California Court Explains the Approval of Sales and Settlements in Bankruptcy Actions

In bankruptcy actions, trustees will often manage the estate, which may include selling any assets that can be liquidated. The bankruptcy courts will generally approve such sales, as long as they comply with the procedural requirements, as illustrated in a recent California ruling. If you have would like to hear more about whether you may be eligible for bankruptcy relief, it is wise to contact a California bankruptcy attorney.

Factual and Procedural History of the Case

It is reported that the debtor’s husband and debtor wife, who were legally separated, filed separate petitions in September 2021, during their legal separation. Their bankruptcy cases were then consolidated. The trustee, who oversaw the consolidated bankruptcy estates, moved for the approval of two settlement and sale agreements. “Agreement A” encompassed the sale of a single business entity that was owned by the debtor husband and the settlement of three related legal matters the debtor husband, formerly legal counsel for the creditor, had been involved in.  The trustee advocated for the approval of the settlement and sale, contending that they were in the estate’s best interest. The debtor husband objected to Agreement A however. The bankruptcy court ultimately approved the agreement, and debtor husband appealed.

Approval of Sales and Settlements in Bankruptcy Actions

On appeal, the court evaluated the bankruptcy court’s approval of Agreement A, encompassing both a sale and a compromise, under § 363 and Rule 9019. To approve a § 363(b)(1) sale, the trustee must establish a sound business purpose, fair sale price, proper notice to creditors, and good-faith negotiation. Rule 9019(a) allows the court to approve compromises or settlements, considering factors such as the probability of success, collection difficulties, litigation complexity, and creditor interests. The court may make general findings supporting the settlement if the record indicates favorability. The trustee bore the burden of proving these elements.

In the analysis, the court addressed the debtor husband’s arguments, emphasizing that Agreement A’s approval was based on valid considerations. The court found the trustee met the criteria for the sale of the business entity and the settlement of related litigations, asserting sound business purpose, arm’s-length negotiation, and fairness in the $50,000 sale price. The record supported the settlement’s approval, and the court’s lack of detailed findings wasn’t a reversible error.

Further, the court dismissed the debtor’s husband’s objections, including claims of extreme prejudice and errors in the court’s modifications. The court clarified that modifications were agreed upon by the parties, not imposed. The trustee’s valuation of litigation matters was deemed sufficient, given the lack of value and cost concerns. While the trustee’s explanation of benefits to creditors was lacking, a carve-out and the assets’ lack of value justified approval. Lastly, concerns about notice were restricted to lienholders, not affecting the settlement notice.

Talk to an Experienced California Bankruptcy Attorney

People with substantial debt often feel overwhelmed and hopeless, but in many instances, they can regain control of their finances via bankruptcy. If you want to learn more about whether bankruptcy may be right for you, it is smart to talk to a lawyer as soon as possible.  Matthew D. Roy is an experienced California bankruptcy attorney who can offer you advice regarding your options and aid you in pursuing the best legal outcome possible in your case. To set up a meeting with Mr. Roy, you can reach out by using our online form or calling us at (916) 361-6028.