the Heritage strategies.

Id.

Carl Behnke declares that he

relied upon the representations made by the Heritage representatives regarding the legality of the tax strategies in making the decision to execute the agreements with Heritage ... as a group, my mother Sally Behnke, my brother John Behnke, and [I] relied on Heritage’s assurances that the IRS had never questioned the legitimacy of the strategies in making the decision to enter into the agreements with Heritage. Whether or not the IRS questioned these strategies was very important to us in deciding to contract with Heritage. Because Heritage restricted our contact with outside people, we placed considerable weight on what Heritage told us about the legitimacy of the approach ... We would not have entered into the agreements with Heritage if we had known that the IRS was questioning the legitimacy of the tax saving strategies.

Id.,

¶ 8 . Carl Behnke and John Behnke signed agreements with Heritage on behalf of the Skinner Trusts on November 16, 2001 (the “Skinner Trusts’ Agreements”). See Ex. P 95-3 (Declaration of Michael J. Gearin), ¶ 10, at APP 97; Ex. P 95-3, Ex. I, at APP 404. Heritage apparently agreed to forgo the $22,500 expense reimbursement provided for in the form Heritage client agreement, as that provision of the Skinner Trusts’ Agreements is marked out and initialed by the parties.

Id.

at Ex. I, Art. Ill, at APP 404. Thereafter, Heritage revealed the 752 Strategy to the Behnkes, as representatives of the Skinner Trusts.

Unbeknownst to the Behnkes, and as noted previously, Heritage had been notified by the IRS on May 2, 2001 by hand-delivered letter that the IRS was “concerned” that Heritage’s tax strategies “lack economic substance and that investors in such transactions may claim artificial tax losses” and that the IRS wanted Heritage to identify all of its clients who had entered into any of the transactions described in the letter within fourteen days.

See supra

at pp. 246-47.

Still without knowledge of the IRS’ concerns about Heritage’s capital gains strategies, the Behnkes elected to implement the 752 Strategy, after consulting with their “approved

advisor”

— i.e., Lewis Rice, which Heritage had recommended to them, and who would be opining as to the validity of the 752 Strategy. The calculated fee due to Heritage was in excess of $3.9 million for both trusts. Under the Skinner Trusts’ Agreements, one-half of the Heri

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tage fee was due within five business days after the Behnkes orally advised Heritage that they intended to implement the 752 Strategy, and the remainder of the fee was due before the expiration of ten business days after the actual implementation of the 752 Strategy. Ex. P 95-3, Ex. I, ¶ 4.4 at APP 405.

However, the Behnkes did not pay the fee in accordance with the written terms of the Skinner Trusts’ Agreements. According to the Behnkes, that is because Canada and they subsequently agreed to different payment

terms

— ie., the Behnkes signed two promissory notes, on behalf of the Skinner Trusts, payable to Heritage in the aggregate amount of $3,915,489.35 (the “Skinner Trusts’ Notes”). Thereafter, the Skinner Trusts made various payments of principal and interest totaling $750,405.70 on the Skinner Trusts’ Notes before learning of the IRS’ views regarding the 752 Strategy. The aggregate principal balance allegedly due on the Skinner Trusts’ Notes is $3,294,962.21 as of May 23, 2003.

According to Carl Behnke’s declaration, in 2003, the Skinner Trusts

finally learned that the Heritage tax strategies had been listed by the IRS as illegitimate. The Trusts sought independent legal advice about the taxes and returns that had been based upon [Heritage’s] advice. In October 2003, the Trusts filed 2002 federal income tax returns. In November 2003, the Trusts filed'amended returns and reversed the strategies. The Trusts participated in the Son of Boss Settlement Initiative pursuant to IRS Announcement 2004-46. As a consequence of following Heritage’s advice, the Trusts paid substantial professional fees and penalties after.unwinding the Heritage transactions.

Ex. P 95-1, ¶ 20 at APP 7. The Skinner Trusts calculate their damages against Heritage to be $1,457,158.10, the amounts asserted in their filed proofs of claim (the “Skinner Trusts’ Claims”).

The Skinner Trusts’ Notes were turned over to the Trustee after his appointment. Based on the records then-available to the Trustee, on July 18, 2005, the Trustee filed an adversary proceeding against the Skinner Children’s Trust (Adversary Proceeding No. 05-3569) and the Skinner Trust No. 2 (Adversary Proceeding No. 05-3570) (collectively, the “Skinner Trusts’ Adversaries”), objecting to the Skinner Trusts’ Claims and seeking to recover the outstanding balance of the Skinner Trusts’ Notes. On August 18, 2005, the Skinner Trusts answered the Trustee’s complaints in the Skinner Trusts’ Adversaries, asserting numerous defenses to the Trustee’s efforts to collect the Skinner Trusts’ Notes. Specifically, the Skinner Trusts pled defenses of estoppel, lack of consideration, unfair and deceptive acts and practices in violation of federal and state law, unauthorized practice of law, “impermissible dealing between an attorney and its client,” and the unlicensed brokering of business opportunities in Washington State.

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On January 6, 2006, the Trustee filed motions for partial summary judgment in the Skinner Trusts’ Adversaries. In his motions for partial summary judgment, the Trustee sought disallowance of the Skinner Trusts’ Claims. The Skinner Trusts responded to the summary judgment motion, attaching numerous documents and declarations in support of their opposition. In essence, the Skinner Trusts contend that (i) the Behnkes were fraudulently induced into entering into the Skinner Trusts’ Agreements by both affirmative misrepresentations by Heritage and material omissions by Heritage, and the provisions of the Skinner Trusts’ Agreements do not bar the fraudulent inducement defense to the Trustee’s efforts to collect the Skinner Trusts’ Notes, (ii) the Skinner Trusts’ Agreements are null and void because they resulted from the unauthorized practice of law by Heritage and demand an unethical attorney fee, (iii) Heritage breached its fiduciary relationship with the Behnkes, (iv) the Skinner Trusts’ Agreements are unenforceable based on Heritage’s undue influence over the Behnkes, and (v) the Skinner Trusts’ Agreements are unenforceable for lack of consideration and un-conscionability.

Like the hearings on the Trustee’s motion for partial summary judgment in connection with the Love Claim and the Love Note, the hearings on the Trustee’s motion for partial summary judgment in connection with the Skinner Trusts’ Claims and the Skinner Trusts’ Notes have been continued. The Trustee’s motion for partial summary judgment and the Skinner Trusts’ opposition to that motion remain pending.

In the Second Amended Plan, the Trustee proposes to settle the Skinner Trusts’ Claims against Heritage by allowing the Skinner Children’s Trust and the Skinner Trust No. 2 unsecured claims in the Case of 65% of the fees actually paid by it to Heritage, or an allowed claim of $238,517.92 and $249,245.79, respectively. Moreover, the Trustee proposes to forgive the Skinner Trusts’ Notes.

4. The Sandwith Claimants and the Mikron Note

The relevant facts surrounding the claims asserted by the Sandwith Claimants (the “Sandwith Claimant Claims”) and the note executed by their closely-held corporation, Mikron, are contained in a Memorandum Opinion and Order entered on November 27, 2006 (Docket No. 52) (the “Prior Mikron Opinion”) in Adversary Proceeding No. 05-3671 (the “Mikron Adversary”).

See Faulkner v. Mikron, Inc. (In re The Heritage Organization, L.L.C.),

354 B.R. 407 (Bankr.N.D.Tex.2006). In the Mikron Adversary, the Trustee is attempting to collect a note signed by Mikron in the “initial amount” of $5,386,919.00 (the “Mikron Note”) in connection with Heritage’s provision of certain estate planning strategies to the Sandwith Claimants. In its answer, Mi-kron asserted numerous defenses to the Trustee’s efforts to collect the Mikron Note. In the Prior Mikron Opinion, this Court denied Mikron’s motion for summary judgment and granted the Trustee’s motion for summary judgment in part, thereby narrowing the issues left for trial in the Mikron Adversary. Specifically, those remaining issues surround Mikron’s unauthorized practice of law defense to

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the Trustee’s attempt to collect the Mikron Note.

See

Prior Mikron Opinion, 354 B.R. at 444 .

After the Prior Mikron Opinion was issued, Mikron was granted leave to amend its answer to assert a fraudulent inducement defense to collection of the Mikron Note. In its latest defense, Mikron contends, in essence, that the Sandwiths would not have used Heritage for estate planning had the Sandwiths known that Heritage’s 752 Strategies were being challenged by the IRS, that Heritage’s references included counsel with a secret financial stake in promoting Heritage’s strategies, that the Sandwiths’ “independent” counsel had a longstanding client relationship with Heritage and Kornman, and that Mikron would not have signed the Mikron Note if it had known of the fraud upon the Sandwiths. The Mikron Adversary is set for trial docket call on November 6, 2007.

C. The Relationship Between Heritage and Canada

Canada, a lawyer, was the former President and Chief Operating Officer of Heritage and was one of the “Principals” responsible for making the final sales pitch to prospective clients to try to “sell” the Heritage tax savings strategies. Canada was involved in the transactions with several of the Client Claimants, although with respect to the Jenkins Tax Claimants, Kornman was the person primarily responsible for getting Jenkins and Meralex to sign the Meralex Agreement. Canada went to work for Heritage in 1995, pursuant to the terms of an employment agreement.

See

Defi’s Ex. 1 (the “Employment Agreement”).

33

He never held an equity interest in Heritage or in any entity that was a member of Heritage. Ex. P 290, p. 11, ¶ 4-5.

At some point in 2001, a dispute arose between Canada and Kornman over Canada’s level of compensation, which resulted in the non-renewal of Canada’s Employment Agreement and Canada’s filing of an arbitration demand against Heritage and Kornman. Canada claimed, among other things, that Heritage had failed to honor an oral promise to pay Canada fifteen percent of the fees generated by what the parties all refer to as the “Connecticut Client.”

See generally

Docket. No. 186 in Adv. Pro. No. 04-3338-BJH (the “Canada Adversary”). In 2004, the arbitrators issued an award in Canada’s favor for approximately $6.1 million. Canada then applied in state court for an order confirming the arbitration award, and on the same date such an order was entered, Heritage filed a motion to vacate a portion of the award. Canada then moved for entry of judgment based on the order confirming the award, but the day before the hearing, Heritage filed its bankruptcy petition.

During the Case, the action pending in state court was removed to this Court, and GMK objected to Canada’s proof of claim (which was filed in the amount of the arbitration award) on the ground that the claim was for services of an insider or attorney of the debtor and exceeded the reasonable value of the services in violation of 11 U.S.C. § 502 (b)(4). This Court, through former Chief Judge Felsenthal, issued a Memorandum Opinion which confirmed the arbitration award in part and vacated it in part and left several issues remaining for trial: (i) the amount of attorneys’ fees to be awarded to the Trustee (who became the representative of the estate upon his appointment), (ii) the splitting of arbitration fees, and (in) the objec

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tion to Canada’s claim pursuant to 11 U.S.C. § 502 (b)(4).

In re The Heritage Organization, L.L.C.,

322 B.R. 285 (Bankr.N.D.Tex.2005). After six days of trial, this Court

34

issued a Memorandum Opinion on January 5, 2006 and a Judgment on January 19, 2006, which allowed Canada’s claim as an unsecured, non-priority claim in the amount of $5,050,152.12 subject to a further request for attorneys’ fees,

see

Docket Nos. 186 and 189 in the Canada Adversary.

Heritage and the Kornman Parties appealed, and Canada filed a cross-appeal. On September 14, 2006, the District Court entered a Memorandum Opinion reinstating and affirming the arbitration award in its entirety,

see

Docket No. 225 in the Canada Adversary, and allowing Canada an unsecured, non-priority claim against Heritage in the amount of $6,218,679.40 (comprised of the original arbitration award plus $57,409.32 of prejudgment interest). The Kornman Parties and the debtor (out of possession) appealed the District Court’s decision to the Fifth Circuit, where it remains pending.

D. Procedural and Other Facts Regarding the Heritage Bankruptcy Case

1. Difficulties in the Trustee’s Administration of the Case

After having sold its tax and estate planning strategies to a number of wealthy clients, Heritage filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on May 17, 2004, thereby initiating the Case. On August 13, 2004, the Court entered an order for the appointment of a Chapter 11 trustee in the Case, and on August 16, 2004, the Trustee was appointed.

While Heritage had ceased operations prior to the filing of the Case, the Trustee, an experienced bankruptcy professional, has had a difficult time administering the Heritage estate, in large part due to the lack of cooperation with, if not outright obstruction of, that administration by Heritage’s former principals, including the Kornman Parties. Stated most simply, the persons in control of Heritage pre-petition have frustrated the Trustee’s efforts to administer the estate at virtually every turn. At a minimum, they (i) failed to turn over all of the books and records of Heritage upon the Trustee’s appointment, (ii) have not been candid with the Trustee throughout his administration of the estate to date,

35

and (iii) have doled out information to the Trustee as it suited their purposes. It is only after the Trustee was forced to file a motion for turn-over, which was ultimately resolved by the entry of an agreed order after a hearing before this Court, and later after a motion for contempt and sanctions was filed (for those parties’ failure to comply with the earlier agreed turn-over order) and a series of hearings before this Court, that significant volumes of documents were finally dis

*255

closed and produced. In fact, the motion for contempt is still pending and was supplemented as recently as April, 2007, with the Trustee alleging that since the filing of the contempt motion, he has received “hundreds of boxes” of documents and tapes that had not previously been turned over.

36

Moreover, the Kornman Parties are engaging in these same tactics in an adversary proceeding pending against them, see Adv. Pro. No. 06-3377-BJH (the “Kornman Adversary Proceeding”). The Trustee has also been forced to file a motion for turn-over, a motion to compel initial disclosures under Rule 26, and a motion for sanctions in the Kornman Adversary Proceeding.

