Musselman v. Jasgur (In Re Seminole Walls & Ceilings Corp.)
2007 Bankr. LEXIS 1205, 366 B.R. 206, 2007 WL 1053462 (2007)
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Rule of Law:
A settlement agreement with a Chapter 7 trustee is not binding and may be unilaterally rescinded by a party at any time before it is approved by the bankruptcy court. Additionally, under Texas law, a corporation that has forfeited its charter is treated as a dissolved corporation and cannot enter into new business transactions; any claims arising from such post-dissolution transactions are extinguished.
Facts:
- Joseph Jasgur, a photographer, created a valuable collection of celebrity photographs, including early images of Marilyn Monroe.
- In 1986-1987, Jasgur entered into business agreements with Paul Philipson to market the collection, which included joint copyright registrations for some photos.
- On February 12, 1999, PITA Corporation, a Texas entity, forfeited its corporate charter and was deemed a dissolved corporation under Texas law.
- In early 2000, after its charter was forfeited, PITA entered into a Purchase Agreement and an Exclusive Marketing Agreement with Jasgur to acquire and sell his photographs.
- In March 2000, PITA, with Jasgur's knowledge and assistance, purchased physical items belonging to Jasgur from the owner of a California storage unit where Jasgur had defaulted on rent.
- Disputes arose between PITA and Jasgur, leading Jasgur to remove his images from a gallery and PITA to sue him in Florida state court.
- In January 2005, the Chapter 7 Trustee for PITA's parent company, Carla Musselman, and Jasgur signed a settlement agreement to resolve ownership of the collection.
- In August 2005, a Florida court declared Jasgur incapacitated, and his appointed guardian subsequently sought to rescind the settlement agreement with the Trustee.
Procedural Posture:
- Seminole Walls and Ceilings Corporation filed a petition for Chapter 11 bankruptcy in the U.S. Bankruptcy Court.
- The court confirmed the debtor's plan of reorganization, but the debtor subsequently defaulted on payments.
- The U.S. Trustee filed a Motion to Convert the case from Chapter 11 to Chapter 7.
- The bankruptcy court granted the motion, converted the case to a Chapter 7 liquidation, and appointed Carla Musselman as the Chapter 7 trustee.
- The Trustee filed adversary proceedings seeking a declaratory judgment on the ownership of the Jasgur Collection and turnover of the assets.
- On March 29, 2005, the Trustee filed a motion to approve a settlement agreement she had reached with Joseph Jasgur.
- After being appointed, Jasgur's guardian filed a formal objection and a motion to rescind the settlement agreement.
- The court bifurcated the trial to first resolve the extent of PITA's interest in the collection and whether Jasgur could rescind the settlement.
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Issue:
May a party to a settlement agreement with a Chapter 7 bankruptcy trustee unilaterally rescind that agreement before it has been approved by the bankruptcy court?
Opinions:
Majority - Judge Karen S. Jennemann
Yes, a party may unilaterally rescind a settlement agreement with a Chapter 7 trustee before it is approved by the bankruptcy court. The court adopted the majority rule that settlement agreements in bankruptcy cases are not binding on the parties until the court grants its approval under Federal Rule of Bankruptcy Procedure 9019. This bright-line rule promotes transparency, protects creditors' rights by allowing them to object, and ensures the court can fulfill its duty to determine if a settlement is in the best interest of the estate. Although Jasgur's other grounds for rescission—mental incapacity and mutual mistake or negligent misrepresentation—were found to be without merit, his rescission was effective because it occurred before the court had approved the settlement. The court also held that PITA, as a dissolved Texas corporation, was prohibited from engaging in new business. Therefore, the agreements it entered into with Jasgur after its charter was forfeited were unenforceable, and any claims arising from them were extinguished. PITA's only valid ownership interest was in the physical assets it purchased from the California storage unit, as a dissolved corporation is permitted to collect and liquidate assets.
Analysis:
This opinion establishes a clear, bright-line rule within the district that settlement agreements in Chapter 7 cases are not enforceable until judicially approved, providing certainty to trustees and other parties. It underscores that a signed agreement is merely a proposal to the court, which can be withdrawn by either party before the court makes it final. The decision also serves as a stark reminder of the importance of corporate due diligence, demonstrating how state corporate law can fundamentally alter property rights in a bankruptcy proceeding. By finding that a dissolved corporation's post-dissolution contracts are void, the court significantly limited the scope of the bankruptcy estate's assets, impacting the potential recovery for all creditors.
