Mediated Settlements Require Court Approval in Bankruptcy: Limits on “Standing” to Object

By Donald L. Swanson

Mediated settlement agreements in bankruptcy are subject to approval by the bankruptcy court after notice to interested persons. [Fn. 1]

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Standing is required

A Recent Case

An entity named “Empower” took aggressive action in a recent bankruptcy case to prevent approval of settlements and a plan, all of which arose from extensive negotiation and mediation efforts among many parties.

The Bankruptcy Court rejected Empower’s efforts, ruling that Empower did not have “standing” to oppose the settlements or the plan.

Fact Background

The bankruptcy debtor is a twenty-five bed critical access hospital serving north Florida and parts of Georgia and Alabama. [Fn. 2]

–Before Bankruptcy

Before bankruptcy, Debtor entered into a “Consulting Agreement” with People’s Choice Hospital (“PCH”). Over time, that consulting relationship deteriorated. Debtor then sued to bar PCH from access to the hospital and and from access to Debtor’s bank accounts. PCH filed multiple counterclaims against Debtor.

In the lawsuit, Debtor alleged that PCH acted improperly, resulting in multiple lawsuits seeking millions of dollars of damages and in an investigation by the U.S. Government into fraudulent and illegal billing practices.

The result of the investigation is that Debtor’s Medicare and Medicaid reimbursements dried up, creating cash flow problems for Debtor and leading to the Chapter 11 case.

In the lawsuit, PCH denied all allegations of wrongdoing and pointed to Empower as the source of the problems.

–After Bankruptcy

Debtor’s proposed plan identifies claims against Empower as an asset to be pursued and recovered after confirmation. Empower did not file or assert any claim against Debtor in the bankruptcy.

The terms of Debtor’s proposed plan resulted from a series of negotiation and mediation efforts among a myriad of parties. It includes a series of compromises and settlements that resulted directly from “strenuous negotiation and mediation” efforts in the bankruptcy case.

The Bankruptcy Code and Rules require Court approval of such settlements and plan. So, on October 19, 2018, Empower filed its objections to the proposed plan and filed a motion to dismiss the Debtor’s Chapter 11 case.

Bankruptcy Court Ruling

On November 5, 2018, the Bankruptcy Court confirmed Debtor’s plan and overruled Empower’s motion to dismiss. [Fn. 3] It did so, based on the proposition that “Empower does not have standing or the right to appear and be heard” on such matters.

Here is the Bankruptcy Court’s rationale:

  1.  Standing, and the right to be heard on a particular matter, is critical. The limits on such rights are vital in bankruptcy, the Court adds, where clouds of persons indirectly affected by the acts and entitlements of others may buzz about, delaying final resolution of cases.
  2. Standing rules in bankruptcy, under 11 U.S.C. § 1109(b) [Fn. 4], include the following:

• The right to appear and be heard as a party in interest under § 1109(b) is not the same as standing;
• § 1109 does not give every party in interest the right to seek relief on every issue;
• As to confirmation, “Congress did not intend to grant all parties in interest standing to be heard … on every single aspect of the reorganization proposal and the effects of its consummation”; and
• To establish standing to object to confirmation, a party in interest under § 1109(b) must possess a legally protected interest affected by confirmation.

3.  Empower’s goal throughout the Chapter 11 case, the Bankruptcy Court found, has been to to hinder and delay the case and to reduce or eliminate the bankruptcy estate’s chances of a successful recovery against it. Such goal, (i) is directly contrary to those of the creditors of this Debtor, (ii) is not a legitimate use of party in interest status in a Chapter 11 case, and (iii) is nothing more than a ruse to hold hostage all legitimate parties in the case, who have been working valiantly toward a consensual plan.

4.  Empower is not a creditor of the Debtor, did not file a proof of claim in the bankruptcy, and has no pecuniary, legally protectable or practical stake in the outcome of the case. Empower’s only role in the bankruptcy is as a potential target of future litigation. As such, its interests are antithetical to the interests of legitimate creditors, who have a direct interest in maximizing a recovery from Empower.

5.  Empower’s objection and motion to dismiss are an improper attempt to use the Bankruptcy Code as a shield against potential liability and to obtain a litigation or negotiation advantage. This will not be allowed to prevail.

Conclusion

Mediated settlements in bankruptcy are subject to bankruptcy court approval after notice to interested persons. The authority to oppose approval, however, is limited to those who have a genuine and legitimate stake in the outcome.

———————————–

Footnote 1: Fed.R.Bankr.P. 9019(a) provides: “Compromise. On motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement. Notice shall be given to creditors, the United States trustee, the debtor, and indenture trustees as provided in Rule 2002 and to any other entity as the court may direct.”

Footnote 2: The case is In re Campbellton-Graceville Hospital Corp., in the United States Bankruptcy Court for the Northern District of Florida, Case No. 17-40185.

Footnote 3: The Bankruptcy Court’s “Memorandum Opinion” is dated October 24, 2018, and appears at Doc. 842.

Footnote 4: 11 U.S.C. § 1109(b) provides: “A party in interest, including the debtor, the trustee, a creditors’ committee, an equity security holders’ committee, a creditor, an equity security holder, or any indenture trustee, may raise and may appear and be heard on any issue in a case under this chapter.”

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