Opposition Brief — Chopin Associates v. Smith, 111 S. Ct. 767 (1991) (No. 90-761)

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JOKE H. BPAMEOL, JR.

No. 90-761 el - eit

in the

PSrupreme Court

of the

Auited States

October Term, 1990

In re Holywell Corporation, Theodore B. Gould,

Miami Center Limited Partnership, _

Chopin Associates and Miami Center Corporation,

Debtors.

Chopin Associates, et al.,

Petitioners,

vs.

Fred Stanton Smith, as Trustee of the

Miami Center Liquidating Trust, et al.,

Respondents.

BRIEF OF FRED STANTON SMITH, TRUSTEE

OF THE MIAMI CENTER LIQU/ DATING TRUST,

IN OPPOSITION TO PETITION

FOR WRIT OF CERTIORARI

Herbert Stettin, Esquire

Herbert Stettin, P.A.

One S.E. Third Avenue #2215

Miami, Florida 33131

Telephone (305) 374-3353

Attorney for Respondent

Fred Stanton Smith, as Trustee of

the Miami Center Liquidating Trust

QUESTION PRESENTED

Whether the Petition for Writ of Certiorari should be

denied where no conflict among the Circuit Courts of

Appeals exists and no important question of federal law is

raised as a result of the Eleventh Circuit Court of Appeals’

affirmance of the bankruptcy court’s approval of a

settlement of ad valorem tax obligations of the Miami

Center Liquidating Trust?

PARTIES TO THE PROCEEDINGS

DEBTOR-PETITIONERS

Chopin Associates, acting by debtors Theodore B.

Gould and Miami Center Corporation,* its partners,

and Miami Center Limited Partnership, acting by

debtors Theodore B. Gould and Miami Center

Corporation, its general partners

RESPONDENTS

Fred Stanton Smith, as Trustee of the Miami Center

Liquidating Trust

Herbert Stettin, as escrow agent

S. Harvey Ziegler, as escrow agent

The Bank of New York :

City National Bank of Florida, as trustee of Land Trust

no. 5008793, Dade County, Florida

Joel Robbins, as Property Appraiser of Dade County,

Florida

Fred Ganz, as Tax Collector of Dade County, Florida

Randall Miller, as Executive Director of the Florida

Department of Revenue

COURTS

Judge Sidney M. Weaver of the United States

Bankruptcy Court for the Southern District of

Florida

Judge C. Clyde Atkins of the United States District

Court for the Southern District of Florida

Judges Tjoflat, Fay and Hoffman** of the United States

Court of Appeals for the Eleventh Circuit

*Miami Center Corporation is a wholly owned subsidiary of Debtor

Holywell Corporation.

**Honorable Walter E. Hoffman, Senior United States District Judge

for the Eastern District of Virginia, sitting by designation.

ws,

ii

TABLE OF CONTENTS

Page

Questions Presented .................... westecendevace i

Parties to the Proceedings .....................220000- ii

CDS r obi sds lo ceesccccicsscccvvcsses iii

EEE OF SPEC OPET ETT ET TTT POLT TET iv

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Statement of Jurisdiction ..................cecceceeces 3

TEED Svcccccccccccccessccsavccccccsss 4

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iii

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TABLE OF AUTHORITIES

Cases: Page(s)

Chopin Associates v. Smith,

No. 88-0117 slip op. (Bankr. S.D. Fla.

November 18, 1988) ..................cceeeeees 6,17

Holywell Corp. v. Bank of New York,

59 Bankr. 340 (S.D. Fla. 1986), dismissed sub

nom Miami Center Limited Partnership v.

Bank of New York, 838 F.2d 1547 (11th Cir.),

cert. denied, 488 U.S. 823, 109 S.Ct. 69,

102 L.Ed.2d 46 (1988) ...................2.005- 4, 18, 22

Estate of Lellock v. The Prudential Ins. Co. of

America,

811 F.2d 186 (3d Cir. 1987).................... 14

In re American Properties, Inc.,

30 Bankr. 239 (Bankr. D. Kan. 1983).......... 13

In re American Reserve Corp.,

841 F.2d 159 (7th Cir. 1987).............. 11, 12, 13, 15

In re Atoka Agr. Systems, Inc.,

39 Bankr. 474 (Bankr. E.D. Va. 1984) ......... 13

In re Blanton Smith Corp.,

81 Bankr. 440 (Bankr. M.D. Tenn. 1987)...... 18

In re Hebert Systems, Inc.,

61 Bankr. 44 (Bankr. W. D. La. 1986)......... 13

In re Jartran, Inc.,

76 Bankr. 123 (Bankr. N.D. Ill. 1987).......... 19

In re Monroe Well Service, Inc.,

80 Bankr. 324 (Bankr. E.D. Pa. 1987) ......... 19

In re Sambo’s Restaurants, Inc.,

754 F.2d 811 (9th Cir. 1985) ................... 16

In re St. Louis Freight Lines,

45 Bankr. 546 (Bankr. E.D. Mich. 1984)....... 19

iv

TABLE OF AUTHORITIES—(Continued)

Cases: Page(s)

In re Sanders,

81 Bankr. 496 (Bankr. W.D. Ark. 1987)........ 18, 19

In re South Atlantic Financial Corp.,

767 F.2d 814 (11th Cir. 1985)................. 13, 15, 16

Kinder v. Superior Court of Los Angeles County,

178 Cal. Rptr. 57, 125 C.A. 3d 308

OR, Gi I IED ccc ccccccccccccccccccccecs 13

Matter of AWECO, Inc.,

725 F.2d 293 (5th Cir.), cert. denied,

469 U.S. 880 (1984) ................... 11, 12, 13, 14, 15

Matter of Jackson Brewing Co.,

624 F.2d 605 (5th Cir. 1980) .............. 10, 11, 12, 17

Peck v. Jenness, .

F I IED dart ccdbseccicesscdeccecccccs 17

Pizza of Hawaii, Inc. v. Shakey’s, Inc.

(In re Pizza of Hawaii, Inc.),

761 F.2d 1374 (9th Cir. 1985).................. 16

Protective Committee for Independent

Stockholders of T.M.T. Trailer Ferry, Inc. v.

Anderson,

390 U.S. 414, 88 S.Ct. 1157,

Fe ia naiic cise cccccccccccccccce 12

The Charter Co. v. Dioxin Claimants

(In re The Charter Co.),

876 F.2d 861 (11th Cir. 1989).................. 15

United States v. Smith,

No. 89-5862 slip op.

(lith Cir. Sept. 18, 1900) ..........cccccccccees 20

TABLE OF AUTHORITIES—(Continued)

STATUTES:* Page(s)

11 U.S.C. Section 541(a) ............ 0c. cece cece eens 3

11 U.S.C. Section 945 ..........cc ccc ce ese eeeeeeeees 18

11 U.S.C. Section 1104(a) ............ccceeeeeeeeeee 18

11 U.S.C. Section 1129(aNX3)...........scceeeeeeeees 19

11 U.S.C. Section 112% aX 11) ...........c cece ee eeee 19

11 U.S.C. Section 1129(d) ........... ccc cc ceeeeeeees 19

11 U.S.C. Section 3020(d) ............. cc cece eee eens 18

11 U.S.C. Section 9019 .......... ccc cece cece e ee eeees 17

26 U.S.C. Section 6012(b) .......... 0. cece eee e ee eens 22

BIEL TE Sdinnnccacccwcsccccedcccccscocccdseoeess 11

REE, BR ccoccccctcccccccccesscosccescccsssecs 11

Sup.Ct.R. 10.1(a)-(c).... 6... ccc cece ce cceccceeeeeeees 2,11

*The statutes cited herein are reprinted in the appendix.

No. 90-761

in the

Supreme Court

of the

United States

October Term, 1990

In re Holywell Corporation, Theodore B. Gould,

Miami Center Limited Partnership,

Chopin Associates and Miami Center Corporation,

Debtors.

Chopin Associates, et al.,

Petitioners,

Us.

Fred Stanton Smith, as Trustee of the

Miami Center Liquidating Trust, et al.,

Respondents.

BRIEF OF FRED STANTON SMITH, TRUSTEE

OF THE MIAMI CENTER LIQUIDATING TRUST,

IN OPPOSITION TO PETITION

FOR WRIT OF CERTIORARI

OPINIONS BELOW

The opinions relevant to the Petition for Writ of

Certiorari are the Order Approving Amended Settlement of

Ad Valorem Tax Claims entered by the United States

Bankruptcy Court for the Southern District of Florida on

November 18, 1988, App. L at 72;' the Order Affirming

Bankruptcy Court’s Order Approving Amended Settlement

of Ad Valorem Tax Claims entered by the United States

District Court for the Southern District of Florida on July 6,

1989, App. G at 34; and the per curiam affirmance of the

bankruptcy court’s decision entered by the United States

Court of Appeals for the Eleventh Circuit on August 14,

1990, App. F at 32.

STATEMENT OF JURISDICTION

The Petitioners seek review of the Eleventh Circuit’s

August 14, 1990 affirmance of the bankruptcy court’s

November 18, 1988 order approving a settlement of ad

valorem property tax claims. The Petitioners have failed to

establish any jurisdictional basis for granting the Petition

for Writ of Certiorari. They have not demonstrated the

existence of a conflict among the United States Courts of

Appeals nor an important question of federal law which has

not been, but should be settled by this Court. See Sup.Ct.R.

10.1(a)-(c).

'References to the Petitioners’ appendix will be by the symbol “App.

__..” References to the appendix attached hereto will be by the symbol

“Liquidating Trustee’s App. __ .

STATEMENT OF THE CASE

The Petitioners are two of five related Debtors? who

filed voluntary Chapter 11 petitions over five years ago in

the United States Bankruptcy Court for the Southern

Distzict of Florida. This is their eighth attempt at review in

this Court.*

In this petition, the Petitioners seek review of an order

of the Eleventh Circuit Court of Appeals affirming the

bankruptcy court’s approval of a settlement of Dade County,

Florida’s ad valorem tax claims against the Miami Center.

App. F. at 32 and L at 72. The Miami Center is a hotel,

office, shopping and parking complex in Miami, Florida

developed by the Petitioners and their Co-Debtors in the

early 1980s, the foreclosure of which precipitated the

Debtors’ August 1984 voluntary Chapter 11 petitions. When

they filed Chapter 11, the Debtors owed over $350 million to

over 400 creditors, with their most significant creditor being

the Bank of New York (hereinafter “bank’’).

In August 1985, one year after the Debtors sought

protection in the bankruptcy court, the court confirmed a

plan of reorganization. Its central features were:

(a) substantive consolidation of the five Debtors;

(b) creation of the Miami Center Liquidating Trust,

which consisted of, inter alia, all of the Debtors’ assets

as defined by Bankruptcy Code Section 541(a), the

*The Petitioner-Debtors are Chopin Associates and Miami Center

Liquidating Partnership, which in turn are related to and/or controlled by

Debtors Theodore B. Gould, Miami Center Corporation and Holywell

Corporation.

‘Of the other seven petitions, six have been denied and one, filed in

October, 1990, is pending decision.

Miami Center, and pending litigation, including the ad

valorem tax lawsuits then pending in state court;

(c) appointment of a Liquidating Trustee to

implement the plan;‘

(d) the purchase of the Miami Center by the bank for

$255.6 million, free and clear of liens, which figure was

paid by the cancellation of the Debtors’ obligations to

the bank (approximately $242 million), plus new cash of

$13.6 million;

(e) the bank’s release of approximately $30 million in

cash collateral to the Liquidating Trustee for payment

of claims; and

(f) subordination of Debtor-affiliated claims to Class 8

and subordination of the Debtors’ claims to Class 9

under the plan.

