Sugarman v. IRZ Consulting, LLC

1 UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF CALIFORNIA 2 FRESNO DIVISION [3] 4 In re ) Case No. 18-11651-B-11 ) 5 GREGORY JOHN te Velde, ) ) 6 Debtor. ) ) 7 ) ) 8 RANDY SUGARMAN, CHAPTER 11 ) TRUSTEE, ) Adv. Proc. No. 19-01033 9 ) (Consolidated by Doc. #94 for Plaintiff, ) trial purposes only) 10 ) v. ) DCN: MBB-7 11 ) IRZ CONSULTING, LLC; aka IRZ ) 12 CONSTRUCTION DIVISION, LLC, ) ) 13 Defendant. ) ) 14 ) ) 15 IRZ CONSULTING, LLC, aka IRZ ) CONSTRUCTION DIVISION, LLC, ) 16 ) Third-Party Plaintiff, ) 17 ) v. ) 18 ) U.S. FARM SYSTEMS; 4 CREEKS, ) 19 INC.; JOHN FAZIO dba FAZIO ) ENGINEERING; DARI-TECH, INC.; ) 20 LASER LAND LEVELING, INC.; MAAS ) ENERGY WORKS, INC.; GEROGE ) 21 CHADWICH dba GEORGE CHADWICK ) CONSULTING; VALMONT NURTHWEST, ) 22 INC.; and NUCO BUILDING SYSTEMS ) UTAH LLC, ) 23 ) Third-Party Defendants. ) 24 ) ) [25] 26 REPORT AND RECOMMENDATION ON U.S. FARM’S MOTION FOR ORDER ESTABLISHING GOOD FAITH SETTLEMENT [28] 1 ————————————————————————————— 2 Michael Brown, LAW OFFICES OF MICHAEL BROWN, Visalia, CA, for U.S. Farm Systems, Inc., Third-Party Defendant. [3] Benjamin P. Tarczy, MILLER NASH LLP, Portland, OR, for IRZ 4 Consulting, LLC, Defendant/Third-Party Plaintiff. 5 ————————————————————————————— 6 RENÉ LASTRETO II, Bankruptcy Judge: [7] 8 INTRODUCTION 9 Third Party Defendant U.S. Farm Systems aka Valmetal Tulare 10 (“U.S. Farm”) moves for an order (a) establishing that U.S. Farm 11 settled the adversary proceeding in good faith with chapter 11 12 liquidating trustee Randy Sugarman (“Plaintiff” or “Trustee”), 13 and (b) barring cross-complaints against U.S. Farm. Doc. #451. 14 Third Party Plaintiff IRZ Consulting, LLC (“IRZ”) timely 15 filed written opposition. Doc. #539. 16 U.S. Farm replied. Doc. #545. 17 This motion was filed on 28 days’ notice pursuant to Local 18 Rule of Practice (“LBR”) 9014-1(f)(1). At the November 16, 2022 19 hearing, the court took the matter under submission and [20] indicated that it would issue a report and recommendation for de [21] novo consideration by the District Court because the outcome of 22 this motion is dispositive as to U.S. Farm’s involvement in this 23 proceeding. Doc. #569. For the reasons stated below, the court 24 recommends that this motion be DENIED. [25] 26 BACKGROUND 27 The underlying facts in this case are largely undisputed. 28 Contrast that with the substantial disputes concerning liability 1 for the damages to the bankruptcy estate asserted by the 2 liquidating trustee. 3 This case derives from the chapter 11 bankruptcy of Gregory 4 John te Velde (“Debtor”). Before filing, Debtor owned and 5 operated several large dairies spanning thousands of acres of 6 land across the Western United States. In late-2015, Debtor 7 hired IRZ to provide construction management services for the 8 construction of a new dairy operation in Boardman, Oregon 9 colloquially referred to as Lost Valley Farm (“LVF”). IRZ, in 10 turn, hired subcontractors to perform certain services. U.S. 11 Farm was hired by Debtor directly to install a mechanical 12 separator, which was part of a waste disposal system. 13 Debtor’s intention was to build a waste disposal system at 14 the LVF dairy that would separate solids from usable effluent. 15 The final filtered effluent was to be used to irrigate adjacent 16 land. However, the operation failed resulting in an 17 environmental catastrophe, which ultimately became a substantial 18 factor in Debtor’s filing of a chapter 11 bankruptcy case in 19 2018. 20 After Debtor filed chapter 11 bankruptcy, Plaintiff was 21 appointed as trustee. He proposed and confirmed a Plan of 22 Reorganization in November 2019 (the “Plan”). U.S. Farm filed 23 two proofs of claim, each in the amount of $187,559.73, to 24 recover the amounts owed for the services it performed with 25 respect to Lost Valley Farm. Claims 74-75. 26 Plaintiff filed this adversary proceeding in 2019 objecting 27 to the claim filed by IRZ and asserting claims raising alleged 28 /// 1 construction defects in the waste system, which resulted in 2 approximately $19 million in damages. 3 IRZ subsequently filed a third-party complaint against nine 4 third-party defendants, including U.S. Farm, asserting claims 5 for contribution, indemnity, and negligence. 