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A Trustee is Not Barred to Bring an Action to Recover Fraudulent Transfers Even When Debtor Agreed to Dismiss the Litigation Under a Settlement Agreement.

DeGiacomo v. Tobins (In re Upper Crust, LLC), Nos. 12-18134-JNF, 14-1163, 2016 Bankr. LEXIS 2656 (U.S. Bankr. D. Mass. July 20, 2016)

In 2005, Tobin, Huggard and Higgins formed Upper Crust, LLC (Debtor), a chain of pizza restaurants that provided customers with traditional and innovative pizza combinations. Beginning in or around the end of 2007, Tobin (Defendant) allegedly transferred funds belonging to Upper Crust to himself to pay for his personal expenses and to support his extravagant lifestyle with his then girlfriend and alleged employee of the Debtor, Stefany. Stefany later married Tobin and was also a Defendant in this action. Huggard and Higgins, after allegedly discovering that Tobins diverted funds from Upper Crust, filed an action against Tobins to recover those funds. After the commencement of the litigation, the parties engaged in settlement discussions and finally executed a settlement agreement, under which Upper Crust agreed to dismiss the litigation in exchange for a payment of $250,000. Further, Upper Crust agreed to release the Tobins of any liability for past expenses, salaries, distributions and agreed not to file charge or sue the Tobins. Tobins honored the settlement agreement and paid $250,000 to Upper Crust. However, no court approval was obtained and Upper Crust also failed to file stipulation of dismissal to this effect in the court. Subsequently, Upper Crust filed for bankruptcy and the Trustee for Upper Crust’s bankruptcy estate brought adversary proceeding against Tobins to recover funds which Tobins fraudulently diverted for their own use pursuant to Sec. 548 of the Bankruptcy Code.

Tobins argued that the Trustee lacked standing to assert any claims for fraudulent conveyance because the claims were not property of the estate and not subject to avoidance under Sec. 548. Tobins reasoned that the Upper Crust waived and released all claims against them under a settlement agreement, including the right to seek the return of the funds allegedly diverted, in exchange for payment of $250,000 before it filed for bankruptcy. The Trustee countered that the settlement agreement was not enforceable and was invalid due to the failure to obtain necessary court approvals and was never consummated due to the parties’ failure to satisfy material conditions precedent.
The Court agreed with the Trustee and concluded that the Trustee was not bound by the settlement agreement. The Court elaborated that even assuming that the settlement agreement and the concomitant release of the defendants was enforceable among the parties executing it and binding upon Huggard, Higgins, Upper Crust, but the creditors of the Debtor, in whose shoes the Trustee stands, cannot be included among that group. The Court ruled that the Trustee’s claims were independent of, and separate from, pre-petition causes of action, which the Debtor possessed outside of bankruptcy. Further, the Trustee’s claims against the Tobins under Sec. 548 and state law belonged to the Debtor’s creditors and were transferred to the Trustee with the Debtor’s slide into bankruptcy. The Court ruled in favor of the Trustee and held that the Trustee did not lack standing in the case to bring an action to recover fraudulent conveyance pursuant to Sec. 548.


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