This matter came before the court on November 30, 1995, for a continued hearing on motions of the trustee, Lucinda Masterton (f/k/a Lucinda Masterton Hall), for approval of proposed settlements reached with the debtor in Adversary Proceeding No. 90-5316, and with Bank One in Adversary Proceeding No. 90-5310 and in Civil Action No. 89-CI-4113 pending in the Fayette Circuit Court.

FINDINGS OF FACT:

1. The debtor, Harold E. Sergent ("Sergent"), filed with this court a petition for relief under chapter 11 of the U. S. Bankruptcy Code on November 2, 1989.

2. On motion of the creditor Bill E. McKay, Jr. ("McKay") to convert or dismiss the petition as a bad faith filing, the court converted the case to one under chapter 7. See Memorandum Opinion of Judge Clive W. Bare dated 3/15/90.

3. Lucinda Masterton ("Masterton") was on April 4, 1990 appointed trustee in the debtor's chapter 7 case. By order entered May 23, 1990, the law firm of Brown, Bucalos, Santana & Bratt, with

Ann E. Samani acting as lead counsel, was appointed to represent the trustee in the case.

4. Prior to the commencement of this bankruptcy case McKay had filed an action against the debtor and others in the Fayette Circuit Court, Case No. 89-CI-4113, ("Fayette Circuit Court Litigation"). By that action McKay sought, inter alia, to set aside as fraudulent several transfers of assets by the debtor to various transferees. The debtor's trustee in bankruptcy, Masterton, intervened as plaintiff in the Fayette Circuit Court Litigation likewise seeking to avoid as fraudulent prepetition transfers of property by the debtor. Once Sergent filed bankruptcy McKay's standing to pursue the state court action insofar as it seeks to set aside as fraudulent transfers of property by the debtor became questionable. See In re Mortgage America Corp., 714 F.2d 1266 (5th Cir. 1983).

In addition, the trustee initiated a number of adversary proceedings in the bankruptcy court including the following:

AP No. 90-5148 an action to recover assets from debtor's wife, Linda Sergent;

AP No. 90-5245 an action to set aside an alleged fraudulent conveyance by the debtor to his wife ("farm-condo swap");

AP No. 90-5310 an action to set aside an alleged preferential conveyance by the debtor to Bank One;

AP No. 90-5316 an action objecting to debtor's discharge;

AP No. 91-5220 an action to set aside an alleged preferential transfer by the debtor to the IRS.

5. The trustee alleged in her original complaint in adversary proceeding 90-5316 that the debtor's discharge should be denied pursuant to 11 U.S.C. § 727(a)(2), (3), (4), (5), and (6). By her First Amended Complaint filed August 6, 1991 the trustee eliminated 11 U.S.C. § 727(a)(3) and (5) as grounds for objecting to the discharge of the debtor. By an agreed order entered September 16, 1991 the trustee withdrew paragraphs 20 and 21 of the First Amended Complaint [paragraphs 14 and 15 of the original complaint] thereby eliminating 11 U.S.C. § 727(a)(4) and (6) as grounds for objecting to discharge of the debtor. Thus, the only remaining ground for objecting to the discharge of the debtor is 11 U.S.C. § 727(a)(2), based on allegations that within one year of bankruptcy the debtor transferred property of the debtor with intent to hinder, delay, or defraud a creditor. Crossmotions for summary judgment by the debtor and the trustee have been denied. No creditor or party in interest other than the chapter 7 trustee timely filed a complaint objecting to the discharge of the debtor. Although under the terms of the settlement the remaining ground for objecting to the discharge of the debtor will be dismissed, the trustee will continue to pursue the litigation in state court which seeks to set aside and to recover for the benefit of the bankruptcy estate property allegedly fraudulently conveyed by the debtor. The complaint in adversary proceeding 90-5316 objecting to the discharge of the debtor, which under the settlement is to be dismissed, does not seek recovery of property allegedly fraudulently conveyed by the debtor.