6 Recently, U.S. Farm entered into a Settlement Agreement and 7 Release of Claims (“Settlement Agreement”) with Plaintiff on or 8 about September 14, 2022. A copy of the Settlement Agreement was 9 included with this motion as an exhibit. Settlement Agreement, 10 Doc. #454, Ex. A. Plaintiff has authority under the Plan to 11 settle litigation related to claims without notice and without 12 bankruptcy court approval. Plan ¶ 6.8, Bankr. Doc. #2975. 13 Under the terms of the Settlement Agreement, U.S. Farm will 14 pay $20,000 to settle any and all claims by Plaintiff, inclusive 15 of all derivative claims by IRZ. Id. The Settlement Agreement 16 states that U.S. Farm’s Claim 74 shall be deemed to be an 17 Allowed General Unsecured Claim in the original amount of 18 $187,559.73 and U.S. Farm shall be entitled to receive any 19 further pro rata dividends payable to other general unsecured 20 creditors. The Settlement Agreement contains the following 21 release clause: 22 Except for any liability expressly created or reserved by virtue of this Agreement, each 23 Party hereby remises, releases, and forever discharges each other, their officers, 24 directors, shareholders, members, managers, partners, employees, consultants, insurers, 25 attorneys, experts, and anyone who has acted for or on their behalf relative to the 26 Dispute, from all past, present, and future claims, demands, actions, causes of action of 27 any nature, and for all liabilities and obligations of every kind and character, [28] 1 example only, claims for payments due or to become due, or other claims for legal or 2 equitable relief which in any way directly or indirectly relate to or arise out of the 3 Dispute, as well as all claims which are, were, or could have been asserted by or 4 between them in any litigation, alternative dispute resolution, proceeding, or court 5 proceeding filed in connection with any matter arising out of or related in any way to the 6 Dispute, including but not limited to claims, demands, causes of action, defenses, 7 indemnity, damages, compensation, or counterclaims therein (the “Released Claims”). [8] This is a full and final release of all unknown 9 and unanticipated injuries, and damages, arising out of or related to the claims for 10 which releases have been given, as well as those now known or disclosed, and the Parties 11 hereby waive all rights or benefits which they now have or in the future may have pursuant to 12 the claims for which releases have been given under the terms of Section 1542 of the Civil 13 Code, which provides as follows: 14 A general release does not extend to claims that the creditor or releasing party does not 15 know or suspect to exist in his or her favor at the time of executing the release and that, 16 if known by him or her, would have materially affected his or her settlement with the debtor 17 or released party. 18 Id. at 2-3. 19 As evidence, U.S. Farm presented the declaration of 20 Plaintiff Trustee, which states, in part: 21 - Under the chapter 11 plan, Plaintiff was appointed as Liquidating Trustee to manage the assets of the estate, 22 including litigation claims. - Through the end of 2019, substantially all of Plaintiff’s 23 time was devoted to managing the LVF, most of which was devoted to addressing the regulatory and other waste-water 24 problems at the farm. Plaintiff was regularly onsite and acquired significant personal knowledge of the causes and 25 consequences of LVF’s wastewater problems. - Plaintiff concluded that the party principally responsible 26 for the “poor design” of the dairy was IRZ. Plaintiff considered naming other co-defendants with IRZ but 27 concluded that there was no substantial factual basis to do so. [28] 1 - All of the wastewater problems at LVF arose out of defects in the waste management “stream” before and after it was 2 processed by the separator fabricated by U.S. Farm. Plaintiff and his onsite staff did not observe any problems 3 with the separator itself. - The settlement reached in this case was made at arm’s 4 length and there was no side dealing or other conduct which would have unfairly prejudiced IRZ or any other party in 5 the lawsuit. 6 Doc. #455. 