The Debtors’ appeal of the bankruptcy court’s August 8,

1985 confirmation of the plan was unsuccessful. Holywell

Corp. v. Bank of New York, 59 Bankr. 340 (S.D. Fla. 1986),

dismissed sub nom, Miami Center Limited Partnership v.

Bank of New York, 838 F.2d 1547 (11th Cir.), cert. denied,

488 U.S. 823, 109 S.Ct. 69, 102 L.Ed.2d 46 (1988). When the

Debtors failed to post a supersedeas bond, the plan was

implemented on October 10, 1985 with the sale of the Miami

Center to the Bank of New York. The plan has since been

substantially consummated. Miami Center Limited

Partnership v. Bank of New York, 838 F.2d at 1552,

1554-55.

‘Fred Stanton Smith was appointed trustee of the Miami Center

Liquidating Trust on August 12, 1985 after confirmation of the plan. No

party appealed this order.

As of the date of closing on the sale of the Miami Center

to the Bank of New York, there remained pending in the

state court a number of ad valorem tax protest suits

initiated by the Debtors for each year dating back to 1979.

The Petitioners assert that Fred Stanton Smith,

Trustee of the Miami Center Liquidating Trust (hereinafter

“Liquidating Trustee”) was not a party to the state court ad

valorem tax protest suits pending at confirmation of the

plan. Under the plan, however, he stepped into the Debtors’

shoes and acquired their rights concerning those cases.

The plan and the closing documents from the sale of the

Miami Center required the Liquidating Trustee to escrow a

portion of the sale proceeds sufficient to pay the disputed ad

valorem taxes.’ App. G. at 35-36. An escrow was established

in 1985 with the Liquidating Trustee’s then counsel, Holland

& Knight, and negotiations for settlement continued.

Thereafter, Herbert Stettin became the Liquidating

Trustee’s attorney and, on February 4, 1988, the bankruptcy

court named Herbert Stettin and the bank’s attorney,

S. Harvey Ziegler, as substitute escrow agents of the fund

previously held by Holland & Knight.‘

*The Petitioners argue that the plan required the taxes to be paid at

the closing, and that the post-confirmation modification to the plan,

which provided for the escrow of monies for the payment of ad valorem

taxes, was improper. This modification did not violate the Bankruptcy

Code in any way. In any event, the Petitioners can hardly argue in good

faith that the trust was harmed by the escrow of monies for the payment

of ad valorem taxes as the escrow permitted the continuation of the ad

valorem tax protest suits, which resulted in substantial savings to the

Liquidating Trust. Prior to this modification, the plan required the

Liquidating Trustee to pay the taxes upon closing of the sale of the Miami

Center.

"The Debtors’ appealed this order to the district court, which

dismissed the appeal, Holywell Corp. v. Smith, No. 88-0628 slip op. (S.D.

Fla. January 30, 1989). The Debtors argued that the bankruptcy court

(Footnote continued on next page)

On March 1, 1988, two and one-half years after

confirmation and several weeks before the Liquidating

Trustee initially sought the court’s approval of the tax

settlement, the Debtors filed an adversary complaint in the

bankruptcy court ia which they sought by declaratory decree

the same relief they later sought in their objections to the

settlement: that is, to have the ad valorem tax claims of

Dade County stricken based on the county’s failure to file

proofs of claim in the Chapter 11 proceedings. App. H at 45.

Prior to filing this adversary complaint, the Debtors had

actively participated in settlement negotiations with the

county concerning payment of the ad valorem taxes. The

bankruptcy court dismissed the adversary complaint on

November 18, 1988 after approving the tax settlement.

Chopin Associates v. Smith, No. 88-0117 slip op. (Bankr.

S.D. Fla. November 18, 1988); App. L at 82.

On March 23, 1988, the Liquidating Trustee filed a

motion in the bankruptcy court seeking approval of a

settlement of the ad valorem property taxes. App. I at 59.

Although the bankruptcy court indicated that it would

approve the terms of the compromise in general, it denied

the motion without prejudice because the compromise

required the Miami Center Liquidating Trust to pay post-

petition interest on the tax debt.

/

(Footnote continued from previous page)

lacked jurisdiction to approve the transfer of the escrowed funds because

confirmation of the plan terminated the bankruptcy proceedings. The

court found “this argument completely without merit”, based on 11 U.S.C.

Section 945, Bankruptcy Rule 3020(d) and the plan’s reservation of

jurisdiction. Id. at 2. The Debtors then appealed to the Eleventh Circuit,

which also dismissed the appeal, Holywell Corp. v. Smith, No. 89-5165

slip op. (11th Cir. November 1, 1989). In addition to naming Stettin and

Ziegler escrow agents, the order determined that the funds held in escrow

were specifically set aside to pay the ad valorem property taxes on the

Miami Center.

On October 4, 1988, the Liquidating Trustee entered

into a new settlement agreement with Dade County and the

Bank of New York which did not require the Liquidating

Trustee to pay post-petition interest. App. K at 68. It was

more financially favorable to the Liquidating Trust.

At the October 31, 1988 hearing on the Liquidating

Trustee’s motion for approval of the amended tax

settlement, the Liquidating Trustee requested the court to

take judicial notice of all of the testimony, exhibits and

arguments presented at the April 28, 1988 hearing. No party

objected and the court granted the motion.

At that April 28, 1988 hearing, the bankruptcy court

heard testimony from John Fletcher, an attorney

specializing in ad valorem tax matters. He testified without

contradiction that the burden of proof in ad valorem tax

disputes in Florida is upon the taxpayer to prove, to the

exclusion of every reasonable hypothesis of value used by the

tax assessor (using recognized methods of valuation), that

there was an error in the assessment. He said that is an

exceedingly difficult burden of proof to sustain. Liquidating

Trustee’s App. A at 1-2. He also testified that, given the

actual sale of the property in October, 1985 for $255.6

million, together with an MAI appraisal for that amount, the

difficulties in the tax protest litigation facing the

Liquidating Trustee were obvious. Id at 3.

A.H. Blake, the former tax assessor for Dade County

and an expert in ad valorem tax matters, testified that the

settlement was fair, reasonable and in the best interests of

the trust. Jd. at 4-5. The Liquidating Trustee, who is himself

an experienced businessman and real estate broker, testified

the settlement was in the best interest of the trust because it

would (a) terminate the multiple tax protest lawsuits

pending in state court, (b) prevent exposure of the trust to

judgments in favor of the county for substantially more than

the settlement agreement, (c) preserve to the Debtors the

right to pursue their claim that the county is time-barred for

failure to file a proof of claim, and (d) terminate the

attorneys’ fees and costs involved in litigating the state court

tax actions. Id. at 8-9.

Frank Jacobs, the assistant property appraiser for Dade

County, testified that the county was aware of the risks at

issue and that the settlement agreement was in no way

structured to favor the Bank of New York over the turst. Id.

at 12.

_ The bankruptcy court also heard testimony from

Debtor Theodore B. Gould regarding the alleged interest of

St. Joe Paper Company to a tax refund. In 1979, the Debtors

purchased the unimproved property on which the Miami

Center was built from St. Joe Paper Company. Mr. Gould

conceded that he could not produce any written agreement

concerning a continuing ownership interest of St. Joe Paper

Company to a tax refund for overpayment of 1979 ad

valorem property taxes. Jd. at 13-16. While one of the tax

protest suits was in the name of St. Joe Paper Company, the

company had given Mr. Gould full authority to pursue the

matter and both the bankruptcy court and the district court

found there was no evidence that St. Joe Paper Company

had any continuing interest in a tax refund. App. G. at 40; L

at 75-76.

In its Order approving Amended Settlement of Ad

Valorem Tax Claims, the bankruptcy court found that the

issue regarding tax years 1979 through 1981 concerned

refunds based on claims of over-assessment. The court

further found that, in exchange for the Liquidating

Trustee’s waiver of his claim for refunds for tax years

1979-81, the county waived its claims for additional taxes

for the Metro-Dade People Mover (public transportation)

and other special assessments. App. L at 76.

The bankruptcy court further found that the issue

regarding 1983 taxes was whether the office building at the

Miami Center was substantially completed as of January 1,

1983, the date of valuation. The county conceded, for

purposes of the settlement, that the building was not

substantially completed, and the bankruptcy court found

that this concession resulted in considerable savings to the

trust. Id.

The bankruptcy court also noted the dispute for tax

years 1984 and 1985 concerned the reasonableness of the

assessment of the property. The court found the settlement

adjusted the assessments for those years greatly in favor of

the trust (by some $90 million), particularly for 1985, the

year the Bank of New York’s designee purchased the

property for $255.6 million, a price consistent with an MAI

appraisal of the property. Id.

In approving the settlement, the bankruptcy court took

into account the fact that the trust would avoid exposure of

substantial additional tax and interest, and would receive

between $400,000 and $500,000 back from the Bank of New

York, representing a reproration of the 1985 taxes taken as a

credit by the bank at the closing on the sale of the Miami

Center. As part of the settlement the bank agreed to pay

interest to the, trust on this reprorated sum. Id. at 78-79.

The bankruptcy court expressly noted that the

amended settlement did not require the trust to pay post-

petition, pre-confirmation interest on the sums due the

county as the original settlement proposal did, and that the

trust would therefore pay $3,320,883.07 instead of

$3,430,753.97, which was the original settlement sum. The

Liquidating Trust agreed this sum would draw interest in

favor of Dade County from April 1, 1988 until paid. Zd.

Almost double this amount had been placed in escrow in

1985 to pay these taxes.

The bankruptcy court “recognized the complexity of all

of the issues involved, the length of time required to resolve

all of these issues, the expense involved in resolving all of

these issues, the uncertainty of result, and the potential

devastating effect an adverse ruling would have upon the

liquidating trust and its ability to pay claims to creditors

and return the surplus to debtors.” Id. at 81. The

bankruptcy court further determined that the settlement

agreement is an “exercise of business judgment which

appears to the [cJourt to be sound, reasonable and practical.

It recognizes a large savings in tax to the liquidating trust, it

permits the debtor, by appeal only, to continue its attempt

to invalidate the tax claims in their entirety . . . and it

assists in the orderly completion of the work to be done in

ending this case.” Id. The bankruptcy court approved the

settlement agreement and the Debtors appealed.

The district court affirmed the bankruptcy court’s

approval of the settlement, noting that the “bankruptcy

court conducted a searching Jackson [In the Matter of

Jackson Brewing Co., 624 F.2d 605 (5th Cir. 1980)] inquiry,

and it approved the proposal only after the proceedings

yielded a welter of evidence bearing on the propriety of the

settlement.” App. G at 38.

The Eleventh Circuit affirmed on August 14, 1990, in a

brief opinion:

The bankruptcy court had the authority to consider

the settlement reached between the parties and

Dade County concerning questions surrounding

outstanding ad valorem property taxes and did not

abuse its discretion in approving the settlement.

AFFIRMED.

App. F at 33. This Petition for Writ of Certiorari followed.

10

SUMMARY OF ARGUMENT

The Petition for Writ of Certiorari should be denied.

The Petitioners attempt to create conflicts among the

Circuit Courts of Appeals where none exist. They also claim

there is an important question of federal law concerning the

necessity of filing proofs of claims in bankruptcy

proceedings. There is none and they failed to raise this issue

adequately below. The Liquidating Trustee’s position

concerning the uncertainty in the law because of the failure

of the county to file a proof of claim is that it was a further

incentive to settle. In any event, the Eleventh Circuit’s

application of Matter of Jackson Brewing Co., 624 F.2d 605

(5th Cir. 1980) in determining whether to approve the

compromise was entirely proper. It was not applied

inconsistently or in derogation of Matter of AWECO, Inc.,

725 F.2d 293 (5th Cir.), cert. denied, 469 U.S. 880 (1984) or

In re American Reserve Corp., 841 F.2d 159 (7th Cir. 1987),

as the Petitioners contend. Any claimed inconsistency is

entirely manufactured and does not warrant the granting of

the Petition for Writ of Certiorari.