6. Although there has been little discovery in adversary proceeding 90-5316, there has been much discovery in the Fayette Circuit Court action and in adversary proceeding 90-5245 regarding the debtor's pre- and post-petition conduct.

7. In AP No. 90-5245, following a two day trial, the court found that the "farm-condo swap" between Harold Sergent and Linda Sergent was a fraudulent transfer pursuant to 11 U.S.C. § 548(a)(2) in that it involved a transfer for less than reasonably equivalent value. Having so found, the court declined to avoid the "farm-condo swap" pursuant to 11 U.S.C. § 548(a)(1), as a transfer made with actual intent to hinder, delay, or defraud creditors. See Memorandum Opinion of Judge Clive W. Bare, entered September 23, 1991 in AP No. 90-5245.

8. By motion filed August 8, 1994 the trustee has proposed dismissal of AP No. 90-5316, thereby withdrawing her objection to the granting of a discharge to the debtor, Harold E. Sergent, upon payment by the debtor to his creditors as set out in the motion.

9. The trustee has enunciated the following reasons in support of her decision to dismiss AP No. 90-5316 as being in the best interest of the estate:

A. The large claims of the Internal Revenue Service ("IRS") and McKay have made settlement difficult. The trustee believes that McKay is prepared to litigate all matters to conclusion without regard to the cost of litigation or the delay involved.

B. The debtor has paid the IRS in excess of $900,000 from post-petition earnings on the prepetition priority tax claim of the IRS. The debtor has filed an adversary proceeding, No. 94-5135, seeking a determination of the amount of his remaining tax liability to the IRS.

C. The debtor has settled the claim of the Commonwealth of Kentucky Revenue Cabinet by making voluntary payments in excess of $100,000 from his post-petition earnings, with the remainder of the Revenue Cabinet's claim to be paid in accordance with the terms of the settlement document attached to the motion of the trustee to approve settlement.

D. The debtor will voluntarily pay from post-petition earnings all the remaining unsecured claims against his estate with the exception of the claims of the IRS and McKay. The claims to be paid by the debtor from his post-petition earnings are as follows:

Claimant Amount Paid to Settle

Mutual Benefit Life Insurance Company $ 60,000.00

W. H. Hodges (includes claims of A. J.

Horne and Patterson Lighting, who

functioned as subcontractors--

$25,000 paid and $15,000 to be paid

upon approval of settlement

by the court) $ 40,000.00

Malcolm Saunier Full Release

Bank One $ 60,000.00

Coopers & Lybrand $ 4,675.00

Turf Magazine $ 1,830.00

Brumfield Hay & Grain $ 717.28

B. F. I. $ 267.74

Wilkinson Flying Service $ 2,076.41

Terminex $ 255.00

Lawrence Brewer & Son $ 1,896.71

White & Associates $ 1,306.61

McAlpins $ 834.18

Ky Tack Shop $ 555.16

Ashland Branded Marketing $ 1,365.11

Joseph E. Johnson, III $ 15,000.00

Thomas H. Burnett $ 15,000.00

Woodlands $ 4,094.73

Central Rock $ 12,220.04

John Cummins $ 12,220.04

TOTAL $226,473.97

E. In addition the debtor has agreed to pay up to $150,000 to cover administrative expenses of the estate, and that sum has been deposited with the trustee.

F. The court shall not dismiss AP No. 90-5316 until all of the above-referenced payments have been made by the debtor.

G. The trustee asserts a judgment denying the debtor a discharge in AP No. 90-5316 would not bring any funds into the estate and thus would not provide benefit to any of the unsecured creditors, especially those creditors holding small claims. The voluntary settlements by the debtor result in creditors holding small claims being paid in full and in several of the unsecured creditors holding large claims agreeing to accept less than 100 cents on the dollar in settlement of such claims.

