By: Gregory A. Melnick
St. John's Law Student
American Bankruptcy Institute Law Review Staff
Recently in Cadle Co. v. Mims (In re Moore),[1] the Fifth Circuit addressed the issue of whether a proposed settlement of estate claims is functionally equivalent to a sale that triggers section 363.[2] The Cadle Company (“Cadle”) was a major creditor of James Moore (“the Debtor”).[3] Prior to bankruptcy, the Cadle sued the Debtor, his wife, and two companies that allegedly were alter egos of the Debtor asserting both fraudulent conveyance and veil-piercing claims.[4] Although the causes of action passed to the trustee upon the bankruptcy filing, Cadle continued to fund the action, and eventually offered to purchase it from the trustee.[5] While Cadle and the trustee were negotiating, the trustee agreed to settle the claims for $37,500.[6] Cadle objected to the settlement and offered to pay $50,000 for the claims.[7] The bankruptcy court approved the settlement, holding that the claims could not be sold as a matter of law.[8] The Fifth Circuit reversed, holding that a proposed settlement triggers section 363's sale provisions.[9]
Initially, the Fifth Circuit noted that “causes of action owned by the trustee are intangible items of property of the estate that may be sold.”[10] Next, the court discussed the proper test to determine if a trustee's proposed settlement of estate claims constitutes a sale under section 363.[11] It is well settled that “a proposed settlement must be ‘fair and equitable’ and in the best interests of the estate,”[12] which includes the trustee's duty to maximize the value of the estate.[13] However, the circuits split on the issue of whether a settlement constitutes a sale of the property of the estate.[14] Under the minority view, the First Circuit held, without explanation, that a settlement is not a sale.[15] The majority of circuits have adopted the reasoning of Goodwin v. Mickey Thompson Entertainment Group, Inc. (In re Mickey Thompson Entertainment Group, Inc.)[16] in holding that a settlement of a claim is in essence a sale because the end result of each is almost identical.[17] Adopting the majority view, the Fifth Circuit held that the bankruptcy court was obliged to consider the appropriateness of an auction and a section 363 sale when another party offered to purchase the claim for more than the value of the proposed settlement.[18]
In re Moore is significant because it established that a proposed settlement is subject to section 363’s sale provisions.[19] This determination benefits creditors who believe that the trustee has undervalued the claim because the creditors can buy the claim out from under the trustee.[20] Moreover, if these creditors offer a higher purchase price for estate claims than the proposed settlement, it will maximize the value of the estate for all the unsecured creditors.[21]
[1] 608 F.3d 253 (5th Cir. 2010).
[2] 11 U.S.C. § 363 (2006).
[3] In re Moore, 608 F.3d at 255.
[4] Id. at 256. Cadle's claim of $12.5 million was 86% of the debtor's unsecured debt. Id.
[5] Id.
[6] Id.
[7] Id.
[8] Id. at 257.
[9] Id. at 255.
[10] In re Moore, 608 F.3d at 258 (quoting Simantob v. Claims Prosecutor, L.L.C.(In re Lahijani), 325 B.R. 282, 287 (B.A.P. 9th Cir. 2005)).
[11] Id. at 263 (remarking courts must scrutinize whether a proposed settlement will maximize the value of the estate and that higher offers to purchase an estate claim must be considered in the absence of sound business reasons to not consider the higher offer).
[12] Id. at263 (citing Am. Can Co. v. Herpel (In re Jackson Brewing Co.),624 F.2d 605, 608 (5th Cir. 1980)).
[13] Id. at 263 (citing Commodity Futures Trading Comm'n v. Weintraub, 471 U.S. 343, 353 (1985)).
[14] Id. at 264 (citing 3 Collier on Bankruptcy, ¶ 363.02[1][f] (Alan N. Resnick Henry J. Sommer eds., 15th ed. rev. 2009).
[15] See Hicks, Muse & Co. v. Brandt (In re Healthco Int'l, Inc.), 136 F.3d 45 (1st Cir. 1998) (commenting settlement is not sale, but Court provided no support for contention).
[16] 292 B.R. 415 (B.A.P. 9th Cir. 2003).
[17] In re Moore, 608 F.3d at 265 (citing In re Mickey Thompson, 292 B.R. at 422).
[18] Id.
[19] Id.
[20] Id. at 262.
[21] Smaller creditors may object to a proposed sale if they feel that the claims are not being sold for a high enough price, and therefore lowering the value of their claims. However, in this case, the largest creditor is offering more than the settlement offer that the bankruptcy court approved, so the value of all creditors' claims increased.
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