In Re: Mark A. Nordlicht

Background

Mark A. Nordlicht personally guaranteed promissory notes issued to Richard and Marisa Stadtmauer by Platinum Partners Value Arbitrage Fund LLP. After the fund defaulted and Nordlicht did not honor the guaranty, the Stadtmauers obtained an arbitration award of $14,896,316.16. They then sued Nordlicht, Dahlia Kalter, several entities, and other defendants in state court, asserting fraudulent-transfer and alter-ego claims and obtaining prejudgment attachments on two properties.

Nordlicht filed for Chapter 7 bankruptcy while the state-court case was pending. Mark S. Tulis became the trustee of Nordlicht’s bankruptcy estate. The trustee agreed to settle the estate’s interests in the fraudulent-transfer and alter-ego claims. During a bidding process, the Stadtmauers offered $2 million for the claims and agreed to release their asserted liens. The settling parties later made a modified offer consisting of $2.5 million for the claims, payment of legal fees related to litigation over the Stadtmauers’ asserted liens, and a $2.5 million indemnity from Barbara Nordlicht if the Stadtmauers prevailed on those lien claims. The bankruptcy court approved the modified offer as the highest and best offer.

Issues on Appeal

The Stadtmauers raised several challenges. They argued that their prejudgment attachments created property rights that could not be eliminated through approval of the settlement; that distributing settlement proceeds to general unsecured creditors violated the priority principles recognized in Czyzewski v. Jevic Holding Corp.; that the bankruptcy court improperly evaluated the settlement under the factors identified in Iridium Capital Corp. v. Official Committee of Unsecured Creditors; and that the modified offer was not higher and better than their offer.

Ownership of the Claims and Attachments

Judge Karas affirmed the bankruptcy court’s determination that the fraudulent-transfer and alter-ego claims belonged to the bankruptcy estate. Under the court’s analysis, a prejudgment attachment does not transfer ownership of property to the attaching creditor. Instead, it temporarily preserves property to satisfy a judgment if the creditor ultimately succeeds. Because the attachments depended on the underlying claims and on a future judgment for the Stadtmauers, the attachments also depended on the status of those claims.

The court distinguished claims belonging personally to an individual creditor from derivative claims—claims based on harm to the bankruptcy estate that could benefit creditors generally. It held that the Stadtmauers’ fraudulent-transfer and alter-ego claims alleged that third parties had depleted Nordlicht’s assets, creating a generalized injury to the estate. Those claims were therefore derivative and could be pursued by the trustee, rather than exclusively by the Stadtmauers. The court accordingly affirmed the ruling that the claims and attachments were estate property.

**Priority and *Jevic***

The court also affirmed the ruling that the settlement did not violate Jevic. The Stadtmauers’ asserted liens were disputed and had not yet been determined to be valid. Therefore, their argument that the settlement improperly bypassed secured-creditor priority depended on an unresolved premise.

The court further explained that even if the Stadtmauers ultimately established valid liens, a claim would be secured only up to the value of the estate property subject to the lien. The court concluded that the Stadtmauers would have no lien on Barbara Nordlicht’s indemnity. If their liens were ultimately upheld, they could receive distributions from the indemnity only to the extent applicable to their unsecured claim after accounting for the value of any secured claim.

Review of the Settlement

Under Bankruptcy Rule 9019, a bankruptcy court may approve a compromise after notice and a hearing. The reviewing court considers whether the bankruptcy court made an informed judgment that the settlement was fair, equitable, and in the estate’s best interests. Under Iridium, relevant factors include the possible success of the litigation compared with the settlement’s benefits, the likelihood and cost of extended litigation, creditors’ interests, support from other parties, the competence of counsel and the bankruptcy judge, the scope of certain releases, and whether the settlement resulted from arm’s-length negotiations.

Judge Karas held that Bankruptcy Judge Robert D. Drain did not abuse his discretion in applying those factors. The state court’s earlier rulings concerning attachments and preliminary motions did not assure the Stadtmauers’ ultimate success because those rulings were preliminary. The remaining discovery and likely trial also supported the bankruptcy court’s conclusion that continuing the litigation could cause substantial expense and delay. The Stadtmauers abandoned their argument concerning the settlement’s releases in their reply, so the district court treated that point as conceded.

Higher and Better Offer

The district court also upheld the finding that the settling parties’ modified offer was higher and better than the Stadtmauers’ offer. The modified offer provided $2.5 million for the claims, payment of legal fees concerning the asserted liens, and a $2.5 million indemnity if the Stadtmauers prevailed on those liens. The court reasoned that the indemnity meant the estate would receive $2.5 million regardless of whether the Stadtmauers’ liens succeeded, which was $500,000 more than the estate would receive under the Stadtmauers’ offer.

The court added that any possible error in the bankruptcy judge’s assessment of New York lien law would have been harmless because it would not have changed the comparison between the offers. The bankruptcy court was evaluating whether the settlement fell below the lowest point in the range of reasonableness, not finally deciding every legal and factual issue in the underlying litigation.

Disposition

Judge Karas denied the Stadtmauers’ appeal and affirmed the bankruptcy court’s order. The Clerk of Court was directed to close the case.