ARGUMENT

I.

THE PETITIONERS HAVE FAILED TO

ESTABLISH ANY BASIS FOR THIS COURT’S

CERTIORARI JURISDICTION

The Petitioners have not met any of the recognized

grounds governing review by certiorari as set forth in Rule 10

of the Supreme Court Rules. The considerations, “while

neither controlling nor fully measuring the Court’s

discretion, indicate the character of the reasons that will be

considered.” Sup.Ct.R. 10.1. The Petitioners have failed to

demonstrate that they meet any of the established criteria.

See Sup.Ct.R. 10.1 (a}-(c).

11

A.

The Bankruptcy Court Properly App’ied

the Recognized Standards for Approving

Settlements in Bankruptcy Proceedings

The Petitioners’ contention that the bankruptcy court’s

application of the standards utilized by courts in approving

settlements in bankruptcy proceedings conflicts with the

Fifth Circuit’s decision in Matter of AWECO, Inc. and the

Seventh Circuit’s decision in In re American Reserve Corp.

is without merit. The bankruptcy court’s application of

these standards, set forth in Matter of Jackson Brewing Co.,

was entirely proper and consistent with AWECO and

: American Reserve.

In determining whether to approve a compromise, the

bankruptcy court “must compare the terms of the

compromise with the likely rewards of litigation.” Protective

Committee for Independent Stockholders of T.M.T. Trailer

Ferry, Inc. v. Anderson, 390 U.S. 414, 425, 88 S.Ct. 1157,

1163, 20 L.Ed.2d 1, 10 (1968); In re Jackson Brewing Co.,

624 F.2d at 607. The court must evaluate the probable

“success in litigation, with due consideration for the

uncertainty in fact and law.” Id. (emphasis supplied). The

court must also consider the complexity, duration, and

expense of litigation, as well as “al! of the factors bearing on

the wisdom of the compromise.” Jd. The Debtors have failed

to prove the bankruptcy court abused its discretion in

applying these standards.

1. Uncertainty of the law

The Petitioners argue that the bankruptcy court could

not approve any settlement of ad valorem property taxes

without first determining whether the county’s failure to file

proofs of claim for pre-petition tax obligations precludes the

county’s right to receive payment of any taxes, citing

12

.

AWECO and American Reserve. This argument is without

merit, for one of the primary reasons for settling was because

of the uncertainty of the law governing whether the county

had a duty to file proofs of claims. In paragraph 21 of the

bankruptcy court’s order, the court specifically considered

“the uncertainty of result and the potential devastating

effect an adverse ruling would have upon the liquidating

trust and its ability to pay claims to creditors and return the

surplus to the debtors.” App. L at 81. The district court also

noted the uncertainty of the law surrounding the county’s

duty to file proofs of claims. The court determined that “{a]t

best, then the appellants’ argument raises a novel issue of

law that has not been decided in this circuit — it hardly

proves that the omnibus settlement was unfair, inequitable,

or not in the estate’s best interests. Compare In re South

Atlantic Financial Corp., 767 F.2d 814, 819 (11th Cir. 1985)

(court addresses distinct question dealing with adequacy of

filing).” App. G at 41-42.

The Petitioners cite In re American Properties, Inc.,

30 Bankr. 239 (Bankr. D. Kan. 1983), to support their claim

that the bankruptcy court erred in approving the settlement

because the county failed to file proofs of claim. While that

case does stand for the proposition that a non-consensual

lienholder must file a proof of claim, 30 Bankr. at 247, the

Petitioners have neglected to cite the cases which hold that a

non-consensual lienholder is not required to file a proof of

claim. See In re Hebert Systems, Inc., 61 Bankr. 44 (Bankr.

W.D. La. 1986); In re Atoka Agr. Systems, Inc., 39 Bankr.

474 (Bankr. E.D. Va. 1984); Kinder v. Superior Court of Los

Angeles County, 178 Cal. Rptr. 57, 125 C.A. 3d 308 (Cal. Ct.

App. 1981). The Eleventh Circuit has never ruled on this

issue. Obviously then the question is uncertain and, as the

district court held, “it hardly proves that the omnibus

settlement was unfair, inequitable, or not in the estate’s best

interests.” App. G at 41.

13

Moreover, even if the county was required to file proofs

of claims, the Liquidating Trustee would still have to pay

the ad valorem property taxes in order to convey the Miami

Center to the Bank of New York free and clear of all liens, as

required by the plan. See Estate of Lellock v. The

Prudential Ins. Co. of America, 811 F.2d 186, 187-88 (3d

Cir. 1987) (lien against property survives discharge of debt).

Yet the Petitioners nonetheless argue that approval of the

compromise was inconsistent with the Fifth Circuit’s

AWECO decision and the Seventh Circuit’s American

Reserve decision.

In AWECO, the issue was “in the period prior to

confirmation of a reorganization plan, must the bankruptcy

court apply the fair and equitable standard in considering a

priority creditor’s objections to a settlement?” 725 F.2d at

298. The issue in the instant case was whether, post-

confirmation, the bankruptcy court could approve a

settlement that was favorable to the trust and where the

duty of the county to file a proof of claim in order to protect

its right of payment was uncertain.

There are several other important facts which

distinguish AWECO from this proceeding. In AWECO, the

settling creditor was a recognized general unsecured creditor

and the objecting creditor was secured. In fact, the

settlement required the transfer of property to the

unsecured creditor that was subject to the secured creditor’s

claim. In this case, one of the issues was whether Dade

County was a priority claimant. The objecting Petitioners

are accorded the lowest priority of payment under the

confirmed and substantially consummated plan. In this case,

the compromise was based in part on the uncertainty of the

law of whether Dade County’s tax claims were barred,

whereas in AWECO, all parties acknowledged that the

settling creditor was a general unsecured creditor. Further,

in AWECO, although the plan was filed, it had never been

14

presented to creditors or submitted to the court for

confirmation. In this case, not only was the plan confirmed

and substantially consummated, but the plan required the

Liquidating Trustee to convey the property to the Bank of

New York free and clear of the county’s tax liens. Clearly

then, AWECO is inapplicable.

The Petitioners’ reliance on American Reserve fares no

better. In that case, the Seventh Circuit reversed and

remanded the bankruptcy court’s approval of a $5,000

settlement on a claim of $79,350 for further findings where

the bankruptcy court’s only findings and conclusions were

that the settlement was in the Chapter 7 estate’s best

interest. 841 F.2d at 161. The court opined that because

claims with different priorities have different settlement

values, the bankruptcy court should “examine the relative

priorities of the contested claim and the estate’s other

claims.” Id. As previously stated, in this Chapter 11 case,

one of the grounds for settling was to avoid a lengthy and

expensive battle on the issue of the county’s right to claim

taxes after not having filed formal proofs of claims where the

law on this question is unsettled, and where the plan

nonetheless requires the taxes to be paid. The Seventh

Circuit’s criticism in American Reserve was clearly aimed at

the bankruptcy court’s failure to make any findings that

would demonstrate the exercise of its discretion. 841 F.2d at

162-63.

In their zeal, the Petitioners also fail to address the fact

that even though Dade County did not file timely formal

proofs of claim, their filings with the court could arguably be

deemed an enforceable infermal proof of claim. See The

Charter Co. v. Dioxin Claimants (In re The Charter Co.),

876 F.2d 861, 864-66 (11th Cir. 1989) (In order to constitute

an informal proof of claim, document must apprise the court

of the existence, nature and amount of claim, and evidence

intent to hold the debtor liable); In re South Atlantic

15

tree

Financial Corp., 767 F.2d 814, 817 (11th Cir. 1985); Pizza of

Hawaii, Inc. v. Shakey’s, Inc. (In re Pizza of Hawaii, Inc.),

761 F.2d 1374, 1381-82 (9th Cir. 1985); In re Sambo’s

Restaurants, Inc., 764 F.2d 811, 815 (9th Cir. 1985).

The Petitioners have not demonstrated either the

existence of a conflict among the courts of appeals or that

the bankruptcy court incorrectly applied the law governing

approval of settlements in bankruptcy proceedings.

2. Complexity, duration and expense of litigation

The bankruptcy court also considered the complexity,

duration and expense of litigation, and concluded that it was

in the best interests of the Miami Center Liquidating Trust

to settle rather than to continue to litigate. App. L at 81-82.

3. Wisdom of the compromise

The bankruptcy court likewise considered the factors

bearing on the wisdom of the compromise:

The Court believes it has done so, and it recognizes

the benefits which flow to each of the parties

involved. The taxing ‘authorities receive a

substantial amount of cash and an end to time

consuming and expensive litigation on their part.

The Bank of New York receives property free of

any further claims by the taxing authorities, and

the debtors receive a resolution of County tax

claims on excellent terms.

App. L at 81-82.

16

The Bankruptcy Court Had Jurisdiction

to Approve the Ad Valorem Tax Compromise

The bankruptcy court, contrary to the Petitioners’

claims, had jurisdiction to approve the compromise.

The Debtors’ argument that the bankruptcy court

lacked jurisdiction to approve the settlement of the state

court ad valorem property tax lawsuits, while novel, is

meritless. The bankruptcy court’s jurisdiction to approve a

settlement of litigation directly affecting the Miami Center

Liquidating Trust is obvious and well settled.

The Debtors’ first claim that the bankruptcy court

lacked jurisdiction because it granted the Debtors relief

from the automatic stay in order to pursue the state court

litigation. This argument misconstrues the meaning of relief

from the automatic stay.

Relief from the automatic stay to pursue a state court

lawsuit does not preclude the parties from settling the

matter rather than seeking the state court’s final judgment.

Peck v. Jenness, 7 How. 612 (1849), relied on by the Debtors,

does not change the result. Peck holds that a court cannot

interfere with proceedings in another court of competent

jurisdiction. 7 How. at 625. The bankruptcy court did not

interfere with the proceedings in the ad valorem tax cases.

The parties to those lawsuits settled the claims, and then

sought the bankruptcy court’s approval. Once a settlement

proposal is reached the bankruptcy court must determine

whether the compromise is in the best interests of the trust.

See In re Matter of Jackson Brewing Co.; 11 U.S.C. Section

9019. Moreover, public policy favors settlement over

lengthy, expensive litigation. See Chopin Associates v.

Smith, No. 89-0070 slip op. (S.D. Fla. July 6, 1989) (Order

17

heel

Affirming Bankruptcy Court’s Order Approving Amended

Settlement of Ad Valorem Tax Claims); App. G at 38.

The Debtors also overlook the fact that the confirmed

plan of reorganization provides the bankruptcy court with

post-confirmation jurisdiction to enter any order necessary

or appropriate to carry out the terms of the plan. See also

11 U.S.C. Sections 945, 3020(d). As the plan required

payment of the ad valorem taxes,’ the order approving the

compromise was well within the bankruptcy court’s power.

The Debtors also claim the bankruptcy court lacked

authority to approve the settlement reached by the

Liquidating Trustee because the Bankruptcy Code does not

provide for the appointment of a Liquidating Trustee. Not

only do the Debtors ignore the confirmed plan (which

provides for the appointment of a liquidating trustee), but

they also misconstrue the status cf the Liquidating Trustee

and the scope of his authority. The Debtors argue that the

Liquidating Trustee was appointed without satisfying the

statutory requirements of 11 U.S.C. Section 1104(a). Yet this

contention ignores the fact that the plan provides for the

appointment of a trustee to administer a trust composed of

the Debtors’ assets. The plan also expressly provides that

the Liquidating Trustee is the successor to the Debtors’

pending litigation.