H. Payment or satisfaction of these claims by the debtor provides a substantial benefit to the remaining creditors (the IRS and McKay) because the settling creditors will not be paid funds of the estate and thus estate funds can be used exclusively to pay the claims of the two remaining creditors, the IRS and McKay. The several tax claims of the IRS are nondischargeable. Consequently, whether the debtor is granted or denied a discharge has no bearing on the collectibility of the claims of the IRS. The settlement proposal preserves the right of McKay to pursue his timely filed complaints to except from discharge the indebtedness represented by his claim reduced to judgment against Harold E. Sergent and Linda Sergent.

10. Approximately $125,000 of estate funds being held by the Master Commissioner of the Fayette Circuit Court represents monies received by the debtor from the now-defunct H. Sergent Energy Services, Inc. The estate has two monetary judgments totalling approximately $250,000 against the estate of Linda Sergent. The trustee in Linda Sergent's estate holds approximately $597,841.93 to be distributed.

11. The proposed dismissal of AP No. 90-5316 is premised and contingent on the agreement that neither of the debtors, Harold E. Sergent or Linda Sergent, nor any of their related entities will receive any funds from their bankruptcy estates or any refund from any taxing authority. Such funds are to be used to pay dividends on the claims of creditors whose claims were by agreement of the parties compromised.

12. The debtor has obtained a release from Bank One, Lexington, N. A., ("Bank One") of its claim filed in the debtor's bankruptcy case in exchange for payment of approximately 12 cents on the dollar. The trustee has agreed to release her claims against Bank One in AP No. 90-5310 which is to be dismissed. The trustee also has agreed to release her claims against Bank One in the Fayette Circuit Court Litigation. The trustee has agreed to release these claims against Bank One upon approval of the dismissal of AP No. 90-5316. The trustee is not releasing any other claims in the Fayette Circuit Court Litigation.

13. The trustee's Motion to Approve Settlement was served on certain parties in interest, including the United States Trustee, on August 8, 1994. Notice of the motion was served on all creditors and parties in interest on the same date.

14. Creditor McKay, upon receiving notice of the proposed settlement, sought to depose the trustee by scheduling her deposition on August 18, 1994.

15. The trustee's motion for a protective order was overruled; the trustee's deposition was taken by McKay on August 29, 1994 and September 6, 1994.

16. On September 12, 1994 McKay filed a motion to extend the time for objecting to the proposed settlement, in which he requested an additional 60 days from the date of his motion within which to file objections to the proposed settlement. The reasons stated for the request included:

A. "Factors outside McKay's control" prevented him from acquiring "needed information" to accurately evaluate the proposed settlement.

B. The trustee's deposition contained "new information" about the proposed settlement, information which was not found in her motion or any where in the bankruptcy record, and other parties in interest, particularly the United States Trustee, should be given additional time to review the deposition.

C. During the trustee's deposition McKay requested notes of all conversations and communications with a number of persons which related in any way to the discharge of the debtor or the proposed dismissal of AP No. 90-5316. He also requested IRS audit materials and bank reconciliation registers. McKay stated that until he could review the requested documents he was unable to evaluate the proposed settlement.

D. McKay requested additional time to obtain more information about the IRS claim because, he asserted, the proposed settlement "isolates McKay and the IRS as creditors and appears to unnecessarily pit McKay against the IRS in a struggle for any assets of the estate."

17. In requesting more time to formulate objections to the proposed settlement, McKay set out in his motion "numerous issues which give rise to substantial objections to the proposed settlements." While stressing that he needed more information to determine the extent to which his objections were well grounded, McKay provided a "bare bones recital" of possible objections. Those possible objections are set out at length in the motion for an extension of time in which to object to the proposed settlement.

