If there are mutual claims, the Ninth Circuit BAP gives the court discretion not to evaluate a settlement as a sale.

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Case Type:
Case Status:
BAP No. NC-21-1233-FBS (9th Circuit, May 26,2022) Published
Settlement agreement involving release of the Trustee's claims against a prior owner, and a sale of claims to that prior owner's company to pursue claims against a different insider group, was properly affirmed by the bankruptcy court in reliance upon the Trustee's business judgment. Furthermore, the court was not required to treat any portion of the compromise as a "sale" because there was a mutual release of significant claims, nor was it required to approve a competing offer that had a larger cash component.
Procedural context:
Insider group of corporate Chapter 11 debtor, that had objected to Trustee's compromise motion and made alternative offer, appealed bankruptcy court order approving the compromise, and the BAP affirmed.
Before the Chapter 11 case, there was litigation between the former owner and the later owners about looting the corporation. The Trustee reached a settlement with the former owner whereby (among other terms) the former owner paid $200,000 to the estate, plus fifty-five percent of any recovery on claims against against the later owners, and the subordination of the former owner's proof of claim. The Trustee represented that he was exercising his business judgment to present the sale as a private sale not subject to overbid. The Trustee gave credit to the views of the former owner that the claims against the later owners were worth "between $10 million and $20 million." The court noted a “sharp disagreement about whose conduct drove [debtor] into bankruptcy” and “decline[d] to turn this compromise motion into a mini-trial on the merits of the Litigation Claims.” There was a concurring opinion that said the court was obligated to treat the sale of claims as a sale motion (Section 363) but had fulfilled the obligations for review of compromise and sale motions.
FARIS, BRAND, and SPRAKER, Bankruptcy Judges.

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