Because the Debtors have exhausted whatever rights

they had to review the order of confirmation, that plan is the

law of the case and the Debtors’ contentions are an

impermissible and frivolous collateral attack. See Miami

Center Limited Partnership v. Bank of New York. This plan

is binding on the Debtors. See In re Blanton Smith Corp.,

81 Bankr. 440 (Bankr. M.D. Tenn. 1987); In re Sanders,

"The plan required the Liquidating Trustee to convey the Miami

Center to the bank’s designee free and clear of all liens, including ad

valorem tax liens.

18

81 Bankr. 496 (Bankr. W.D. Ark. 1987); In re Monroe Well

Service, Inc., 80 Bankr. 324 (Bankr. E.D. Pa. 1987); In re

Jartran, Inc., 76 Bankr. 123 (Bankr. N.D. Ill. 1987); In re St.

Louis Freight Lines, 45 Bankr. 546 (Bankr. E.D. Mich.

1984). The validity of the Liquidating Trustee’s

appointment, his authority to settle litigation, and the

bankruptcy court’s post-confirmation jurisdiction are thus

firmly established.

eT.

The Petitioners’ Remaining Arguments

are Meritless

The Petitioners’ remaining arguments are not only

lacking in any recognized factual or legal basis, but are

entirely irrelevant for purposes of determining whether

certiorari should be granted.

1. Income Taxes

The Petitioners argue that the “purpose of the

establishment of an escrow, segregating the funds for the

payment of the real property taxes, was . . . to provide a

legal basis for the undisputed fact that the liquidating plan

did not provide a basis for the payment of income taxes

arising from the sale of the insolvent debtor MCLP’s

property.” Petition for Writ of Certiorari at 12-13.

(Emphasis and footnotes deleted). The Petitioners further

argue that: 7

Section 112d) provides, in relevant part, that a

court may not confirm a plan “if the principal

purpose of the plan is the avoidance of taxes,” and

Section 1129(aX3) requires that the plan be

proposed in good faith and not by any means

forbidden by law. The Feasibility Standard, Section

1129aX11), required that the bankruptcy court

19

assure itself that confirmation of the plan was not

likely to be followed by the need for further

financial reorganization of the debtors, that

reorganization would succeed, and therefore, in

accordance with the Bankruptcy Reform Act’s

legislative history, the debtors’ “fresh start” would

not be burdened with the responsibility for the

payment of income taxes arising from the sale of

the insolvent MCLP’s property and the United

States would not lose taxes which the Internal

Revenue Service had not had a reasonable time to

collect. 7.

The Eleventh Circuit’s opinion that the

bankruptcy court did not abuse its discretion in

approving the settlement for the payment of

disputed real estate taxes for the purpose of

discharging statutory liens on the property and that

the confirmed plan made no provision for the

payment of income taxes arising from the sale of

the insolvent debtor MCLP’s property precludes

the conclusion that the confirmed plan was fair and

equitable to the United States.

Petition for Writ of Certiorari at 15-16 (footnotes deleted).

This argument is improper and irrelevant.

On September 18, 1990, the Eleventh Circuit held the

Miami Center Liquidating Trust was not responsible for

filing income tax returns or paying income taxes due, if any,

on the sale of the Miami Center and what has been referred

to as the Washington properties. United States v. Smith,

No. 89-5862 slip op. (11th Cir. Sept. 18, 1990). While the

Debtors have filed a petition for rehearing in banc, the

United States has not. The petition for rehearing is pending.

20

It is remarkable that the Petitioners would seek to

circumvent the Eleventh Circuit’s authority to rule on the

Petitioners’ petition for rehearing by arguing as they have in

the Petition for Writ of Certiorari. It is even more

remarkable that the Petitioners would seek to circumvent

the Supreme Court Rules governing petitions for writs of

certiorari by arguing the Eleventh Circuit’s income tax issue

in this proceeding. It is entirely improper.

In addition to being an improper argument, it is

irrelevant to the issue before the Court. The Petitioners’

argument is apparently in two parts: (1) that the bankruptcy

court abused its discretion in approving the ad valorem tax

settlement because the purpose of the settlement was to

discharge statutory liens, and (2) the plan of reorganization

should not have been confirmed because the plan did not

provide for the payment of allegedly due federal income

taxes, thus the plan was not fair and equitable to the United

States. In a footnote to the second half of this argument, the

Petitioners erroneously contend that the Eleventh Circuit

affirmed the district court’s reversal of the entire plan of

reorganization. Petition for Writ of Certiorari at 16, n. 23.

Each of these arguments is wholly baseless.

In response to the first half of this argument, it has been

pointed out that the confirmed plan included the Miami

Center property as an asset of the Miami Center Liquidating

Trust and required the trust to convey the property to the

Bank of New York for $255.6 million, free and clear of liens.

At the time of the conveyance, October 10, 1985, there were

pending ad valorem tax protest suits concerning the

property in state court for each year going back to 1979.

Unless modified, the plan would have required the trust to

pay these taxes in order to convey the property free and

clear of liens. Instead, to the benefit of the trust, the plan

was modified to allow the trust to escrow a portion of the

sale proceeds for the payment of ad valorem taxes so the

21

trust could pursue the state court tax protest suits and

continue settlement negotiations. There was no devious

attempt to discharge statutory liens which attached to the

property.

In response to the second half of the Petitioners’

argument, the Eleventh Circuit has affirmed the bankruptcy

court’s determination that the trust is not responsible for

claimed federal income because (a) the plan does not provide

for the payment of such taxes, (b) it would be an unlawful

post-confirmation modification to the plan to do otherwise,

and (c) 26 U.S.C. Section 6012(b) does not apply to the

Miami Center Liquidating Trust. The Eleventh Circuit’s

opinion is reprinted in the Petitioners’ appendix. See App. E

at 13. While the Petitioners and their Co-Debtors have filed

a petition for rehearing in banc, the United States has not.

In any event, this issue is entirely irrelevant to the issue of

whether this Court has jurisdiction to review the Eleventh

Circuit’s affirmance of the bankruptcy court’s approval of

the ad valorem tax compromise.

Lastly, Petitioners’ footnote 23 deserves comment. The

Petitioners contend the Eleventh Circuit has recently

affirmed the district court’s reversal of the bankruptcy

court’s order confirming the plan. In fact, the Eleventh

Circuit dismissed as moot the Petitioners’ challenge to the

plan of reorganization. Miami Center Limited Partnership

v. Bank of New York, 838 F.2d 1547 (11th Cir.), cert. denied,

488 U.S. 823, 109 S.Ct. 69, 102 L.Ed.2d 46 (1988). The

district court’s opinion to which the Petitioners refer in

footnote 23 was limited by its own terms to the plan’s

classification of the claim on a non-debtor, Miami Center

Joint Venture. In the Petitioners’ effort to argue that this

decision is broader than it is, they neglect to supply the

Court with a copy of the opinion. A copy of the district’s

court’s decision reversing the priority accorded the claim of

Miami Center Joint Venture under the plan is reprinted in

22

the appendix hereto. See Liquidating Trustee’s App. B. As a

plain reading of this opinion makes clear, the entire plan was

not reversed. The Eleventh Circuit’s decision dismissing the

Debtors’ appeal of the order of confirmation is the law of the

case. The Petitioners’ arguments to the contrary are nothing

more than a collateral attack on the confirmed and

substantially consummated plan.

CONCLUSION

The Petitioners have entirely failed to demonstrate that

this Court has jurisdiction to grant the Petition for Writ of

Certiorari. For all of the reasons set forth herein, the

Petition for Writ of Certiorari should be denied.

RESPECTFULLY SUBMITTED,

Herbert Stettin, Esquire

Herbert Stettin, P.A.

One S.E. Third Avenue #2215

Miami, Florida 33131

Telephone (305) 374-3353

23

Appendix

I , me, 2

INDEX TO APPENDIX

App.

Excerpts from transcripts of April 28, 1988 and

April 29, 1988 bankruptcy court hearing........... A

Olympia & York Florida Equity Corp. v. Bank of

New York, No. 85-3230 slip op. (S.D. Fla.

March 24, 1987) (Memorandum Opinion) .......... B

els cc antvsccapaceeséceeces C

11 U.S.C. Section 541(a)

11 U.S.C. Section 945

11 U.S.C. Section 1104(a)

11 U.S.C. Section 1129(aX3),(11)&(d)

11 U.S.C. Section 3020(d)

11 U.S.C. Section 9019

26 U.S.C. Section 6012(b)

- Sup.Ct.R. 10

ey

APPENDIX A

Testimony of John Fletcher:

* * *

the taxpayer was represented by Lapidus & Frankel and

Richard L. Lapidus.

Q. Do you consider Mr. Lapidus to be a competent

assessment lawyer?

A. Yes, sir.

Q. What was the result in that case?

A. In the Hotelrama case, the Third District Court of

Appeals determined that taxpayers, even though he felt he

had a better valuation method and proved that it was a

better valuation method, if we can accept that, lost the case,

as long as he failed to carry his burden under the three tests

of valuation.

Q. What did the Court establish as the burden

imposed upon a taxpayer who contests an assessment of ad

valorem taxes?

A. Well, it echoed — I won’t say that case established

it but it echowed [sic] the burden of proof that has been on

the taxpayer for a good number of years.

Q. What is that?

A. What that is is that the taxpayer must show that

the assessment is invalid by excluding all reasonable

hypotheses of assessments.

App. A-1

Q. Does that mean if the tax assessor can show one

basis for the assessment, one reasonable basis, even if there

are other more reasonable bases, ten other more reasonable

bases, the assessor wins?

A. Basically, yes, and if I could explain, the hypotheses

of assessments generally are those appraisal methods that

are accepted in the appraisal industry, if that is the right

word. Those are the cost approach, the income approach,

and the market or comparable sales approach. If the

property appraiser has evidence showing that any one of

those proves his point, then the taxpayer loses.

Q. I ask you to assume as a fact in this case that in

1985, there were one or more M.A.I. prepared assessments of

the property which is the subject of this case.

THE COURT: Do you have any problem with the

witness being termed an expert in his field?

MR. MARK: Ihave no problem with his expertise

in this area. I have a problem with the relevance of his

testimony to any of the issues before the Court.

THE COURT: Well, let’s do one thing at a time.

I will accept him.

MR. STETTIN: Thank you, sir.

BY MR. STETTIN:

Q. I ask you to assume for this question that the

property in question was appraised one more time in 1985 by

an M.A.L., Charles Failla for one, who found the value of the

property to be in excess of $255 million.

App. A-2

I also ask you to assume as a fact in this case that

the property was sold pursuant to a confirmed amended plan

of reorganization for $255,600,000.

Sir, would either or both of these facts constitute a

basis for the tax assessor to use in valuing the property?

A. I would assume that we are talking about a fair

market value appraisal by the appraiser and an arm’s length

transaction in the sale.

Q. I ask you to assume both of those.

A. Under those circumstances, that definitely would

be very substantial if the property appraiser were to use that

figure.

MR. STETTIN: I have nothing further on direct.

MR. MARK: Robert Mark on behalf of the Miami

Center Limited Partnership, one of the parties objecting to

the settlement.

* * *

’

Testimony of A.H. Blake:

MR. STETTIN: I will submit it is.

BY MR. STETTIN:

Q. What instructions did you get from me?

A. Well, what you essentially told me was to see what I

can do because this thing is getting out of hand.

