Ten Tips for Documenting Claims Settlements

Journal Issue

Apr 2006

Column Name

Claims Chat

Citation

ABI Journal, Vol. XXV, No. 3, p. 26, April 2006

Topic Tags

Practice and Procedure

Journal HTML Content

Settling a claim usually involves
three key phases: the evaluation phase, the negotiation phase and the
documentation phase. The evaluation phase traditionally involves
company personnel and its advisors. The negotiation phase involves a lot
of time and energy on the part of client personnel and high-level
lawyers. The documentation phase focuses on claims settlements, which
are often documented by junior attorneys who are rushing to meet a
negotiated effectiveness deadline or a court hearing. While the
documentation phase of the process can be mundane, it often results in
confusion, additional time and expense – or even litigation
– if the settlement agreement is not drafted properly. This
article will provide you with some tips for crafting effective
settlement documents. These tips are a good refresher for seasoned
practitioners and a primer for attorneys who are drafting settlements
for the first time. As you review these tips, bear in mind how the
settlement agreement will be used in the future. You should draft the
stipulation assuming that five years from now, somebody – the
client, the claimant, a court, you or one of your colleagues who never
worked on the matter – will get a call concerning the claim and
will likely need to know (1) how it was disposed of during the case,
(2) what kind of distribution the claimant received under the plan or
(3) whether a motion to dismiss state court litigation brought by the
claimant concerning matters related to the claim will be successful.
Tip 1: In Cases Involving Multiple Debtors, Clarify Which Debtors
Are Affected by the Settlement of the Claim In administratively
consolidated cases, it is easy to get lax in the documentation phase,
as all pleadings or stipulations begin with the phrase "XYZ Co.
and its chapter 11 debtor affiliates hereby move...." While this is
standard language, sometime in the future the client must be able to
review the stipulation and determine whether it can move to dismiss
state or federal court litigation against an affiliate in South
Dakota, for example. If the claim is asserted against a South Dakota
entity, it should be the lead party to the stipulation. The name of
the South Dakota entity should appear in several places in the document:
(1) in the title, so that a docket entry is created (we will elaborate
on that one later); (2) in the opening paragraph, "The South
Dakota Entity and its chapter 11 debtor affiliates, on the one hand,
and ABC Co., on the other hand, hereby stipulate..."; and (3) in
the signature line. Tip 2: Clearly Set Forth the Related Claim
Numbers A claims register is organized by claim numbers, not by
claimant. A court or claims agent cannot modify the claims register
unless a stipulation, amended claim, withdrawal or court order directs
the modification. A claims agent will not – and cannot –
rely on your verbal or even written interpretation that a stipulation
resolves all of the claims filed by ABC Corp. Accordingly, the
stipulation should clearly provide that the settlement "amends and
supercedes" claim numbers 1, 2 and 3, and if applicable, that
claim numbers 4, 5 and 6 are not affected by the settlement. Tip
3: The Stipulation Should Include All Necessary Information—Even
What May Seem Today to Be Redundant or Useless Information When
drafting, assume that five years from now, the claimant has a new
general counsel who had no involvement with the debtor or the
settlement of the claim. You or your client may be tired of seeing
stipulations that read, for example: <blockquote> • "On
Aug. 22, 2004, XYZ Co. and 56 of its affiliates commenced chapter 11
cases in the U.S. Bankruptcy Court for the Southern District of New
York," and "the bar date for filing proofs of claim against
the XYZ Co. debtors was Jan. 24, 2005," or •
"XYZ's plan of reorganization was confirmed pursuant to an order
entered on Dec. 9, 2005." </blockquote>However, this
information will help educate the new general counsel who is
considering litigation against the reorganized debtor. To that end, the
recitals should always include the following: <blockquote> 1.
Procedural background of case – petition date, bar date, date
claim was filed, date confirmation order was entered; 2.
Description of the relationship among the parties (if the relationship
is contractual, description of executory contract or unexpired lease
impacted by settlement) and a description of the basis for the
claim; and 3. Whether the claim was included in the schedules of
assets and liabilities and, if so, in what amount and
classification. </blockquote>Tip 4: Indicate Classification of
Allowed Claim: "General Unsecured Claim,"
"Administrative Claim" or "Secured Claim" A
common mistake in a settlement stipulation is the omission of the
classification of the settled claim. Even if it is obvious to the
drafter that the claimant should have a general unsecured claim, the
stipulation should state so clearly: "ABC Corp. has an allowed
general unsecured claim against the 'South Dakota Entity,' in the
amount of $100,000." This is especially important if the original
claim was filed asserting a classification different than the final
settlement classification. Tip 5: Identify Each Particular Debtor
Against Which the Claim Will Be Allowed A term that merely
states that "ABC Corp. has a general unsecured claim in the
amount of $100,000" leaves open the possibility that the claimant
could assert that all of the debtors have joint and several liability
for the claims. Particularly if the settlement is documented
pre-confirmation, one should never assume that administratively
consolidated debtors would be substantively consolidated under a plan.
A better practice is to state: "ABC Corp. has an allowed general
unsecured claim against the South Dakota Entity, Parent Debtor and no
other debtors or affiliates." Tip 6: Make the Settlement
Agreement Available on the Docket The best way to ensure that the
client and other parties in interest have access to information
concerning the settlement is to create a docket entry. Even if the
court, Bankruptcy Code, Bankruptcy Rules or the claim-objection
procedures do not require bankruptcy court approval of the settlement,
it is recommended that you obtain an order approving the settlement
agreement that can be used to fend off future litigation or that can
be filed in another forum to support dismissal papers. Even in cases
where time is short or obtaining an order approving the settlement is
unnecessary, the settlement agreement should be on the docket so that
the information will be available to the client and other parties in
interest, even after the final decree is entered. If an order
approving the settlement is unnecessary, simply attach the settlement
to a "Notice of Settlement Concerning Proof of Claim Filed by ABC
Corp." The docket in some of the larger cases may include
thousands of entries. In this age of electronic filing, we have the
benefit of creating a word-searchable docket. Make sure the name of
the claimant is in the title of the document, to ensure that parties
can quickly search the docket and pull the settlement agreement or any
other docket entries specifically related to ABC Co. (There is nothing
more frustrating than seeing 50 docket entries entitled
"Stipulation Resolving Proof of Claim Against Parent
Debtor.") Even if a motion is filed seeking approval of 15
stipulations, always include the names of all of the settling
claimants in the title of the document to ensure that all names appear
on the docket entry. Tip 7: Indicate Status of Relationship after
Settlement, Executory Contract Rejected, Terms Modified, etc.