7 Since all of IRZ’s claims against U.S. Farm are derivative 8 of Plaintiff’s claims against IRZ, U.S. Farm requests to be 9 dismissed from this lawsuit. Doc. #451. U.S. Farm states that 10 fair notice of the settlement was given to IRZ through its 11 counsel via email. A copy of the email chain is attached in 12 which IRZ responds that any settlement should be resolved [13] globally. Doc. #454, Ex. 2. [14] 15 CONTENTIONS 16 First, U.S. Farm contends that the Settlement Agreement 17 with Plaintiff meets the requirements of a “good faith” 18 settlement set forth in Cal. Code Civ. Proc. (“CCP”) §§ 877 & 19 877.6, which will bar any cross-complaints against U.S. Farm. 20 Doc. #456. Second, U.S. Farm argues that IRZ was given fair 21 notice of the settlement but indicated that they wanted a global 22 settlement before any third-party defendants would be released. 23 Lastly, U.S. Farm insists that it must be dismissed from this 24 adversary proceeding as to all of the third-party claims 25 asserted by IRZ because they are derivative of the Plaintiff’s 26 claims against IRZ. 27 In response, IRZ argues that this motion should be denied 28 because the Settlement Agreement between Plaintiff and U.S. Farm 1 was not in good faith under the standards set forth under 2 California law as evidenced by the proportionately low amount 3 U.S. Farm is to pay under the Settlement Agreement. Doc. #539. 4 U.S. Farm replies that it cannot be liable because 5 operational manuals were available to Debtor and claims that 6 caselaw supports approval of its settlement unless fraud is 7 substantially alleged, which it is not. Doc. #545. [8] 9 DISCUSSION 10 Neither party has suggested that this dispute should be 11 decided under Oregon law. Under California law, CCP 877 requires 12 that any settlement cutting off the right of contribution by 13 non-settling defendants must be executed in good faith. Fed. 14 Sav. & Loan Ins. Corp. v. Butler, 904 F.2d 505, 511 (9th Cir. 15 1990). CCP 877 provides, in relevant part: 16 Where a release, dismissal with or without prejudice, or a covenant not to sue or not to 17 enforce a judgment is given in good faith before verdict or judgment to one or more of 18 a number of tortfeasors claimed to be liable for the same tort, or to one or more other co19 obligors mutually subject to contribution rights, it shall have the following effect: [20] (a) It shall not discharge any other such 21 party from liability unless its terms so provide, but it shall reduce the claims 22 against the others in the amount stipulated by the release, the dismissal or the covenant, or 23 in the amount of the consideration paid for it, whichever is greater. [24] (b) It shall discharge the party to whom it is 25 given from all liability for any contribution to any other parties. [26] 27 CCP § 877(a)-(b). 28 /// 1 The Ninth Circuit has held that the procedures contained in 2 CCP § 877.6 for making a motion for a “good faith” settlement 3 determination are not binding on federal courts, but the 4 provisions do create a “substantive” law that must be applied in 5 an action in the federal courts to which California substantive [6] law applies. Butler, 904 F.2d at 511 (“nothing is to prevent the 7 district court from granting a motion for an early determination 8 of the good faith question. In fact, it makes eminent good sense [9] to do so.”); see also Trujillo v. Crescent Jewelers, No. 9910 55914, 2000 U.S. App. LEXIS 30235 (9th Cir. Nov. 29, 2000); [11] Medina v. Argent Mortg. Co., No. C05-02905 HRL, 2007 U.S. Dist. 12 LEXIS 48312 (N.D. Cal. June 27, 2007). CCP § 877.6 provides, in 13 relevant part: 14 b) The issue of good faith of a settlement may be determined by the court on the basis of 15 affidavits served with the notice of hearing, and any counteraffidavits filed in response, 16 or the court may, in its discretion, receive other evidence at the hearing. [17] (c) A determination by the court that the 18 settlement was made in good faith shall bear any other tortfeasor or co-obligor from any 19 further claims against the settling tortfeasor or co-obligor for equitable comparative 20 contribution, or partial or comparative indemnity, based on comparative negligence or 21 comparative fault. 