Q. What do ycu mean by getting out of hand?

App. A-3

A. Well, the total potential exposure when I entered

the picture to the liquidating trustee was in excess of $10

million, of which almost $3 million was just interest.

THE COURT: I guess the question should be, if

Mr. Stettin said that, what he meant by getting out of hand?

BY MR. STETTIN:

Q. What did I mean by getting out of hand?

A. Ithink we had discussed this as a very real problem

because interest was running at the rate of about $78,000 a

month.

Q. Were you able to come to a resolution with this

preliminary agreement with the Dade County Tax Assessor’s

Office for a settlement of all of the years?

A. Yes, and I think that it’s a very fair one.

* * *

Q. You heard Mr. Mark question John Fletcher

before.

Do you know whether the property, that is the

Miami Center property, has increased in value in the years

1986 and 1987?

A. No, I do not.

Q. Do you have, an appraisal that was made

subsequent to that? I don’t mean the Failla update, I mean

other than that, showing the present value of that property?

A. Yes, sir.

App. A-4

Q. What is the present value pursuant to the most

recent appraisal that you know?

A. In June of ’87, it was said to be $170 million.

Q. Who was that?

A. Joseph J. Blake & Associates, no relation.

Q. Sir, do you have an opinion as to whether or not the

settlement proposed is in the best interest of the estate?

A. Yes, I do, and I think it is.

Q. What is the opinion first?

A. I think it’s in the best interest.

Q. Why?

A. To win an ad valorem tax case is pretty near

impossible, provided the assessor has done what the law tells

him to do. The potential risk here is $10,500,000. The agreed

settlement is like $6,140,000. It’s a difference of $4.4 million.

It’s kind of having — it’s kind of knowing when to

hold them and when to fold them.

MR. STETTIN: Excuse me for one second, Your

Honor.

THE COURT: Certainly.

MR. STETTIN: No further questions.

App. A-5

THE COURT: Any other questions from this

side?

MR. GOULD: No.

THE COURT: These were not introduced?

MR. MARK: I have got my copies.

Your Honor, if you would, I will leave that set with

you and I will move them into evidence at the appropriate

time.

MR. ZIEGLER: Just a couple questions, Your

Honor.

THE COURT: Proceed.

CROSS EXAMINATION

BY MR. ZIEGLER:

Q. Mr. Blake, you have testified about the use of three

approaches on reaching the value of property, cost, market

and income; is that correct?

A. Yes, sir.

Q. Are these approaches weighted in valuing property

dependent upon the individual properties?

In other words, some property it makes more sense

to use, to have more heavily weight the cost basis and in

some property more heavily weight the income basis?

App. A-6

A. It was pretty much up to the assessor’s discretion,

provided that he has at least given serious consideration to

whichever approach he excludes.

Q. Does the income approach have much weight in a

situation where you are dealing with more or less loss? In

other words, where you are dealing with the difference

between two negative numbers, it lost $5 million in year one,

and it only lost $500,000 in

e * *

claim filed?

A. Absolutely not.

Q. Did you agree as part of your settlement discussion

that you would agree that you would not raise the objection

that no claim had been filed, therefore no right to payment

should exist?

A. That is correct.

Q. The County understood that, that Mr. Gould still

had the right to raise that issue; isn’t that right?

A. Yes.

Q. Were you also made aware of the fact that the

County claims interest as part of this settlement amount,

they allocate a portion of the monies to interest?

A. Yes.

Q. Did you have discussion with your lawyer

concerning whether or not interest was enforceable post-

petition against the liquidating trust?

App. A-7

A. Yes.

Q. Did you have a concern about that fact?

* » *

Testimony by Fred Stanton Smith:

liquidating trust.

Q. And if there is more than enough to pay all of the

creditors whose claims exist and the administrative

expenses, what will happen to the excess?

A. It goes back to the residual interest, Mr. Gould and

his group.

Q. How long have you been in the real estate business

personally?

A. For 25 years.

Q. What business do you have outside of being the

liquidating trustee?

A. I’m president of the Keyes Company.

Q. In your opinion, do you have a very good close

familiarity with the taxing authorities in Dade County, tax

assessment procedures and the values of real property in

Dade County?

A. Ido.

Q. Sir, did you make a value judgment as a

businessman in this case as to whether or not this settlement

was in the best interest of the estate?

App. A-8

A. I did.

Q. What is your opinion?

A. It’s my opinion that based upon the costs of

litigation, the probability of the failure of the litigation, the

disaster to the liquidating trust if we have to pay more

money out, which we don’t have, and the ability to get

money back in order to meet our other obligations, it all

became a very good settlement that we should pursue.

Q. Did you ever give any instructions to Mr. Blake or

any other representative, Shutts & Bowen or otherwise,

concerning whether or not to favor the Bank of New York in

any universal settlement, global settlement?

A. I never had a concern concerning the Bank of New

York.

Q. Do you believe this settlement favors the Bank of

New York over the trust?

MR. MARK: Objection, that is leading. Now we

are getting into the heart of the issues.

MR. STETTIN: Why is that misleading: “Do you

believe that the settlement favors the Bank of New York

over the trust?”

MR. MARK: It calls for a yes or no answer.

MR.STETTIN: But so do most questions, Judge.

THE COURT: Overruled.

MR. MARK: Go ahead.

App. A-9

BY MR. MARK:

Q. You testified earlier, Mr. Smith, that the monies

that remain in escrow after payment of the taxes would be

returned to the trust; correct?

A. Right.

Q. Any monies left in the trust after payment of all

claims would go to the residual beneficiaries?

A. Correct.

Q. It is a fair statement, then, isn’t it, sir, that the less

money that the trust has to pay in taxes for these disputed

years, the more that will be refunded and the more that — at

least the more potential there will be for additional refunds

for the beneficiaries?

A. Yes.

Q. Now, it is your testimony, isn’t it, sir, that you

didn’t concern yourself with the deal that the current

owners, M.C. holding partners, were making for 1986 and

’87, as long as you felt the deal was good for the year ’79

through ’85?

A. My only concern was were they going to make their

settlement because as I understood it, Dade County would

only make one global settlement with all parties concurring

as to their portion of it, so I was concerned that, yes, the

bank did settle but as to what it was or how they settled or

what the cost was, was of no concern to me.

App. A-10

Q. They had to agree but you didn’t feel as if the

amount they agreed to had any influence on the amount the

County was going to get from you?

A. That’s right.

Q. And yet, sir, wasn’t it your understanding that the

County was looking for a certain total amount of additional

payments to resolve the entire range of taxes for the year ’79

through ’87?

A. It was my presumption that they were looking for a

bulk amount of money that they wanted to get into their

tills.

Q. Now, if they were looking for a bulk amount of

money, the two parties that were paying that bulk amount of

money were the trustees and M.C. holding partners, in

effect, the bank group; correct?

A. Right.

Q. If we assume it’s a bulk amount of money, isn’t it

also fair to say, sir, that the more the bank pays, the less the

trust pays and vice versa?

A. If that were a correct presumption, that would be

true.

Testimony by Frank Jacobs:

That is not the argument that has been advanced, Judge.

THE COURT: Overruled.

App. A-11

BY MR. KRACHT:

Q. You are familiar?

A. Iam familiar with the suggestion, yes.

Q. What is your position with respect to that

suggestion?

A. It’s very far from the truth.

Q. Are you aware or did you favor the Bank of New

York to the expense of the liquidating trust to the detriment

of the trust?

A. Absolutely not.

Q. Was it ever suggested to you in your negotiations

and in your structuring of the settlement that you give

preferential treatment to the ’86 and ’87 years over the "79

through ’85 years?

MR. MARK: Objection, leading. This _ is

argument, Judge.

THE COURT: Sustained.

MR. KRACHT: Your Honor, whether anyone

instructed, gave him any of these instructions—

MR. MARK: Objection. This should be another

question, the objection was sustained. Ask a question,

please, sir.

Testimony by Theodore B. Gould:

App. A-12

The legal expenses associated with litigating the refund

would be paid back to me first. The residual funds would be

divided based upon the prorata interest of St. Joe Paper and

myself and the payment of the real estate tax for 1979.

THE COURT: Is there such an arrangement? Is

such an agreement in writing?

MR.STETTIN: His testimony was before, Judge,

when I interrupted, that it was but he can’t find it.

THE COURT: All right.

MR. STETTIN: That is the reason for my

question because I have never seen it.

THE COURT: Well, I understand, and I was

going to ask the same question, and also the contents

relative to, if he is going to institute the suit, does he have

the ability and the right to settle the suit.

MR. STETTIN: That is my next question.

THE COURT: Your next question, that was my

question. I will listen.

BY MR. STETTIN:

Q. Let me lead up to it this way.

From 1979 when the suit was filed, did you pay the

legal expenses?

App. A-13

A. © «ll, in fact, the office building earned a profit, an

operatin :ofit after the payment of ad valorem taxes but

before del. service for all of those years.

MR. STETTIN: Thank you, sir.

CROSS EXAMINATION

BY MR. ZIEGLER:

Q. Mr. Gould, in regard to the St. Joe Paper Company

agreement, you had the right to settle that case on any basis

that you deemed appropriate; is that a fair statement of your

agreement?

A. I don’t think so.

Q. Could you have settled that case and gotten a zero

refund or a one dollar refund?

A. I did not, I regret to say, raise that issue you with

Mr. Ball so I don’t know. I would certainly have to — I

would have had to have discussed it with Mr. Ball and Mr.

Wheeland (phonetic) and report back.

Q. Was that part of the written agreement?

A. It wasn’t part of the agreement but I would, as a

matter of fact, as a matter of ethics, do that.

Q. Asa matter of legal obligation, you aad the right to

settle the case at whatever you thought needed to be done?

MR. MARK: Objection, calls for a_ legal

conclusion.

App. A-14

THE WITNESS: I don’t think so. As a matter of

legal obligation, I had the responsibility to request their

authority to settle it. After all, they would receive part of the

refund.

BY MR. ZIEGLER:

Q. Whatever that may have been, whether it was 50

cents or whatever.

How much refund was being sought for 1979?

A. $147,000.

Q. How much did you spend with Shutts & Bowen and

Tax Adjustment Experts and everybody else that you would

attribute to the 1979?

A. About $30,000.

Q. So, we are down to roughly $110,000 if you won the

case a hundred percent for 79?

A. Let’s put it this way, Mr. Ziegler. Mr. Ball and I felt

the same way about the taxes.

MR. STETTIN: If he doesn’t ask him, Judge, I

will. I am dying to know what Mr. Ball feels about taxes.

(Laughter)

MR. MARK: I assume that is a waiver of the

hearsay objection. Go ahead and answer it.

MR. ZIEGLER: Given the fact there is only 15

minutes left, we’re not going to get invoived with the land

App. A-15

Mr. Ball owned and why he wouldn’t want to pay ad valorem

taxes.

(Laughter)

BY MR. ZIEGLER:

Q. Did Shutts & Bowen ever raise or anybody else ever

raise in the Circuit Court cases the failure to file the claims

as a basis for the dismissal of any litigation or the

determination of litigation? Is that part of the pleadings?

A. I am sorry, would you ask the question again,

please?

Q. Has the issue of no taxes being due for the years of

’84 and ’85 ever been raised in the cases which you had an

active participation in with Shutts & Bowen?

A. In the State Court, you mean?

Q. Yes, sir?

A. I don’t know.

Q. You don’t know whether it was ever made part of

those pleadings?

App. A-16

APPENDIX B

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF FLORIDA

Case No. 85-3230-Civ-ATKINS

OLYMPIA & YORK FLORIDA EQUITY CORP. and

MIAMI CENTER JOINT VENTURE,

Appellants,

vs.

