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Does a Trustee in Bankruptcy Need to Approve a Settlement of a Lawsuit?

Does a Trustee in Bankruptcy Need to Approve a Settlement of a Lawsuit?

Q: What happens if a settlement is accepted during bankruptcy?

If a settlement is accepted during bankruptcy, the Trustee must seek court approval before finalizing it. This process involves filing a Motion for Authority to Compromise, which outlines the case details and reasons for accepting the settlement. Until the bankruptcy court approves it, the settlement is not finalized.

Q: Who makes decisions in a corporate bankruptcy case?

In a corporate bankruptcy case, the Trustee is responsible for managing the bankruptcy estate and making key decisions, including those related to settlements. Although you can provide input, the Trustee and your attorney, who is appointed by the Trustee, ultimately make the decisions.

Q: Do I need court approval for a settlement in bankruptcy?

Yes, any settlement accepted by the Trustee in a bankruptcy case requires court approval. The Trustee will file a motion with the bankruptcy court to obtain this approval, ensuring that the settlement is in the best interest of the creditors and the bankruptcy estate.

Q: Can creditors object to a settlement in bankruptcy?

Yes, creditors can object to a settlement in bankruptcy. Once the Trustee files a motion for court approval of the settlement, creditors are notified and have the opportunity to raise objections during a hearing. The court will consider these objections before granting approval.

Full question:

This is a follow-up question to the question I previously asked and is based on the answer you provided. Since I cannot cancel the BK for my corporation I have the following question: Will I have any input on whether or not to accept the settlement offer from the defendent or is that strictly the Trustee's and my attorney's (who were hired by the Trustee) sole decision. I want to make sure that since my company was the victim that I actually have a voice in the whether or not to accept the offer. The case is located in the State of California.

Category: Bankruptcy
Date: 04/07/2025
State: California

Answer:

The filing of a bankruptcy petition by your client creates a bankruptcy estate which the Trustee is appointed to administer. Pursuant to 11 U.S.C. section 541(a), property of the estate consists of all legal or equitable interests of the debtor in property as of the commencement of the case.

The right to the proceeds of the personal injury lawsuit become property of the estate and, upon the filing of the bankruptcy, the Trustee succeeds to any right of the debtor in the lawsuit.
If the defendants make a settlement offer prior to trial, you must communicate that offer directly to the Trustee. It is the Trustee who has the right to accept or reject any offers, presumably after consulting with you on the likelihood of success at trial.
If the Trustee decides to accept the offer, s/he must obtain court approval. Do not let the state court dismiss the case prior to obtaining bankruptcy court approval.

The Trustee will file with the bankruptcy court a Motion for Authority to Compromise ("Motion") pursuant to Bankruptcy Rule 9019. The Motion will set forth the status of the case and the reasons for accepting the settlement. Until the bankruptcy court approves the settlement, the case is not settled. A recovery by way of settlement on a claim owned by the estate is subject to notice to creditors and opportunity for hearing on any objection against settlement.

Please see also:

http://www.dcba.org/brief/junissue/1998/art50698.htm
http://www.coloradolaw-blog.com/2009/06/med_mal_claim_right_to_settle.html

This content is for informational purposes only and is not legal advice. Legal statutes mentioned reflect the law at the time the content was written and may no longer be current. Always verify the latest version of the law before relying on it.

FAQs

Can I negotiate a settlement during bankruptcy?

In bankruptcy, the Trustee typically handles negotiations for settlements. While you can express your opinions and preferences to the Trustee, the final decision to accept or reject a settlement offer rests with them. It's important to communicate your concerns and ensure your voice is heard in the process.