Trustee’s settlement binding only if approved by court

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Where the trustee made an offer to settle, which was agreed to for consideration, a binding settlement agreement was reached. But in a question of apparent first impression in the Fourth Circuit, the agreement is binding only if approved by the bankruptcy court.

Background

This is a motion for enforcement of settlement filed by Robin W. Greenawalt, Unique Creations on Main Inc. and Main Street Preservation LLC against the Chapter 7 trustee, William E. Callahan Jr. The trustee objected to the enforcement motion stating that the agreement was subject to conditions precedent that were not met.

On Oct. 21, 2019, the court conducted an evidentiary hearing. At the conclusion of the hearing, the court took the matter under advisement. The court gave the parties an opportunity to file briefs addressing arguments raised at the hearing. Both parties filed briefs and responses and the matter is now ready for decision.

Agreement

The first issue is whether under Virginia law the parties reached a binding contract to settle a claim. The court finds that the parties reached an agreement to settle the 2014 litigation May 2, 2017.

The trustee made an oral offer during the May 2, 2017, phone call when he stated that he was willing to settle the 2014 litigation for $6,191. This offer was accepted via an email dated June 8, 2017. The trustee’s immediate reply that he would send out an asset notice after a deal was reached is confirmation of that fact. If no agreement was made, there would be no other reason for the trustee to send an asset notice to creditors in this case. Further, there is consideration. Thus, the parties entered into a valid contract to settle the 2014 litigation.

There is no persuasive evidence the settlement contract was made explicitly subject to a formal writing. Although the trustee was then sent a draft release agreement, there is no evidence on which the court could conclude that the parties were not bound by the oral agreement.

Court approval

While the Fourth Circuit has not addressed the issue of whether court approval is mandatory under Rule 9019, other courts have addressed the issue. The “majority view” is that settlement is only enforceable if the bankruptcy court has approved the settlement. While some courts have reached the opposite conclusion, this court agrees with the majority view that a settlement is only enforceable if the bankruptcy court has approved it.

Thus, while the parties have formed a valid contract to settle the 2014 litigation, the agreement still must be approved by the court. The court will set a hearing on the matter where both parties may present evidence on whether the court should approve the agreement.

Greenawalt v. Callahan, No. 15-71683, Dec. 16, 2019. WDVA Bankr. at Roanoke (Black). VLW No. 019-4-033, 9 pp.