As we have discussed in previous posts, when a plaintiff or defendant in a pending civil lawsuit files for bankruptcy, the suit becomes part of the bankruptcy estate. Further, under § 541 of the Bankruptcy Code, the trustee in bankruptcy succeeds to all causes of action held by a debtor at the time a bankruptcy petition is filed, including damages actions. As such, only the trustee may move for court approval of a compromise or settlement of an action that is property of the bankruptcy estate. A debtor may, however, object to the approval of a compromise of a damages action if there is a chance that the debtor may receive some disbursement or refund from an estate or if a debtor is provided for in any way by a plan of reorganization.
Settlements and compromises in bankruptcy proceedings are governed by Rule 9019, Federal Rules of Bankruptcy Procedure. Rule 9019 provides for approval of compromises upon a motion by a trustee and after notice and a hearing. The rule also gives a court broad discretion in approving or denying compromises.
Courts within Florida and the Eleventh Circuit have held that a court should approve a compromise if the compromise is fair, equitable and in the best interest of an estate. In determining whether or not a compromise of a damages action brought by a trustee on behalf of an estate is fair and equitable and in the best interest of an estate, a court should consider:
(1) The probability of success in the litigation;
(2) the difficulties, if any, to be encountered in the matter of collection;
(3) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; and
(4) the paramount interest of the creditors and a proper deference to their reasonable views in the premises.
Despite the debtor’s right to object, and the trustee’s burden of proof for all four elements, courts in Florida have generally allowed the trustee’s settlement – absent exceptional mitigating circumstances.