As a result of the continuing problems with the turn-over of assets, documents, and records to the Trustee, the Court directed the turn-over and production of all such assets, documents, and records in the Case no later than May 17, 2006 and, in the Kornman Adversary Proceeding, directed each of the defendants to file a certification under penalty of perjury detailing the diligence of their search for responsive documents and the completeness of their production.

37

See

Transcript of hearing held 5/2/07 (Docket No. 128 in 06-3377-BJH). However, notwithstanding these procedures, and certain of the former principals’ certifications of diligent compliance, significant amounts of documents continue to be turned over to the Trustee on a time-table that appears only to suit Heritage’s former principals.

For example, some 5,000 audio tapes were turned over to the Trustee in March and April 2006, over 19 months after the Trustee’s appointment. Of course, these tapes should have been turned over to the Trustee immediately upon his appointment. Heritage apparently taped many of its conversations with third parties, including its former clients and the lawyers representing those clients. It appears that these third parties were unaware that their conversations were being taped by Heritage. This production of audio tapes came after a series of hearings on the motion to compel and for contempt. While only a relative handful of the audio tapes have been transcribed (less than 200), many contain information that is relevant and discoverable in connection with the contested claim objections and/or adversary proceedings pending in the Case relating to the Client Claimants. Moreover, it appears that certain of the information from these audio tapes is inconsistent with positions taken by Kornman-related entities in those contested matters and proceedings, and the positions taken by the Trustee in those contested matters and proceedings.

38

An additional 3,000 audio tapes were turned over about a year later, over 30 months into the Trustee’s administration

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of the Heritage bankruptcy estate. Specifically, these additional 3,000 tapes were provided to the Trustee literally only days before Kornman pled guilty to a criminal indictment pending against him in federal district court in the Northern District of Texas styled

United States v. Gary M. Kornman,

Criminal Action No. 3:05-CR-0298P (the “Kornman Criminal Case”). Kornman entered into a plea agreement on April 9, 2007, in which he pled guilty to one count of making false statements to the Securities and Exchange Commission in violation of 18 U.S.C. § 1001 .

39

The Court notes that the plea agreement, entered into by the U.S. Attorney without any consultation with the Trustee,

40

also contains a provision stating that the government “agrees not to bring any additional charges against Kornman for alleged obstructive conduct relating ... to the production of records to the bankruptcy trustee appointed over The Heritage Organization, L.L.C. after his appointment on or about August 16,2004.” Ex. P. 142, ¶ 7. The Court therefore strongly suspects that the Kornman Parties are well aware that their conduct in the Case has been inappropriate, arguably obstructive, and could have resulted in their criminal prosecution in accordance with 18 U.S.C. §§ 152 and 1519 (2000

&

Supp.2007).

While there has not been time (or the financial resources) to transcribe any significant portion of these additional audio tapes, certain of the additional tapes that have been transcribed to date contain relevant and discoverable information in connection with the Client Claimants’ contested matters and adversary proceedings. More significantly, it appears that certain of the information recovered from the recently produced tapes that have been transcribed is damaging to the Kornman-relat-ed entities’ and the Trustee’s position in those matters.

It is not surprising that the Trustee continues to testify that he has no confidence that he either has, or has access to, all of Heritage’s assets, business records, and other documents.

2. The Nature of the Creditor Body

The creditors in the Case can be divided into five groups: (1) the IRS, which asserts a priority tax claim of $913,499 and which has not been active in the Case, (2) sixteen small creditors, who are not former clients of Heritage and whose claims aggregate some $45,000, over $40,000 of which are held by two of them and none of whom have been active in the Case,

41

(3) the Client Claimants, whose filed proofs of claim aggregate some $109 million and whose claims the Trustee has proposed to settle in the Second Amended Plan for about $20 million, all of whom have been active in the Case, (4) Canada, who has been active in the Case, and whose allowed claim in the Case is approximately $6.2 million, although that allowance is currently on appeal to the Fifth Circuit by the debtor (out of possession) and the Korn-man Parties, and (5) Kornman, various Kornman-related entities, and certain other Heritage/Komman employees and/or former employees, most (in dollar amount) of whose claims are contingent and/or un-

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liquidated indemnity claims that have been objected to by the Trustee.

42

With the exception of the IRS and the holders of Small General Unsecured Claims, it is a significant understatement to say that the other creditor groups do not care for each other. The Client Claimants, who dealt with Kornman, Canada, or Bird, believe that they were defrauded by Heritage. None of the Heritage strategies that the Client Claimants “bought” from Heritage withstood IRS scrutiny, and all of the Client Claimants have incurred substantial fees undoing the strategies. They have not only paid the taxes that the Heritage strategies were supposed to save them, but have also paid interest on the taxes and, in most cases, penalties. Korn-man’s lawyers argue that the Client Claimants understood that the agreements they signed bar the claims they now make, and that the Client Claimants simply feel stupid for having bought into inherently risky tax strategies. As for Canada, a Harvard lawyer, the Client Claimants point out that after leaving Heritage, Canada “switched sides” and began suing other tax promoters like Heritage for defrauding clients

43

—an irony not lost on the Client Claimants.

3. Procedural Twists and Turns

Notwithstanding the significant difficulties faced by the Trustee in attempting to bring these disparate groups of creditors together, after years of protracted litigation in the Case,

44

the Trustee was able to negotiate a comprehensive settlement with the Client Claimants and Mikron. As a result, on March 10, 2007, the Trustee and the Client Claimants (as joint proponents) filed a Joint Disclosure Statement Pursuant to 11 U.S.C. § 1125 in Support of Trustee’s and Client Claimants’ Joint Plan of Liquidation under Chapter 11 of the United States Bankruptcy Code (the “Disclosure Statement”),

see

Docket No. 1021, and the Trustee’s and Client Claimants’ Joint Plan of Liquidation under Chapter 11 of the United States Bankruptcy Code

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(the “Plan”).

See

Docket No. 1020. To address certain objections to approval of the Disclosure Statement and certain concerns raised by the Court at the hearing to consider approval of the Disclosure Statement, the Trustee and the Client Claimants filed their “Joint Disclosure Statement Pursuant to 11 U.S.C. § 1125 in Support of Trustee’s and Client Claimants’ First Amended Joint Plan of Liquidation ...” (the “Amended Disclosure Statement”),

see

Docket No. 1091, and the “Trustee’s and Client Claimants’ First Amended Joint Plan of Liquidation ...” (the “Amended Plan”),

see

Docket No. 1090. The Amended Disclosure Statement was approved by Order entered on May 3, 2007,

see

Docket No. 1092, and the hearing to consider confirmation of the Amended Plan was set to commence on June 11, 2007.

On the eve of the Original Hearing, a settlement was reached with Canada relating to his objections to confirmation of the Amended Plan and the' settlement contained in the Amended Plan as it relates to the Client Claimants. While the general terms of that settlement were announced to the Court at the commencement of the Original Hearing, the Plan Proponents had not had time to prepare the formal documentation required to modify the Amended Plan to contain the new Canada settlement terms. With the agreement of the Kornman Parties, however, the Court proceeded with the confirmation hearing (with Canada now supporting confirmation), understanding that the Kornman Parties could supplement their objections to confirmation with any additional arguments that were precipitated once the formal modification document was filed. The “Plan Modification to Trustee’s and Client Claimants’ First Amended Joint Plan of Liquidation under Chapter 11 of the United States Bankruptcy Code” (the “Plan Modification”) was filed on June 12, 2007,

see

Docket No. 1189, and affected creditors were notified of the opportunity to change their votes.

See

Docket No. 1190.

At the conclusion of the Original Hearing, the Court took confirmation under advisement. The Court proceeded to orally announce, however, that it had at least two serious concerns over the confirmability of the Amended Plan, as modified by the Plan Modification (the “Modified Plan”).

45

First, the Court was concerned that the evidentiary record failed to support the creation of an administrative convenience class of creditors consistent with the requirements of 11 U.S.C. § 1122 (b). Second, if the administrative convenience class was not legally proper, there appeared to be unfair discrimination between the treatment proposed to those creditors and the creditors contained in Class 5 of the Modified Plan.

See

11 U.S.C. § 1129 (b)(1).

Presumably in response to the Court’s expressions of concern, the Plan Proponents filed, on June 22, 2007, the Second Amended Plan,

see

Docket No. 1201, and a “Joint Supplemental Disclosure Statement Regarding Trustee’s and Client Claimants’ Second Amended Joint Plan of Liquidation ...” (the “Supplemental Disclosure Statement”).

see

Docket No. 1202. The Korn-man Parties filed objections to the Supplemental Disclosure Statement, but an agreement was reached as to those objections and an Amended Joint Supplemental Disclosure Statement (Docket No. 1233) was approved by Order entered on July

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12, 2007. The creditors affected by the changes proposed by the Second Amended Plan (Classes 4 and 6) were re-solicited, and the Court scheduled a supplemental confirmation hearing for July 31, 2007.

During the Supplemental Hearing, the Court heard additional evidence regarding, among other things, (i) the proposed settlement with Canada, (ii) relevant facts surrounding the other changes contained in the Second Amended Plan, and (Hi) feasibility of the Second Amended Plan. At the conclusion of the Supplemental Hearing, the Court took confirmation of the Second Amended Plan under advisement.

II. LEGAL ANALYSIS

A variety of matters must be analyzed in determining whether the Second Amended Plan can be confirmed, including: (i) whether the settlements contained in the Second Amended

Plan—i.e.,

the proposed global settlement with the Client Claimants and Mikron and the proposed settlement with Canada, can be approved; and (ii) whether the Second Amended Plan satisfies the legal requirements for confirma

tion—i.e.,

have the Kornman Parties raised any sustainable objections to confirmation of the Second Amended Plan. Because the settlements with the Client Claimants, Mikron, and Canada are integral to the Second Amended Plan, and because the Second Amended Plan cannot be confirmed if those settlements fail to satisfy the legal test for approval of settlements in this Circuit, the Court will start its legal analysis of confirmation with its analysis of the proposed settlements and will then turn to the Kornman Parties’ more technical objections to confirmation of the Second Amended Plan

A. Legal Standard for Approval of Bankruptcy Settlements

This Court is authorized to approve settlements in accordance with Federal Rule of Bankruptcy Procedure 9019(a). According to the Fifth Circuit, “[a]pproval should only be given if the settlement is fair and equitable and in the best interest of the estate.”

In re Cajun Elec. Power Coop., Inc.,

119 F.3d 349,

355

(5th Cir.1997) (internal quotations omitted). In

Cajun,

the Fifth Circuit further stated that

[t]he fair and equitable standard is not as vague as it might appear to be. The words fair and equitable are terms of art—they mean that senior interests are entitled to full priority over junior ones. In deciding whether a settlement of litigation is fair and equitable, a judge in bankruptcy must make a well-informed decision, comparing the terms of the compromise with the likely rewards of litigation. In particular, the 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.

Id.

at 355-56 (internal quotations omitted).

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In explaining what bankruptcy courts must do to satisfy the first factor—

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i.e.,

probability of success in the litigation, the Circuit further stated that “it is unnecessary to conduct a mini-trial to determine the probable outcome of any claims waived in the settlement. ‘The judge need only apprise himself of the relevant facts and law so that he can make an informed and intelligent

decision Id.

at 356 (quoting

LaSalle Nat’l Bank v. Holland (In re Am. Reserve Corp.),

841 F.2d 159, 163 (7th Cir.1987)). Finally, the Fifth Circuit noted in Cajun that

[ujnder the rubric of the third, catch-all provision, we have specified two additional factors that bear on the decision to approve a proposed settlement. First, the court should consider the best interest of the creditors, with proper deference to their reasonable views. Second, the court should consider’ the extent to which the settlement is truly the product of arms-length bargaining, and not of fraud or collusion.

Id.

at 356 (internal citations omitted).

The parties agree this is the relevant legal standard to be applied. They disagree, however, about its proper application here.

B. Application of the Legal Standard to the Settlement with the Client Claimants and Mikron

1. Complexity and Likely Success

At the outset of its analysis, the Court notes the complexity of the legal and factual issues raised in the contested claim objections pending against the Client Claimants and the adversary proceedings pending against Love, the Skinner Trusts, and Mikron. Over 500 exhibits were admitted into evidence in connection with the Original Hearing and the Supplemental Hearing.

47

The Court has spent incalculable hours dealing with the legal issues presented by the Trustee, the Kornman Parties, Mikron, and/or the affected Client Claimant in connection with the Mikron Adversary and the Trustee’s motions for summary judgment (or partial summary judgment) in both the contested matters and the other adversary proceedings pending in the Case. By way of example, the Court notes that there are a total of seventeen motions for summary judgment pending—eight filed by Heritage and GMK (with respect to claim objections those entities filed in the Case) and nine by the Trustee (five in the Case with respect to claim objections, three in the various adversary proceedings in which a claim objection is asserted in the Trustee’s complaint, and one in the Jenkins/Meralex adversary proceeding where the Trustee asserts a claim objection in his answer). Over thirty briefs, responsive briefs, reply briefs and sur-reply briefs have been filed with respect to these motions.

48

The Court has had to create its own

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spreadsheet to track the numerous claims and defenses asserted by each of the parties in the Case and the myriad of adversary proceedings. The Court has already ruled on a summary judgment motion in the Mikron Adversary Proceeding, and the Prior Mikron Opinion is fifty-one pages of fairly terse legal analysis. While the Court has not actually heard the other summary judgment motions, it has prepared for hearings on those motions

twice

and has studied the voluminous summary judgment appendices filed by the parties in connection with those motions, all of which materials were introduced into evidence here. Countless hours have been spent doing independent research on the novel legal issues raised by the various parties. In short, the Court is intimately familiar with the legal and factual contentions of the parties; those issues are complex, as will become more apparent as the Court proceeds with its analysis of the proposed settlement.

