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US to assert a claim against otherwise exempt homestead property rather than funds otherwise available to creditors. In re Szwyd, 394 B.R. 230 (Bk. D. Mass. 2008); In re Jordan, 389 B.R. 398 (Bk. M.D. Pa. 2007).
There has long been considerable uncertainty regarding a debtor's ability to sell free and clear of a partially secured debt without the creditor's consent. Some courts have interpreted section 365(f)(3) to permit such sales, others have used 365(f)(5), and others have essentially ignored the issue. In In re PW, LLC, 391 B.R. 25 (BAP-9th Cir. 2008), the Ninth Circuit BAP raised serious questions about such a sale. Specifically, the Court held that the debtor could not sell free and clear of an under water junior lien under (f)(5) unless there is an actual proceeding in which the creditor could be compelled to accept a monetary payment for its interest and chapter 11 is not such a mechanism. Of perhaps even greater significance, the Court held that in such a sale, the debtor is not protected by the good faith provision of section 363(m) because that provision is not applicable to lien stripping under 363(f); however, it does appear that the actual purchaser is protected.
There has been a fair amount of litigation whether a trustee or debtor can prosecute tort, pi and other claims which are undisclosed on his/her schedules. A number of consumer cases said no because the debtor should not benefit from nondisclosure, and dismissed actions at the instance of the defendant. More recent authorities have focused on who will benefit and have refused to dismiss actions where the beneficiaries would be creditors who had no part in the misleading schedules. A good recent example is Kane v. Caillouet, 2008 WL 2721157 (5th Cir. 2008), involving a trustee's effort to prosecute an undisclosed pi claim. The defendant moved to dismiss on the ground of judicial estoppel, but the Court held judicial estoppel did not bar prosecution of the claim. The Court reasoned that the trustee was the real party in interest and had not abandoned his interest, creditors would be harmed if judicial estoppel was applied, and the debtors would not benefit unless there was a surplus in the estate.
Settlements are critical in bankruptcy but raise a host of issues. In cases involving a trustee without much creditor oversight, courts often are skeptical regarding how much diligence and effort the trustee devoted to evaluating the claim. In chapter 11 cases, there may be similar issues, especially if there isn't an active creditors' committee. When the settlement involves insiders or related parties, there are obvious concerns. And, courts have not entirely worked out the relationship between chapter 11 confirmation requirements and settlements which may undermine those requirements. A sampling of cases of interest include:
In re TSCI, Inc., 393 B.R. 71 (Bk. D. Del. 2008) (settlement of committee challenge to withdrawal of bid by stalking horse bidder after it learned the debtor might not own certain property which was to be included in the sale which resulted in a lower purchase price and resulted in a payment to unsecured creditors did not violate the absolute priority rule).
In re Jordan, 2008 WL 2705187 (Bk. D. Idaho 2008) (prepetition settlement of
©2009 Jonathan M. Landers
