California Court Discusses Review of Proposed Compromises in Bankruptcy Cases

In bankruptcy cases, it is not uncommon for the debtor and the trustee to propose a compromise to the bankruptcy court. The court will generally review a proposed compromise to determine if it is fair and equitable, in consideration of numerous factors, as discussed in a recent California case. If you need assistance with a bankruptcy matter, it is in your best interest to consult a California bankruptcy lawyer.

History of the Case

It is alleged that the bankruptcy court considered a proposed compromise between the debtor and the Chapter 7 trustee of a medical institute. The terms of the proposed compromise included the debtor subordinating his $1.35 million proof of claim in the medical institute’s bankruptcy to the allowed claims of all non-insiders.

Reportedly, his company would purchase the medical institute’s rights to pursue certain claims against two creditors for $200,000 in cash and a share of the potential net recovery on those claims. In return, the trustee agreed to settle all of the medical institute’s claims against the debtor and two of the debtor’s companies and withdraw the medical institute’s claim in the debtor’s bankruptcy with prejudice.

Review of the Proposed Compromise

The bankruptcy court reviewed the proposed compromise, considering the fairness and equity of the settlement under a four-factor standard that involved evaluating the likelihood of success in the litigation; the challenges, if any, that could arise in the matter of collection; the difficulty of the litigation involved, and the inconvenience, expense, and delay it would cause; and the chief interest of the creditors and a deference to their views in the principles, if they are reasonable.

The creditors challenged the bankruptcy court’s findings regarding the last factor, focusing on the interests of the debtor’s creditors. They argued that the court erred in concluding that the only loss to the debtor’s creditors from the proposed compromise was the forgone possibility of recovery on his $1.35 million proof of claim against the medical institute. They also contended that the court disregarded evidence suggesting that the claims against them, which the debtor’s company would purchase, were worthless. Additionally, they argued that the bankruptcy court failed to consider the objections of creditors holding a majority of the claims filed against the debtor.

The court rejected these arguments. It found that the cost to the debtor’s estate, particularly the potential value lost in subordinating his proof of claim in the medical institute’s bankruptcy, was the primary focus of his creditors’ interests. The court also determined that the value of assets purchased by the debtor’s company was immaterial to the debtor’s estate creditors, and the bankruptcy court was entitled to weigh the evidence presented.

Furthermore, while the bankruptcy court was obligated to consider the reasonable views of the majority of creditors, those views were not binding. Here, the court did consider the creditor’s objections but ultimately concluded that all of the debtor’s creditors benefited from the compromise’s terms.

As a result, the bankruptcy court’s decision to grant the debtor’s motion to compromise controversies was upheld, as it had adequately considered all the relevant factors and did not abuse its discretion.

Meet with a Skilled California Bankruptcy Attorney

If you find yourself struggling to fulfill your financial obligations and are exploring the possibility of filing for bankruptcy, meeting with an attorney should be your next step. Matthew D. Roy is a dedicated California bankruptcy attorney who is well-equipped to offer insights into the various avenues available to you and to help you pursue potential debt relief solutions. To initiate a consultation or schedule an appointment with Mr. Roy, you can reach out by completing an online contact form or by dialing (916) 361-6028.