Regarding the Trustee’s likelihood of success on the merits of the claim objections and the adversary proceedings at issue here, and as noted previously, the Heritage client agreements (including the Meralex Agreement, the Love Agreement, the Skinner Trusts’ Agreements, and the Sandwith Agreements), as drafted by Heritage, are very one-sided in Heritage’s favor. If these client agreements are enforceable as written, several of the defenses to the collection of the notes payable to Heritage and the theories which underlie the Client Claimants’ claims against Heritage are likely barred. For example, in Section 5.1 of the client agreement, entitled “Uncertainty of Results,” the client acknowledged that results from the Strategies “are subject to interpretations of current Law and may be substantially impacted by changes of Law ...” and that the IRS “could possibly disallow or contest these large tax savings and that tax payments and court proceedings may be necessary to gain or defend any tax savings.”

See, e.g.,

Ex. P 87, Ex. A, § 5.1 at APP 10. Similarly, in Section 5.2 of the client agreement, entitled “No Reliance On [Heritage],” the client acknowledged that he would

act solely on the advice of [his] Authorized Advisors, that [he has] exercised and will at all times in the future exercise independent judgment in determining to enter into this Agreement and to Implement any of the Strategies or attempt to achieve a Result using any of the Strategies, and that [he has] not relied and will not rely upon any advice, information, representations or agreements, oral or otherwise, of [Heritage].

Id.

at § 5.2. Moreover, in Section 5.3 of the client agreement, entitled “Indemnification of [Heritage],” the client agreed to release, hold harmless, and indemnify Heritage

from Any and All Claims ... arising out of or relating in any way to any Strategies ... [or] to any Results ... including, by way of example but not limited to, any claims alleging negligence, gross negligence, error, omission or wrongful conduct by [Heritage], and extending to any and all damages, costs, attorneys’ fees, experts’ costs, valuation costs, accounting fees, civil or criminal tax liabilities, penalties, interest and other results or outcomes of any and all tax returns, tax liabilities, tax positions, contracts, transfers, purchases, sales, investments and transactions with respect to any Property ... whether or not related to taxes, to [the client] or to any Strategies.

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Id.

at § 5.3, APP 11. Section 11.2 of the client agreement, entitled “No Other or Prior Agreements and/or Inducements,” provides that

[b]y signing this Agreement [the client] Acknowledge^] that there were no promises, representation or agreements, oral, written or implied, made to [him] by any Party or other Person which induced [him] to enter into this Agreement. The Parties further Acknowledge that there are no other agreements between them, oral, written or implied, other than those stated explicitly in this written Agreement.

Id.

at § 11.2, APP 15. In addition, Section 11.4 of the client agreement, entitled “Amendments and Supplemental Agreements,” provides that

[t]his Agreement embodies all understandings and all agreements between the Parties, supersedes all prior agreements and understandings, and may be changed, terminated, amended or supplemented only by an agreement, in writing, fully executed ... by all the Parties affected by the Supplemental Agreement and delivered in accordance with any express terms hereof.

Id.

at § 11.4, APP 15. Finally, just above the signature block, the client agreement provides, in bold, that “[t]his written Agreement represents the final agreement between the Parties and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the Parties. There are no unwritten oral agreements between the Parties.”

Id.

at APP 18.

The Trustee relies heavily upon these provisions to assert that the defenses to the collection of the Skinner Trusts’ Notes, the Love Note, and the Mikron Note asserted by the Skinner Trusts, Love, and Mikron, respectively, are barred. Similarly, the Trustee relies heavily on the fact that each of these notes is unconditional on its face, and that the alleged conditions to the payment obligations otherwise stated in those notes cannot be found in the notes.

49

While these contractual provisions and the unconditional nature of the notes may defeat certain of the Client Claimants’ defenses and/or counterclaims, it appears equally likely that several of those defenses and/or counterclaims would, for the reasons explained below, survive a motion for summary judgment, thereby requiring further potentially problematic discovery, a trial on the merits, and appeals from any resulting determination. Therefore, notwithstanding the onerous contractual provisions and apparent unconditional nature of the notes, the Court concludes that there are complex legal and factual issues which raise serious questions about the probability of the Trustee’s success in easily or completely disposing of the claims and defenses asserted by the Client Claimants and/or Mikron. In exploring these complex legal and factual issues further in connection with its analysis of the likelihood of success factor, the Court will address the claims and defenses of the four controlling Client Claimants and Mikron based upon the Court’s current view of which claimants are most likely to succeed

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and which claimant is least likely to succeed.

a. The Skinner Trusts’ Claims and Defenses to Collection of the Skinner Trusts’ Notes.

Because of the timing of the signing of the Skinner Trusts’ Agreements, the Skinner Trusts’ fraudulent inducement claims and defenses to collection of the Skinner Trusts’ Notes are quite problematic for the Trustee. The Skinner Trusts were first contacted by Heritage about six months

after

the IRS notification letter had been hand-delivered to Heritage, and it appears undisputed that the Behnkes were not told of (i) the IRS’ position regarding the 752 Strategy, (ii) the ongoing IRS investigation of Heritage, and/or (iii) the IRS’ request for identification of Heritage clients who had implemented the 752 Strategy. It is hard to imagine more material information to a prospective Heritage client than this type of information. Proceeding to implement the 752 Strategy while there was an ongoing IRS investigation of Heritage assured the Heritage client of an IRS audit and, in light of the stated position of the IRS, the likely disallowance of the client’s tax return.

To date, the Trustee’s only response to these extremely difficult facts underlying the Skinner Trusts’ fraudulent inducement defenses to collection of the Skinner Trusts’ Notes and the Skinner Trusts’ Claims is to point to the waiver/release/merger/reliance disclaimer provisions of the Skinner Trusts’ Agreements. However, the general rule in Texas is that waiver/release/merger/reliance disclaimer clauses such as the ones contained in the Skinner Trusts’ Agreements can be avoided by proof of fraud in the inducement, and the parol evidence rule does not bar proof of such fraud.

Schlumberger Tech. Corp. v. Swanson,

959 S.W.2d 171 (Tex.1997).

If the settlement is not approved, the Trustee will attempt to carve around this general rule by relying upon its exception, also described in

Schlumberger.

The

Schlumberger

court held that such clauses can, in certain circumstances, negate the reliance element of a fraudulent inducement claim and bar such a claim as a matter of law. In summary, the

Schlumberger

court held

that a release that clearly expresses the parties’ intent to waive fraudulent inducement claims, or one that disclaims reliance on representations about specific matters in dispute, can preclude a claim of fraudulent inducement. We emphasize that a disclaimer of reliance or merger clause will not always bar a fraudulent inducement claim. We conclude only that on this record, the disclaimer of reliance conclusively negates as a matter of law the element of reliance ....

Id.

at 181 (internal citation omitted). Both the state and federal courts in Texas since

Schlumberger

have struggled with the circumstances under which such clauses will or will not be binding, and will or will not negate the rebanee element of a fraudulent inducement claim. According to the

Schlumberger

court, “[t]he contract and the circumstances surrounding its formation determine whether the disclaimer of reliance is binding.”

Id.

at 179 .

The Trustee will assert that the Skinner Trusts’ Adversaries fall within the

Schlumberger

exception and thus the Skinner Trusts’ fraudulent inducement defenses and claims are barred as a matter of law.

See, e.g., Armstrong v. Am. Home Shield Corp.,

333 F.3d 566 (5th Cir.2003);

Steinberg v. Brennan,

No. 3:03-CV-0562, 2005 WL 1837961 (N.D.Tex. July 29, 2005). The Skinner Trusts, on the other hand,

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will argue that the Skinner Trusts’ Adversaries are more like those post

Schlumber-ger

cases which uphold the general rule that waiver/release/merger/reliance disclaimer clauses such as the ones contained in the Skinner Trusts’ Agreements can be avoided by proof of fraud in the inducement, and the parol evidence rule does not bar proof of such fraud. Ultimately, this Court will be called upon to decide whether these fraudulent inducement defenses are barred as a matter of law under

Schlumberger

and its progeny, and in assessing the probability of the Trustee’s success on this issue, this Court concludes that it is more likely than not that the Skinner Trusts’ fraudulent inducement defenses would survive the Trustee’s pending motion for summary judgment for the reasons explained below.

Briefly, the

Schlumberger

court put particular emphasis on the following facts: the parties before it were dealing at arm’s length. Both were equally sophisticated in the relevant subject matter in dispute (there, diamond mining). The party asserting the fraudulent inducement claim had competent (and presumably independent) legal counsel representing it in drafting the agreement which contained the contractual language alleged to bar the subsequent fraudulent inducement claim. And, significantly, the contractual language which was alleged to preclude the fraudulent inducement claim was contained in a document (there, a settlement agreement and release), the very purpose of which was to end the parties’ dispute about the (mis)representations which allegedly formed the basis of the fraudulent inducement claim. The parties had already been embroiled in the dispute at the time the release was signed, and thus the release formed a significant part of the basis of the bargain.

See Carousel’s Creamery, LLC v. Marble Slab Creamery, Inc.,

134 S.W.3d 385 (Tex.App.-Houston [1st Dist.] 2004). The

Schlumberger

court appeared concerned about finality — “the ability of the parties to fully and finally resolve disputes between them. Parties should be able to bargain for and obtain a release barring all further dispute.”

Schlumberger

at 179. As one Texas court has summarized

Schlumberger,

when concluding that a fraudulent inducement claim was barred as a matter of law by the contractual language at issue there, the court focused on:

the parties (1) were attempting to end their relationship, (2) were “embroiled in a dispute,” (3) were dealing at arm’s length, (4) were represented by highly competent and able legal counsel during the negotiations over the terms of the release itself, (5) were knowledgeable and sophisticated business players, and (6) the terms of the release “in clear language ... unequivocally disclaimed rebanee” on the specific representations of the value of the project, which representations were the basis for the ... lawsuit.

IKON Office Solutions, Inc. v. Eifert,

125 S.W.3d 113, 125 (Tex.App.-Houston [14th Dist.] 2003) (quoting

Schlumberger

at 179-80).

The Texas state court cases decided

post-Schlumberger

appear to require facts similar to

Schlumberger

before concluding that a fraudulent inducement claim has been contracted away.

See, e.g., Coastal Bank SSB v. Chase Bank of Texas, N.A.,

135 S.W.3d 840 (Tex.App.-Houston [1st Dist.] 2004) (fraudulent inducement claim barred by contractual disclaimer of reliance contained in a lending syndicate contract between two financial institutions);

Carousel’s Creamery,

134 S.W.3d at 393-94 (fraudulent inducement claim

not

barred by merger/disclaimer/integration clauses in a franchise agreement where the agreement was not intended to resolve an

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ongoing dispute between the parties and the franchisee was not represented by counsel in negotiating the agreement);

Woodlands Land Dev. Co., L.P. v. Jenkins,

48 S.W.3d 415 (Tex.App.-Beaumont 2001) (fraudulent inducement claim

not

barred by “as is” clause in real estate contract where buyer was not knowledgeable in real estate and the contract did not have the specific purpose of ending a dispute); Yza

guirre v. KCS Res., Inc.,

47 S.W.3d 532 (Tex.App.-Dallas 2000) (merger clause in a settlement agreement which contained terms respecting royalty payments precluded subsequent claim that lessors were fraudulently induced by promises of royalty payments);

Fletcher v. Edwards,

26 S.W.3d 66 (Tex.App.-Waco 2000) (fraudulent inducement claim

not

barred by “as is” clause in real estate contract where contract was not resolving a dispute about the subject matter of the alleged representations, buyers were not represented by counsel and were not sophisticated in real estate).

50

Schlumberger

thus appears to be a fact-sensitive ruling. As should be apparent, the Behnke declarations, when read in light of the case law discussed above, raise serious fact questions. In short, it is unlikely that the Trustee could prevail on a motion for summary judgment on the Skinner Trusts’ fraudulent inducement defenses.

The Trustee faces factual hurdles as well. As noted earlier, the Trustee will no doubt argue that the waiver provisions of the Skinner Trusts’ Agreements preclude the Skinner Trusts’ fraudulent inducement defenses and counterclaims. Ex. P 95-3, Ex. I, § 5.2 at APP 405, 424-25. However, waiver is an intentional relinquishment of a known right or intentional conduct inconsistent with claiming that right,

In re Gen. Elec. Capital Corp.,

203 S.W.3d 314, 316 (Tex.2006), and the record, as it currently stands, strongly suggests that the Skinner Trusts had no way of knowing about the false statements made by Heritage at the time their representatives signed the Skinner Trusts’ Agreements and the Skinner Trusts’ Notes. Specifically, the evidence is undisputed that Heritage was notified by the IRS by hand-delivered letter that the IRS was “concerned” that Heritage’s tax strategies “lack economic substance and that investors in such transactions may claim artificial tax losses.” see Ex. P 68-80 at APP 1976. Moreover, the IRS asked Heritage

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to identify all of its clients who had entered into any of the transactions described in the letter within fourteen days.

51

The IRS also asked Heritage to provide all memoranda, correspondence, and any other documents related to any transaction described in the letter, including promotional and marketing material, and other, similar documents.

Id.

at APP 1979.

Accordingly, at the time the Behnkes signed the Skinner Trusts’ Agreements on November 16, 2001 and the Skinner Trusts’ Notes on January 2, 2002, Heritage should have known that it was extremely likely that the Skinner Trusts would be audited by the IRS. Yet, the Behnkes’ declarations stand un-refuted that the Heritage representatives (i) assured them that the IRS had never questioned any of Heritage’s strategies and that the strategies were legal, (ii) gave no indication that the IRS was in anyway skeptical or interested in the legitimacy of Heritage’s strategies, and (in) never told them that the IRS had notified Heritage that it was required to divulge the names of any clients who implemented the Heritage strategies. The Behnkes further declare that they relied on Heritage’s assurances that the IRS had never questioned the legitimacy of the strategies and that whether or not the IRS questioned these strategies was very important to them in deciding to contract with Heritage. Finally, the Behnkes declare that they would not have entered into the Skinner Trusts’ Agreements with Heritage if they had known that the IRS was questioning the legitimacy of the Heritage strategies.