22 CCP § 877.6(b) & (c). 23 Though procedural, the Ninth Circuit has determined that it 24 “makes eminent sense” for a good faith determination under this [25] statute to be made by a federal trial court. Butler, 904 F.2d at 26 511. The party asserting the lack of good faith has the burden [27] of proof on that issue. CCP 877.6(d); Tech-Bilt, Inc. v. [28] Woodward-Clyde & Assocs., 38 Cal. 3d 488, 499-500 , 698 P.2d 159 , 1 166-67 (1985). However, the party seeking a good faith 2 determination has the initial burden of presenting a prima facie 3 case. 4 CCP § 877.6 requires complete notice to non-settling 5 parties as a prerequisite to a determination of good faith. 6 Assuming adequate notice is given, the California Supreme Court 7 has outlined four factors a court should consider in determining 8 good faith of a settlement: 9 • A rough approximation of plaintiff’s total recovery and the settlor’s proportionate liability. 10 • The amount paid in settlement. • The allocation of settlement proceeds among plaintiffs. 11 • A recognition that a settlor should pay less in settlement than he would if he were found liable after a trial. 12 • The financial condition and insurance policy limits of the settling tortfeasor. 13 • The existence of collusion, fraud, or tortious conduct intended to injure the interests of the non-settling 14 parties. 15 Tech-Bilt, 38 Cal. 3d at 499-500 , 698 P.2d at 167 . These 16 statutes serve the policies under California law of sharing 17 liability among parties potentially jointly at fault, while 18 encouraging reasonable settlements. Id. at 494 , 698 P.2d at 162 . 19 A finding of good faith under CCP § 877 is a finding of 20 fact for the trial court to be made under the factors stated in 21 Tech-Bilt. See, Owen v. United States, 713 F.2d 1461, 1466 (9th 22 Cir. 1983) 23 The California Supreme Court has also stated that bad faith 24 is not necessarily “established by a showing that a settling 25 defendant paid less than his theoretical proportionate or fair 26 share.” Tech-Bilt, 38 Cal. 3d at 499 , 698 P.2d at 166 . “Such a 27 rule would unduly discourage settlements” because it would not 28 consider various unknown and speculative factors such as the 1 amount of damages, probability of legal liability, the solvency 2 of the defendant, and the risk of going through trial. Ibid. 3 1. Rough approximation of Plaintiff’s total recovery and 4 the settlor’s proportionate liability. A settling party’s 5 proportionate liability is one of the most important factors in 6 making a good faith determination. Toyota Motor Sales U.S.A., 7 Inc. v. Superior Ct., 220 Cal. App. 3d 864, 871 , 269 Cal. Rptr. 8 647, 650 (1990). In Mattco, the court held that a $250,000 9 settlement out of a $39 million claim (0.006%) was not within 10 the reasonable range or “ballpark” of their share of 11 proportionate liability. Mattco Forge, Inc. v. Arthur Young & 12 Co., 38 Cal. App. 4th 1337, 1351 , 45 Cal. Rptr. 2d 581 , 589 13 (1995), reh’g denied, 39 Cal. App. 4th 1210 . 14 Here, U.S. Farm reasons that if the case were to proceed to 15 trial, damages were $18 million, and it were found 1% liable, it 16 would be responsible for $180,000 in damages. Doc. #456. But 17 since it is settling the claim for $20,000, if it were found to 18 be 1% liable, it must only pay $20,000 under the Settlement 19 Agreement. Id. at 6. A more likely outcome, says U.S. Farm, is 20 that it will be found 0% liable and would owe $0, but it is 21 willing to pay this settlement amount regardless of the eventual 22 outcome. 23 IRZ responds that U.S. Farm is settling for one-tenth of a 24 percent (0.001%) of Plaintiff’s claimed $18.8 million dollars in 25 damages. If U.S. Farm were determined to be 1% liable by a jury, 26 it would be avoiding at least $160,000 in damages, or eight 27 times the $20,000 provided in the Settlement Agreement. 28 /// 1 U.S. Farm replies that Tech-Bilt, rather than Mattco, is a 2 more comparable case to the issues present here. Doc. #545. In 3 Mattco, a plaintiff contractor had its suit dismissed because 4 they fabricated estimate sheets to increases damages. Mattco, 38 5 Cal. App. 4th at 1354, 45 Cal. Rptr. 2d at 591 . The court 6 ordered Mattco to pay $1.4 million in sanctions or the matter 7 would be dismissed. Mattco entered into a mutual release and 8 sued its accounting firm. The good faith settlement in question 9 was between Mattco and its own attorney for malpractice, and the 10 court refused to approve the good faith settlement because the 11 allegations against the settlement included fraud. Id. at 1357 , [12] 45 Cal. Rptr. 2d at 593 . 