18. On September 19, 1994 the court conducted a hearing on the motion of the trustee To Approve Settlement and on the motion of McKay To Extend Time for Objecting. The court heard the arguments of counsel. The IRS objected to the settlement on the basis that unsecured claims should not be paid ahead of the priority claim of the IRS. The United States Trustee did not file written objections to the settlement but did argue in support of McKay's request for additional time and expressed concern that the settlement was a "bargain for a discharge," that the debtor was being allowed to "divide and conquer" his creditors as a "trade off" for dismissal by the trustee. At the conclusion of the hearing, the motion of the trustee for approval of the settlement was granted; the motion of McKay for additional time within which to formulate objections to the settlement was denied. As indicated by the findings in Paragraph 15 above McKay had deposed the trustee on two occasions concerning the details of the settlement and other matters.

19. McKay timely filed an appeal from the order approving the settlement. No other party in interest appealed the order.

20. On July 21, 1995 the U. S. District Court for the Eastern District of Kentucky issued an opinion and order reversing the order of this court denying McKay's request for an extension of time in which to file objections. In remanding the case the District Court directed that this court permit McKay time within which to file objections to the proposed settlement and to conduct a hearing on his objections. The court was directed to enter findings of fact and conclusions of law upon request of any party.

21. In conformity with that Opinion and Order, on August 4, 1995 an order was entered granting McKay 90 days from the date of the order within which to conduct discovery and to file objections to the proposed settlement. A hearing was scheduled for November 17, 1995. On motion of the United States Trustee the hearing was reset for November 30, 1995.

22. No discovery was conducted by McKay within the greater than ninety day period (August 4, 1995 to November 30, 1995) allowed by the court. McKay did not file a motion to compel production of documents by the trustee, or any other party identified in Paragraph 2 of McKay's motion to extend the time for objecting to the proposed settlements. Furthermore, McKay did not file any objections to the proposed settlement within the time allowed by the court.

23. A hearing was conducted on November 30, 1995. Although the United States Trustee supported McKay's motion for an extension of time to object to the settlements proposed by the trustee, the United States Trustee has not filed any objections to the proposed settlement. Instead, on November 27, 1995, three days prior to the hearing on November 30, 1995, the United States filed a motion pursuant to 11 U.S.C. § 707(a) to dismiss the debtor's bankruptcy case for lack of good faith on the part of the debtor in his prepetition and post-petition conduct. The record indicates the United States Trustee deposed the debtor on October 24, 1995, but no evidence indicating lack of good faith on the part of the debtor was offered in support of the motion to dismiss. The motion of the United States Trustee requests the court condition dismissal of the case pursuant to 11 U.S.C. § 349. The United States Trustee again expressed concern that the proposed dismissal of the pending objections to the discharge of the debtor filed by the chapter 7 trustee in conjunction with the proposed settlement agreement is against public policy as a bargain, payment, or tradeoff whereby the debtor is "purchasing his discharge."

McKay appeared late at the November 30, 1995 hearing and made no statement. While the hearing was in progress McKay filed a lengthy affidavit in the clerk's office. The affidavit may replicate allegations which McKay had previously filed with the United States Trustee concerning the conduct of the chapter 7 trustee and her attorney in the Harold E. Sergent case and of the chapter 7 trustee in the Linda Sergent case, allegations which are being evaluated by the office of the United States Trustee. In pleadings McKay has expressed the concern that the proposed settlement could be construed to be a bankruptcy crime under title 18 U.S.C. § 152(6). The court discounted this concern in approving the settlement agreement because the details of the settlement agreement are a matter of public record and are subject to scrutiny by this court.

24. McKay filed a timely complaint to except from discharge under 11 U.S.C. § 523 the debt owed to him by the debtor, Adversary Proceeding No. 90-5230; he filed a similar complaint in the bankruptcy case of Linda Sergent, Adversary Proceeding No. 91-5209. As previously noted, under the settlement agreement McKay retained the right to continue to prosecute these complaints. However, he has not done so. Both of these complaints have been dismissed for want of prosecution by McKay.