THE BANK OF NEW YORK,

Appellee.

MEMORANDUM OPINION

Olympia & York Florida Equity Corporation (O&Y), as

a general partner of Miami Center Joint Venture (MCJV),

appeals from the bankruptcy court’s Confir:aation Order

confirming a Chapter 11 plan of reorganization initiated by

five debtors. Competing plans of reorganization were

submitted to the creditors who rejected the debtors’ plans

and adopted the Bank of New York’s (Bank’s) plan.

O&Y/MCJV asserts that its claim was improperly classified

under this plan.

Pursuant to 11 U.S.C. § 1129(b), the court may confirm

a plan even though a class has rejected it if all other

requirements of § 1129(a) have been fulfilled and “the plan

does not discriminate unfairly, and is fair and equitable,”

with respect to that class. Jd. O&Y/MCJV, as the only

creditors in Class 7, voted to reject the plan. Therefore, the

question presented is whether the plan fulfilled the

requirements of § 1129(b).

App. B-1

I. STATEMENT OF THE CASE

A. The Parties and Their Respective Interests'

The five debtors include the Holywell Corporation, a

Delaware corporation (“Holywell”), of which debtor

Theodore B. Gould (“Gould”) is the sole stockholder and

president; Miami Center Limited Partnership, a Florida

limited partnership (“MCLP”) of which Gould and debtor

Miami Center Corporation (“MCC”) are sole general

partners and are also limited partners; MCC, A Florida

corporation and wholly-owned subsidiary of Holywell (Gould

is also president of this entity); Chopin Associates, a Florida

general partnership (“Chopin”) of which Gould and MCC

are the sole general partners; and Gould himself.

The Bank was the construction lender for Phase I of the

debtors’ “Miami Center” complex. That Phase consists of

the Edward Ball Office Building, the Intercontinental Hotel

(known as the “Pavillon” during the Gould group’s

ownership), retail space between them known as the

“Podium,” and an adjoining parking garage (collectively

known as the “Miami Center Project’). The Bank has its

offices in New York, New York, and is chartered under the

laws of the State of New York.

MCJV is a Florida general partnership formed by

debtor Gould and O&Y. At all material times, Gould served

as “managing venturer” and general partner of MCJV.

MCJV owns four vacant lots near the existing Miami Center

Project. Gould and O&Y, as the only partners, originally

planned to construct Phases II and III of Miami Center on

those lots, but disputes and arbitration between the two

partners has precluded further construction or development.

‘Attached as court appendices I and II are two diagrams which set

forth, graphically, the relationship between the various entities involved

in this bankruptcy proceeding.

App. B-2

Over 400 other creditors have or had an interest in these

proceedings, including the IRS, the Dade County Tax

Collector, many of the contractors and subcontractors

involved in the construction, former employees, and others.

Creditors’ committees were appointed by the bankruptcy

court, and have been active for the Holywell, MCLP, and

MCC estates.

B. General Background Information

During the summer of 1984, the Bank initiated

foreclosure proceedings in state court after declaring the

debtor’s mortgage loans on the Miami Center to be in

default. The debtors quickly responded by filing their

voluntary petitions for reorganization on August 22, 1984.

During the Chapter 11 reorganization proceedings, the

debtors and the Bank filed competing reorganization plans.

The various creditors’ committees and individual creditors

rejected the debtors’ plans and adopted the Bank’s plan,

although it was rejected by the impaired classes 7-9. This

plan was then confirmed by the bankruptcy court over the

Class 7 creditors’ objection pursuant to 11 U.S.C. § 1129(b)

(1979).

Several appeals were taken from the various bankruptcy

proceedings. Two of these appeals were closely related to

this one. In one, Bank of New York v. Olympia & York

Fiorida Equity Corp., No. 85-3430-Civ-ATKINS (June 23,

1986), the Bank sought reversal of a final judgment and

related orders of the bankruptcy court in an adversary

proceeding. The bankruptcy court found that certain lease

agreements relating to furniture, fixtures, and equipment

(FF&E) within the Miami Center project were “true leases.”

After reviewing the bankruptcy court’s orders and the lease

agreements, I affirmed. This action was significant because it

formed the foundation for O&Y/MCJV’s priority claims as

the owner/lessor of the FF&E.

App. B-3

Another appeal went before Judge Aronovitz in which

he was asked to review the same confirmation order as it

related to other classes under the Bank’s plan. After

reviewing the confirmation order, he found that the

bankruptcy court failed to enter clear and concise findings of

fact and conclusions of law which would support its order;

therefore, he remanded the case. Following the proceedings

on remand, Judge Aronovitz affirmed the amended

confirmation order as it related to those aspects of the

Bank’s plan on appeal before him.

Having resolved the “true lease” issue which established

the nature of O&Y/MCJV’s claim as to the FF&E, I

carefully reviewed the confirmation order as it related to

Class 7 of the plan. Like Judge Aronovitz, I found that it was

necessary to remand the case for a more detailed order

clearly elucidating the basis for the bankruptcy court’s

decision to place O& Y/MCJV’s claim in class 7 of the plan.”

On November 10, 1986, the bankruptcy court concluded its

remand proceedings and entered its Order on Remand in

which it adopted the proposed findings of fact and

conclusions of law submitted by the Bank.’ Thus, the initial

*Remand proceedings were appropriate under Wilson v. Huffman (In

re Missionary Baptist Foundation of America), 712 F.2d 206 (5th Cir.

1983). There, the district court evaluated the record to find sufficient

findings of fact to satisfy each of Mobile’s three elements for equitable

subordination. The Fifth Circuit remanded the case saying:

These findings, though perhaps inherent in the bankruptcy

court’s ruling, were not enunciated. Though we agree that

Huffman’s insider connection with the debtor compels close

examination of his claim, we cannot conclude, in the absence of

explicit findings by the bankruptcy court on each element of the

Mobile test, that the trustee hes discharged his burden of proof

thereunder.

Id. at 212 (emphasis added).

*O&Y/MCJV challenges the propriety of the bankruptcy judge’s

verbatim adoption of the Bank’s proposed findings and conclusions, and

(Footnote continued on next page)

App. B-4

Confirmation Order, as amended by the adoption, nunc pro

tunc, of the explicit findings of fact and conclusions of law,

constitutes the foundation for O& Y/MCJV’s appeal.‘

C. The Nature of the O&Y/MCJV Claim

The appeal before this court concerns only the rights

and claims of MCJV, prosecuted by O&Y as as its general

partner, and managing venturer relating to the FF&E leases.

Originally, O&Y filed separate claims as a creditor; however,

in coniunction with the Trustee’s consent to entry of the

final modified arbitration award, O&Y issued a formal

release of all its own claims against debtor Gould.‘

O&Y/MCJV asserts that it has priority claims for the

market value of the FF&E, the cumulative defaulted rental

payments and late charges accrued from March 1, 1983 to

(Footnote continued from previous page)

asserts that the “blanket adoption” of one party’s findings and

conclusions indicates that the court failed to conduct a thorough,

independent analysis of the evidence and the law. While this practice has

been severely criticized, see Cabriolet Porsche-Audi v. American Honda

Motor Company, 773 F.2d 1193, 1198 n.2 (lith Cir. 1985), it is

permissible. See Anderson v. Bessemer City, 470 U.S. ___, 105 S.Ct.

1504 (1985). Nevertheless, such a practice invites particularly close

scrutiny of the findings in light of the record.

‘On remand, the bankruptcy court correctly determined that it was

not called upon to alter or enhance the record. I simply wanted a more

detailed explanation concerning the basis for the court’s approval of the

plan. Therefore, the record, as it stood at the time of confirmation, must

support the amended findings.

‘O&Y and Gould initiated arbitration proceedings against each other

in 1982 based upon their conflicting views regarding the operation of

MCJV. The bankruptcy court permitted O& Y to pursue its rights under

the relevant arbitration statutes and to proceed to an award in a court of

competent jurisdiction, although it recognized that these proceedings

could affect O& Y’s and Gould’s interests in MCJV. The final modified

award was executed by the arbitrators on June 30, 1986 and entered as a

judgment in the Florida Circuit Court on July 10, 1986.

App. B-5

October 10, 1985, and defaulted rental payments and late

charges from October 10, 1985.°

II. DISCUSSION

This appeal presents many complex legal issues. Over

400 parties struggled through the bankruptcy proceedings,

under that court’s supervision, attempting to make the best

of an undesirable situation. The plan has been substantially

consummated, and appears to have been successfully

implemented.’ Nevertheless, O&Y/MCJV vehemently

objects to the placement of its claim concerning the FF&E

into class 7 of the plan. Conversely, the Bank argues that

this classification was eminently correct, because it satisfied

all statutory requirements under the Code.

A. Standard of Review

A district court must accord substantial deference to the

bankruptcy court’s findings of fact, and should reverse only

when they are “clearly erroneous.” Wilson v. Huffman (In re

Missionary Baptist Foundation of America), 712 F.2d 206,

209 (5th Cir. 1983); Bankruptcy Rule 8013. Moreover, the

bankruptcy court’s balancing of equities in analyzing the

plan’s fairness is a factual process, therefore, the court’s

determination on this point is also subject to the “clearly

erroneous” standard of review. Danning v. General Motors

Acceptance Corp. (In re Jules Meyers Pontiac, Inc.), 779

*MCLP was supposed to make rental payments to MCJV under the

lease agreement as of March 1, 1983. On October 10, 1985, the trustee

transferred his interest in the FF&E to the Bank and its designated

transferee.

"The claims classified under the plan from Class 1 to Class 6 have

either been paid is full or funds have been reserved for the disputed

items. In addition, in the most recent reports, the Liquidating Trustee

estimated that approximately $3 million will be available to satisfy the

remaining claims.

App. B-6

ee

LS a

F.2d 480, 482 (9th Cir. 1985). Conclusions of law, however,

are subject to plenary review. Machinery Rental v. Herpel

(In re Multiponics), 622 F.2d 709, 713 (5th Cir. 1980)

(hereinafter referred to as “Multiponics’”’).

B. Classification Under The Code

A Chapter 11 plan of reorganization may involve the

sale of all or substantially all of the debtor’s assets. 11

U.S.C.A. § 1123(b)(4) (1979). After all, one of the primary

goals of the bankruptcy code is to effectuate an equitable

distribution of the debtor’s assets in satisfaction of its debts.

Benjamin v. Diamond (In re Mobile Steel Co.), 563 F.2d

692, 698 (5th Cir. 1977). To achieve the goal, the plan must

group the claims or interests by classes. 11 U.S.C.A. §§ 1122,

1123 (1979); Bankruptcy Rule 3013. “The classes which hold

priority claims must be specially organized and full payment

*11 U.S.C.A. § 1122(a) provides:

Except as provided in subsection (b) of this section, a plan may

place a claim or an interest in a particular class only if such claim

or interest is substantially similar to the other claims or interests

of auch class.

11 U.S.C.A. § 1123 provides (in pertinent part):

(a) Notwithstanding any otherwise applicable

nonbankruptcy law, a plan shall —

(1) designate, subject to section 1122 of this title, classes

of claims, other than claims of a kind specified in section

507(a)(1), 507(a)(2) or 507(a){7) of \this title and classes of

interests;

(2) specify any class of claims or interests that is not

impaired under the plan;

(3) specify the treatment of any class of claims or

interests that is impaired under the plan;

(4) provide the same treatment for each claim or

interest of a particular class, unless the holder of a particular

claim or interest agrees to a less favorable treatment of such

particular claim of interest;

(5) provide adequate means for the _ plan’s

implementation. .. .

App. B-7

is mandatory although the payment may be deferred.” R.