As the Skinner Trusts’ Adversaries currently stand, and in light of the Trustee’s failure to refute the Behnkes’ factual contentions, relying instead on the waiver/release/merger/reliance disclaimer provisions of the Skinner Trusts’ Agreements, it appears there is a substantial likelihood that the Skinner Trusts would prevail on their fraudulent inducement claims and defenses to collection of the Skinner Trusts’ Notes. Of course, if the Skinner Trusts were to prevail on their fraudulent inducement claims and defenses, the Trustee would not recover on the Skinner Trusts’ Notes and the Skinner Trusts would have allowed claims in the Case well in excess of the fees they actually paid to Heritage. The Skinner Trusts’ proofs of claim, as amended on February 23, 2006, include claims for other costs incurred in implementing the strategies; namely, the fees paid to Lewis Rice, A & D, and Whitley Penn (an accounting firm). These claims amount to $103,051.50 for both Skinner Trusts. Furthermore, the Skinner Trusts’ proofs of claim list the professional fees paid to Preston Gates

&

Ellis, LLP and Whitley Penn for their assistance in undoing the Heritage tax strategies, and the penalties assessed against the Skinner Trusts by the IRS. The Skinner Trusts collectively paid $582,189 in tax penalties to the IRS, $17,113 to Preston Gates & Ellis, LLP in 2003 and 2004, and $4,400 to Whitley Penn in 2004.

All of these costs, which total $706,753.50, may be recoverable as consequential damages caused by Heritage’s fraud. A victim of fraud is entitled to recover the actual amount of loss resulting directly and proximately from the fraud.

Tex. Commerce Bank Reagan v. Lebco Constr.,

865 S.W.2d 68, 73-74 (Tex.App.-Corpus Christi 1993). The Skinner Trusts could plausibly argue that the professional fees paid to implement the strategies, the penalties paid to the IRS for having imple

*267

mented the strategies, and the professional fees paid to “un-implement” the strategies were all a direct and proximate result of the fraud perpetrated by

Heritage

— ie., but for Heritage’s fraud, the Skinner Trusts would not have incurred any of these costs.

See also Sorenson v. Fio Rito,

90 Ill.App.3d 368 , 45 Ill.Dec. 714 , 413 N.E.2d 47, 51-52 (1980) (upholding plaintiffs recovery of legal expenses incurred in trying to obtain refund of tax penalties which were assessed against plaintiff solely as a result of defendant’s wrongful acts).

In addition, the Skinner Trusts contend that the Skinner Trusts’ Agreements are null and void because they resulted from the unauthorized practice of law and they charge an unethical attorneys’ fee. These legal contentions are also problematic for the Trustee.

First, the Court has previously held in the Mikron Adversary that Mikron raised a genuine issue of material fact with respect to whether or not Heritage was providing legal services. Moreover, the Court held that the waiver of defenses contained in the Mikron Note did not preclude the Court from considering whether Heritage was engaged in the unauthorized practice of

law

— ie., that it would be against public policy to enforce such a waiver. Finally, the Court concluded that since there was a disputed issue of material fact with respect to whether Heritage was providing legal services, there were disputed material issues of fact with respect to whether fee forfeiture was an appropriate remedy and/or whether the Heritage fee was unconscionable.

see

Prior Mikron Opinion, 354 B.R. at p. 436-37 . Given this ruling in the Mikron Adversary, it is likely that the Court would reach the same conclusion in the Skinner Trusts’ Adversaries. Accordingly, it is likely that the Trustee would not be able to obtain a summary judgment on this defense to collection of the Skinner Trusts’ Notes.

Texas law defines the practice of law to include (i) the preparation of documents or pleadings on behalf of a client incident to a court proceeding, and (ii) a service “rendered out of court, including the giving of advice or the rendering of any service requiring the use of legal skill or knowledge, such as preparing a will, contract, or other instrument, the legal effect of which under the facts and conclusions involved must be carefully determined.” Tex. Gov’t Code Ann. § 81.101 (Vernon 2005).

52

The Behnkes have submitted evidence that Heritage made a presentation to them at which Heritage

described various legal cases, including a factual description of the cases, the position of the ... IRS, and the court’s ruling. They provided handouts that highlighted important portions of these cases through the use of underlining, bold type, and enlarged font. The Heritage representatives also ... assured us ‘it was legal’ and ‘the strategies were legal.’

Ex. P 95-1, ¶ 6-7 at APP 3. Carl Behnke submitted evidence that the Behnkes considered Heritage’s advice to be legal advice.

Id.

at ¶ 9, APP 4. Moreover, the Behnkes have submitted a declaration of Linda Eads, a law professor at Southern Methodist University Dedman School of Law who also serves as chair of the State Bar of Texas Committee on the Texas Disciplinary Rules of Professional Con

*268

duct. Based upon her review of the presentation that Heritage made to the Behnkes, Professor Eads opines that Heritage provided legal services to the Skinner Trusts, and that the provision of those services constituted the unauthorized practice of law in both Texas and Washington. She further opines that Heritage’s fee is an unethical fee because it is unreasonable in both Texas and Washington. Ex. P 95-4 at APP 445-53.

While the parties have obviously not provided the Court with all of the evidence they will introduce on this issue should the Skinner Trusts’ Adversaries go to trial, the Court notes that in replying to the Skinner Trusts’ opposition to his motion for summary judgment, the Trustee did not provide any evidence to refute any of the Skinner Trusts’ summary judgment evidence. The Kornman Parties also provided no evidence to refute the Skinner Trusts’ evidence. Instead, the Trustee and/or the Kornman Parties argue that (i) the provisions of the Skinner Trusts’ Agreements bar this claim (in the Prior Mikron Opinion, the Court rejected a similar argument made with respect to a waiver of defenses clause contained in the Mi-kron Note), (ii) there is no private right of action for the unauthorized practice of law, and (iii) even if Heritage had submitted a tax strategy to the Skinner Trusts and advised them on the legal consequences thereof while providing copies of tax regulations and case law, then “such facts obviously do not constitute the practice of law, and are actions taken by virtually every accountant and tax preparer on a daily basis, without a law license.”

Reply Brief of the Heritage Organization, LLC and GMK Family Holdings, LLC in Supp. Of Mot. For Summ. J. On Claims of Skinner Claimants,

Docket No. 713 in 04-35574-BJH, at p. 13-14.

At this stage of the evidentiary record the

only

evidence before the Court supports the Skinner Trusts’ unauthorized practice of law claims. The legal issues surrounding these claims are quite complex.

For at least these reasons, and based on the current state of the record, the Court concludes that there are serious and substantial factual and legal impediments to any recovery by the Trustee in the Skinner Trusts’ Adversaries and/or in connection with the Trustee’s objections to the Skinner Trusts’ Claims in the Case.

b. The Love Claim and Defenses to Collection of the Love Note

Love’s claim that he was fraudulently induced into signing the Love Agreement is equally problematic for the Trustee. Love has sworn in his affidavit that at no time throughout his dealings with Heritage did Heritage tell him that Heritage had been notified by the IRS that the IRS questioned Heritage’s strategies. Ex. P 87, ¶22, at APP 8. Love testified in his deposition that had he “either seen this letter or known about any aspect of it, I would have not done any of those things. I just — no one. No one I know would do something with knowledge of this.” Ex. P 270, Tab 7 (Depo. of Luther Ross Love, Jr., 6/7/07), p. 185:2-19. Love would be expected to testify at trial that ‘had he known of the IRS notification letter, he would not have entered into the Love Agreement.

Bird, the Heritage principal responsible for the Love Agreement, does not refute Love’s factual contentions in any material respect. In fact, it appears from his deposition testimony that Bird claims to not have known about the IRS notification letter himself. Ex. P 196-1 at APP 908-10, pp. 89:6-91:13. Implicit in that testimony is Bird’s admission that he did not inform

*269

Love of the IRS notification letter received two weeks prior to the signing of the Love Agreement. Moreover, Bird testified that the information contained in that notification letter would have been material to a prospective Heritage client. Ex. P 196-1, at APP 910, p. 91:3-8. In addition, it is clear that the May 2, 2001 letter was hand-delivered to Heritage’s office and was signed for by Claudia McElwee, a Heritage vice-president. Ex. P 196-2 at APP 953, p. 111:2-25; Ex. P 68-30 at APP 880;

Stipulation of Add’l Facts for Purposes of June 11, 2007 Hearing,

Docket No. 1180 in 04-35574-BJH, at ¶ 5. Bird’s apparent lack of personal knowledge is unlikely to provide Heritage a defense to Love’s fraudulent inducement claim.

Landon v. S & H Mktg. Group., Inc.,

82 S.W.3d 666 (Tex.App.-Eastland 2002) (notice to an officer (i.e., McElwee) is notice to the corporation where the officer in his line of duty ought to act upon or communicate the knowledge to the corporation);

Poth v. Small, Craig & Werkenthin, LLP,

967 S.W.2d 511 (Tex.App.-Austin 1998) (knowledge by corporate officers may be imputed to the corporation itself). Therefore, the fact that Bird claims not to have known about the IRS letter is irrelevant, because it appears from the current record that Heritage had received the letter.

Of course, if Love was fraudulently induced into signing the Love Agreement, the Love Note will not be enforceable against him either, Tex. Bus.

&

Com.Code Ann § 3.305 (Vernon 2002 & Supp.2007);

53

Estate of Stonecipher v. Estate of Butts,

591 S.W.2d 806, 809 (Tex.1979) (“our courts have consistently held that fraud vitiates whatever it touches”);

PSB, Inc. v. LITIndus. Tex. L.P.,

216 S.W.3d 429, 433 (Tex.App.-Dallas 2006) (a contract procured by fraud is voidable), and he will be entitled to recover not only the fees he actually paid to Heritage, but consequential damages as well. Like the Skinner Trusts, Love appears to have expended significant amounts of money as a result of implementing the strategies: first professional fees to Lewis Rice, and then penalties to the IRS and the State of Ohio and other unspecified professional fees, presumably incurred in undoing the tax strategies.

See supra

at p. 247.

For the reasons just discussed in connection with the Skinner Trusts’ fraudulent inducement claims and defenses, the waiver/release/merger/reliance disclaimer provisions of the Love Agreement are not likely to bar Love’s fraudulent inducement claim and defense to collection of the Love Note as a matter of law.

See supra

at pp. 263-66. Accordingly, if that claim/defense proceeds to trial, it appears there is a substantial likelihood that Love would prevail on his fraudulent inducement claim and defense to collection of the Love Note. Of course, if Love was to prevail on his fraudulent inducement claim and defense, the Trustee would not recover on the Love Note and Love would have an allowed claim in the Case well in excess of the fees he actually paid to Heritage. Love’s proof of claim, as amended on February 23, 2007, states claims for $75,000 paid to Lewis Rice, $370 paid to Whitley Penn, $601,142 in federal tax penalties, $265,868 in State of Ohio tax penalties, and $727,549 in “other” professional fees. Including $1,114,381 in fees paid to Heritage, the

*270

amended proof of claim demands $2,784,310 plus interest.

Turning to Love’s subsequent oral modification defense to collection of the Love Note, this defense is also quite problematic for the Trustee. In his affidavit, Love swears, and should be expected to so testify at trial, that Heritage, acting through Bird, agreed (i) to refund any fees he paid if the IRS disallowed the 752 Strategy, and (ii) that no further fees would be due from him. Ex. P 87, ¶ 17, at APP 6. It is undisputed that the IRS disallowed the 752 Strategy as implemented by Love. And, while Bird does not admit he made that subsequent agreement per se, neither does he directly deny it. Rather, he states only that he typically told prospective clients that if the IRS ultimately disallowed the strategies, that Heritage “wouldn’t be in business 30 days much less 30 years if we went around suing our customers.” Ex. P 270, Tab 2 (Depo. of Anthony Bird, 12/15/05), at p. 56:23-24.

While the Love Agreement purports to bar subsequent oral modifications, there is substantial legal authority in Texas allowing parties to orally modify a written agreement, even when the written agreement purports to bar such subsequent oral modifications.

In re The Heritage Organization, LLC,

No. 3:06-CV-0578-H, 2006 WL 2642204 at *3 (N.D.Tex. Sept.14, 2006) (stating that “[u]nder Texas law older than the undersigned senior judge, an oral agreement may supersede a written agreement not required by law to be in writing, even if the written agreement prohibits oral modification,” and citing a Texas Supreme Court decision from 1887);

Am. Garment Props., Inc. v. C.B. Richard Ellis-El Paso, L.L. C.,

155 S.W.3d 431 (Tex.App.-El Paso 2004);

Lone Star Steel Co. v. Scott,

759 S.W.2d 144 (Tex.App.-Texarkana 1988).

As a logical consequence of his subsequent oral agreement defense to collection of the Love Note, Love contends that the Trustee’s attempt to collect the Love Note breaches the Love Agreement, as modified by the parties after its execution. Love’s damages for such a breach would be whatever amount he is found to owe to Heritage under the Love Note. Those amounts would be offset, resulting, according to Love, in no recovery by the Trustee. Love’s contentions make sense if he succeeds in proving a subsequent oral modification of the Love Agreement.

For at least these reasons, the Court concludes that the Trustee faces substantial uncertainty, both factually and legally, in attempting to defeat Love’s breach of contract/subsequent oral modification claim and defense. Therefore, based on the current state of the record, the Court concludes that there are serious and substantial factual and legal impediments to any recovery by the Trustee in the Love Adversary and/or in connection with the Trustee’s objections to the Love Claim in the Case.

c. The Sandwith Claims and Mi-kron’s Defenses to Collection of the Mikron Note.

For the reasons explained in connection with the Skinner Trusts’ unauthorized practice of law defense,

See supra

at pp. 266-68, Mikron’s unauthorized practice of law defense to the Trustee’s efforts to collect the Mikron Note puts the Trustee at risk of losing the Mikron Adversary. If Heritage is found to have engaged in the unauthorized practice of law in either the states of Washington or Texas, the Court will have to decide if the fee charged to the Sandwith Claimants for the estate planning strategies, the balance of which is now due per the Mikron Note, is unconscionable and whether fee forfeiture, in

*271

whole or in part, is appropriate. According to Heritage, the fee due under the Sandwith Claimants’ agreements with Heritage was $11,386,919, $6,000,000 of which was paid in cash and $5,386,919 of which was paid through the execution of the Mikron Note.

