Rule 9019: Compromise and Arbitration

Bankruptcy Rule 9019(a) authorizes a trustee to seek a compromise or settlement of claims, upon motion and after notice and a hearing. Fed. R. Bankruptcy. P. 9019(a). The purpose of such a compromise agreement “is to allow the trustee and the creditors to avoid the expenses and burdens associated with litigating sharply contested and dubious claims.” In re A & C Props., 784 F.2d 1377, 1380-81 (9th Cir.1986). The bankruptcy court is charged with an affirmative obligation to apprise itself “of all facts necessary to evaluate the settlement and make an “informed and independent judgment’” as to whether the compromise is fair and equitable. LaSalle Nat’l Bank v. Holland (In re Amer. Reserve Corp.), 841 F.2d 159, 162-63 (7th Cir.1987) (quoting Protective Commonwealth. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424, 88 S.Ct. 1157, 20 L.Ed.2d 1 (1968) ); In re Batt, 488 B.R. 341 (Bankr. W.D. Ky. 2013).

Bankruptcy Rule 9019 (a) also empowers bankruptcy courts to approve settlements “if they are in the best interests of the estate.” Vaughn v. Drexel Burnham Lambert Grp., Inc. (In re Drexel Burnham Lambert Grp., Inc.), 134 B.R. 499, 505 (Bankr. S.D.N.Y. 1991). A decision to approve a particular compromise or settlement is within the sound discretion of the bankruptcy court. In re Drexel Burnham, 134 B.R. at 505.  It is appropriate for the court to consider the opinions of the trustee or debtor in possession that a settlement is fair and equitable. Nellis v. Shugrue, 165 B.R. 115, 122 (S.D.N.Y. 1994). In addition, the bankruptcy court should exercise its discretion “in light of the general public policy favoring settlements.” In re Hibbard Brown & Co., 217 B.R. 41, 46 (Bankr. S.D.N.Y. 1998).

In making the determination of whether settlements are “fair and equitable” and in the best interests of creditors, courts have considered the following TMT Trailer factors: “the probabilities of ultimate success should the claim be litigated,” and “an educated estimate of the complexity, expense, and likely duration of such litigation, the possible difficulties of collecting on any judgment which might be obtained, and all other factors relevant to a full and fair compromise.” TMT Trailer, 391 U.S. at 424-25. In determining whether to approve a proposed settlement, a bankruptcy court need not decide the numerous issues of law and fact raised by the settlement, but rather should “canvas the issues and see whether the settlement ‘fall[s] below the lowest point in the range of reasonableness.’” Cosoff v. Rodman (In re W.T. Grant Co.), 699 F.2d 599, 608 (2d Cir. 1983) (quoting Newman v. Stein, 464 F.2d 689, 693 (2d Cir. 1972)).