13 Since the facts in Mattco are not similar to the facts in 14 this case, it should be considered dicta, claims U.S. Farm. The 15 primary reason for denying the settlement was not the size of 16 the settlement, but because it was the product of collusion 17 aimed and injuring the interests of other parties. 18 There is a lack of evidence as to what Plaintiff’s total 19 recovery may be and U.S. Farm’s proportionate share of 20 liability. The allegations are that nearly $19 million is the 21 alleged damage. But there is no basis, even from Plaintiff 22 Trustee, that is evidence of possible recovery. So, the court is 23 unable to adequately evaluate proportionate liability. 24 U.S. Farm’s counsel’s aspirational opinion that U.S. Farm 25 is likely to be found 0% at fault has limited factual basis. 26 Counsel’s declaration (Doc. #453) says Trustee and his counsel 27 are experienced, that in discovery it has been determined that 28 IRZ directed the design and placement of the mechanical 1 separator, and that there are no specific allegations that the 2 separator was functioning improperly. 3 The declaration largely is without foundation as counsel 4 was not observing the operation of the dairy. Trustee and his 5 general counsel’s experience has never been presented to the 6 court as “in depth” in litigation matters concerning dairy 7 construction processes. In fact, Trustee has special counsel 8 representing him in this litigation. The reference to discovery 9 is hearsay. Whether IRZ designed and determined where the 10 separator was placed does not mean the separator necessarily was 11 up to the tasks required at LVF dairy. The lack of specific 12 allegations about the separator does not absolve U.S. Farm. The 13 waste management system failed, and the mechanical separator it 14 designed was part of that system. 15 Mr. Sugarman’s declaration (Doc. #455) suffers from the 16 same foundational problems, though Mr. Sugarman certainly had 17 much time observing the damage the failed system caused. Mr. 18 Sugarman also opines that the problems related to the wastewater 19 stream occurred before and after the waste was processed by the 20 separator. This is not evidence that the separator had nothing 21 or little to do with the doomed waste disposal system. Rather, 22 it leads to more questions concerning causation supporting the 23 view that there is insufficient evidence as to possible 24 liability of U.S. Farm. 25 2. Amount paid in settlement: IRZ says that the amount paid 26 in settlement does not suggest good faith. Doc. #539, citing 27 Mattco, 38 Cal. App. 4th at 1351 , 45 Cal. Rptr. 2d at 589 28 ($250,000 settlement out of a $39 million dollar damage claim 1 deemed to not be within the reasonable range or “ballpark” of 2 their share of liability). As in Mattco, IRZ contends here that 3 U.S. Farm’s $20,000 settlement is not within the reasonable 4 range of its share of the $18.8 million in liability alleged by 5 the Trustee. Since this is only one tenth of one percent 6 (0.001%) of the alleged damages, the Settlement Agreement’s 7 terms do not suggest good faith. 8 Additionally, the Settlement Agreement includes the 9 allowance of U.S. Farm’s Claim 17 in the amount of $187,559.73 10 and permits U.S. Farm to receive a pro rata distribution of 11 dividends paid to allowed, general unsecured claims. Thus, U.S. 12 Farm may actually receive more from the settlement than it is 13 paying. 14 As noted above, U.S. Farm’s reply alleges that the 15 proportionate damages in Mattco were secondary to claims of 16 actual fraud in rejection of the good faith of the settlement. 17 Doc. #545. 18 3. Allocation of settlement proceeds among plaintiffs: 19 Allocation of settlement proceeds is inapplicable because 20 Plaintiff Trustee is the only plaintiff here. As such, there are 21 no other plaintiffs with whom Plaintiff will have to share the 22 $20,000 settlement proceeds. 