Rogers Towers, PA welcomes readers to its new Florida Banking Law Blog! A product of the firm’s Banking and Financial Services Practice Group, the blog will serve as a convenient way for us to share our expertise in banking-related legal issues. We represent banks and other providers of financial services in a broad range of matters throughout the state of Florida. As a result of our significant experience, we will have much to share in the upcoming blog posts and we hope that you will find these posts to be informative and beneficial to you in your respective positions in the industry. We appreciate your interest in the field and in Rogers Towers, PA and we look forward to your comments in response to our blog. Again, welcome to the Florida Banking Law Blog!
Under the Chapter 9 Plan of Adjustment filed on Friday of last week, Detroit Emergency Manager Kevyn Orr urged retirees to vote on a quick exit from bankruptcy by offering smaller-than-expected pension cuts. For non-uniformed city employees, Orr offered a 26 percent reduction in their pensions – so long as they agreed not to drag out litigation or pursue the sale of city-owned art. If they do pursue litigation, their pensions could be cut by upwards of 34 percent. Police officers and firefighters were offered a similar deal – a four percent cut in pensions if they accepted the plan without a fight and ten percent if they did not. Ironically, the anti-litigation offer came on the same day that the Sixth Circuit Court of Appeals accepted a direct appeal of Detroit’s eligibility for bankruptcy from the city’s pension funds and largest labor union.
To hasten the “timely exit” from bankruptcy, Judge Stephen Rhodes set a trial date on June 16 for Detroit to prove it can accomplish a plan to shed debt and exit from bankruptcy. Rhodes emphasized that nothing in the scheduling order “excuses any party from the continuing obligation to participate in good faith in any mediation as ordered by Chief Judge Rosen.” Further, he implored all parties “to negotiate with full intensity and vigor with a view toward resolving their disputes regarding the treatment of claims in the city’s plan of adjustment.”
The ball, now, has been placed squarely in the creditors’ court. Given the antipathy that they have shown thus far, it is unlikely that the city’s pensioners will agree to the terms of the plan of adjustment – especially in light of the grant of direct appeal. A fight would create a potential problem for Emergency Manager Orr, as his appointment ends in September, allowing only three months after trial to exit from the biggest municipal bankruptcy case in U.S. history.
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:
(1) The probability of success in the litigation;
(2) the difficulties, if any, to be encountered in the matter of collection;
(3) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; and
(4) the paramount interest of the creditors and a proper deference to their reasonable views in the premises.
Despite the debtor’s right to object, and the trustee’s burden of proof for all four elements, courts in Florida have generally allowed the trustee’s settlement – absent exceptional mitigating circumstances.