Settlement barring trustee from intervening is rejected

Where the Chapter 7 trustee entered into a settlement with the debtor that included dismissal of a § 727 adversary proceeding without allowing the U.S. trustee an opportunity to intervene, the pact was rejected as the notice provisions in the rules would be rendered meaningless if the § 727 action was dismissed without affording the U.S. trustee or another creditor the opportunity to intervene..

Background

This matter comes before the court on the Chapter 7 trustee’s motion to reconsider the court’s order denying approval of the trustee’s proposed settlement with the debtor and the debtor’s related companies because the court concluded that it violated public policy in that it called for the debtor to buy a discharge. The debtor and his related companies have joined in the trustee’s motion. The U.S. trustee opposes the motion. The court conducted an evidentiary hearing on the trustee’s motion, at which the trustee and the debtor testified Nov. 10, 2020.

Analysis

Absent the provision in the amended settlement agreement requiring Allied to withdraw its objection to discharge with prejudice without affording the U.S. trustee the opportunity to intervene, the proposed settlement is a reasonable exercise of the trustee’s business judgment and it materially benefits the creditors. The settlement was negotiated at arms-length. The two adversary proceedings, and Allied’s civil action in the district court, are all uncertain as to result and will be expensive collectively to try.

But for the section of the agreement requiring Allied to dismiss the § 727 adversary proceeding without allowing the U.S. trustee an opportunity to intervene, the court would approve the settlement. The converse is also true: if the settlement agreement allowed the U.S. trustee the opportunity to intervene and the U.S. trustee declined, the court would approve the settlement.

The Chapter 7 trustee, who has considerable experience both as a private attorney and as a trustee, testified that § 727 cases are settled and dismissed all the time. It is true that §727 actions are routinely settled and dismissed, but only after affording the creditors and the U.S. trustee the opportunity to intervene and where the U.S. trustee declines (most often by not objecting to the dismissal). 

The trustee, Allied and the debtor suggest that the U.S. trustee is arguing for the per se rule, that § 727 actions can never be dismissed. Their position, however, essentially would read Bankruptcy Rule 7041’s and the Local Rule’s notice provisions out of the Rules. While the trustee and Allied have provided notice, such notice is rendered meaningless if the court were to dismiss the § 727 action without affording the U.S. trustee or another creditor the opportunity to intervene.

Chapter 7 trustee’s motion to reconsider denied.

In re Orlando Perdomo Jr., No. 19-10812, Nov. 25, 2020. EDVA Bankr. at Alexandria (Kenney). VLW No. 020-4-019. 12 pp.