By: J. Ellsworth Summers and Scott St. Amand
As we have discussed in previous posts, when a plaintiff or defendant in a pending civil lawsuit files for bankruptcy, the suit becomes part of the bankruptcy estate. Further, under § 541 of the Bankruptcy Code, the trustee in bankruptcy succeeds to all causes of action held by a debtor at the time a bankruptcy petition is filed, including damages actions. As such, only the trustee may move for court approval of a compromise or settlement of an action that is property of the bankruptcy estate. A debtor may, however, object to the approval of a compromise of a damages action if there is a chance that the debtor may receive some disbursement or refund from an estate or if a debtor is provided for in any way by a plan of reorganization.
Settlements and compromises in bankruptcy proceedings are governed by Rule 9019, Federal Rules of Bankruptcy Procedure. Rule 9019 provides for approval of compromises upon a motion by a trustee and after notice and a hearing. The rule also gives a court broad discretion in approving or denying compromises.
Courts within Florida and the Eleventh Circuit have held that a court should approve a compromise if the compromise is fair, equitable and in the best interest of an estate. In determining whether or not a compromise of a damages action brought by a trustee on behalf of an estate is fair and equitable and in the best interest of an estate, a court should consider: