For business people, whether you are settling a dispute or selling an asset may seem obvious. But for lawyers, the distinction can be surprisingly tricky, and it has serious ramification for our clients.
The confusion arises because the Bankruptcy Code allows you to either sell or settle a claim that a debtor has against someone else. What happens if the trustee settles a claim against a defendant in exchange for a cash payment, and a creditor objects because it believes the claim is worth more than is being paid? What if a trustee wants to sell claims that the debtor has against third parties? Whether these transactions are treated as settlements or sales matters quite a bit.
When selling an asset under Bankruptcy Code section 363, you must demonstrate that you have maximized the asset’s value. To settle a claim, the bar is much lower. Bankruptcy Rule 9019 requires that you show that the settlement is fair and equitable, which generally means that it does not fall below the “lowest point in the range of reasonableness.” Moreover, you cannot appeal a bankruptcy sale to a good faith purchaser unless you obtain a stay. (This is meant to encourage bidding in bankruptcy sales by protecting good faith purchasers). A settlement, in contrast, can be appealed without a stay.
The Ninth Circuit Court of Appeals recently adopted the BAP’s earlier reasoning in Mickey Thompson (decided in 2003) and the reasoning of the Fifth and Third Circuits, holding that a bankruptcy court has the discretion to apply the more stringent standards and procedures for sales to a settlement agreement in order to maximize value.
In Adeli v. Barclay, the bankruptcy trustee had entered into a settlement agreement with a creditor under which the creditor would purchase the estate’s claims against it in exchange for both cash and a waiver of the creditor’s claims against the estate. The trustee filed a motion to approve the settlement under Rule 9019 and presented evidence regarding the settlement’s reasonableness. It also noticed the matter as a sale subject to overbidding under Section 363. Nobody submitted an overbid. The debtor then appealed the settlement to the district court—but without seeking a stay pending appeal. The Ninth Circuit concluded that, because the bankruptcy court determined that the creditor/buyer was a good faith purchaser of the potential claims, and the debtor did not seek a stay pending appeal, the appeal was moot under Bankruptcy Code section 363(m) and was properly dismissed.
While the Ninth Circuit’s decision adopted Mickey Thompson’s reasoning and does not appear to significantly change current practice, it does serve as a stark reminder of the very real differences between sale and settlement procedures. Meanwhile, its time for the lawyers to update their form files to replace references to Mickey Thompson with a citation to Adeli v. Barclay.
Adeli v. Barclay (In re Berkeley Delaware Court, LLC), No. 14-55854 *10 (9th Cir. August 23, 2016). Download in PDF
Mette H. Kurth