When considering approval of a compromise and settlement that includes a sale of estate property, the bankruptcy court sometimes has discretion not to evaluate the transaction as a sale under Section 363 and likewise has discretion not to allow overbids, according to the Ninth Circuit Bankruptcy Appellate Panel.
Concurring, Bankruptcy Judge Gary Spraker believes that a Section 363 analysis is required, but he concurred because he saw the bankruptcy court as having properly evaluated the settlement as a sale.
The facts were complex. Basically, the former part owner and former chief executive of a company was in his own chapter 11 case. The company was in chapter 7 with a trustee. The company and the former owner had highly disputed litigation claims against one another.
The trustee for the company and the former owner, the chapter 11 debtor, negotiated a settlement. For $200,000, an entity controlled by the former owner would buy the chapter 7 trustee’s claims against the majority owners of the chapter 7 debtor company. Were the litigation successful, the buyer would turn over 55% of the recovery to the chapter 7 trustee.
The settlement called for the chapter 7 trustee to release the estate’s claims against the former owner, but the former owner would subordinate his claims to all claims of the company’s non-insider creditors.
The majority owners of the chapter 7 debtor objected to the settlement and made a competing offer to buy the claims against themselves.
In both the chapter 7 case and the chapter 11 case, the bankruptcy court approved the settlement without permitting an overbid by the majority owners. The majority owners appealed to the BAP.
The BAP’s Majority Opinion
Writing on May 26 for himself and Bankruptcy Judge Julia W. Brand, Bankruptcy Judge Robert J. Faris based his decision largely on the BAP’s previous opinion in Goodwin v. Mickey Thompson Ent. Grp. (In re Mickey Thompson Ent. Grp.), 292 B.R. 415 (B.A.P. 9th Cir. 2003). He described Mickey Thompson as holding that, “in some circumstances, a settlement agreement transferring estate assets must be evaluated both as a compromise under Rule 9019 and a sale under § 363.” Id. at 421.
In a later case, Judge Faris said that the Ninth Circuit “agreed with” Mickey Thompson and held that the bankruptcy court “has the discretion to apply Section 363 procedures to a sale of claims pursuant to a settlement approved under Rule 9109.” Adeli v. Barclay (In re Berkeley Delaware Court, LLC), 834 F.3d 1036, 1040 (9th Cir. 2016).
Crucially, Judge Faris observed that the BAP in Mickey Thompson “applied the § 363 sale analysis to a settlement of litigation claims because the claims ran in only one direction.”
“Unlike in Mickie Thompson,” Judge Faris said that the case on appeal had claims by the trustee against the former owner and claims by the former owner against the estate represented by the trustee. “Because this settlement resolved mutual claims,” he held that “it was not a one-way sale requiring scrutiny under § 363.”
“In other words,” Judge Faris said, “Mickey Thompson’s requirement that the bankruptcy court examine a compromise as a sale or conduct an auction is inapplicable to this case.”
With regard to issues related to the majority owners’ competing bid, Judge Faris described how the bankruptcy court considered and rejected it, finding that it was inferior to the proposed settlement. “This fulfilled the purpose of the Mickey Thompson rule,” he said.
Having held that the bankruptcy court properly exercised discretion to approve the settlement without applying Section 363 and without permitting an overbid, Judge Faris proceeded to evaluate the bankruptcy court’s decision to approve the settlement under Rule 9019. Among other things, he said that the court was not bound “to defer to the wishes of objecting creditors simply because they held the majority of the claims in the two bankruptcy cases.”
In deciding whether the settlement was in the creditors’ best interests, he concluded that the decision not to permit overbids was not error, because the bankruptcy court had compared the two proposals. “It does not make sense,” Judge Faris said, “to require an auction where bids cannot be readily compared.”
Finding no error in approval of the settlement, Judge Faris affirmed.
The Concurrence
Judge Spraker agreed with the Rule 9019 analysis and with the result. However, he believed that the court was required to analyze the settlement as a sale under Section 363.
Even in cases with mutual claims, Judge Spraker believes that the court is obliged to analyze a settlement as a sale under Section 363.
Judge Spraker reached the same result because he concluded that the bankruptcy court had properly considered the settlement as a sale and had properly exercised discretion in not allowing overbids.
When considering approval of a compromise and settlement that includes a sale of estate property, the bankruptcy court sometimes has discretion not to evaluate the transaction as a sale under Section 363 and likewise has discretion not to allow overbids, according to the Ninth Circuit Bankruptcy Appellate Panel.
Concurring, Bankruptcy Judge Gary Spraker believes that a Section 363 analysis is required, but he concurred because he saw the bankruptcy court as having properly evaluated the settlement as a sale.
The facts were complex. Basically, the former part owner and former chief executive of a company was in his own chapter 11 case. The company was in chapter 7 with a trustee. The company and the former owner had highly disputed litigation claims against one another.
The trustee for the company and the former owner, the chapter 11 debtor, negotiated a settlement. For $200,000, an entity controlled by the former owner would buy the chapter 7 trustee’s claims against the majority owners of the chapter 7 debtor company. Were the litigation successful, the buyer would turn over 55% of the recovery to the chapter 7 trustee.