By: Donald L Swanson

The opinion is In re Legarde, Case No. 22-12184, Eastern Pennsylvania Bankruptcy Court (issued September 14, 2023; Doc. 112).

Facts

Debtor claims Creditor raped her.

Then, Debtor posts stuff about Creditor on the internet.

So, Creditor sues Debtor for defamation, alleging willful and malicious conduct.

Bankruptcy Developments

On August 19, 2022, Debtor files a voluntary Chapter 13 bankruptcy.

On October 27, 2022, Creditor moves to dismiss Debtor’s bankruptcy because Debtor has no income and, therefore, does not qualify for Chapter 13.

In response, Debtor’s counsel indicates an intent to convert Debtor’s case to Chapter 7.

Mediation & Settlement Term Sheet

Then, counsel for Debtor and Creditor agree to mediate before converting to Chapter 7.

On March 23, 2023, a mediation session occurs via Zoom, with Debtor, Creditor, their respective attorneys, and the mediator participating, and with Debtor’s Husband involved as well.  The session begins at Noon and ends at 7:30 p.m.

The mediation session concludes with Debtor, Debtor’s Husband and Creditor signing a two-page, single-spaced, typewritten document with eleven numbered paragraphs titled, “Settlement Term Sheet.”  Such document provides:

• Debtor’s Husband will pay Creditor $18,000 over 36 months;
• Creditor will drop the lawsuit against Debtor;
• Debtor will (i) assist in removing Debtor’s online statements about Creditor, and (ii) never disparage Creditor again; and
• Debtor and Creditor will:
  • never contact each other and never discuss their relationship with each other online or on social media; and
  • release each other from all claims.

Additionally, mediator files a certificate with the Bankruptcy Court representing that:

• a settlement has been reached;
• a confidential settlement term sheet containing the material terms is signed by all; and
• counsel for the parties will prepare a confidential settlement agreement and file a stipulation with the Bankruptcy Court.

Problems Develop

On the day following the mediation session, Debtor’s counsel informs Creditor’s counsel that Debtor is “having anxiety issues related to the settlement.”

Three days later, Debtor’s counsel sends an email to Creditor’s counsel declaring, “Debtor rejects the mediation settlement” and will proceed in Chapter 7.

Creditor’s counsel responds with the proposition that, if Debtor refuses to file a motion to approve the settlement under Fed.R.Bankr.P. 9019, Creditor will seek court approval of the settlement and enforce the settlement.

Debtor’s counsel emails back:

• Debtor does not consent to any such motion;
• the signed document is confidential and not yet a final agreement;
• a final document containing additional terms is required—but does not yet exist; and
• the Bankruptcy Court has no jurisdiction over Debtor’s Husband.

Enforcement Motion & Initial Response

Then, Creditor files and serves a motion to enforce the settlement and a supporting declaration saying:

• the signed document does not provide for a revocation by Debtor;
• Debtor’s counsel repeatedly called that document a settlement; and
• Debtor’s post-mediation remorse is irrelevant.

In response, Debtor’s counsel, (i) files a limited objection discussing a breakdown of the attorney/client relationship, (ii) files a motion to withdraw as Debtor’s counsel, based on an inability to agree on a joint legal strategy, (iii) denies representing Debtor’s Husband; and (iv) wonders whether the Bankruptcy Court has jurisdiction over Debtor’s Husband.

Debtor asks her counsel to file a substantive objection to the enforcement motion, but counsel doesn’t want to do that, expressing a need to speak with someone at the ethics hotline before taking any such action.

New Attorneys

A new attorney enters an appearance for Debtor, and another attorney enters appearance for Debtor’s Husband.

–Debtor’s Husband Arguments

On May 30, 2023, the attorney for Debtor’s Husband responds to the enforcement motion:

• admitting to Husband signing the Settlement Term Sheet; but
• arguing that such document cannot be enforced against him because he was not represented by counsel in the mediation session;
• denying that the mediator’s certification is determinative; and
• arguing that the Settlement Term Sheet is an agreement to agree—not a binding contract—because, e.g., it has no default or cure provisions.

–Debtor Arguments

Also on May 30, 2023, Debtor’s new attorney responds to the enforcement motion, arguing:

• Debtor is not bound by the Settlement Term Sheet; 
• Creditor’s claims in the defamation lawsuit are invalid;
• Debtor should be heard and not punished for former counsel’s failure to file a timely and substantive response;
• Local Rule 9019-2(n)(6), requiring parties to file a stipulation of a mediated settlement, should be enforced;
• the explanation to Debtor, about mediation being a non-binding process, should be honored;
• material terms of the alleged agreement are missing, such as a choice of law and enforcement provisions;
• payment terms for Debtor’s Husband, a non-party, are without mutual assent, because Debtor’s Husband attended the mediation only to provide emotional support; and
• the Settlement Term Sheet is akin to a “gag-order” on Debtor.

