IN RE: THOMAS E. GENTRY CASE NO. 87-50064

UNITED STATES BANKRUPTCY COURT 

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

IN RE:

THOMAS E. GENTRY CASE NO. 87-50064

d/b/a Tom Gentry Farm

DEBTOR

MEMORANDUM OPINION

This case was heard by the court on June 14, 1996 on the motion of the debtor, by counsel. The debtor wants the court to close his bankruptcy case and abstain from hearing any matters related to a Global Settlement Agreement entered into on January 14, 1991, and approved by the court on January 24, 1991. Alternatively, the debtor requests a jury trial. The factual issue he wants presented to a jury is whether equine collateral was disposed of in a commercially reasonable manner. The debtor and his family granted a security interest in the equine collateral to the chapter 11 trustee and creditors to secure the payments provided for by the Global Settlement Agreement.

The Global Settlement Agreement, a concession by the debtor to his creditors, was executed by the debtor, his children, and two corporate entities wholly owned by the children. The debtor, his children, and the corporate entities owned by the children were defendants in adversary proceedings pending in this court. The adversary proceedings challenge transfers of property made by the debtor to the children. The chapter 11 trustee and creditors, the other signatories to the Global Settlement Agreement, were plaintiffs in the adversary proceedings or in civil actions pending against the debtor in other courts.

The Global Settlement Agreement was intended to settle most of the litigation pending against the debtor, his children, and the corporate entities owned by the children.

The agreement provided that the claims of major unsecured creditors were to be subordinated to the claims of creditors holding small unsecured claims. The claims of the latter were to be paid in full. Each major unsecured creditor was to be paid an agreed upon amount as specified in the agreement, with interest at the rate of 10% from the date the agreement was approved by the Bankruptcy Court until paid.

To fund the payment of claims as provided for in the agreement and the payment of administrative expenses of this bankruptcy case, the Gentry family agreed to pay to the chapter 11 trustee $150,000 upon court approval of the agreement and $170,000 on or before March 1, 1991. They also agreed to pay another $80,000 on or before March 1, 1991; $400,000 on or before December 1, 1991; $200,000 on or before December 1, 1993, and $125,000 on or before December 1, 1994. The aforementioned amounts plus accrued interest were to be paid on the dates indicated. After payment of administrative expenses and small unsecured claims the remaining funds were to be distributed to major unsecured creditors pro-rata as specified in the Global Settlement Agreement. The Gentry family also was required to pay subordinated claims of Keeneland Association and Citizens Fidelity Bank totaling $250,000.

To secure the "Scheduled Payments, Pro-Rata Payments and the Subordinated Payments set forth in Sections 5.1, 5.2 and 5.3 of the Global Settlement Agreement" the Gentry family, executed a security agreement on January 31, 1991, granting to the chapter 11 trustee and the debtor's major unsecured creditors a security interest in the family's interest in all equine collateral (with the exception of three specifically identified thoroughbred horses). The equine collateral is identified in exhibits to the security agreement. There does not appear to be any dispute that the security interest in question was properly perfected.

The record indicates that on or about March 4, 1991 the Gentry family made initial payments called for by the agreement which, with interest, totaled $440,000. From this and other funds the trustee paid all small unsecured claims and made pro-rata payments to the major unsecured creditors as provided for by the Global Settlement Agreement. See motion of Barry Lee Weisbord filed July 18, 1991 requesting an order discharging him as trustee.

Following a hearing on August 22, 1991 an order was entered on September 17, 1991 discharging Mr. Weisbord as trustee and restoring the debtor to the status of debtor in possession. The order authorized the trustee to turn over remaining estate funds estimated to be approximately $48,000 to the debtor in possession.

The Gentry family failed to make the $400,000 payment which under terms of the Global Settlement Agreement was due on or before December 1, 1991, thus defaulting on the agreement.

On January 10, 1992, the major unsecured creditors moved for, and following a hearing on January 22, 1992 were granted, relief from stay for the purpose of enforcing the Global Settlement Agreement.

On March 23, 1992 the major unsecured creditors moved for an order directing the Gentry family to surrender and deliver the equine collateral covered by the security agreement dated January 31, 1991. On April 2, 1992 an agreed order was entered directing the Gentry family to surrender and deliver to the creditors holding a security interest therein the collateral covered by the security agreement. The order authorized the security interest holders to dispose of the collateral at private or public sale in a commercially reasonable manner and as allowed by applicable law.

On July 2, 1992 the security interest holders moved for an order holding the debtor and the Gentry family in contempt for failure to surrender certain collateral. Following a hearing on July 22, 1992 an agreed order was entered on July 28, 1992 compelling the Gentry family to comply with the agreed order of April 2, 1992 enforcing the Global Settlement Agreement.

On May 7, 1993, the debtor/debtor in possession moved for an order rescinding the transfer to Hunting Horn, Inc. of the debtor's lender liability cause of action against First National Bank of Louisville, and for an order dismissing the bankruptcy case. Hunting Horn, Inc. is one of the corporate entities wholly owned by the debtor's children.