23 4. Recognition that a settlor should pay less in settlement 24 than if found liable at trial: U.S. Farm believes that it will 25 be found 0% liable at trial, but it will agree to pay $20,000 26 anyways regardless of the eventual outcome so that it may avoid 27 trial. 28 /// 1 IRZ acknowledges that a party settlor should pay less in 2 settlement than it would if it were to be found liable after a 3 trial. Tech-Bilt, Cal. 3d at 499, 698 P.2d at 166 . This 4 recognition, however, should not extend to the “extreme” that a 5 settlor should pay one tenth of one percent (0.001%) of a 6 plaintiff’s claimed damages. Plus, since the Settlement 7 Agreement is permitting U.S. Farm’s claim to proceed unimpeded 8 and allow U.S. Farm to receive a pro rata share of the 9 distribution to allowed unsecured claims, U.S. Farm may receive 10 more than it is paying under the Settlement Agreement. 11 The court must also consider not only the settlor’s 12 potential liability to the Plaintiff, but also its proportionate 13 share of culpability as among the parties alleged to be liable 14 for the same injury. TSI Seismic Tenant Space, Inc. v. Superior 15 Court, 149 Cal. App. 4th 159, 166 , 56 Cal. Rptr. 3d 751 , 756 16 (2007). U.S. Farm provided a critical part of the waste 17 management system. Even assuming the separator was operationally 18 sound, there is insufficient evidence that the separator should 19 be evaluated in a vacuum in comparison with the rest of the 20 wastewater system. A $20,000 settlement amount payable to a 21 party that has not sued the settling defendant and said 22 defendant maintaining its claim is disproportionate to the 23 importance of the separator to the system. 24 5. Financial condition and insurance policy limits of 25 settling defendants: U.S. Farm does not have errors & omissions 26 insurance on this claim because it did not function as a 27 contractor in this case, and only installed machinery. 28 Doc. #456. Since U.S. Farm would not have designed the farm to 1 function as it did, it should not be subject to a long, 2 expensive, complicated trial of anyone associated with the farm. 3 That said, nothing is known of U.S. Farm’s financial condition 4 here and its ability to respond in damages. Nevertheless, the 5 lack of insurance coverage does suggest a compromise in a 6 smaller sum should be within the “range of reasonableness.” On 7 this record, that is not determinable. 8 6. The existence of collusion, fraud, or tortious conduct 9 intended to injure the interests of the non-settling defendants: 10 The existence of collusion, fraud, or tortious conduct aimed to 11 injure the interests of non-settling defendants is the final 12 determining factor enumerated in Tech-Bilt. Techbilt, Cal. 3d at 13 499, 698 P.2d at 166 . U.S. Farm says that there should be no 14 allegations of sabotage or collusion because there has been very 15 little communication between U.S. Farm and Trustee. Doc. #456. 16 However, IRZ alleges the existence of collusion, fraud, or 17 tortious conduct aimed to injure its interests as a non-settling 18 party is a substantial factor and claims that the potential 19 indemnity liability to IRZ prevents a finding of good faith 20 here. Doc. #539. IRZ compares this matter to Mattco, where the 21 plaintiff did not bring an action against the settling party, 22 and the settling party was only involved through a cross23 complaint by a non-settling defendant. Id., citing Mattco, 38 24 Cal. App. 4th at 1353, 45 Cal. Rptr. 2d 590 . The settling 25 parties expressly noted in their Settlement Agreement that the 26 purpose of the agreement was to “eliminate the uncertainty 27 arising from the continued defense of the cross-complaint.” Id. 28 Ultimately, the Mattco court found that the disproportionately 1 low settlement was aimed at injuring the non-settling 2 defendants’ interests. 