Imperative to Meet Rule 9019 Standards For Courts to Approve Compromise Between the Parties
In re Stanfill, No. 3:15-bk-30233-SHB, 2016 Bankr. LEXIS 2535 (U.S. Bankr. E.D. Tenn. July 8, 2016)
Debtor Jacqueline Stanfill was an investment advisor who induced her clients to fund what they believed were legitimate investments with a brokerage firm when in fact, the Debtor either lost the invested funds in other ventures personal to her or spent the funds on herself and her family and friends as part of a lavish lifestyle. The Debtor pleaded guilty to federal charges and was sentenced imprisonment. Later, an involuntary petition was filed against the Debtor and the Trustee discovered that there was a fraudulent transfer of assets from the Debtor to Regina Lambert, (Debtor’s spouse) that was liable to be avoided for the benefit of the bankruptcy estate.
Subsequently, the Trustee and Lambert’s attorney negotiated and agreed to settle the Trustee’s potential fraudulent conveyance claims. After arriving at settlement, the Trustee filed a motion to compromise with the bankruptcy court and the creditors of the Debtor objected to the motion.
The issue before the Court was whether a compromise or settlement was fair and should be approved despite the objections of other creditors. The Court stated that its authority to approve or disapprove the compromise motion arises from Rule 9019 of the Federal Rules of Bankruptcy Procedure. As a general rule, settlements and compromises are favored in bankruptcy as they minimize costly litigation and further parties’ interests in expediting the administration of the bankruptcy estate. At the same time, however, it is essential that every important determination in bankruptcy proceedings receive the ‘informed, independent judgment of the bankruptcy court. The Court elaborated that it is not permitted to act as a mere rubber stamp or to rely on the trustee’s word that the compromise is reasonable. Rather, the court possesses an affirmative obligation to appraise itself of the underlying facts and make an independent judgment as to whether the compromise is fair and equitable.
After weighing all factors, the Court concluded that the proposed settlement between the Debtor’s estate and the Debtor’s spouse was not approved because the Trustee failed to meet his burden under FRBP 9019 to show that the proposed settlement was fair and equitable and in the best interest of the estate. The Court reasoned that the Trustee’s evidence failed to show that it would be cost prohibitive to file an adversary proceeding to seek recovery of fraudulent conveyances under Sec. 548 and/or state law, or that the adversary proceeding would be unnecessarily complex. The Court also found that it was not clear that there was a lesser probability of success, if an adversary proceeding were to be filed because there were still a great number of records that had not yet even been examined.
Accordingly, the Court denied the Trustee’s motion to compromise between the parties as the Trustee failed to meet his burden under Rule 9019 and the proposed settlement did not weigh more favorably for the benefit of the estate.
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