If the settlement of the claimant's proofs of claim against the estates
left the contractual relationship between the parties unaltered, state
this in the settlement agreement. If the settlement altered the terms
of an executory contract or unexpired lease, specifically set out the
modifications in the settlement agreement or attach the modified
agreement or lease as an exhibit to the settlement agreement. Note
that court approval under §363(b) may be required if the
modifications are outside the debtor's ordinary course of business. In
that case, move for approval of the agreement under §363(b) and
Rule 9019 of the Federal Rules of Bankruptcy Procedure. The
settlement may also provide for the rejection of the executory contract
or unexpired lease at issue. If so, make sure the effective date of the
rejection is clearly stated, and note that the allowed claim provided
for in the settlement constitutes the entirety of the rejection
damages claim, and that no additional rejection damages claims may be
asserted or allowed. Tip 8: Think Through the Releases
Releases have come back to haunt all of us at one point or another.
Look beyond the boilerplate language contained in standard releases
and carefully consider (1) which entities are being released and (2)
which claims are being released. With respect to which entities are
being released, be careful not to release affiliates or agents of the
claimant unintentionally. On the debtor side, try to obtain a release
for all of the debtors and nondebtor affiliates. With respect to
which claims are being released, when representing the debtor be
careful not to release chapter 5 (preference and fraudulent transfer)
actions unintentionally, unless such a release was part of the
bargaining process. In many cases, the claims-resolution and avoidance
action processes are on different tracks, with claims being resolved
well before the completion of the avoidance action analysis. Before
releasing chapter 5 actions, ask the client or financial advisor to
provide a brief analysis of potential chapter 5 actions against the
claimant. Analyzing chapter 5 actions before settling with a claimant
can create leverage in settlement negotiations. In any case, never
release chapter 5 actions before knowing what actions exist. Tip
9: Your Client Should Sign the Settlement Agreement It is not
uncommon for a lawyer to sign a settlement agreement on behalf of the
client. While this action is not prohibited by the ethical rules or
codes, the better practice is to have the client sign the stipulation,
particularly when the settlement agreement waives your client's
ability to utilize tools of the Code, such as avoidance powers or
§502(j). Tip 10: Create a Form of Stipulation The best
way to ensure that the client, financial advisors and colleagues
properly document claims settlements is to take the time to create a
form of settlement agreement that incorporates these tips and
circulate that form to everyone who may be involved with the
settlement of claims. The individuals who execute the documentation
phase cannot always be controlled, but a checklist of items that must
be considered before finalizing the settlement can ensure some level of
consistency and efficiency in the process. Conclusion
While many of these tips are common sense to most practitioners, they
are also commonly ignored or overlooked, resulting in additional work,
cost and even, at times, litigation. A well-drafted settlement
stipulation may not win you a literary prize, but it will help you
provide your client with superior service.

Journal Authors

Carrianne Basler

Michelle Campbell Ross

Journal Date

Saturday, April 1, 2006 - 12:00

Bankruptcy Rule

2006

none