Following a hearing on May 26, 1993 an order was entered on June 17, 1993 dismissing the debtor's bankruptcy case with prejudice. The order provided that the transfer to Hunting Horn, Inc. of the debtor's cause of action against First National Bank of Louisville was rescinded and that the cause of action shall revert to the debtor. The order of dismissal as permitted by title 11 U.S.C. 349 reserved to the court the right to reopen the case sua sponte or on motion to establish deficiency amounts and enforce post-judgment remedies, subject to any defenses or counterclaims which may be asserted concerning the disposition of collateral which secured the Global Settlement Agreement. The court retained jurisdiction for the issuance of such orders as may be necessary to allow the security interest holders to enforce their rights in the equine collateral covered by the security agreement of January 14, 1991.

Although the debtor's chapter 11 case was dismissed with prejudice, the case was not closed. This was due in part to the residual jurisdiction retained by the court in the order of dismissal and the fact the court was awaiting an accounting of the disposition of the collateral foreclosed on by the major unsecured creditors.

On November 17, 1995, counsel for the security interest holders filed a report of the disposition of the collateral subject to their security interest showing receipts and disbursements in connection with the liquidation of the equine collateral.

Meanwhile, the debtor was pursuing his lender liability cause of action against First National Bank of Louisville.

On or about April 2, 1996, the parties agreed to settle the debtor's lender's liability action against First National Bank of Louisville for an unrevealed amount. The action is styled Follow the Leader, Inc. and Tom Gentry v. National City Bank, a/k/a First National Bank of Louisville, Jefferson Circuit Court Case No. 87-CI-00853.

The Global Settlement Agreement of January 14, 1991 provided that the approval of the agreement by the Bankruptcy Court shall have the force and effect of a judgment of the Bankruptcy Court against the Gentry Family (defined to mean the debtor, his children, and the corporate entities owned by the children) for the Scheduled Payments, the Pro Rata Payments, the Subordinated Payments and Supplemental Payments, in favor of the trustee and the parties to this agreement other than the Gentry Family. Global Settlement Agreement paragraphs 1.2 and 5.6.

The order of this court of January 24, 1991 approving the Global Settlement Agreement also provided that the order shall have the full force and effect of a judgment of this court against the debtor, Thomas E. Gentry, Olin B. Gentry, Kathleen Gentry Spears, Bright Holdings, Inc. and Hunting Horn, Inc., for the Scheduled Payments, the Pro Rata Payments, and the Subordinated Payments and Supplemental Payments (as those terms are defined in the Settlement Agreement), in favor of the trustee and the parties to the Settlement Agreement other than the Gentry Family.

On April 3, 1996 the major unsecured creditors as defined by the Global Settlement Agreement based on the aforementioned judgment of this court obtained writs of garnishment from this court for an amount due of $1,455,783.22 with per diem of $336.85 from April 4, 1996. The writs were served on National City Bank and counsel for the debtor.

At a hearing held on April 9, 1996, this court ruled the garnishments were valid. An order to this effect was entered on April 17, 1996. The order provided that upon approval of the settlement of the debtor's lender liability action by the presiding trial judge of the Jefferson Circuit Court, an adjusted garnishment amount of $1,106,698.98, with per diem of $263.27 should be paid to Thomas Burnett, as representative of the major unsecured creditors, and held by him in an interest bearing escrow account or certificate of deposit pending further orders of this court.

The order gave the debtor twenty days from the April 17, 1996 date of the order within which to file a motion raising the issue of whether the collateral covered by the Security Agreement of January 31, 1991 was disposed of in a commercially reasonable manner. The major unsecured creditors as defined in the Global Settlement Agreement were given twenty days to respond to the motion, after which the court was to hear and rule on the motion.

The debtor did not file pleadings in the bankruptcy court raising the issue of whether the collateral had been disposed of in a commercially reasonable manner. Instead, on May 7, 1996 the debtor filed a Complaint and Petition for Declaration of Rights in a state forum, the Bourbon Circuit Court, Civil Action No. 96-CI-00090, naming as defendants the creditors who were granted a security interest in the Gentry Family equine collateral by the security agreement of January 31, 1991. The complaint alleges that the collateral was not sold in a commercially reasonable manner. The debtor requested a monetary judgment in his favor against the defendants in the amount of the difference between the fair market value of the collateral and the outstanding balance due the defendants under the Global Settlement Agreement as of April 2, 1992, the date the defendants took possession of the collateral. The debtor requested a trial by jury on all issues so triable.

The defendants in the Bourbon Circuit Court action timely removed that action to this court. It is now denominated Adversary Proceeding No. 96-5051. The defendants have filed an answer specifically denying certain allegations and generally denying each and every allegation contained in the complaint.

The debtor's motion for this court to abstain from hearing any matters related to the Global Settlement Agreement and to close the debtor's bankruptcy case, or, in the alternative, for a jury trial, was filed in the debtor's bankruptcy case on May 7, 1996, the same day the declaratory judgment action was filed in the Bourbon Circuit Court. The motion was premature in that it was filed before removal of the Bourbon Circuit Court action to this court.

