What’s With Judges Wanting to Re-Write Settlement Agreements?!

By Donald L. Swanson

What’s with judges re-writing terms of bankruptcy settlement agreements?!

A Current Example

That’s exactly what the dissenting judge wants to do in the In re Jevic Holding Corp. case (certiorari granted by U.S. Supreme Court on June 28, 2016; oral argument held on December 7, 2016). This dissenting judge would:

(i) approve most of the terms in the settlement agreement, but

(ii) substitute terms the dissenting judge likes for terms he doesn’t like.

The context is an agreement for distribution of settlement proceeds in a bankruptcy case.  The dissenting judge says this:

–”I would not unwind the settlement entirely.”

–“Instead, I would” enforce most of the terms “for which they bargained.”

–As to the bargained-for terms the judge doesn’t like:

— “I would then have the court order any proceeds that were distributed” to creditors with a low priority “disgorged” and applied to higher priority claims.

–Then, to the extent funds are left over, “I would have the court redistribute them to the remaining creditors in accordance with the Code’s priority scheme.”

Where would this judge get authority to do such a thing?  Don’t settlement agreements (whether reached through mediation or otherwise) need to be either rejected or approved in their entirety?

It’s clear from the facts of the In re Jevic case that the parties would never have agreed to the dissenting judge’s re-write terms.  So, how can a judge re-write the agreement and impose terms the parties did not want and would not have bargained for?

–Whatever happened to “self-determination” in mediation and in settlements generally?

An Analogy

We already have a Bankruptcy Code context (i.e., assumption of executory contracts under § 365) where an agreement, if it is to be assumed at all, must be assumed in its entirety: as-is and without modification.

And there is a solid economic reason for this requirement: because the parties are entitled to what they bargained for and can’t have different terms imposed upon them.

–To illustrate, imagine this: a debtor wants to assume all the terms of a lease agreement—except for the terms that require debtor to make lease payments.

–That’s ridiculous, of course.  And the debtor can’t do such a thing.  The debtor must assume all the contract terms—or none at all.

Similarly, in a bankruptcy settlement (whether mediated or not), where the agreement requires bankruptcy court approval, the agreement ought to be approved in its entirety—or not at all.

–It’s appropriate, of course, for a court to suggest differing terms to the parties that would make the agreement acceptable to the court — and allow the parties to accept such revisions (or not).

–But a court ought not revise the agreement at its own whim and impose those revisions upon the settling parties, against their will!

Other Examples

Unfortunately, however, other courts dealing with circumstances similar to In re Jevic have imposed their own re-write terms on post-petition settlements.  Here are two examples:

1. In SPM Manufacturing Corp., 984 F.2d 1305 (1st Cir. 1993), an under-secured creditor reached a settlement agreement with the creditors committee that, in exchange for a sale of its collateral, it would carve-out and gift a portion of its lien proceeds to unsecured creditors.

The bankruptcy judge doesn’t like the gifting portion of the deal.  So, he approves the over-all settlement but modifies the carve-out and requires payment of the gifted funds to the IRS instead.

However, the First Circuit Court of Appeals, on appeal, rectifies the error: it says the carve-out and gift are proper, reverses the Bankruptcy Court, and approves the settlement agreement as written.

2. In In re On-Site Sourcing, Inc., 412 B.R. 817 (Bkrtcy.E.D.Va. 2009), the bankruptcy court deals with a bankruptcy settlement similar to the SPM Manufacturing case – a portion of the secured creditor’s lien is carved-out in the settlement and gifted to unsecured creditors. Here’s what the bankruptcy judge says:

“The issue before the court is the extent to which a chapter 11 debtor may substitute a § 363 sale for a chapter 11 plan. The debtor reached too far in this case. While the sale will be approved, those portions that are a substitute for a chapter 11 plan will be excised.”

A settlement agreement is “approved” but portions of it are “excised”?!  Seriously?!

Conclusion

This substituting of terms the court likes for terms the court doesn’t looks like judicial over-reach to me.