A recent unreported Ninth Circuit Bankruptcy Appellate Panel decision, Tieni v. Mastan (In re Bondanelli), 2020 Bankr. LEXIS 735, upheld a bankruptcy court’s approval of the Chapter 7 trustee’s proposed settlement of his litigation against multiple defendants despite determined opposition by creditors who held most of the claims.  In the Ninth Circuit, the starting point for evaluating a proposed settlement in bankruptcy court pursuant to Bankruptcy Rule 9019 is In re A & C Properties, 784 F.2d 1377, 1986 U.S. App. LEXIS 23092, 20 Fed. R. Evid. Serv. (Callaghan) 643, which provides that to approve a trustee’s proposed settlement agreement, the court must find that it was negotiated in good faith and that the compromise is fair and equitable. 

In determining the fairness, reasonableness and adequacy of a proposed settlement agreement, the court must consider;

(a) The probability of success in the litigation; (b) the difficulties, if any, to be encountered in the matter of collection; (c) the complexity of the litigation involved, and the expense inconvenience and delay necessarily attending it; (d) the paramount interest of the creditors and a proper deference to their reasonable views in the premises.

A & C Properties, at 1381.

In Bondanelli, because creditors holding the majority of the claims objected to the proposed settlement, the focus was on “the paramount interest of the creditors and a proper deference to their reasonable views in the premises” and the proper amount of deference the court should give the trustee’s business judgment.

The trustee has the burden to persuade the bankruptcy court that the compromise is fair and equitable.  In re Woodson, 839 F.2d at 620.  He is assisted in this burden by the general rule that bankruptcy courts should give some deference to his business judgment in deciding whether to settle a matter for the benefit of the estate.  Goodwin v. Mickey Thompson Entm't Grp., Inc. (In re Mickey Thompson Entm't Grp., Inc.), 292 B.R. 415, 420 (9th Cir. BAP 2003) (citing In re A & C Props., 784 F.2d at 1381).  He is also aided by policy considerations.

Bondanelli, at *5.

The BAP found that the bankruptcy judge gave the appropriate amount of deference to the trustee’s views as to the reasonableness of the settlement (considering the A & C factors) without ceding the court’s duty to make its own determination.  The Ninth Circuit BAP determined that the bankruptcy court heard and considered all of the objecting creditors’ arguments at the reasonableness hearing, and the bankruptcy court found that the proposed settlement was actually in the interests of creditors, and this was not error.

So in the Ninth Circuit creditors do not have an automatic veto of settlements of compromises proposed by the trustee, and the bankruptcy judge retains discretion.