Aaron, Bankruptcy Law Fundamentals, § 1.04 at 1-22

(1986) (footnote to citations omitted).

The Bank urges that its plan is acceptable because the

classification of the MCJV lease claims is fair and equitable,

and does not discriminate unfairly under § 1129(b).°

Furthermore, the Bank asserts that O& Y/MCJV’s claim is

not substantially similar to other clairas or interests, because

50% of any distribution on MCJV’s claim would go to

debtor Gould. However, having reviewed the facts and the

relevant legal principles, I conclude that the Bank is

incorrect.

Under the Bank’s plan, O& Y/MCJV’s claim cannot be

paid until all claims filed by other creditors not affiliated

with Gould have been satisfied. In effect, this classification

structure means that even general unsecured creditors will

be paid before O&Y/MCJV. To justify its treatment of the

O&Y/MCJV claim, the Bank relies heavily on the factual

premise that any distribution on the O&Y/MCJV claim will

benefit Gould. However, this premise is incorrect. Any

payment to O&Y/MCJV based on the FF&E leases would

not benefit debtor Gould. In fact, Gould’s share of any

MCJV proceeds, rents, or profits are available to the

liquidating trustee, since “all legal or equitable interests of

the debtor in property as of the commencement of the case,”

or any “[p]roceeds, . . . rents, or profits of or from property

*11 U.S.C.A. § 1129(b)(1) provides:

(b)(1) Notwithstanding section 510(g) of this title if all of the

applicable requirements of subsection (a) of this section other

than paragraph (8) are met with respect to a plan, the court, on

request of the proponent of the plan, shall confirm the plan

notwithstanding the requirements of such paragraph if the plan

does not discriminate unfairly, and is fair and equitable, with

respect to each class of claims or interests that is impaired under,

and has not accepted, the plan.

App. B-8

of the estate . . .” become part of the bankruptcy estate. 11

U.S.C.A. § 541(a) (Supp. 1986) (emphasis added). See also In

re Wallen, 43 Bankr. 408, 409 (D. Idaho 1984); Houchen v.

Gadberry (In re Gadberry), 30 Bankr. 13, 14 (C.D. Ill. 1983);

Dominican Fathers of Winona v. Dreske (In re Dreske), 25

Bankr. 268, 271 (E.D. Wis. 1982); Don/Mark Partnership v.

James B. Nutter & Co., (In re Don/Mark Partnership), 14

Bankr. 830, 832 (D. Colo. 1981); cf. Missouri v. Eastern

District of Arkansas, 647 F.2d 768 (8th Cir. 1981) (court held

that debtor’s 2.3% fractional interest in deposited grain was

sufficient to bring all property under the bankruptcy court’s

jurisdiction.) In short, any interest Gould held in MCJV

became part of the bankruptcy estate upon the

commencement of this case.

The Bank’s position is incorrect for another reason. The

plan must satisfy the requirements of code sections 1122,

1123, and 1129. While the Bank feels that the plan’s

classification structure fulfills all of these code requirements,

I disagree.

Classification is simply the process under which the

plan’s proponent recognizes the legal differences between

various claims and interests, and ranks them according to

their nature and priority. See Scherk v. Newton (In re

Rocky Mountain Fuel Co.), 152 F.2d 747, 750-51 (10th Cir.

1945); Seidel v. Palisades-on-the Desplains (In re

Palisades-on-the-Desplaines), 89 F.2d 214, 217 (7th Cir.

1937). See also 11 U.S.C.A. § 112%b) (1979). A party

submitting a plan of reorganization has considerable

discretion to determine the proper classification of claims

and interests according to the unique factual circumstances

presented; however, “. . . there must be some limit on a

debtor’s power to classify creditors in such a manner. The

potential for abuse would be significant otherwise.”

Teamsters National Freight Industry Negotiating

Committee v. U.S. Truck Co. (In re U.S. Truck Co.), 800

App. B-9

F.2d 581, 586 (6th Cir. 1986). The result is not surprising—

considerable discretion is permitted in determining the

proper classification of claims and interests; however, if the

plan unfairly creates too many or too few classes, or violates

basic priority rights, the court cannot confirm the plan. See

id. Thus, classification principles cannot be employed to

effectuate the subordination of valid claims. See In re

Martin’s Point Limited Partnership, 12 Bankr. 721 (Bankr.

N.D. Ga. 1981); 11 U.S.C.A. § 1129(b).

One final point merits discussion under the

“classification” issue. In its initial brief, the Bank argued

that the MCJV claim is partially an equity interest. Yet,

even if this assertion were true, it would not justify the

subordination of a valid claim. Id. at 727 (“. . . a valid claim

of a creditor who is also an equity security holder is not to be

subordinated to the claim of a creditor who is not also an

equity security holder, but is to be treated equally.”’).

C. Claims of An Insider

In support of the plan’s classification structure, the

Bank emphasizes O& Y/MCJV’s status as an insider.’ The

Bank argues that appellant’s status is significant for two

reasons. First, the Bank urges that insider creditors may not

be given the same priority as unsecured creditors. In re Toy

& Sports Warehouse, Inc., 37 Bankr. 141, 152 (Bankr.

S.D.N.Y. 1984) In re Economy Cast Stone Co., 16 Bankr.

646, 651 (Bankr. E.D. Va. 1981). Alternatively, the Bank

asserts that an insider creditor’s claims must be closely

scrutinized to determine whether equitable subordination is

warranted. Estes v. N&D Properties, Inc. (In re N&D

Properties, Inc.), 799 F.2d 726, 731 (11th Cir. 1986);

"MCJV is an insider because it is a “partnership in which the debtor

is a general partner.” 11 U.S.C.A. § 101(28)(A)(ii) (Supp. 1986). O& Y is an

insider because it is a “general partner of the Debtor.” 11 U.S.C.A. §

101(28)(A)(iii) (Supp. 1986).

App. B-10

ww Semis atcnipaaitaaad

Multiponics, 622 F.2d 709, 714 (5th Cir. 1980). If the

claimant is an insider, the party seeking equitable

subordination need present only “material evidence of

unfair conduct,” and need not provide proof of, “more

egregious conduct such as fraud, spoilation or overreaching.”

Estes at 731.

O&Y/CJV responds with two arguments. First,

appellant contends that it is not an insider in the legal

connotation of the term. Second, appellant assumes a

“fallback” position arguing that the mere invocation of the

term “insider,” without more, does not serve to meet any

standard or test required by law for equitable subordination.

The code is clear regarding the definition of an insider.

In this case, it is beyond question that O&Y and MCVJ are

insiders. See 11 U.S.C.A. § 101(28)A(ii) and (iii). However,

the insider label is not sufficient, in and of itself, to justify

the subordination of a claim. Insider’s claims and rights

must be treated in the same manner as other rights and

claims in the absence of proof of nefarious or inequitable

conduct directed toward and resulting in harm to creditors.

See Estes at 731; Multiponics at 713; Huffman at 212.

Further, appellant asserts that even where the claimant is an

insider the proponent of the plan bears the burden of

presenting material evidence of inequitable and unfair

conduct damaging the creditors. See Multiponics at 714;

Estes at 731.

Two cases are particularly relevant regarding the

subordination of an insider’s claim. In Huffman, the Fifth

Circuit found that “Huffman was an insider.” Jd. at 211.

Nevertheless, the court indicated that the three-prong test

of Mobile still had to be satisfied. “Though we agree that

Huffman’s insider connection with the debtor compels close

examination of his claim, we cannot conclude, in the absence

of explicit findings by the bankruptcy court on each element

App. B-11

of the Mobile test, that the trustee has discharged his

burden of proof thereunder.” Jd. at 212.

Very recently, the Eleventh Circuit examined this issue

in Estes, and followed the teachings of Mobile and Huffman.

The court expressly stated that three elements must be

established before a claim may be equitably subordinated.

See Estes at 731. Where the claimant is an insider, the

trustee’s burden of proof in establishing evidence of unfair

conduct is somewhat lessened, but the claim is not

automatically subordinated. See id."

D. Equitable Subordination

The principle of subordination is firmly established in

bankruptcy proceedings. This doctrine permits the court to

lower the priority of a valid claim to achieve an equitable

result when the claimant has been guilty of improper

conduct."* 3 Collier on Bankruptcy ¥ 510.02 (15th Ed. 1986).

Although the doctrine was judicially created," it has now

been codified within the bankruptcy code. Currently, the

relevant provision is found at 11 U.S.C.A. § 510(c) which

provides:

"Significantly, I note that Congress specifically rejected a provision

which would have automatically subordinated certain insider claims as a

matter of law. See S. Rep. No. 989, 95th Cong., 2 Sess. 74 (1978); H.R. 31,

95th Cong., Ist Sess. (1975).

"Subordination is not the same as disallowance. “If a creditor's

misconduct has been directed toward the debtor . . . the claim... . is

disallowed.” 3 Collier on Bankruptcy, 510.02 (15th Ed. 1986).

Subordination is employed when a claim is valid, but the claimant’s

conduct is such that equitable considerations require it to be paid after

other claims have been satisfied. See id.

"Under the previous Act, courts subordinated creditor’s claims based

upon the bankruptcy court’s grant of equitable jurisdiction. See Pepper v.

Litton, 308 U.S. 295 (1939).

App. B-12

as sin ees

§ 510 Subordination

* * *

(c) Notwithstanding subsection (a) and (b) of

this section, after notice and a hearing, the court

may—

(1) under principles of equitable

subordination, subordinate for purposes of

distribution all or part of an allowed claim to all or

part of another allowed claim or all or part of an

allowed interest to all or part of another allowed

interest, or

(2) order that any lien securing such a

subordinated claim be transferred to the estate.

Section 510(c) authorizes subordination when the court

finds that an equitable remedy is required. Established case

law, however, continues to be significant because § 510(c)

indicates that its application should follow equitable

principles. See 3 Collier on Bankruptcy 1 510.01 (15th Ed.

1986). To resolve subordination situations, the Fifth Circuit

established a three part test to determine when a claim or

interest should: be subordinated. See Mobile at 700. This test

has been expressly adopted by the Eleventh Circuit. See

Estes at 731. The three elements of the test include:

(1) that the claimant has engaged in inequitable

conduct;

(2) that the conduct has injured creditors or given

unfair advantage to the claimant; and

(3) that subordination of the claim is not

inconsistent with the Bankruptcy Code.

App. B-13

Id. (citation omitted).

In proving the elements for equitable subordination,

ene must first determine the status of the claim holder.

The burden and sufficiency of proof required are

not uniform in all cases. Where the claimant is an

insider or a fiduciary, the trustee bears the burden

of presenting material evidence of unfair conduct.

Once the trustee meets his burden, the claimant

then must prove the fairness of his transactions

with the debtor or his claim will be subordinated. If

the claimant is not an insider or fiduciary, however,

the trustee must prove more egregious conduct such

as fraud, spoilation, or overreaching, and prove it

with particularity.

Id. (citations omitted). Additionally, the trustee, or other

moving party, must show the extent of any inquiry or unfair

advantage to determine the extent to which the claim should

be subordinated. The claim should only be subordinated to

the extent necessary to offset the harm caused by the unfair

conduct. See Benjamin, at 701. “For example, if a claimant

guilty of misconduct asserts two claims, each worth $10,000,

and the injury he inflicted on the bankrupt or its creditors

amounted to $10,000, only one of his claims should be

subordinated.” Jd. at 701. Finally, the evidence must show

which creditors were disadvantaged, because a valid claim

should only be subordinated to the claims of the

disadvantaged creditors. See Estes at 732-33.

