All Settlements Final: District of Montana Bankruptcy Court Refuses to Set Aside Releases Alleged to Have Been Obtained by Fraud
In re Shoot the Moon, LLC, 635 B.R. 568 (Bankr. D. Mont. 2022)
Article Courtesy of David Simonds of Hogan Lovells
Summary
In In re Shoot the Moon, LLC, the United States Bankruptcy Court for the District of Montana (the “Bankruptcy Court”) dismissed an adversary proceeding, brought by a liquidating trustee, seeking a declaratory judgment that a broad release of claims against lenders that was part of an asset sale and related stipulations was null and void as obtained through fraud.[1]
Case Description
In the early 2000s, Kenneth Hatzenbeller and two other principal investors created a business known as Shoot the Moon. Over time, this enterprise grew to consist of nineteen LLCs formed pursuant to Idaho, Montana, and Washington law that owned and operated sixteen restaurants located throughout the three states. Mr. Hatzenbeller and the Shoot the Moon entities had debtor-creditor relationships with a variety of counterparties, including defendants First Interstate Bank (“FIB”) and Prairie Mountain Bank n/k/a American Bank Center (“ABC”).
In October 2015, all nineteen Shoot the Moon entities merged into Shoot the Moon, LLC, which filed a chapter 11 petition on the following day. A chapter 11 trustee was appointed (the “Trustee”).
In July 2016, the Trustee moved to sell substantially all of the property of the bankruptcy estate free and clear of liens, claims, rights, encumbrances, and other interests. Because the proposed purchase price totaled less than the aggregate value of all liens on the property, the Trustee sought the consent of various secured creditors – including FIB and ABC – to the sale. The secured creditors agreed to the sale only after the Trustee entered into a stipulation that provided a general release to the secured creditors of all claims against them, known and unknown. The official creditors’ committee objected to the stipulation, particularly the general release. After the secured creditors agreed to provide additional concessions regarding distributions of value, the creditors’ committee withdrew its objection. In September 2016, the Bankruptcy Court entered an order approving the asset sale and the stipulation with the secured creditors.
The Bankruptcy Court subsequently confirmed a chapter 11 plan, pursuant to which the Trustee was appointed trustee of the “STM Liquidating Trust” (in such capacity the “Liquidating Trustee”), which was the successor in interest to the bankruptcy estate.
In August 2021, the Liquidating Trustee commenced the subject adversary proceeding, alleging that Mr. Hatzenbeller for several years engaged in a check-kiting scheme using the Shoot the Moon entities, that defendants knew of and participated in the scheme, that the Shoot the Moon entities suffered resulting injury, and that the stipulation and release were null and void as obtained through fraud. Specifically, the complaint asserted that the defendants failed to disclose their knowledge and participation in the check-kiting scheme to the Liquidating Trustee when negotiating the settlement and alleged generally that the defendants concealed their involvement in the check-kiting scheme.
Citing the importance of finality, certainty and speed in bankruptcy court settlements, and noting that parties frequently regret settlements with hindsight, the Bankruptcy Court held that, under Montana law, which applied to the settlement, the Liquidating Trustee had failed to plead grounds to invalidate the release, and thus the claim should be dismissed. The Bankruptcy Court held that, under Montana law, simple nondisclosure was not sufficient to establish fraudulent concealment. The Liquidating Trustee did not allege any affirmative acts by either FIB or ABC to mislead, hinder or otherwise create misimpressions. Rather, the alleged facts simply told a story of passive nondisclosure – a failure to volunteer – which was legally insufficient to invalidate the release.
The Bankruptcy Court also gave short shrift to the Liquidating Trustee’s allegation that his complaint established “special circumstances” creating a duty of disclosure due to defendants’ “peculiar knowledge” of material facts about the check-kiting scheme. Not only did the Liquidating Trustee fail to cite any authority indicating that this duty arises in the context of adverse parties negotiating a settlement agreement or release, contrary to public policy, a requirement that potentially harmful information be affirmatively disclosed as a condition to an effective settlement or release would actually hamper and discourage settlement negotiations. Such a requirement would also create boundless uncertainty, subjecting any general release to attack months or years later.
As a post-script, the Bankruptcy Court gave the Liquidating Trustee leave to amend his complaint, requiring that any amendment include particularized factual allegations regarding affirmative conduct relating to the parties’ stipulations. However, the Liquidating Trustee’s amended complaint fared no better. In their second motion to dismiss, FIB and ABC argued that the complaint constituted an impermissible collateral attack on the sale order, a final order that had been approved over five years earlier and not appealed. The Bankruptcy Court agreed, and, in In re Shoot the Moon, LLC, 642 B.R. 21 (Bankr. D. Mont. 2022), dismissed the Liquidating Trustee’s claims without leave to amend.
[1] If this case sounds familiar, the Spring 2022 edition of ACIC’s Private Notes featured a discussion of a decision in a separate adversary proceeding in this long-running and highly litigious bankruptcy case. Click here for a refresher.