25. The court has considered the arguments of counsel and the history of the litigation in this case. The debtor has voluntarily paid in full some prepetition creditors from post-petition income and has reached an agreement with other creditors, other than the IRS and McKay, to accept less than payment in full in complete satisfaction of their claims. The court also has considered the element of probability of success of the trustee in prosecuting AP No. 90-5316 with the attendant risks, delay, and costs to the estate in litigating that proceeding. Considering all these factors the court finds that the settlement is in the best interest of creditors generally.

26. The court is not persuaded by the contention of the United States Trustee that the proposed settlement is an attempt by the debtor to "purchase" his discharge or an attempt by the chapter 7 trustee to "sell" the discharge. Further, the court is not persuaded that payment of the remaining creditors, with the exception of the IRS and McKay, is an attempt by the debtor to isolate the IRS and McKay as creditors in order to "pit" them against each other in a "struggle" for remaining assets of the estate. The debtor has filed a complaint pursuant to 11 U.S.C. § 505 seeking a determination of his remaining tax liability, if any, to the IRS. The complaint alleges the debtor has paid the IRS in excess of $900,000, owes no additional taxes to the IRS and, in

fact, may be entitled to a refund, which under the settlement agreement will go to the debtor's estate for the benefit of McKay and other creditors.

As previously noted by the court in paragraph 24 above, McKay's complaints against the debtor and his wife Linda S. Sergent, Adversary Proceedings Nos. 90-5230 and 91-5209, to have the indebtedness owed by them to him excepted from discharge have been dismissed for want of prosecution. This occurred because of McKay's refusal and the refusal of other witnesses at his direction to participate candidly in discovery proceedings. McKay's stone walling of discovery proceedings may have been based on his conviction that it was inappropriate for the law firm of Stoll, Keenon and Park to represent Harold E. Sergent in this matter after having represented Ashland Oil in McKay's civil action against Ashland Oil for wrongful dismissal. The court invited McKay to seek disqualification of Stoll, Keenon and Park by appropriate pleadings so the court could rule on the issue. He failed to raise the issue by appropriate pleadings, choosing instead to persist in frustrating discovery proceedings. It is also possible that McKay's failure to pursue the foregoing adversary proceedings or to file objections to the proposed settlement agreement may be based on the realization that under the terms of the settlement agreement he may receive a substantial dividend on his claim against the debtor.

28. The most controversial aspect of one of the proposed settlement agreements for which the chapter 7 trustee seeks approval is that, if approved, the agreement will result in dismissal of the trustee's complaint grounded on title 11

U.S.C. § 727(a)(2) objecting to the discharge of the debtor. Notice as required by Rule 7041 of the Federal Rules of Bankruptcy Procedure was given of the proposed dismissal of this adversary proceeding. The dismissal issue is unnecessarily complicated by the fact that the United States Trustee appears before the court wearing more than one hat. The complaint objecting to the discharge of the debtor was initiated by the United States Trustee through its designee the chapter 7 trustee in this case. See 11 U.S.C. § 102(9). The United States Trustee through its designee the chapter 7 trustee seeks permission to dismiss the complaint as part of a settlement agreement because the chapter 7 trustee deems such dismissal to be in the best interest of creditors. The chapter 7 trustee is the representative of the estate. 11 U.S.C. § 323. As permitted by title 11 U.S.C. § 307, the United States Trustee is opposing the settlement. Insofar as the court can determine, the United States Trustee does not take issue with the fact the settlement may be in the best interest of creditors generally. The United States Trustee opposes the settlement solely on public policy grounds, which the court does not find to be particularly applicable under the facts of this case.

CONCLUSIONS OF LAW:

The court concludes:

1. The court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334.

2. The matter is properly before the court pursuant to Rules 7041, 7042 and 9019, Federal Rules of Bankruptcy Procedure, in that adequate and sufficient notice of the trustee's motion to approve settlement was provided to all creditors and parties in interest.

