654 B.R. 49
Bankr. N.D.N.Y.2023Background
- Adversary Proceeding sought (1) permission under 11 U.S.C. § 363(h) to sell Hawaii real property jointly owned by debtor Stanley DiStefano and his non‑debtor spouse, and (2) an accounting of postpetition rental income from that property.
- Trustee Wolinsky filed the AP in 2020; after his death Trustee Ehrlich succeeded and moved to settle the AP; an earlier settlement was denied because it failed to address the rents claim.
- Trustee Ehrlich renewed the settlement, increasing the proposed payment to the estate to $142,500 (an extra $10,000 to address the rents claim); Trustee estimates the estate could recover at most $18,000 in rents and $232,411.15 from a sale.
- Creditor Endurance opposes the renewed settlement, disputes Trustee’s rent calculation (claiming $263,000 in collected rents), and has offered conditional litigation funding and a carve‑out for unsecured creditors but with terms that would give it consultation/consent rights.
- The Court applied the Iridium factors, concluded litigation risks, collection difficulties, insolvency, and the arm’s‑length nature of negotiations favor settlement, and approved the $142,500 settlement as above the lowest range of reasonableness.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the trustee’s renewed Rule 9019 settlement should be approved | Settlement yields prompt, certain distribution ($142,500); litigation is risky, protracted, and estate is insolvent | Endurance says litigation could yield greater recovery and offered funding to pursue litigation | Approved: Court finds settlement reasonable under Iridium factors and above lowest range |
| Proper recovery from rental income (amount estate can collect) | Trustee: limited recoverable rents ≈ $18,000 (trustee’s accounting and equitable defenses limit recovery) | Endurance: estate entitled to total collected rents (~$263,000) less expenses; trustee undervalues recovery | Court accepts trustee’s conservative calculation for settlement analysis; calculates alternate max recoverable rents ~$89,420 and uses figures to assess reasonableness |
| Weight of creditors’ interests and effect on Endurance’s secured rights | Prompt cash benefits all creditors; litigation would increase interest on Endurance’s lien and may produce only a paper judgment | Endurance: has greater upside from litigation and offered conditional funding + carve‑out for unsecured creditors | Court: Factor favors settlement—no other creditors object; insolvency and collection risk support compromise |
| Validity/weight of Endurance’s amended funding offer (and its conditions) | Trustee declined to seek approval of Endurance’s offer because conditions would unduly constrain trustee’s business judgment (de facto veto) | Endurance: funding and carve‑out show support for litigation and benefit estate/creditors | Court: Trustee did not move to accept offer; Court rejects giving Endurance veto/consult rights as undermining trustee’s discretion |
Key Cases Cited
- Motorola, Inc. v. Official Comm. of Unsecured Creditors (In re Iridium Operating LLC), 478 F.3d 452 (2d Cir. 2007) (establishes multi‑factor test for evaluating bankruptcy settlements)
- Detroit v. Grinnell Corp., 495 F.2d 448 (2d Cir. 1974) (Second Circuit guidance that a settlement need not equal the maximum possible recovery to be reasonable)
- In re Dewey & LeBoeuf LLP, 478 B.R. 627 (S.D.N.Y. 2012) (settlements favored in bankruptcy to minimize costly litigation)
- In re Hilsen, 404 B.R. 58 (Bankr. E.D.N.Y. 2009) (court should not substitute its judgment for trustee’s business judgment in settlement decisions)
- In re WorldCom, Inc., 347 B.R. 123 (Bankr. S.D.N.Y. 2006) (objections by parties in interest are relevant but not controlling in settlement review)
- Maley v. Del Global Techs. Corp., 186 F. Supp. 2d 358 (S.D.N.Y. 2002) (court may approve settlements representing only a fraction of the potential recovery)