Unpublished Disposition, 855 F.2d 862 (9th Cir. 1986)

MEMORANDUM^* 

This case arises out of competing claims over a life insurance policy's proceeds totaling approximately $530,000. The policy owner, Edward Maguire (Edward), was the founder, majority shareholder, and President of Mac Designs, Inc. (Mac Designs), the debtor herein. On January 26, 1983, Edward applied for a life insurance policy. The policy was issued and became effective on April 1, 1983. Edward designated the debtor as the primary beneficiary, and the debtor paid all policy premiums until Edward's death.

On July 26, 1984, Edward changed the primary beneficiary from the debtor to his wife, Melody. Approximately one year later, on July 10, 1985, Edward committed suicide. On September 12, 1985, the debtor filed a voluntary petition under Chapter 11 of the Bankruptcy Code. Both Melody and the debtor's creditors' (creditors committee) claim they are entitled to the life insurance policy's proceeds. The debtor initiated this litigation by filing a complaint seeking to impose a constructive trust on the life insurance policy proceeds.

After Judge Brown of the Bankruptcy Court denied the creditors' committee's motion for partial summary judgment, the parties agree to and conducted a settlement conference before Judge Brown. Although no settlement was reached during that conference, Melody and the debtor reached a compromise of their claim shortly thereafter. Melody agreed to take $250,000 in full settlement of her claim, and in return waive any interest she might have in the remaining approximately $280,000.

Judge Brown heard the motion for approval of the compromise and, over the creditor committee's objections, issued an order approving the compromise on December 30, 1986. Judge Brown concluded that there was a substantial probability that the debtor would not prevail if the matter were fully litigated, and that the settlement was a fair, just and reasonable resolution of Melody's claims.

The creditors' committee appealed Judge Brown's decision to the United States District Court for the Northern District of California. The district court affirmed Judge Brown's order, concluding that Judge Brown had before him more than sufficient information to enable him to properly exercise his discretion in approving the compromise. Additionally, the district court determined that Judge Brown's finding that the compromise was in the parties' best interest was not clearly erroneous. The creditors' committee timely appeals from the district court's decision.

"In an appeal from the district court's affirmance of a decision of the bankruptcy court, our role is essentially the same as that of the district court, and we are, in essence, reviewing the final order of the bankruptcy court." In Re A & C Properties, 784 F.2d 1377, 1380 (9th Cir. 1986) (citation omitted). We review a bankruptcy court's findings of fact under the clearly erroneous standard and its conclusions of law under the de novo standard. Id. However, we will not disturb a bankruptcy court's approval of a compromise absent a clear abuse of discretion. Matter of Walsh Construction, Inc., 669 F.2d 1325, 1328 (9th Cir. 1982). We conclude that Judge Brown did not abuse his discretion in approving the compromise and, accordingly, affirm the district court's affirmance of the compromise.

Bankruptcy Rule 9019(a) permits a court to approve a compromise or settlement. A bankruptcy court does not abuse its discretion in approving a particular compromise settlement if it "appris [es] itself of all facts necessary for an intelligent and objective opinion concerning the claim's validity," and then determines "that either (1) the claim has a 'substantial foundation' and is not 'clearly invalid as a matter of law,' or (2) the outcome of the claim's litigation is 'doubtful.' " Matter of Walsh Construction, Inc., 669 F.2d at 1328 (citations omitted); see also Protective Committee Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 88 S. Ct. 1157, 20 L. Ed. 2d 1 (1968). The bankruptcy judge "need not conduct an exhaustive investigation into the validity of the asserted claim" because the judge is "uniquely situated to consider the equities and reasonableness of a particular compromise." Id. The reasonableness of a compromise depends on the particular facts and circumstances of each case.

The creditors' committee contends that Judge Brown did not apprise himself of all the facts necessary to form an intelligent and objective opinion regarding the reasonableness of the compromise. However, the record shows that Judge Brown was very familiar with this case when he approved the compromise. Judge Brown had previously heard the creditors' committee's motion for partial summary judgment and reviewed the pleadings that were filed as a result thereof. These pleadings, a statement of material facts not in dispute, three memoranda of points and authorities both in support of and against the partial summary judgment motion, and declarations by attorneys on both sides and Melody Maguire, set forth the facts surrounding the claims being litigated, and enabled Judge Brown to form an objective and intelligent opinion concerning the claims' validity.

With the necessary facts before him, we conclude that Judge Brown did not abuse his discretion when approving the compromise because Melody's claim has a substantial foundation and is not clearly invalid as a matter of law. Although the corporation paid all of the policy's premiums, Edward was the policy's designated owner. Edward often ignored the corporate form, making it difficult to determine whether the premium payments were intended as a form of compensation to Edward for services he rendered to the corporation, or were intended for the corporation's own benefit. Additionally, important facts underlying the debtor's intent when purchasing the policy were lost when Edward committed suicide. Consequently, as the designated policy beneficiary, Melody's claim has substantial foundation and is not clearly invalid as a matter of law.

We also reject the creditors' committee's contention that Judge Brown violated Northern District of California Local Rule 240-1 by hearing both the contested motion for an order approving the compromise and the settlement conference. Local Rule 240-1, in pertinent part, provides: "Such [settlement] conference shall be held before any judge or magistrate other than the assigned judge unless all parties stipulate otherwise."

Although the parties do not appear to have entered into an express stipulation that Judge Brown could hear the settlement conference, the creditor's committee voluntarily appeared at and participated in the settlement conference. Therefore, we conclude that Local Rule 240-1 was not violated. Additionally, the creditors' committee may have waived this argument. Although the committee agreed with Judge Brown's suggestion that the proceeding should be transferred to another judge, the committee neglected to state their objection to Judge Brown's presiding at the settlement conference when it filed its objection to the proposed compromise.

Finally, we reject the debtor and Melody's request for sanctions to be imposed on the creditors' committee for filing a frivolous appeal and intentionally misleading the court. "Sanctions are appropriate when the result of the appeal is obvious and the arguments of error are wholly without merit." Grimes v. C.I.R., 806 F.2d 1451, 1454 (9th Cir. 1986); F.R.A.P. 38. We conclude that there was a genuine issue argued on appeal and imposition of sanctions is, therefore, inappropriate.

AFFIRMED.