3. Rule 7041 is intended to protect against a debtor's "buying off" a creditor objecting to discharge. The notice provisions of that rule were complied with in this case. Neither McKay nor the United States Trustee asked to be permitted to continue prosecution of the objections to discharge filed by the chapter 7 trustee. They apparently want the court to force the chapter 7 trustee to continue to pursue the objections at the expense of the estate, when, under the circumstances of this case only one creditor, McKay, might benefit from successful prosecution of the objections. The chapter 7 trustee apparently believes it is more cost effective to pursue recovery in the state court action of the transfers that are the underlying basis for the objections to discharge. Any recovery in the state court action will inure to the benefit of the estate, and perhaps to McKay, depending on the outcome of the adversary proceeding seeking a determination of the debtor's tax liability to the IRS. Also, the settlement preserved the right of McKay to continue prosecution of his adversary proceedings to except from discharge the indebtedness owed to him by the Sergents. The fact that the latter adversary proceedings have been dismissed by the court for want of prosecution does not impact on the fairness of the settlement agreement as originally proposed. On these facts the court is not persuaded by the argument that the settlement agreement is an attempt by the debtor to "buy off" and objecting creditor. In this instance the objections to discharge were filed by the chapter 7 trustee rather than a creditor. It is true that the debtor has paid into the estate $150,000 to cover administrative expenses. However, that sum appears to be approximately equivalent to the funds that are available for payment of administrative expenses in any event. See Paragraph 10 of the Findings of Fact. The payment of the $150,000 into the estate by the debtor will free up other funds coming into the estate for the payment of any unsatisfied portion of the claim of the IRS and the claim of McKay. The settlements proposed by the chapter 7 trustee look after the interests of creditors generally. They will stop accrual of attorney fees in pursuit of objections to discharge that ultimately, even if successful, may not benefit creditors generally. McKay failed to timely file objections to discharge of the debtor, choosing instead to file a complaint to except his debt from discharge.

4. The motion of the United States Trustee pursuant to 11 U.S.C. § 707(b) to dismiss this case for lack of good faith should be overruled for several reasons. Procedurally, there was not sufficient notice of the motion. See Rule 2002(a)(5) of

the Federal Rules of Bankruptcy Procedure. The motion replicates a motion previously considered and overruled by Judge Bare. See page 4 of the brief in support of McKay's motion of January 12, 1990 to dismiss this case or convert the case to a case under chapter 7. The United States Trustee presented no evidence on which to base dismissal of the case for lack of good faith. Assuming the settlement proposal whereby the debtor is proposing to pay his post-petition earnings to all of his creditors except

McKay shows a lack of good faith toward McKay, it does not demonstrate a lack of good faith toward creditors generally.

The dismissal of this case would terminate the capacity of the trustee to participate as the representative of the estate in the Fayette Circuit Court litigation. 11 U.S.C. § 323. It would revest in the debtor property of the estate. 11 U.S.C. § 349(b). Dismissal would not bar the debtor from obtaining a discharge in a subsequent case. 11 U.S.C. § 349(a). Dismissal would deny the debtor a convenient forum for determining his tax liability. Dismissal under section 707(a) may be appropriate at the outset of a case in rare circumstances of demonstrated egregious conduct. It is not appropriate in this case which has been pending for more than five years, in which there is much ongoing litigation, and in which there has thus far been no showing or finding of egregious conduct on the part of the debtor toward creditors generally.

Accordingly, the court remains of the opinion and again concludes that the motions of the trustee for approval of the settlement agreements in question should be sustained.

Dated:

By the court -

__________________________

JOE LEE

CHIEF JUDGE

Copies to:

Ann E. Samani, Esq.

Lucinda Masterton, Esq.

Joseph M. Scott, Jr., Esq.

Samuel D. Hinkle IV, Esq.

Laura Day DelCotto, Esq.

John P. Brice, Esq.

Joseph J. Golden, Esq.

Barbara Curtin Kenny, Esq.

Stephen Palmer, Esq.

David E. Middleton, Esq.

George Algier, Esq.

Bill E. McKay