450 B.R. 363
Bankr. D. Conn.2011Background
- Debtor Barbara J. Milazzo filed a Chapter 7 bankruptcy; the case has been pending for almost eleven years.
- The Chapter 7 Trustee prosecuted an adversary proceeding to avoid transfers to Michael Milazzo; settlement proposed for estate $20,000.
- CadleRock offered to buy the avoidance action for $22,500, which the Trustee declined; CadleRock objected to the motion to approve settlement.
- District Court remanded for articulation of why an auction was not required and for basis to approve the settlement.
- Court held the trustee cannot be compelled to sell or auction the avoidance action; CadleRock lacks derivative standing under STN/Commodore/Housecraft rules.
- Court found the settlement within the range of reasonableness and approved it, denying CadleRock’s objections.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the trustee may be compelled to sell or auction the avoidance action. | CadleRock contends §363 sale/auction required due to higher offer. | Trustee may not transfer or permit derivative prosecution absent STN/Commodore approval; no auction required. | Trustee cannot be compelled to sell or auction; no auction required. |
| Whether CadleRock may pursue the avoidance action in a derivative capacity versus the trustee. | CadleRock seeks derivative standing to prosecute for the estate. | Derivative standing requires trustee consent and compliance with STN/Commodore/Housecraft criteria; not satisfied here. | CadleRock lacks derivative standing; cannot pursue or control the action. |
| Whether the proposed settlement satisfies Rule 9019 criteria for compromise. | Settlement is fair, reasonable, and in the estate's best interests given litigation risks. | Settlement should be rejected if not in the estate's best interests or not the product of arm's-length bargaining. | Settlement is within the range of reasonableness and approved. |
| Whether the settlement properly accounts for potential prepetition and postpetition transfers and their recoveries. | Settlement accounts for likely outcomes and avoids costly litigation with limited upside. | Higher potential recovery should be pursued through an auction. | Settlement appropriately accounts for risks and benefits; not necessary to pursue further litigation. |
Key Cases Cited
- In re STN Enterprises, 779 F.2d 901 (2d Cir.1985) (derivative standing framework for trustee-consented actions)
- In re Commodore International Ltd., 262 F.3d 96 (2d Cir.2001) ( Commodore standing: derivative suits must be necessary and beneficial)
- In re Housecraft Industries USA, Inc., 310 F.3d 64 (2d Cir.2002) (derivative standing with trustee participation may be allowed)
- In re Adelphia Communications Corp., 544 F.3d 420 (2d Cir.2008) (trustee involvement and supervision crucial to derivative standing)
- In re Smart World Technologies, LLC, 423 F.3d 166 (2d Cir.2005) (derivative standing requires trustee consent and proper safeguards)
- In re Metropolitan Elec. Mfg. Co., 295 B.R. 7 (Bankr.E.D.N.Y.2003) (limits on transfer/assignment of avoidance powers)
- In re Iridium Operating LLC, 478 F.3d 452 (2d Cir.2007) (range-of-reasonableness framework for settlements in bankruptcy)
- In re Boyer, 354 B.R. 14 (Bankr. D. Conn.2006) (policy against pursuing meritless claims and importance of settling)