In this case, the bankruptcy court appears to have relied

upon three facts to fulfill Mobile’s tripartite test. First, the

court imputed Gould’s acts of misconduct to O&Y/MCJV as

a matter of partnership and agency principles. Second, the

court found that O&Y/MCJV was responsible for MCLP’s

undercapitalization. Third, the court found that O&Y

App. B-14

substantially contributed to MCJV’s and Gould’s financial

difficulties, to the detriment of other creditors, by failing to

provide or arrange for the financing of Phases II and III of

the Miami Center.

O&Y/MCJV challenges all of these facts and asserts

that there is no semblance of proof of wrongful conduct of

the claimant/appellant affecting the debtors’ creditors. First,

O&Y/MCJV argues that ali of Gould’s acts of misconduct

were outside the course and scope of the partnership’s

business. In fact, Gould’s conduct was against O&Y and the

partnership’s interest. Therefore, appellant urges that

Gould’s misconduct cannot be used to subordinate its claim.

Second, O&Y/MCJV suggests that the theory of

undercapitalization of CLP is outrageous and

incomprehensible. Appellant insists that MCJV was the

victim of, not a contributor to, MCLP’s poor financial

situation. Finally, appellant states that everyone recognized

that the construction of phases II and III of the Miami

Center would have subjected Gould to even greater losses

and further indebtedness. Thus, appellant’s failure to

provide financing for further development could not have

injured any of the debtor’s creditors.

After carefully considering the facts, I conclude that the

evidence was insufficient to satisfy the elements of equitable

subordination. First, I find that the court erred when it

imputed Gould’s acts of misconduct to O&Y/MCJV. These

acts were clearly outside the ordinary course of the business

of the partnership and not authorized by O&Y. See Fla.

Stat. Ann. § 620.62 (1977)."* Second, I simply cannot accept

“Fla. Stat. Ann. § 620.62 (1977) reads as follows:

Partnership bound by partner's wrongful act. — When loes or

injury is caused to a person, not a partner in the partnership, or

any penalty is incurred by a wrongful omission of a partner

acting in the ordinary course of the business of the partnership

(Footnote continued on next page)

App. B-15

appellee’s theory of undercapitalization. Perhaps the best

indication that the FF&E lease was valuable was that the

trustee was required to obtain title to the FF&E under the

plan. Therefore, it is unreasonable to believe that the

valuable FF&E lease agreements injured any of the debtor’s

creditors, even if I could somehow attribute MCLP’s

financial situation to O&Y/MCJV. Finally, I find that

insufficient evidence was offered to prove that O& Y’s failure

to provide further financing hurt any creditors or gave O& Y

an unfair advantage. Under the circumstances, O&Y’s

decision seems sound.

Ill. CONCLUSION

After carefully reviewing the amended confirmation

order, I find that the court erred in confirming the plan

which placed the O& Y/MCJV lease claim in class 7 beneath

even the unsecured creditors. The plan, as structured, is not

fair and equitable with respect to the class 7 creditor. None

of the theories presented by the Bank justify the

subordination of O&Y/MCJV’s claim. I must, therefore,

remand the case so that the bankruptcy court can determine

O&Y’s share of the claim.

On remand, the banker ;«cy court must resolve two

issues. First, the bankrupccy court should determine the

value of the lease claim. Then, it should determine the

respective interest in this claim held by O&Y and the

bankruptcy estate (in lieu of debtor Gould).

(Footnote continued from previous page)

or with the authority of his copartners, the partnership is liable

for it to the same extent as the partner so acting or omitting to

act. (emphasis added).

%'O&Y and the Bank continue to dispute the interest each party holds

concerning the lease claim. The bankruptcy court must determine what

effect, if any, the arbitration proceeds have had which would alter the

general partners’ 50% interests.

App. B-16

Because the parties are in substantial disagreement

regarding the payment of the claim, I feel compelled to

resolve this point. O&Y should be paid:

(1) First, from the cash which remains available to the

trustee;

(2) Second, from any property controlled by the

trustee including Gould’s interest in MCJV; and

_ (3) Finally, from the surety bond provided by the

Bank to guarantee O&Y’s payment under the plan.

For all of the reasons expressed in this opinion, the

order of confirmation is reversed and remanded for further

considerations not inconsistent with this opinion.

DONE AND ORDERED at Miami, Florida, this 24 day

of March, 1987.

/s/_ C. CLYDE ATKINS

UNITED STATES DISTRICT JUDGE

ce: John Kozyak, Zsq.

Albert I. Edelman, Esq.

Scott D. Sheftall, Esq.

Raymond W. Bergan, Esq.

Fred H. Kent, Esq.

Vance E. Salter, Esq.

Irving M. Wolff, Esq.

App. B-17

50%

Court Appendix II

50%

Olympia & York

"osy”

(Appellant)

Theodore

ARBITRATION “Gould”

e— es "FF (Debtor)

Gould

7 i ee

“Managing Venturer”:

Gould

Miami Center Joint Venture

“MCJV"

(Appellant)

Assets

l. 4 Lots -- value $104 million

2. Furniture, fixtures

& equipment ("FF&E")

Liabilities

1. Bank of Montreal $16 million

plus interest

2. O&Y Advances $34 million

or more

“PFGE Leases”

"General Partner":

Gould

Miami Center Limited Partnership

“MCLP"

(Debtor)

App. B-19

APPENDIX C

11 U.S.C. Section 541(a): Property of the estate

(a) The commencement of a case under under section

301, 302, or 303 of this title creates an estate. Such estate is

comprised of all the following property, wherever located:

(1) Except as provided in subsections (b) and (c)\(2)

of this section, all legal or equitable interests of the

debtor in property as of the commencement of the case.

(2) All interests of the debtor and the debtor’s

spouse in community property as of the commencement

of the case that is—

(A) under the sole, equal, or _ joint

management and control of the debtor; or

(B) liable for an allowable claim against the

debtor, or for both an allowable claim against the

debtor and an allowable claim against the debtor’s

spouse, to the extent that such interest is so liable.

(3) Any interest in property that the trustee

recovers under section 543, 550, 553, or 723 of this title.

(4) Any interest in property preserved for the

benefit of or ordered transferred to the estate under

section 510(c) or 551 of this title.

(5) An interest in property that would have been

property of the estate if such interest had been an

interest of the debtor on the date of the filing of the

petition, and that the debtor acquires or becomes

entitled to acquire within 180 days after such date—

App. C-1

(A) by bequest, devise, or inheritance;

(B) as a result of a property settlement

agreement with the debtor’s spouse, or of an

interlocutory or final divorce decree; or

(C) as a beneficiary of a life insurance policy

or of a death benefit plan.

(6) Proceeds, product, offspring, rents, and profits

of or from property of the estate, except such as are

earnings from services performed by an individual

debtor after the commencement of the case.

(7) Any interest in property that the estate

acquires after the commencement of the case.

11 U.S.C. Section 945: Continuing jurisdiction and

closing of the case

(a) The court may retain jurisdiction over the case for

such period of time as is necessary for the successful

execution of the plan.

(b) Except as provided in subsection (a) of this section,

the court shall close the case when administration of the case l

has been completed.

11 U.S.C. Section 1104(a): Appointment of trustee or

examiner

(a) At any time after the commencement of the case

but before confirmation of a plan, on request of a party in

interest, and after notice and a hearing, the court shall order

the appointment of a trustee—

App. C-2

(1) for cause, including, fraud, dishonesty,

incompetence, or gross mismanagement of the affairs of

the debtor by current management, either before or

after the commencement of the case, or similar cause,

but not including the number of holders of securities of

the debtor or the amount of assets or liabilities of the

debtor; or

(2) if such appointment is in the interests of

creditors, any equity security holders, and other

interests of the estate, without regard to the number of

holders of securities of the debtor or the amount of

assets or liabilities of the debtor.

11 U.S.C. Section 1129: Confirmation of plan

(a) The court shall confirm a plan only if all of the

following requirements are met:

* * *

(3) The plan has been proposed in good faith and

not by any means forbidden by law.

* * *

(11) Confirmation of the plan is not likely to be

followed by the liquidation, or the need for further

financial reorganization, of the debtor or any successor

to the debtor under the plan, unless such liquidation or

reorganization is proposed in the plan.

* * *

(d) Notwithstanding any other provision of this

section, on request of a party in interest that is a government

unit, the court may not confirm a plan if the principal

App. C-3

purpose of the plan is the avoidance of taxes or the

avoidance of section 5 of the Securities Act of 1933

(15 U.S.C. 77e).

11 U.S.C. Section 3020(d): Deposit; Confirmation of

Plan

(d) Retained power

Notwithstanding the entry of the order of confirmation,

the court may enter all orders necessary to administer the

estate.

11 U.S.C. Section 9019: Compromise and Arbitration

(a) Compromise

On motion by the trustee and after a hearing on notice

to creditors, the debtor and indenture trustees as provided

in Rule 2002(a) and to such other persons as the court may

designate, the court may approve a compromise or

settlement.

26 U.S.C. Section 6012(b): Persons required to make

returns of income

(a) General rule.—Returns with respect to income

taxes under subtitle A shall be made by the following:

* * *

(b) Returns made by fiduciaries and receivers.—

(1) Returns of decedents.—If an individual is

deceased, the return of such individual required under

subsection (a) shall be made by his executor,

App. C-4

|

administrator, or other person charged with the

property of such decedent.

(2) Persons under a_ disability.—If an

individual is unable to make a return required under

subsection (a), the return of such individual shall be

made by a duly authorized agent, his committee,

guardian, fiduciary or other person charged with the

care of the person or property of such individual. The

preceding sentence shall not apply in the case of a

receiver appointed by authority of law in possession of

only a part of the property of an individual.

(3) Receivers, trustees and assignees for

corporations.—In a case where a receiver, trustee in a

case under title 11 of the United States Code, or

assignee, by order of a court of competent jurisdiction,

by operation of law or otherwise, has possession of or

holds title to all or substantially all the property or

business of a corporation, whether or not such property

or business is being operated, such receiver, trustee, or

assignee shell make the return of income for such

corporation in the same manner and form as

corporations are required to make such returns.

(4) Returns of estates and trusts.—Returns of

an estate, a trust, or an estate of an individual under

chapter 7 or 11 of title 11 of the United States Code

shall be made by the fiduciary thereof.

(5) Joint fiduciaries.— Under such regulations

as the Secretary may prescribe, a return made by one of

two or more joint fiduciaries shall be sufficient

compliance with the requirements of this section. A

return made pursuant to this paragraph shall contain a

statement that the fiduciary has sufiicient knowledge of

the affairs of the person for whom the return is made to

App. C-5

enable him to make the return, and that the return is, to

the best of his knowledge and belief, true and correct.

Sup.Ct.R. 10 Considerations Governing Review on

Writ of Certiorari

-l. A review on writ of certiorari is not a matter of

right, but of judicial discretion. A petition for a writ of

certiorari will be granted only when there are special and

important reasons therefor. The following, while neither

controlling nor fully measuring the Court’s discretion,

indicate the character of reasons that will be considered:

(a) When a United States court of appeals has

rendered a decision in conflict with the decision of

another United States court of appeals on the same

matter; or has decided a federal question in a way in

conflict with a state court of last resort; or has so far

departed from the accepted and usual course of judicial

proceedings, or sanctioned such a departure by a lower

court, as to call for an exercise of this Court’s power of

supervision.

(b) When a state court of last resort has decided a

federal question in a way that conflicts with the decision

of another state court of last resort or of a United States

court of appeals.

(c) When a state court or a United States court of

appeals has decided an important question of federal

law which has not been, but should be, settled by this

Court, or has decided a federal question in a way that

conflicts with applicable decisions of this Court.

App. C-6