Ironically, and admittedly in a slightly different context, the Trustee and the Kornman Parties argued that the portion of a client fee Canada claimed to be entitled to in connection with another Heritage client relationship

(i.e.,

the so-called “Connecticut Client”) represented an unreasonable amount for him to receive for the work he did in connection with Heritage’s agreement with that client.

See Trustee’s Statement of Position on Remaining Issues for Determination and Joinder in Objection to Canada Claim Pursuant to 11 U.S.C. § 502 (b)(4),

Docket No. 106 in Adv. Pro. No. 04-3338-BJH, at ¶¶ 23-30;

Proposed Findings of Fact and Conclusions of Law,

Docket No. 123 in Adv. Pro. No. 04-3338-BJH, at ¶ 57 (“the proposed compensation to Canada is unreasonable as either an hourly rate or as a contingency fee award”). As part of their legal and factual analysis, the Trustee and the Korn-man Parties relied upon an attorney’s fee analysis to substantiate their opposition to Canada’s receipt of the agreed upon fee, claiming that Canada’s portion of the fee was grossly overstated based upon a reasonable analysis of the work he did for the client on Heritage’s behalf.

See, e.g., Trustee’s Statement of Position on Remaining Issues for Determination and Joinder in Objection to Canada Claim Pursuant to 11 U.S.C. § 502 (b)(4),

Docket No. 106 in Adv. Pro. No. 04-3338-BJH, at ¶ 23 (“the factors generally applicable to determining the reasonableness of attorneys’ fees are equally helpful in determining the reasonableness of insider compensation”). Now, in the context of the Client Claimant disputes, the Trustee and the Kornman Parties will apparently reverse field, and argue that the overall Heritage fee is reasonable, even if it represents the payment of legal services.

54

For all of these reasons, and based upon the current record and briefing by the parties, it appears that there is substantial risk to the Trustee in trying these issues.

55

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In Mikron’s recently pled fraudulent inducement defense, Mikron contends that the Sandwiths would not have used Heritage for estate planning and Mikron would not have signed the Mikron Note had the Sandwiths known that (i) Heritage’s other tax strategies were being challenged by the IRS, (ii) Heritage’s references included counsel with a secret financial stake in promoting Heritage’s strategies, and (iii) the Sandwiths’ “independent” counsel had a longstanding client relationship with Heritage and Kornman. Mikron was granted leave to add this defense by Order entered on February 21, 2007. The Court assumes that the Sandwiths will testify to the facts alleged in their amended answer. If so, the Court notes that since Heritage did not even meet with the Sandwiths until after the IRS notification letter and Mikron did not execute the Mikron Note until early 2003,

see

Prior Mikron Opinion, 354 B.R. at 417 , this defense may prove problematic for the Trustee as well.

The Court also notes that the basis of the Sandwiths’ claims differ slightly from those of the other Client Claimants. Heritage provided estate planning services to the Sandwiths (as opposed to the 752 Strategies provided to the other Client Claimants) and the Sandwiths, not Mikron, are parties to various client agreements with Heritage. The Mikron Note, however, was signed by Ron Sandwith and Mi-kron, and not by the Sandwith Children. In connection with the summary judgment motions resulting in the Prior Mikron Opinion, the Sandwith Children argued that the parties’ contract consisted of the Mikron Note that Ron Sandwith and Mi-kron signed, together with the five client agreements between Heritage and Ron Sandwith and Heritage and each of the Sandwith Children. The Sandwith Children asserted that the fee due to Heritage under the five client agreements was to be adjusted after an appraisal of the property used to implement the

Strategies

— i.e., the Mikron shares — and that the Mikron Note, which purported to liquidate the fee, was therefore unenforceable because it was signed only by Ron Sandwith and Mikron, and not by all of the parties to the “contract.” Essentially, the Sandwith Children argued that Ron Sandwith could not amend his client agreement with Heritage (by liquidating the fee due, in the form of signing the Mikron Note) without the consent of each of his children. And, according to the Sandwith Children, the appraisal of the value of their Mikron stock (which was subsequently performed) determined that not only was no further fee due to Heritage, but, instead, that the Sandwith Children were entitled to a refund of a portion of the fee already paid to Heritage.

The Court ruled in the Prior Mikron Opinion that although the five client agreements would be construed together under Texas law, each of those agreements evinced the parties’ intent that Ron Sand-with could modify his client agreement with Heritage if he was the only party affected by the modification. Prior Mikron Opinion, 354 B.R. at 423 . The Court ruled that Ron Sandwith was permitted to liquidate the amount of the fee that he was liable for under his client agreement with Heritage, and agree to pay that fee on different terms than those stated in his agreement.

Id.

at 424 . The Court further ruled that since the Sandwith Children were not parties to the Mikron Note, they were not bound by Ron Sandwith’s liquidation of the fee, and were free to continue to seek a refund of any alleged overpayment they had made to Heritage.

Id.

at pp. 425-26. The Sandwith Childrens’ proofs of claim seek such a partial refund of the amounts they had already paid to Heritage.

If the Sandwith Children are correct in their interpretation of their agreements

*273

with

Heritage,

— ie., that the fee due to Heritage was to be adjusted after an appraisal was done on the value of the Mi-kron stock used to implement the strategies — then the Court’s ruling that the Sandwith Children were not bound by their father’s liquidation of the fee means that the Sandwith Children would have a valid claim against the estate for a refund of fees they overpaid.

In addition, if Mikron is correct in its contention that Heritage was engaged in the unauthorized practice of law, a forfeiture of a substantial portion, if not the entire fee may be appropriate, in which ease the Trustee might not collect anything on the Mikron Note, and the Sand-with Children would be entitled to a

full

refund of the fees paid to Heritage — a result much harsher, from the estate’s point of view, than the terms of the settlement.

This potential risk helps to explain the terms of the Trustee’s proposed settlement with Mikron and the Sandwith Claimants. Under the terms of the settlement proposed with Mikron and the Sandwith Claimants, Mikron will pay $2,750,000 to the estate in satisfaction of the Mikron Note. That payment shall be deemed to constitute a payment by Mikron on behalf of the Sandwith Claimants. The Sandwith Claimants’ proofs of claim are in the collective amount of $2,155,352. Upon receipt of the payment from Mikron, the Sandwith Claimants’ claims will be deemed proportionately increased in an amount so that the aggregate total of their claims shall be increased by the $2,750,000, for a total claim of $4,905,352. However, as part of the compromise, the Sandwith Claimants have agreed to a reduction of that amount to $3,250,000. Under the terms of the Second Amended Plan, the Sandwith Claimants will have a single, jointly held claim for that amount, and the balance of $1,655,352 will be disallowed.

56

For at least these reasons, and based on the current state of the record, the Court concludes that there are serious and substantial factual and legal impediments to any recovery by the Trustee in the Mikron Adversary and/or in connection with the Trustee’s objections to the Sandwith Claimants’ Claims in the Case.

d. The Jenkins Tax Claimants’ Claims

As noted previously, only two theories of recovery remain pending against Heritage in the Jenkins/Meralex Adversary, which forms the basis for the Jenkins/Meralex proof of claim in the

Case

— i.e., (i) fraud/fraudulent inducement and (ii) breach of fiduciary duty. After reviewing the contentions of the parties and the evidence introduced at the Original Hearing and the Supplemental Hearing, the Court concludes that these claims are weaker than other of the Client Tax Claimants’ claims for several reasons.

First, Jenkins had a prior contractual relationship with Heritage and had signed an equally, if not more, onerous agreement with Heritage in connection with the implementation of his earlier estate planning strategies, as he admitted in his deposition.

Compare

Kornman Ex. 40 and 52; Kornman Ex. 81 (Depo. of Howard Jenkins, 2/13/06), p. 29:3. Jenkins was satisfied with the results of the Heritage estate planning strategies and thereafter served as a reference to prospective Heritage clients — both in written letter format and

*274

by telephone. In his letter of reference, Jenkins comments upon the onerous terms of the client agreements, but proceeds to recommend Heritage to the prospective client notwithstanding the inclusion of these onerous provisions in the client agreements.

Id.

at 59:15; Kornman Ex. 48 (“The only problem I encountered was with a law firm with whom I had a longstanding relationship.... They advised me not to sign Heritage’s agreement.”).

Second, Jenkins and Meralex signed the Jenkins/Meralex Agreement and implemented the 752 Strategy very early in the IRS enforcement process regarding capital gains

strategies

— i.e., the agreement was signed in 1998 and the 752 Strategy was implemented by May 1999. As time passed, the IRS became increasingly vocal about its concerns over the legitimacy of the capital gains strategies Heritage and others were promoting. And, while the 752 Strategy was always risky, as time passed, the degree of risk became more and more significant, as the IRS became more active in auditing returns utilizing these types of strategies to avoid payment of capital gains taxes otherwise due. To prevail on their claim that Heritage made material misrepresentations regarding the legality and validity of the 752 Strategy, Jenkins and Meralex will have to prove, among other things, that Heritage knew that its statements were false. Factually, it will be more difficult to prove this element of their fraud/fraudulent inducement claim in the 1998/1999 time frame.

Third, Jenkins’ and Meralex’s fraud/fraudulent inducement claims also arise from the alleged misrepresentations by Heritage regarding, in essence, the legality and validity of the 752 Strategy itself and the failure of Heritage to disclose the extent of Ahrens’ financial interest in Jenkins’ and Meralex’s decision to implement the 752

Strategy

— i.e., that Heritage never disclosed that Ahrens, who apparently developed the strategy, would earn a 5% override or royalty on fees Heritage received from clients who implemented the 752 Strategy, including Mera-lex, through an entity he created for that purpose, FWP Technologies.

57

While Jenkins and Meralex contend that their so-called “independent” lawyer was not so independent because of his undisclosed financial interest in making sure that Jenkins and Meralex ultimately decided to implement the 752 Strategy, A & D did disclose the fact that it would receive a fee from Heritage if the strategy was implemented. Specifically, in the engagement agreement between Jenkins/Meralex and A & D, A & D discloses that

We are bound by our ethical duty as lawyers to disclose to you that we have previously represented and continue to represent [Heritage]. Further, we will receive payment from Heritage for using the capital gains strategy we have discussed. On this project we will work jointly with Heritage in preparing, presenting and implementing the capital gains strategy for you. Since this relationship creates a potential conflict of interest regarding our obligations to both you and Heritage, we ask that you acknowledge this conflict and expressly waive the conflict in writing by signing the attachment to this letter.

Ex. P 68-54 at APP 1741. Jenkins signed the attachment.

Id.,

at 1744. So, while the Court is troubled by the extent of the

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disclosure, the fact remains that a financial interest of A & D was disclosed. Moreover, in his deposition, Jenkins admitted that he was aware of Heritage’s relationship with A & D, A & D’s potential conflict of interest, and A & D’s ongoing representation of Heritage, yet did not raise any questions about this relationship with anyone. Kornman Ex. 81 (Depo. of Howard Jenkins, 2/13/06), p. 130:16-131:17.

Finally, Jenkins made certain admissions in his deposition that affect the strength of the Jenkins/Meralex claims. For example, when asked about the way the Jenkins/Meralex Agreement was to work, Jenkins admitted that he understood that he would “sign it,” that he would “learn about the strategies, and if they didn’t work, [he was] releasing and agreeing to hold Heritage harmless if those strategies didn’t work.”

Id.

at 275:3-10. Moreover, Jenkins admitted that he also understood that the fee he was paying was going to be non-refundable, even if the strategies didn’t work.

Id.

at 275:11-15. Jenkins further admitted that he wasn’t aware of any fraud by Heritage in connection with the 1994 Heritage estate planning strategies he implemented,

Id.

at p. 276:18-23, and that certain of the provisions of the Jenkins/Meralex Agreement that he relies on in connection with his current fraud/fraudulent inducement claims are actually less stringent than they were in connection with the 1994 agreement between the parties.

Id.

at 277:20-24. Specifically, Jenkins agreed that he negotiated for a reduction of the penalty for disclosure in the Jenkins/Meralex Agreement, down to $2 million in that agreement from $5 million in the 1994 client agreement.

See id.

at 276:1-7.

With these potential factual complications for Jenkins/Meralex in mind, the Court will turn to the legal issues connected to the Jenkins/Meralex claims of fraud/fraudulent inducement and breach of fiduciary duty, and the fact that the Jenkins/Meralex Agreement contains provisions that disclaim reliance on any representations made by Heritage. Notwithstanding the admissions made by Jenkins in his deposition, the Declaration of Jenkins submitted in opposition to the Trustee’s motion for partial summary judgment, when read in light of the case law discussed at pp. 263-65,

supra,

raises fact questions that likely preclude a summary judgment in the Trustee’s favor on the fraud/fraudulent inducement claims. However, based upon the current state of the record, it appears that the underlying facts surrounding Heritage’s relationship with Jenkins and the timing of the execution of the Jenkins/Meralex Agreement and the implementation of the 752 Strategy, give the Trustee a significantly greater likelihood of prevailing at trial. Of course, if the Trustee was to prevail at trial, the Jenkins/Meralex Claim, would be disallowed.

Turning next to the breach of fiduciary duty claims alleged by Jenkins/Meralex, the Court notes that Jenkins contends that Heritage, acting primarily through Korn-man and Canada, began providing financial, tax, estate planning and management services to Jenkins and his family beginning in 1994. Ex. P 130, Ex. 2, ¶ 3 at APP 11. Jenkins alleges that Heritage advised him in forming several trusts and business entities, and that he relied upon Heritage’s advice in these matters because he didn’t have any specialized knowledge with respect to the services that Heritage provided.

Id.

He further alleges that Heritage managed the day-to-day affairs of some of the Jenkins entities from Heritage’s offices in Dallas, and that the relationship continued until August 2000.