3 As with Mattco, U.S. Farm and Plaintiff here do not have 4 claims against each other, and U.S. Farm is only involved 5 through IRZ’s third-party complaint. As in Mattco, the purpose 6 of the Settlement Agreement is for U.S. Farm to avoid a “long, 7 expensive, complicated, sprawling trial” and “avoid the cost of 8 defending” its action with IRZ. Doc. #539, citing Mem. P. & A., 9 Doc. #451, at 4:12, 6:22-25. In effect, U.S. Farm is avoiding 10 its defense against IRZ without IRZ’s consent to dismiss. This 11 is not a settlement on the merits of Plaintiff’s claim with U.S. 12 Farm, it is a settlement where U.S. Farm is procuring a 13 dismissal of IRZ’s claims through a third party, and therefore 14 aimed at injuring IRZ’s interests. 15 IRZ has failed to specifically identify any such collusion, 16 fraud, or tortious conduct. No affirmative evidence of collusive 17 interaction has been presented. The evidence appears to 18 establish very little interaction between U.S. Farm’s counsel 19 and Plaintiff. That said, U.S. Farm’s desire to extricate itself 20 from IRZ’s third party claim provides a very strong motivation 21 to settle. 22 As above, U.S. Farm argues that Mattco should be treated as 23 dicta because it involved allegations of actual fraud. 24 Doc. #545. Instead, Tech-Bilt should be more controlling, and 25 under Tech-Bilt, the Settlement Agreement must be approved, 26 contends U.S. Farm. As mentioned, IRZ has presented no 27 affirmative evidence of collusion or fraud. 28 /// 1 Potential indemnity and contribution liability 2 IRZ further argues that the potential liability for 3 indemnity to a non-settling defendant is an important 4 consideration for determining whether to approve a settlement by 5 an alleged tortfeasor. Doc. #539, citing TSI Seismic Tenant 6 Space, 149 Cal. App. 4th at 166 , 56 Cal. Rptr. 3d at 756 . The 7 Settlement Agreement results in U.S. Farm sharing only 0.001% of 8 the liability alleged here. Even if U.S. Farm were to be found 9 90% liable for Plaintiff’s $18.8 million dollar damage claim, it 10 would be required to pay only $20,000 in this action. Thus, 11 there must be substantial evidence to support a critical 12 assumption as to the nature and extent of its liability, and 13 U.S. Farm cannot show substantial evidence that it is liable for 14 such a negligible amount of indemnity in this action. Lastly, 15 U.S. Farm’s declarations in support of the motion were not made 16 by an individual with personal knowledge of U.S. Farm’s work on 17 this project. Declarants Attorney Michael Brown and Plaintiff 18 Trustee Randy Sugarman are individuals who were not involved in 19 the operations of the farm during the relevant time period, and 20 thus IRZ claims the declarations should be considered irrelevant 21 as to any determination of U.S. Farm’s liability. 22 U.S. Farm’s reply includes the declaration of David 23 Shoenhair, the project manager employed by U.S. Farm that was 24 substantially in charge of installing the mechanical separator 25 at Debtor’s dairy. Doc. #546. Mr. Shoenhair declares that U.S. 26 Farm did not receive complaints of the mechanical separator 27 failing or not doing what it was designed to do. Id. Although he 28 was aware that there were overall operational issues at the 1 Oregon dairy, Mr. Shoenhair was not aware of any particular 2 issues with the mechanical separator, specifically. Id. Mr. 3 Shoenhair acknowledges a separator drain plumbing issue, but it 4 was fixed immediately upon being notified, and U.S. Farm 5 personnel did make several trips to the dairy to make the 6 mechanical separator function optimally given the lack of 7 agitation necessary for solids to enter the separator. However, 8 U.S. Farm was not required to provide oversite of the system, 9 but it did so anyway on a good faith basis due to its long10 standing relationship with Debtor. 11 Additionally, Mr. Shoenhair says that Debtor had 12 operational manuals for the mechanical separator because they 13 were given to him when another mechanical separator was 14 installed at one of Debtor’s other farms in California. Id. U.S. 15 Farm does not create a separate operation manual for every 16 mechanical separator it installs, but the manuals are available 17 online to clients, including Debtor. Debtor was already familiar 18 with the operations of the mechanical separator because he had a 19 substantially identical separator installed at a different farm 20 that he owned. 