The Global Settlement Agreement clearly indicates that in the event of default this abated chapter 11 case and related adversary proceedings could be reactivated under the jurisdiction of the bankruptcy court. Agreement paragraphs 3(d), 3.5, 8.5, 10.1(a), 10.1(b)(1), 10.2, 10.3, 12.2.

The order of June 17, 1993 dismissing the debtor's chapter 11 case precludes the debtor from obtaining a discharge with respect to debts existing at the time of dismissal and reserves and retains jurisdiction of the bankruptcy court for issuance of such orders as may be necessary to allow creditors to enforce their rights in collateral securing the Global Settlement Agreement.

The Global Settlement Agreement provides that the remedies specified in the agreement are cumulative and not exclusive. Paragraph 10.3. The Security Agreement executed by the parties in connection with the Global Settlement Agreement contains language to the same effect. Security Agreement, paragraph 19. An election to terminate rather than enforce the agreement would have the effect of permitting the major unsecured creditors to collect the full amount rather than the compromised amount of their claims. Paragraph 10.2.

The Security Agreement executed by the debtor, his children, and the corporate entities owned by the children, conveying to the defendants in the Bourbon Circuit Court action a security interest in the equine collateral owned by the Gentry Family, provides that the parties to the security agreement "waive all right to trial by jury in any action, proceeding or counterclaim arising out of the rights, remedies, warranties, or representations of the parties to this Security Agreement and the construction of this Security Agreement." Security Agreement, paragraph 16.

Both the Global Settlement Agreement and the accompanying Security Agreement provide the agreements are governed by the law of the Commonwealth of Kentucky.

CONCLUSIONS OF LAW:

The motion of the debtor for the court to abstain from hearing matters related to the Global Settlement Agreement, to close the debtor's bankruptcy case, or in the alternative, for a jury trial shall be overruled.

To the extent that the motion to abstain relates to the debtor's bankruptcy case rather than to the civil action commenced by the debtor in the Bourbon Circuit Court, there is no showing that the interests of creditors and the debtor would be better served by the continued suspension of proceedings in the bankruptcy case. 11 U.S.C. 305. This is especially so in view of the fact that monies sufficient to satisfy the claims of creditors have been sequestered by garnishments issued on the judgment of this court against the debtor.

To the extent that the motion to abstain relates to Adversary Proceeding No. 96-5051, the civil action removed to this court from the Bourbon Circuit Court, which seeks a declaratory judgment as to the effect of a Global Settlement Agreement and an accompanying Security Agreement executed by the parties postpetition with the approval of this court, the adversary proceeding obviously is a proceeding "arising in" this bankruptcy case. Consequently, 11 U.S.C. 1334(c)(2) does not mandate abstention in this removed adversary proceeding. In re Ben Cooper, Inc., 896 F.2d 1394 (2d Cir. 1990), cert. den., 500 U.S. 928; Arnold Print Works, Inc., 815 F.2d 165 (1st Cir. 1987). Nor, on the facts of this case, is there any basis for discretionary abstention under 11 U.S.C. 1334(c)(1).

There was consideration for the debtor's contractual waiver of his right to a jury trial in any action or counterclaim arising out of the rights or remedies of the parties to the security agreement. The major unsecured creditors likewise waived their right to a jury trial. They compromised the amount of their claims. They agreed to forego prosecution of the several actions or adversary proceedings against the debtor, his children, and the corporate entities owned by the children. Under the facts of this case such a contractual waiver of a right to a jury trial is enforceable. McCarthy, et al. v. Wynne, et al., 126 F.2d 620 (10th Cir. 1942); Freeman v. Island Discount Corp., 169 N.Y.S.2d 830, (S.Ct., App. Div. 2d Dept. 1958); Annot., Validity and Effect of Contractual Waiver of Trial by Jury, 73 A.L.R.2d 1332 (1960).

Dated:

By the court -

 

_____________________________

JOE LEE, CHIEF JUDGE

 

Copies to:

Robert L. Treadway, Esq.

Lawrence J. Zielke, Esq.

Thomas H. Burnett, Esq.

Natalie S. Wilson, Esq.

Harvie B. Wilkinson, Esq.

Robert S. Ryan, Esq.

U.S. Trustee

f:\opinions\1996\gentry

UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

 

 

IN RE:

 

THOMAS E. GENTRY CASE NO. 87-50064

d/b/a Tom Gentry Farm

 

DEBTOR

 

 

ORDER

 

 

In conformity with the memorandum opinion of the court this day entered, IT IS ORDERED that the motion of the debtor for the court to abstain from hearing matters relating to the Global Settlement Agreement, to close the debtor's bankruptcy case, or in the alternative, for a jury trial is overruled.

Dated:

By the court -

 

_____________________________

JOE LEE, CHIEF JUDGE

 

Copies to:

 

Robert L. Treadway, Esq.

Lawrence J. Zielke, Esq.

Thomas H. Burnett, Esq.

Natalie S. Wilson, Esq.

Harvie B. Wilkinson, Esq..

Robert S. Ryan, Esq.

U.S. Trustee