Id.

at ¶ 4. Lastly, Jenkins alleges that Kornman acted as a

trusted advisor for a number of years and ... consulted extensively with me

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during that time, by phone on numerous occasions and in person on approximately twenty occasions. The nature of the relationship was such that I accepted Kornman’s professional advice and had executed numerous instruments created by or for Kornman in connection with such financial planning. Kornman had also advised me in my divorce.

Id.

at ¶ 7.

Under Texas law, in order to recover for a breach of fiduciary duty, a plaintiff must first establish that the defendant owed a fiduciary duty to the plaintiff.

Hartford Cas. Ins. v. Walker County Agency, Inc.,

808 S.W.2d 681, 687 (Tex.App.-Corpus Christi 1991);

Jones v. Blume,

196 S.W.3d 440, 447 (Tex.App.-Dallas 2006) (citing

Punts v. Wilson,

137 S.W.3d 889, 891 (Tex.App.-Texarkana 2004)). Texas courts recognize two types of fiduciary relationships—formal and informal.

Abetter Trucking Co. v. Arizpe,

113 S.W.3d 503, 508 (Tex.App.-Houston [1st Dist.] 2003). Formal fiduciary relationships arise as a matter of

law—i.e.,

attorney-client, principal-agent, partners, and joint venturers.

Id.

(citing

Ins. Co. of N. Am. v. Morris,

981 S.W.2d 667, 674 (Tex.1998)). Jenkins’ declaration does not allege facts in support of a formal fiduciary relationship between himself and Heritage.

Under Texas law, an informal fiduciary relationship arises where one party is “under a duty to act for or give advice for the benefit of another upon matters within the scope of their relation.”

ARA Auto. Group v. Cent. Garage, Inc.,

124 F.3d 720, 723 (5th Cir.1997) (quoting

Texas Bank & Trust Co. v. Moore,

595 S.W.2d 502, 507 (Tex.1980)). However, informal fiduciary relationships are disfavored because a fiduciary relationship “imposes extraordinary duties and requires the fiduciary to put the interests of the beneficiary ahead of its own if the need arises.”

Id.

(citing

Floors Unlimited, Inc. v. Fieldcrest Cannon, Inc.,

55 F.3d 181, 188 (5th Cir.1995)). Accordingly, “mere subjective trust alone is not enough to transform arms-length dealing into a fiduciary relationship” because “businessmen generally do trust one another, and their dealings are frequently characterized by cordiality.”

Thigpen v. Locke,

363 S.W.2d 247, 253 (Tex.1962). There must be a “moral, social, domestic or purely personal relationship,” and thus, “[t]he existence of the fiduciary relationship is to be determined from the actualities of the relationship between the persons involved.”

Id.

The

Thigpen

court failed to find a fiduciary relationship even where the defendant, a bank trust officer, had (i) helped the plaintiffs obtain a loan for their business, (ii) personally guaranteed a loan on their behalf, (iii) extended them a personal loan, (iii) seen the plaintiffs frequently on a social basis, (iv) helped the plaintiffs form a corporation in which the defendant then acted as a director and owned shares, and (v) given the plaintiffs business advice on the management of their retail store. The Texas Supreme Court went on to say that, while a fiduciary relationship may arise out of a “purely personal relationship,” the [plaintiffs] offered no evidence, other than their own subjective trust, that indicated the relationship in this case was “anything more than a debtor-creditor relationship.”

Id.

Texas courts “do not create [a fiduciary] relationship lightly.”

Schlumberger Tech. Corp. v. Swanson,

959 S.W.2d 171, 177 (Tex.1997). For example, in

Mauskar v. Hardgrove,

No. 14-02-00756-CV, 2003 WL 21403464 (Tex.App.-Houston [14th Dist.] June 19, 2003), the plaintiff purchased four insurance policies from the defendants over a period of ten years.

Id.

at *1 . When he purchased the policies, the plaintiff asked the defendants to provide a

*277

very specific type of policy.

Id.

The plaintiff later sued when he discovered that the policies he purchased were not the type of policies he requested.

Id.

The plaintiff claimed a fiduciary relationship existed between the parties because the plaintiff had known the defendants “for many years, had repeated business transactions with them, and had placed a high degree of trust in them as his financial advisors.”

Id.

at *6 . The court found that the duration of the relationship and the plaintiffs subjective trust in the defendants were not sufficient to create the “requisite special relationship” necessary to create an informal fiduciary relationship.

Id.

(citing

Thigpen,

363 S.W.2d at 253 );

Schlumberger,

959 S.W.2d at 177 . Moreover, the cases upon which Jenkins relies, several of which arise in the context of financial ad-visor-client relationships, are distinguishable because the relationships at issue there were significantly different than the relationship which Jenkins alleges between himself and Kornman.

See, e.g., Dominguez v. Brackey Enter., Inc.,

756 S.W.2d 788, 791 (Tex.App.-El Paso 1988) (finding a fiduciary relationship between a financial advisor and client where the parties were also “good social friends” and relying upon two cases — one in which the financial ad-visor was “close friends” with the plaintiff and his best man at his wedding and one in which there was a parent-child relationship).

While the Court is unable to speculate as to whether Jenkins would be able to establish such a fiduciary relationship at trial, the Court believes, based on the limited record presented thus far, that the viability of Jenkins’ breach of fiduciary duty claim is in doubt. Jenkins’ declaration simply does not allege facts which appear to raise a question of fact as to the existence of a fiduciary relationship between Heritage and Jenkins, as he does not allege any facts tending to show a “moral, social, domestic or purely personal relationship,” which the Texas courts require in establishing a “informal” fiduciary relationship.

So, while a trial of the Jenkins/Meralex Adversary will likely be required to liquidate the Jenkins/Meralex claim in the Case (at least with respect to the fraud/fraudulent inducement claim), and while there is risk to the Trustee regarding the outcome of that trial, the factual differences between the "Jenkins/Meralex claim on the one hand and the Love Claim and the Skinner Trusts’ Claims on the other hand cause this Court to conclude that the Jenkins/Meralex claim is significantly less valuable than the Love Claim and the Skinner Trusts’ Claims. And, if the settlement is approved, the Jenkins Tax Claimants will have an allowed unsecured claim in the Case of $9,813,004.50 (65% of the total fee paid to Heritage in connection with the implementation of the 752 Strategy).

Based upon the above analysis of the relative strengths/weaknesses of the Skinner Trusts’ claims and defenses, the Love claim and defenses, the Sandwith Claimants/Mikron claims and defenses, and the Jenkins Tax Claimants’ claim, the Court concludes that, with the possible exception of the Jenkins Tax Claimants’ claim, this

factor

— i.e., the probability of the Trustee’s success in the litigation — militates in favor of approval of the proposed settlement. The Court will address the fact that the Jenkins Tax Claimants’ claim is weaker than the other Client Tax Claimants’ claims later in this Memorandum Opinion, and will balance that fact against the benefits to be realized if the integrated settlement with all of the Client Claimants and Mikron is approved, in coming to its final conclusion regarding whether the proposed, fully integrated settlement with all of the Client Claimants and Mikron can

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be approved consistent with the legal standard articulated by the Fifth Circuit.

See infra

at pp. 285-89.

2. Complexity and Likely Duration of the Litigation

As the above discussion suggests, the claim objections pending against the Client Claimants, along with the adversaries pending against Love, the Skinner Trusts, and Mikron, raise complex factual and legal issues to be resolved by the Court. While certain of the claims/defenses raised by those parties may be able to be resolved as a matter of law through summary judgment motions, certain claims/defenses will not be able to be resolved so easily, including the fraud/fraudulent inducement claim/defense, the subsequent oral amendment claim/defense, and the unauthorized practice of law claim/defense. Mikron and all of the Client Claimants have raised the fraud/fraudulent inducement claim/defense. Mikron and all of the Client Claimants, except the Jenkins Tax Claimants, have raised the unauthorized practice of law claim/defense. The Jenkins Tax Claimants have raised a breach of fiduciary duty claim, as have certain of the Client Claimants. And, Love and the Skinner Trusts have raised subsequent oral amendment claims/defenses to the Trustee’s efforts to collect the Love Note and the Skinner Trusts’ Notes.

If the Court is required to proceed to trial on the claim objections and the adversary proceedings, the Mikron/Client Claimant litigation will "go on for years. As noted previously, the Mikron Adversary is set for trial docket call in November, 2007. The Jenkins/Meralex Adversary is specially set for trial for two weeks in November, 2007. The Skinner Trusts’ Adversaries and the Love Adversary are currently set for trial docket call in November, 2007. In light of its regular bankruptcy caseload and docket, only the Jenkins/Meralex Adversary will be tried in November, 2007. The Mikron Adversary, the Love Adversary and the Skinner Trusts’ Adversaries will have to be set for trial thereafter. Moreover, the claim objections pending against the Troutt Claimants, the Rainwater Claimants, the Powell Claimants, the Fluharty Claimants, Patterson, and Woodruff, do not have firm trial settings. In part, this is because of the ongoing discovery problems encountered by both the Client Claimants and the Trustee in getting all documents turned over by the Kornman Parties and other persons in control of Heritage prior to its bankruptcy filing. Thousands of audio tapes, containing potentially relevant information to the matters in dispute in the contested matters and adversary proceedings involving the Client Claimants, have not been transcribed. Given the illiquid nature of the estate’s remaining assets,

see infra

at p. 281, it is not clear that the Trustee has the resources to meaningfully address these audio tapes, including the costs associated with identifying the relevant ones and having them transcribed, absent approval of certain litigation settlements—

i.e.,

like the proposed settlement with Carl E. Berg (“Berg”) heard concurrently with the Modified Plan at the Original Hearing.

58

Even then, there are questions about the wisdom of spending precious funds that might otherwise be available for the pursuit of more valuable litigation (or, hopefully, for distribution to creditors) for such purposes. Of course, if the Mi-kron/Client Claimant litigation is not settled, the Trustee may have little choice—

*279

he will need to respond to legitimate discovery requests from those parties prior to any trial.

While the Trustee did not provide the Court with a specific estimate of the likely duration and/or cost of the litigation, he did testify that the costs of continuing litigation with all of these parties would be “tremendous.” Audiotape: Hearing conducted 06/12/07 at 12:41:43-12:42:08 p.m. (on file with the Court). And, we know that substantial costs have already been incurred in connection with the ongoing Client Claimant/Mikron litigation. Specifically, through April 15, 2007, the Trustee has incurred professional fees and expenses of approximately $1.1 million in connection with these contested matters and adversary proceedings. The Trustee estimated that he incurred additional fees and expenses in prosecuting the Amended Plan, the Modified Plan, and the standalone motion to approve the settlement in May and June, 2007 (through the conclusion of the Original Hearing) of $300,000-$350,000. Audiotape: Hearing conducted 06/12/07 at 12:19:54-12:20:24 p.m. (on file with the Court). Needless to say, significant additional costs have been incurred since the Original Hearing. At the Supplemental Hearing, the Trustee estimated that accrued administrative expenses for the Trustee and his counsel, as of June 30, 2007 (and, of course, subject to Court approval) are approximately $1.9 million. Ex. P 293.

Moreover, the Trustee recited the relevant facts which will affect the likely length of the litigation. First, given the number of Client Claimant contested matters and adversary proceedings, it could easily be mid-2008 before this Court disposes of all of them in the first instance.

Second, it appears likely that an appeal will be taken from this Court’s final decision at trial in connection with each of the Client Claimant contested matters and adversary proceedings, whatever that decision may be. The Trustee anticipates an appeal from any ruling in the Love Adversary, the Skinner Trusts’ Adversaries, and the Mikron Adversary, as does this Court. The Trustee also anticipates appeals from the disposition of each of the claim objections pending against the Client Claimants’ claims. While one can wonder if an appeal, the cost of which is paid in one hundred cent dollars, makes economic sense for the Client Claimants, given the fact that it is unclear what distributions will be made on their allowed claims, if any, in the Case, the obvious hard feelings that exist between the Client Claimants and the Kornman Parties, coupled with the substantial neh-worths of all of these parties, cause this Court to agree with the Trustee — appeals are assured. Even assuming that this Court rules in the Trustee’s favor at trial, which appears doubtful in most instances (see

supra

at pp. 262-73), it would be years before the judgments and/or orders are final, given appeals to both the District Court and the Fifth Circuit. Depending upon the appellate outcomes, it is even possible that a retrial of some issue or issues would be required (if, for example, partial summary judgments are granted but are subsequently reversed after a trial of remaining issues), with the possibility of even further appeals before decisions are final.

59

As the Trustee testified, if the settlement is not approved

*280

I see this case going back into the ongoing litigation battle. I see a tremendous amount of costs being incurred going forward; I don’t see where the end potentially is going to be with regard to these particular issues because of the possibilities of appeals if there are positive results for the estate. I am looking at an estate right now that has what might be insufficient funds to launch and continue an extended battle with this group over these claims. I’m very concerned about what might happen if we go forward without this.

Audiotape: Hearing conducted 06/12/07 12:41:56-12:42:43 p.m. (on file with the Court).

This testimony by the Trustee and these facts militate in favor of approval of the settlement, despite the absence of a specific budget of projected legal fees or expert testimony about the potential twists and turns the Client Claimant litigation may take, for several reasons. First, the Court need only “form an educated estimate” of the expense of the potential litigation.

Prot. Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson,

390 U.S. 414, 424 , 88 S.Ct. 1157 , 20 L.Ed.2d 1 (1968). This “educated estimate” has been described as an analysis of “the likelihood of complex and protracted litigation, with its attendant expense, inconvenience and delay,”

In re Iridium Operating LLC,

478 F.3d 452, 462 (2 nd Cir.2007) (internal quotations omitted), suggesting that expense and delay is inevitable once the Court determines, as it has here, that complex and protracted litigation will ensue if the settlement is not approved. Second, a proper consideration in evaluating a settlement is the “experience and knowledge of the bankruptcy court judge reviewing the settlement.”

