How a Chapter 7 Trustee may settle (or not settle) claims of a Chapter 7 Bankruptcy Debtor
A recent case out of a Bankruptcy Court in Massachusetts highlights some important rights and restraints of a Chapter 7 Bankruptcy Trustee. In In re Deveau, (Bankr. E.D. Mass. 12/19/19), Case No. 15-13300, the Bankruptcy Judge, Hon. Frank J. Bailey, was faced with a complicated set of facts and a Chapter 7 Trustee who sought the Court’s approval of a potential settlement of a claim. The Judge ultimately did not approve a settlement between the Trustee with an insurance carrier who had previously denied coverage to the debtor.
Facts and Background
Before Deveau filed a Chapter 7 bankruptcy petition, he was involved in a motor vehicle accident in which Rierson suffered serious injuries. Progressive, the alleged insurance carrier, provided Deveau with defense counsel in the initial state court trial, which resulted in a defense verdict. Deveau successfully appealed the defense verdict requiring a new trial to be scheduled for February 2020.
Progressive then sued Deveau claiming that Deveau was not covered by the insurance policy. Deveau then settled with Progressive to enter a declaratory judgment in favor of Progressive. Deveau also signed a release with Progressive at that time.
Deveau filed a Chapter 7 bankruptcy petition shortly after the Progressive settlement. The Chapter 7 Trustee argued that Progressive had engaged in bad faith in declining coverage to Deveau. Thus, pursuant to the Trustee’s powers in a Chapter 7 case for any “fraudulent conveyance”, the Chapter 7 Trustee sued Progressive in state court alleging that the denial of coverage was in bad faith. Rierson also filed complaints against Deveau asserting that any damages or debt owed by Deveau were non-dischargeable debts pursuant to 11 U.S.C. §523(a)(2)(A) (false pretenses, a false representation, or actual fraud) and §727(a).
Chapter 7 BANKRUPTCY Trustee SETTLEMENT
The Trustee then reached an agreement with Progressive and sought the Bankruptcy Court’s approval of the proposed settlement terms. The proposed settlement provided that the Trustee would sell, free and clear, all rights under the insurance policy to Progressive in exchange for $825,000.00. However, Progressive was only required to pay the claim if Deveau was successful in defending the dischargeability actions brought by Rierson. Progressive would also be granted a permanent injunction against any person – i.e. Rierson – from asserting future claims against Progressive.
Rierson opposed the proposed compromise.
BANKRUPTCY COURT RULING
Judge Bailey ultimately disapproved of the proposed compromise primarily due to the fact that the Chapter 7 Trustee had not actually pursued any fraudulent conveyance claim and that the Trustee had no interest in the insurance policy to “sell” to Progressive. Since the sale was not allowed, any injunction which was included in the proposed sale was also rejected. The Court also noted that the Trustee failed to exercise good judgment in the proposed settlement as the payment from Progressive was delayed and conditioned on a successful result in the dischargeability actions while the injunction obtained by Progressive was immediate.
There are a number of interesting points which may be learned from the Deveau case and the results.
First, for those unfamiliar with bankruptcy law, a Chapter 7 Trustee may avoid pre-bankruptcy transfers of property which may include more than “hard” assets such as real estate or personal assets. Numerous provisions of the Bankruptcy Code provide for a trustee to “avoid” transfers of “property of the estate”. Here we see the Trustee seeking to avoid a “fraudulent transfer” under Section 548. However, a Trustee may also seek to avoid transfers as a result of a lien (Section 544), certain statutory liens (Section 545), and preferential transfers (Section 547). Section 549 also allows a trustee to “avoid” certain post-petition transfers.
Second, those who may be considering Chapter 7 bankruptcy or consulting those who may wish to file should be aware that their history of pre-bankruptcy transfers must be reviewed before any accurate conclusion can be reached about the expected course of a case. Too often, we see complicated matters in bankruptcy court arising from what some felt were “simple cases”.
Finally, Deveau highlights the role of a Chapter 7 Trustee and the care in which bankruptcy attorneys should have where issue of pre-petition transfers are involved. While the facts of Deveau clearly impacted Judge Bailey’s ruling, what also seems clear is that a Chapter 7 Trustee may have been too quick to see a potential “windfall” while not considering all the steps necessary to properly proceed under the Bankruptcy Code.