JOINT MOTION FOR ORDER APPROVING COMPROMISE OF CONTROVERSY WITH DICK BRUHN, INC. (FEDERAL RULE OF BANKRUPTCY PROCEDURE 9019)
Last week the Debtors and Creditors' Committees in the two Bruhn bankruptcy cases (the personal case and the Dick Bruhn, Inc. case) finally agreed on the terms of a settlement. Under Bankruptcy Procedure Rule 9019, before a debtor may enter into a settlement the debtor must receive permission from the Court to do so and must request this permission through what is called a "Motion for Order Approving Compromise of Controversy". In this motion, the debtor must demonstrate to the Court that settling the dispute is better than the risk of litigating the dispute. Since both parties to the settlement are debtors, the Court has to be convinced the compromise is good for both estates.
The essential components of the settlement are as follows:
· The Estate of Richard L. Bruhn (the "Individual Estate") shall have an allowed secured claim in the Dick Bruhn, Inc. ("DBI") case in the sum of $500,000.
· The Individual Estate shall have an administrative rent claim against the Corporate Estate in the sum of $93,000.
· All claims of any relative of Richard L. Bruhn in either estate (except for the claim of the former spouse of Richard L. Bruhn) shall be subordinated to the payment in full (plus interest as allowed by law) of the holders of allowed general unsecured claims.
· The DBI Estate shall have an allowed non-priority general unsecured claim in the Individual Estate in the amount of the lesser of (a) the aggregate amount of allowed DBI non-Noteholder claims, and (b) $1,300,000. Each distribution made by the Individual Estate to certain taxing authorities on account of allowed unsecured claims under Section 507(a) of the Bankruptcy Code relating to the operation of Dick Bruhn, Inc. (including any claim relating to sales taxes) shall not reduce the amount of DBI's claim in the Individual Estate but instead shall reduce dollar for dollar the distribution to which the DBI Estate is entitled for its claim.
On Friday, February 15, 2008, counsel for the Debtor and counsel for the Creditors' Committee filed a joint motion to the Court to approve a settlement agreement with the DBI estate (the "Settlement Motion"). The Settlement Motion includes a copy of the proposed settlement that the estates are requesting permission to enter into with the Court's permission.
The Debtor's estate filed claims against the DBI estate for money loaned directly to the DBI over the years (totaling approximately $3.2 million), about $170,000 for rental income, and over $8.6 million for the indemnity for potential payment to those creditors holding DBI Investment Notes (the "Noteholders"). If the Debtor's estate is successful against the DBI estate, aside from removing the DBI claim from the Individual Estate, the Individual Estate's collection status from the DBI estate would not change and the Individual Estate would have substantially less to distribute its creditors due to litigation and investigation expenses.
The DBI estate filed a large claim in Mr. Bruhn's estate. This claim is for $11.5 million dollars and is based on alleged diversions of funds and Debtor’s purported alter ego liability for all DBI’s debts. If DBI is successful in its claim against Mr. Bruhn, then the amount DBI would receive from Mr. Bruhn's estate for this claim would be used by the DBI estate to pay both Noteholders and the other DBI creditors. The non-Noteholder creditors in the DBI estate are trade creditors – creditors who are owed money based on goods and services provided to the DBI businesses. We are advised by the DBI estate that the amount claimed by the trade creditors is about $2.2 million. Additionally, there will be additional claims from landlords of various Selix stores that are being closed.
If the two estates were to litigate their claims against each other, the estates would incur an estimated $500,000 in costs. Because of nature of the claims, in any outcome of litigation one estate would completely win and other would completely lose. Also, a plan of reorganization could not be confirmed until the litigation was over, which would delay an distribution to creditors.
Both estates believe that losing at least $500,000 in litigation costs does not serve any estate justice. This settlement, or compromise, between the Debtor and DBI is meant to finalize the claims of each against the other, avoid approximately $500,000 in litigation costs, and eliminate a delay of several years in distribution.