Id.

at 462 . This Court regularly considers fee applications which include requests for fees in connection with complex litigation matters like those involving Mikron and the Client Claimants. Third, this Court is intimately familiar with the Case and all of the contested matters and adversary proceedings pending in the Case, including all of the difficulties the Trustee has encountered in trying to gather Heritage’s assets and records, and in attempting to collect on Heritage’s assets, including the client notes receivable and other litigation claims which comprise Heritage’s remaining assets. This Court knows the typical range of legal fees incurred in complex, protracted litigation and that knowledge, coupled with the Trustee’s testimony that the cost of continued litigation will be “tremendous,”

see

Audiotape: Hearing conducted 06/12/07 at 12:41:43-12:42:08 p.m. (on file with the Court), forms a sufficient basis upon which this Court may form an “educated estimate” that the Mikron and Client Claimant litigations, if they continue through discovery (which, as noted earlier, has not occurred easily in the Case), trial, and the appellate process, will likely be extremely expensive and last for several more years.

3. Other Factors Bearing on the Wisdom of the Compromise

The Court has considered two other factors to be of particular significance, both of which militate in favor of approval of the settlement. First, the Heritage bankruptcy estate is administratively insolvent,

60

and the Trustee needs the proceeds

*281

of this settlement to fund the collection of assets that he deems to be more valuable. The remaining Heritage assets are all illiquid. Some assets are unliquidated claims with litigation already on file in this Court, which the Trustee values at a maximum of approximately $41.5 million.

61

Other Heritage assets are unliquidated claims without any litigation yet pending but with tolling agreements with the potential defendants to prevent the running of statutes of limitations.

62

Still other assets are liquidated in amount, but will likely require collection litigation and are perhaps uncollectible.

63

Finally, there are the six remaining client notes. The Trustee proposes to forgive three of these

notes

— ie., the Skinner Trusts’ Notes and the Love Note — and to settle the Mikron Note for a cash payment of $2,750,000 in connection with this settlement. The Trustee proposes to settle the Berg note for a cash payment of $975,000 in connection with the Berg settlement motion heard concurrently with confirmation during the Original Hearing. The final client

note

— ie., the Schuler note (valued at a range of $0 — $5,119,208)—only recently matured, and although demand has been made, no payment has been received, suggesting that litigation will also be required to collect this note.

Obviously, the common denominator with all of Heritage’s remaining assets is that the Trustee must have funds in order to attempt to realize on these assets either through the commencement of litigation in which contests can be expected, the continuation of existing and contested litigation, or the commencement of collection efforts against recalcitrant Kornman-related entities. Stated most simply, the Trustee has chosen to liquidate the Mikron Note in order to have the funds to realize on other contingent assets that he believes to be more valuable. The $2,750,000 that the estate will receive upon the approval of this settlement will assist the Trustee in his efforts to collect what he believes to be more valuable contingent assets. The Trustee has chosen to forgive the Skinner Trusts’ Notes and the Love Note after considering the relative strengths/weaknesses of his cases and in order to achieve a comprehensive settlement with all of the Client Claimants. The Trustee’s decisions to settle with Mikron, the Skinner Trusts, Love, and the other Client Claimants are rational ones, made by him in the exercise of his reasonable business judgment.

In addition, the Court has considered the best interests of the creditors, with proper deference to their

reasonable

views.

In re Cajun Elec. Power Coop.,

*282

Inc.,

119 F.3d 349, 356 (5th Cir.1997) (emphasis added). As noted previously, the creditor body in the Case can be divided into five groups.

See supra

at pp. 256-57. Out of these five groups, only two individuals/entities asserting indemnity claims in the Case, allegedly arising from their fraudulent conduct, object to the proposed comprehensive settlement with the Client Claimants and Mikron. Specifically, the only creditors objecting to the settlement are Kornman and his company, GMK. As the targets of much of the Trustee’s remaining litigation efforts, it is in the Korn-man Parties’ interest to block any settlements that the Trustee proposes, since the Kornman Parties would presumably like the estate to remain administratively insolvent and thus unable to pursue litigation against them.

64

The only objectants to the settlement therefore have a non-creditor interest in opposing any settlement by which the estate will receive funds, and the Court must therefore partially discount their opposition and conclude that their views of the merits of the settlement may be skewed.

The stated thrust of their opposition is several-fold. First, they object because the Trustee is allegedly settling his claims against Mikron, Love, and the Skinner Trusts too cheaply. For the reasons set forth above, the Court disagrees. The proposed settlement as it relates to the compromise of the Mikron Note and the forgiveness of the Skinner Trusts’ Notes and the Love Note falls within the range of reasonableness given all of the factors considered above and the circumstances of the Case.

In re Allied Props., LLC,

No. 06-33754, 2007 WL 1849017 at *4 (Bankr. S.D.Tex. June 25, 2007) (the Trustee’s burden is “not high;” the Trustee “need only show that his decision falls within the range of reasonable litigation alternatives”);

In re Bradley,

No. 06-51740-RBK, 2007 WL 1500876 (Bankr.W.D.Tex. May 18, 2007) (court should approve a settlement if it is within a range of reasonableness, fair and equitable, and in the best interest of the bankruptcy estate);

In re Mirant Corp.,

348 B.R. 725 , 742 n. 36 (Bankr.N.D.Tex.2006) (“For a settlement to meet the best interests test, the amount being paid or received by the estate ... need only be within the extremes of the range.”).

Nor does the Court agree that the Trustee’s proposed settlement of his objections to the claims asserted by the Client Claimants in the Case are too generous, with the possible exception of the Jenkins Tax Claimants, which will be addressed further below. The Court is satisfied by the Trustee’s explanation of how he got to a comprehensive, integrated settlement with the Client Tax

Claimants

— i.e., the common denominator among all of the Client Tax Claimants is the amount of fees they paid to Heritage and each of those claimants views its claims to be as valuable as any other claimant’s claims (because all of them feel strongly that they were defrauded by Heritage). For the reasons set forth above, the Court concludes that the allowance of unsecured claims in the Case to the Client Tax Claimants (with the possible exception of the Jenkins Tax Claim

*283

ants addressed further below) in the amount of 65% of the fees actually paid to Heritage in connection with the strategies that were, without exception, disallowed by the IRS falls within the range of reasonableness given the circumstances in the Case.

While the facts of each particular Client Tax Claimant’s relationship with Heritage differ in some respects (related largely to the timing of the signing and implementation of the strategies), the legal and factual contentions regarding their fraudulent inducement claims, their unauthorized practice of law claims, and their subsequent oral agreement claims, as applicable, are strikingly similar. And, while the Court agrees that the factual differences that do exist must be taken into consideration, particularly as they relate to the fraudulent inducement claims, the Court has done so, and concludes that the settlement meets the standard set forth by the Fifth Circuit in

In re Cajun Elec. Power Coop., Inc.,

119 F.3d 349, 355 (5th Cir.1997). In other words, while some of the Client Tax Claimants may have stronger claims than others given the factual differences between

them

— i.e., the Skinner Trusts’ and Love’s fraudulent inducement claims are among the strongest given the timing of their agreements with Heritage, each of the Client Tax Claimants (with the possible exception of the Jenkins’ Tax Claimants) have other strong claims against the

estate

— i.e., the unauthorized practice of law claim. From this Court’s perspective, allowing all of them unsecured claims in the Case of 65% of the fees actually paid to Heritage is fair and equitable and in the best interest of the estate. Some claimants might be at the low end of what the Court may view as a reasonable settlement range, while other claimants might be at the upper end of that reasonable settlement range, but all fall within the range of a fair and equitable settlement which is in the best interest of the estate.

65

Contrary to another of the Kornman Parties’ objections, the fact that this Court will have to proceed to trial on the remaining claims in the Jenkins/Meralex Adversary, which resolution may serve to liquidate more of Kornman’s alleged indemnity claims against the estate, and may have to determine Heritage’s solvency at various points in time (implicating the validity and amount of any contingent client claims) in connection with the avoidance claims pending in the Kornman Adversary Proceeding, does not change the Court’s view of the appropriateness of the settlement. The Trustee should not be held hostage to continued litigation just because the proposed settlement does not resolve the Jenkins Tax Claimants’ claims against Kornman, GMK, Ahrens, and A & D.

Moreover, the fact that the Court may be required to determine whether Heritage was insolvent at the time of various transfers which are alleged to be avoidable in the Kornman Adversary Proceeding does not mean that the Court will be required to actually liquidate the Client Claimants’ claims in the context of that adversary proceeding. The case law is clear that in determining the value of contingent assets or liabilities for purposes of a solvency analysis, a bankruptcy court

*284

should not use their face value.

In re WRT Energy Corp.,

282 B.R. 343, 399 (Bankr.W.D.La.2001);

In re Join-In Int’l USA, Ltd.,

56 B.R. 555 (Bankr.S.D.N.Y.1986);

In re Carousel Candy Co., Inc.,

38 B.R. 927 (Bankr.E.D.N.Y.1984). Rather, the court should multiply the face amount of the asset or liability times the probability that the contingency will occur.

Covey v. Commercial Nat'l Bank of Peoria,

960 F.2d 657 (7th Cir.1992);

In re Taylor,

228 B.R. 491 (Bankr.M.D.Ga.1998). In other words, the court must determine the “likelihood that the contingency will occur and the liability will become real.”

WRT Energy,

282 B.R. at 399

(quoting FDIC v. Bell,

106 F.3d 258, 264 (8 th Cir.1997)). A contingent liability is assessed from the debtor’s perspective, rather than the creditor’s.

Covey,

960 F.2d at 660 ;

In re Davis,

148 B.R. 165 (Bankr.E.D.N.Y.1992). Further, the court values contingent assets and liabilities based on information known or knowable as of the date of the challenged transfer, without the benefit of hindsight.

In re Commercial Fin. Svcs., Inc.,

350 B.R. 520 (Bankr.N.D.Okla.2005);

In re WRT Energy Corp.,

282 B.R. 343, 407 (Bankr.W.D.La.2001);

but see In re Pilavis,

233 B.R. 1 (Bankr.D.Mass.1999) (court may use hindsight as a guide to valuation where a judgment is entered in the interim).

Thus, while the Court will be required to conduct a solvency analysis in the context of the Kornman Adversary Proceeding (assuming the avoidance claims are pursued), the Court will employ a specific valuation method which considers different factors than those the Court has considered here in connection with assessing whether this settlement is fair and equitable and in the best interest of the estate.

66

The Kornman Parties also claim that the Trustee lacks the authority to settle the claim objections lodged by the Kornman Parties. Specifically, the Korn-man Parties argue that they are “parties in interest” under 11 U.S.C. § 1109 with standing to object to a proof of claim under 11 U.S.C. § 502 (a). Thus far, the Court agrees. The Kornman Parties further argue, however, that when a party in interest objects to a claim, then § 502(b), by virtue of its use of the word “shall,”

requires

that the court rule upon the objection. Section 502(b) provides

“[I]f such objection to a claim is [made], the court, after notice and a hearing, shall determine the amount of such claim ... and shall allow such claim in such amount, except to the extent that ... (1) such claim is unenforceable against the debtor and property of the debtor under any agreement or applicable law for a reason other than because such claim is contingent or unma-tured .... ”

Recognizing that Rule 9019 of the Federal Rules of Bankruptcy Procedure

67

would appear to permit the Trustee to compromise claim objections, the Kornman Parties assert that Rule 9019, as a rule of procedure, cannot be read to abridge, enlarge, or modify their substantive statutory right to object to a claim under § 502.

see

28 U.S.C. § 2075 (“The Supreme Court shall have the power to prescribe by general rules ... the practice and procedure

*285

in cases under title 11 ... [such] rules shall not abridge, enlarge or modify any substantive right.”). Therefore, according to the Kornman Parties, the Trustee cannot settle their claims objections and this Court must actually determine the claims through continued litigation.

The Court rejects the Kornman Parties’ legal contention for two reasons. First, this argument was soundly rejected in

In re Kaiser Aluminum, Corp.,

339 B.R. 91 (D.Del.2006). The facts in

Kaiser

are on all fours with the Case at bar. One creditor objected to a second creditor’s claim, and the debtor sought to settle with the second creditor. The first creditor was not a party to the settlement and objected to the compromise. The bankruptcy court approved the settlement over the first creditor’s objection, thus mooting the first creditor’s claim objection. The first creditor appealed, contending that (i) the bankruptcy court was required to rule upon the first creditor’s claim objection before considering the settlement, and (ii) allowing the compromise under Rule 9019 would abridge its statutory substantive right under § 502 to object to claims. The District Court rejected these arguments, finding that (i) there is no direct conflict between § 502 and Rule 9019, (ii) the rules do not dictate that claim objections be heard before settlement motions, (iii) requiring litigation on the merits would undermine the policy of promoting settlements in bankruptcy, and (iv) the debtor, as a fiduciary under the Code, has the duty to all creditors to resolve claims in the best interest of the estate.

Id.

at 94-95. This Court agrees with the

Kaiser

court’s analysis.

Second, the Kornman Parties’ interpretation of § 502 and Rule 9019 makes no sense. Taken to its logical conclusion, the Kornman Parties’ argument that § 502 confers not only a right to object to a claim but also a right to a ruling would mean that the Court could

never

permit a settlement of a claim objection — the Court would be required to deny the compromise and rule upon the merits, even though both the claimant and the objectant desired a different result. In other words, if the Kornman Parties’ interpretation is correct, the Trustee could not, even in the absence of opposition, compromise

his own

claim objection. Yet courts routinely permit settlements of claim objections.

Like the

Kaiser

court, this Court believes that the better way to harmonize § 502 and Rule 9019 is to read the “notice and a hearing” requirement of Rule 9019 as satisfying the right to be heard with respect to a claim objection.

See id.

at 95. While any party in interest has a statutory right to object to a claim, the Trastee, as the representative of the estate, has the ability to compromise that objection, as long as the objectant is given notice and an opportunity to be heard with respect to the fairness and wisdom of the compromise.