21 Even so, Mr. Shoenhair is employed by U.S. Farm. Though his 22 testimony is useful to indicate Debtor was provided operational 23 manuals for the mechanical separator, it is self-serving with 24 respect to whether the mechanical separator was faulty. Plus, it 25 is noteworthy that Mr. Shoenhair specifies a “lack of agitation” 26 of the “solids” before “entering” the separator. This suggests 27 either misuse of the separator as designed, or that the 28 separator needed another process to function properly. This does 1 not absolve the separator as a contributing cause of the waste 2 system’s failure. [3] 4 CONCLUSION 5 The record here does not support a good faith finding as a 6 | matter of law. Though Plaintiff attributes the waste-water 7 | management problems at LVF dairy to defects in the waste 8 management stream before and after it was processed by U.S. 9 Farm’s mechanical separator, such diagnosis is speculative at 10 best. Plaintiff is not an expert. And although U.S. Farm has 11 produced the declaration of Mr. Shoenhair, he is an employee of 12 U.S. Farm, which makes his declaration unpersuasive. U.S. Farm 13 has not produced substantial evidence that there was no fault 14 with its mechanical separator. Further, by settling with 15 Plaintiff, U.S. Farm is effectively removing itself as a third16 party defendant from IRZ’s third-party complaint without IRZ’s 17 consent. Since the settlement represents a one-tenth of one 18 percent (0.001%) share of the $18.8 million in liability alleged 19 | by Plaintiff, this proportionately de minimis share does not 20 suggest that Plaintiff and U.S. Farm executed the Settlement 21 Agreement in good faith. For these reasons the court recommends 22 this motion be DENIED. 23 The court will issue a subsequent order setting deadlines 24 for objections to this proposed report and recommendation to be 25 | heard in District Court before the Honorable Ana de Alba. 26 Dated: Dec 06, 2022 By the Court 27 fe a 4 □ 28 ort streto II, Judge United States Bankruptcy Court 1 Instructions to Clerk of Court Service List - Not Part of Order/Judgment [2] 3 The Clerk of Court is instructed to send the Order/Judgment or other court generated document transmitted herewith to the 4 parties below. The Clerk of Court will send the Order via the BNC or, if checked , via the U.S. mail. [5] 6 Tracy A. Agrall 246 W. Shaw 7 Fresno CA 93704 8 Steve Alfieris 502 West Grangeville Blvd 9 Hanford CA 93230 10 Hagop T. Bedoyan 7647 N. Fresno Street 11 Fresno CA 93720 12 Michael Brown 1809 West Main Street, Suite H 13 Visalia CA 93291 14 D. Gary Christensen 3400 U.S. Bancorp Tower 111 S.W. 5th Ave 15 Portland OR 97204 16 Paula C. Clark 502 West Grangeville Blvd 17 Hanford CA 93230 18 Ronald A. Clifford 1100 Town and Country Rd., Ste 1250 19 Orange CA 92868 20 Michael A. Dias 502 W Grangeville Blvd 21 Hanford CA 93230 22 Anthony Dutra 425 Market Street 23 26th Floor San Francisco CA 94105 [24] Mark F. Enenbach 25 First National Tower #3700 1601 Dodge St 26 Omaha NE 68102 27 David A. Foraker 111 SW 5th Ave #3400 28 Portland OR 97204 1 Vanessa Triplett Kuchulis 111 S. W. 5th Ave #3400 2 Portland OR 97204 3 Sanford R. Landress 3400 U.S. Bancorp Tower 4 111 SW 5th Ave Portland OR 97204 [5] John H. MacConaghy 6 645 First St., West, Suite D Sonoma CA 95476 [7] Randy Sugarman 8 583 1st St W Sonoma CA 95476 [9] Aaron Moore 10 1600 West St. Redding CA 96001 [11] James J. Niemeier 12 First National Tower, Suite 3700 1601 Dodge Street 13 Omaha NE 68102 14 Kyle D. Sciuchetti 111 SW Fifth Ave #3400 15 Portland OR 97204 16 Lindy H. Scoffield 3043 Gold Canal Dr #100 17 PO Box 269127 Sacramento CA 95826-9127 [18] Shanon J Slack 19 2030 Main Street Suite 1300 20 Irvine CA 92614 21 Randy Sugarman 583 1st St W 22 Sonoma CA 95476 23 Benjamin P. Tarczy 111 SW Fifth Avenue, Suite 3400 24 Portland OR 97204 25 Duncan C. Turner Badgley Mullins Turner PLLC 26 19929 Ballinger Way NE #200 Seattle WA 98155 [27] Scot M. Tyler 28 100 N. Tryon St #4700 1 Charlotte NC 28202 2 Kurt F. Vote 265 E. River Park Circle, Suite 310 3 Fresno CA 93720 4 Riley C. Walter 265 E. River Park Circle Suite 310 5 Fresno CA 93720 6 Brianna J. Wellman 111 SW Fifth Ave #3400 7 Portland OR 97204 8 Neal L. Wolf 425 Market St 26th Fl 9 San Francisco CA 94105 10 Tracy Hope Davis Gregory S. Powell 11 U.S. Trustee’s Office 2500 Tulare St #1401 12 Fresno CA 93721