In re Texaco, Inc.,

84 B.R. 893, 901 (Bankr.S.D.N.Y.1988) (citing

Prot. Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson,

390 U.S. 414 , 88 S.Ct. 1157 , 20 L.Ed.2d 1 (1968)) (“[A] compromise between parties in the context of a bankruptcy reorganization may be accomplished in a bankruptcy case with the court’s approval.”). Rule 9019’s requirement of court approval of a compromise after notice and a hearing provides protection to the party whose claim objection is being compromised. Thus, this Court disagrees with the Kornman Parties’ legal contention that the Trustee lacks authority to settle objections to claims filed against the estate.

Lastly, the Court has considered whether this settlement is the product of arm’s-length bargaining between the Trustee on the one hand and the Client Claimants and Mikron on the other hand and concludes

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that it is. This factor also militates in favor of the settlement.

As the above analysis demonstrates, the Court is well satisfied that approval of the settlement is appropriate if the fact that the Jenkins Tax Claimants’ claims appear to be significantly weaker than Jenkins Tax Claimants do not assert an unauthorized practice of law claim or a subsequent oral agreement claim. After the District Court’s dismissal of various claims (while the lawsuit was pending there), the only claims remaining for trial in the Jenkins/Meralex Adversary are the fraud/fraudulent inducement and breach of fiduciary duty claims. On the current record, the Court believes that the Trustee stands a much greater chance of prevailing in the Jenkins/Meralex Adversary than he does in any of the other Client Claimant litigation. However, even recognizing this fact, the Court still finds that the settlement can, and should, be approved. This is so for several reasons.

First, as noted previously, the Heritage estate is administratively insolvent. While the Court has approved the Berg settlement by Memorandum Opinion and Order entered concurrently with this Memorandum Opinion, which approval will temporarily make the estate solvent,

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the fees and expenses to be incurred in connection with the Kornman Adversary Proceeding will render the estate administratively insolvent once again.

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The Trustee believes that the claims pending in the Kornman Adversary Proceeding are the most valuable of Heritage’s remaining assets and that those claims should be pursued. The Client Claimants agree with the Trustee’s assessment. In order to have the funds to continue to pursue the Kornman Adversary Proceeding, the Trustee needs to realize on other client note receivables. For the reasons discussed above, it is unlikely that the Trustee could negotiate a materially better settlement with either the Skinner Trusts or Love on an individual basis given the apparent relative strength of their respective cases. That leaves only the Mikron Note and/or the Schuler note. As noted previously, the Schuler note only recently matured, and Schuler has not come forward to pay that note, suggesting that the Trustee will have to institute litigation (yet again) against Schuler to collect the note.

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The funds provided by the compromise of the Mikron Adversary—

ie.,

$2,750,000, will provide the necessary resources for the estate to attempt to realize on what is believed to be its most valuable remaining

asset

— ie., the litigation claims pending against the Kornman Parties, among others, in the Kornman Adversary Proceeding.

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Second, the estate needs closure on the litigation pending with the Client Claimants, as continued litigation will cost an already insolvent estate more money than it either has, or is likely to collect through continued litigation with these claimants. The Trustee has sought to achieve a delicate balance in the Case to date, attempting to deal fairly with the Client Claimants, Canada, and the Kornman Parties for over three years. At this point in the factual development of the Case, it appears that the Trustee has concluded that the Client Claimants’ claims against Heritage are stronger than he thought initially.

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Based on the current record, the Court understands the Trustee’s conclusion. To date, the only settlement that the Trustee has been able to negotiate that will bring closure to all of the Client Claimant litigation is the settlement contained in the Second Amended Plan and the stand-alone motion for approval of the settlement. The Trustee testified that the settlement negotiations were hard-fought and difficult, taking over a year to come to fruition,

see

Audiotape: Hearing conducted 06/12/07 at 12:26:20 -12:37:27 p.m. (on file with the Court), and that it was the best settlement that he was able to negotiate with the Client Claimant group as a whole. While perhaps not “perfect” or even one the Court would prefer — particularly as it relates to the Jenkins Tax Claimants’ claims — the Trustee’s proposed settlement will bring closure to the estate’s continued involvement in the Client Claimant litigation, which has no meaningful economic upside to the estate greater than that realized pursuant to the settlement. In other words, from the Court’s perspective, while a “better” settlement with the Jenkins Tax Claimants would result in the allowance of a lesser unsecured claim against the estate, the Trustee has no affirmative claims against the Jenkins Tax Claimants which would generate any affirmative recovery by the estate even if this settlement is not approved.

Third, while it is possible that Mikron might be willing to settle on these economic terms on a stand-alone basis, the Trustee would then either have to negotiate stand-alone settlements with all of the other Client Claimants, which may or may not be possible, or continue to litigate their claims and defenses. That continued litigation would be expensive as discussed above, and would divert monies needed in connection with the Trustee’s attempt to realize on what he, and the other creditors, believe to be the estate’s most valuable remaining

asset

— i.e., the litigation claims pending against the Kornman Parties, among others, in the Kornman Adversary Proceeding.

Fourth, the Trustee will be able to “cap” the estate’s exposure to Jenkins and his affiliates in another litigation matter involving the acquisition of the Maxim Hotel in Las Vegas, Nevada (the “Casino Litigation”). In the Casino Litigation, Jenkins and several affiliates assert damages in excess of $50 million against various parties, including Heritage, and Jenkins and his affiliates have filed proofs of claim against the estate. While the extent of Heritage’s exposure in the Casino Litigation is hotly contested,

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if the settlement is approved, the Jenkins entities have agreed to “cap” this claim against Heri

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tage at $2.34 million, irrespective of the outcome at trial.

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While the extent of the benefit to be realized by the estate from this claim cap is uncertain, the estate’s exposure is significantly reduced.

Fifth, at the end of the day, the only parties likely affected by the allowance of what the Kornman Parties would call an “excessive” claim to the Jenkins Tax Claimants are the other Client Claimants and, to a lesser extent, Canada, and they have agreed to the allowance of such a claim. Specifically, the Client Claimants and Canada have come to terms on Canada’s economic treatment in the Case. As a result, Canada is no longer objecting to the settlement. Moreover, the Client Claimants and Canada are prepared to pay the holders of Small General Unsecured Claims in full and prior to their receipt of any distributions on their allowed claims through the “Intraclass Distribution Priority” agreement proposed in the Second Amended Plan.

See

Second Amended Plan, ¶ 4.4.3. The IRS claim has been filed as a priority unsecured claim and, unless it is objected to, which the Trustee has testified is unlikely, the IRS is entitled to a priority in payment to any unsecured creditor.

Id

at ¶ 4.4. 1; 11 U.S.C. § 507 (a)(8). That leaves only the so-called “Insiders,” as defined in the Second Amended Plan, and none of them have objected to the settlement other than the Kornman Parties. Moreover, the claims of the other “Insiders” (other than the Kornman Parties) aggregate $3,232,076.99.

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The Trustee has objected to these claims. Even if these claims are allowed, however, the dilutive effect of the “excessive” Jenkins Tax Claimants’ claim is of little significance, and is certainly not worth the continued cost of further litigation to the estate.

Finally, as the settlement relates to the Kornman Parties’ claims against the estate, it is unlikely that their claims will survive the Trustee’s pending claim objections. Specifically, the Trustee has objected to the allowance of the claims asserted by the Kornman Parties in accordance with § 502(d) of the Bankruptcy Code,

see

Docket Nos. 1131,1135 in Case No. 04-35574-BJH. It is undisputed that avoidance claims currently pend against each of the Kornman Parties in the Kornman Adversary Proceeding. As a result, § 502(d) appears to require the disallowance of those claims as a matter of law, as counsel for the Kornman Parties admitted during closing argument. 11 U.S.C. § 502 (d);

75

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In re Lambert Oil Co.,

347 B.R. 508 , 522 n. 6 (W.D.Va.2006) (a court order avoiding a transfer is not a prerequisite to disallowance of a claim);

In re Enron Corp.,

340 B.R. 180, 191 (Bankr.S.D.N.Y.2006); 4 Alan N. Resnick, Collier on Bankruptcy ¶ 502.05[2][a] (15th ed. Rev.2006); Audiotape: Hearing conducted 06/15/07 at 5:22:42-5:24:02 p.m. (on file with the Court). So, it appears that as soon as the Trustee’s claim objection is heard, the Kornman Parties’ claims will be disallowed in the Case.

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Balancing all of these considerations with the one potential shortcoming of the

settlement

— ie., that it allows the Jenkins Tax Claimants a larger unsecured claim in the Case than continued litigation might determine to be allowable, the Court concludes that the Trustee’s proposed settlement with the Client Claimants and Mi-kron is fair and equitable and in the best interest of the estate.

C. Application of the Legal Standard to the Canada Settlement

As noted previously, the Court must evaluate the Canada settlement in light of the probability of success in the litigation, with due consideration for the uncertainty in fact and law, the complexity and likely duration of the litigation, and other factors which bear upon the wisdom of the compromise.

In re Cajun Elec. Power Coop., Inc.,

119 F.3d 349, 355-56 (5th Cir.1997). Under the third prong, the Court must consider, among other things, the best interests of the creditors, “with proper deference to their reasonable views,” and whether the settlement is the product of arms-length bargaining.

Id.

at 356 (internal quotations omitted).

As is relevant to the Kornman Parties’ objections to the settlement with Canada, the settlement provides that Canada’s $6,218,679.40 claim is bifurcated into two parts. The first part consists of 65% of the claim, or approximately $4.04 million, which is treated as an allowed general unsecured claim in Class 4 under the Second Amended Plan. The remaining 35% of the claim, or approximately $2.18 million, is treated as an allowed subordinated claim in Class 6 under the Second Amended Plan, subordinated in payment to all creditors with allowed claims in Classes 4 and 5. In addition, the Second Amended Plan provides that the Trustee, Heritage, the bankruptcy estate and all of the Client Claimants, except the Jenkins Tax Claimants, will release Canada from all claims arising out of, based upon, or involving the tax strategies. Similarly, the Second Amended Plan requires that Canada provide a mirror image release to those same parties.

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1. Probability of Success

The Kornman Parties argue that the settlement with Canada is not fair and equitable and in the best interest of the estate because the Trustee has admitted that the estate has potential claims against Canada under the Employment Agree

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ment, but the Trustee has not properly-evaluated the validity or amount of those claims. Specifically, the Kornman Parties argue that the estate may be able to (i) “claw back” millions of dollars of bonus payments Heritage made to Canada in connection with Canada’s work with certain of the Client Claimants to the extent that Heritage refunds fees to those Client Claimants, and (ii) pursue Canada for alleged violations of covenants not to compete and not to disclose confidential information, both of which are contained in the Employment Agreement. Moreover, the Kornman Parties assert that the Trustee has not adequately evaluated the estate’s ability to fully subordinate Canada’s claim in the Case.

The Trustee testified that he was aware long ago of the Kornman Parties’ assertion that bonus payments Heritage made to Canada may be recoverable under the provisions of the Employment Agreement. In fact, the Plan Proponents’ original disclosure statement discloses the existence of such potential claims. The disclosure statement describes the potential “bonus repayment” claim as follows:

Each employee agreed [in an employment agreement] that the Debtor reserved the right, in its sole, unlimited and absolute discretion, to refund to any client all or part of the monies paid by that client. Each employee further agreed that the employee would reimburse the Debtor for any expenses incurred in connection therewith, and repay to the Debtor all bonus compensation derived from or attributable to any moneys refunded to the client.

See

Docket No. 1021, p. 63.

The Trustee essentially testified, however, that the potential recovery on this claim is not worth the costs of pursuit, in light of the settlement terms, for several reasons. First, according to the Trustee, Heritage has not voluntarily refunded any monies to any of its clients. Second, to the extent that the allowance of unsecured claims in the Case to the Client Tax Claimants can be considered a “refund” of monies within the meaning of the Employment Agreement, according to the Trustee, Canada is voluntarily agreeing to subordinate more of his claim than he would likely be required to “repay”

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to Heritage even if the Trustee elected to pursue this claim. By way of further explanation, the Trustee testified that Canada received aggregate bonus payments from 1999 through 2002 (when Canada’s Employment Agreement was not renewed) of approximately $3 million. And, while it is difficult to tie specific bonus payments to specific clients based on the Heritage books and records in his possession, the Trustee testified further that other Heritage clients—

i.e.,

former clients who did not file claims in the Case and thus are not receiving a “refund” of monies through the claim allowance process — paid fees to Heritage during this time period too; and thus, some of Canada’s bonus payments are likely attributable to these other former Heritage clients. Moreover, the Trustee testified that during this time frame, the most significant fee paid to Heritage was paid by the so-called “Connecticut Client” — who is not a claimant in the Case at all and thus is not receiving any “refund” of fees under the Second Amended Plan (thereby potentially triggering a right to “claw back” bonus payments to Canada). In addition, even as to the fees

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paid to Heritage by the Client Claimants, whose claims are being partially allowed under the Second Amended Plan (thereby potentially triggering a right to “claw back” bonus payments from Canada attributable to those clients), Canada was only involved as a “Principal” with some of them. Specifically, Canada was involved as a “Principal” in the transactions with Skinner, Woodruff, Patterson, Troutt, Flu-harty, and Jenkins. He was not involved in the transactions with Love, Powell, Rainwater, or the Sandwiths, and thus presumably did not receive any bonus payments attributable to the latter. At most, the Trustee testified that he believes that the fees attributable to the Client Claimants with whom Canada was involved total no more than $1.2 to $1.5 million.

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Third, the Trustee testified that a further discount of the alleged right to “claw back” this $1.2 to $1.5 million of bonus payments would likely be justified because under the terms of the Second Amended Plan, the estate is proposing to “refund,” at most, only 65% of the fees paid to Heritage by those clients. And, this proposed 65% “refund” is subject to the availability of funds. In other words, the Client Claimants may never in fact receive the full “refund” the Second Amended Plan proposes to pay them because their allowed claims may not be paid in full— further limiting the value of

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