–Creditor Replies

On June 12, 2023, Creditor replies to the response of Debtor’s Husband, arguing:

• the Settlement Term Sheet is a binding contract, even if a more complete draft was intended, because it’s terms are sufficiently definite;
• any lack of legal representation of Debtor’s Husband at the mediation is irrelevant because courts routinely enforce agreements of unrepresented parties;
• sufficient consideration exists for the obligations of Debtor’s Husband under the Settlement Term Sheet; and
• Creditor has detrimentally relied on the settlement.

Also on June 12, 2023, Creditor replies to Debtor’s response, arguing:

• there is no excusable neglect for failing to file a timely response;
• breakdown of attorney-client relationship is not an excusable neglect;
• the Settlement Term Sheet is a binding and enforceable contract;
• Debtor’s rape allegations violate the non-disparagement clause in the Settlement Term Sheet; and
• the Settlement Term Sheet does not impinge upon Debtor’s freedom of speech.

–Additional Briefing

Debtor’s Husband, in follow-up briefing:

• notes he is not a party to the bankruptcy;
• characterizes his involvement in the mediation as “popping in” because “he worked from home and the mediation was conducted remotely”;
• emphasizes his lack of legal representation at the mediation; and
• says the Settlement Term Sheet is unenforceable because it:
  • is “devoid of the key terms necessary to fully define” his obligations; and
  • does not contain sufficient consideration because he would pay $18,000 without receiving anything in return.

More Withdrawals

On July 12, 2023, counsel for Debtor’s Husband moves to withdraw, due to “fundamental differences” over the representation.

On July 18, 2023, Debtor’s new counsel also moves to withdraw, because Debtor wishes to proceed pro se.

Both motions are granted.

Approving & Enforcing the Settlement

In a hearing, the Court indicates that the Settlement Term Sheet is subject to Bankruptcy Rule 9019.  So, the Court directs Creditor to submit a Rule 9019 motion. 

On July 24, 2023, Creditor files a motion to approve the Settlement Term Sheet under Rule 9019.  And on August 14, 2023, Creditor certifies that no one responded to that motion.

On August 23, 2023, the Court holds a hearing on the enforcement motion and the 9019 Motion.  Neither Debtor nor Debtor’s Husband appears at the hearing.

So, the Bankruptcy Court approves the settlement and grants Creditor’s enforcement motion.  What follows is a summary of the Court’s analysis and rationale.

Legal Principles & Findings

State Contract Law

Settlement agreements reached through mediation are as binding as those reached through litigation and are construed under traditional principles of state contract law.

The test for enforceability of an agreement is whether:

• both parties have manifested an intention to be bound by its terms;  
• the terms are sufficiently definite to be enforced; and
• consideration exists.

All three of these requirements are satisfied.

Failure to File a Timely Objection

Debtor’s failure to file a timely objection, due to disagreement with counsel, does not constitute excusable neglect:

• the word “neglect” empowers courts to accept late filings caused by inadvertence, mistake, or carelessness, as well as by intervening circumstances beyond a party’s control; and
• in evaluating “excusable,” the Court can consider all relevant circumstances, including, danger of prejudice to the debtor, length of the delay and its potential impact on judicial proceedings, reason for the delay and whether the movant acted reasonably and in good faith.

An attorney’s failure to file in a timely manner alone is not “excusable.”  Even when a late filing is the fault of Debtor’s counsel, Debtor must be held accountable for the attorney’s acts and omissions.

Here, Debtor and her counsel were in constant contact during the relevant time, and Debtor knew of the enforcement motion and its time deadlines.  So, there is no basis for excusable neglect.

Fed.R.Bankry.P. 9019 Approval

–Generally

Bankruptcy Rule 9019(a) provides:

• On motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement.

Settlements under Rule 9019 are favored in bankruptcy, because they avoid the expense of litigation, which can be burdensome.

Factors for approving a settlement under Rule 9019 are entirely different from those on whether an agreement exists at all.  And a settlement agreement will not be rescinded merely because one party knows it made a bad bargain.

A trustee or debtor in possession can be compelled to file a Rule 9019 motion, even if the trustee or debtor in possession has backed away from the settlement.

–Factors

In deciding whether to approve a settlement the Court must consider these factors:

1. probability of success in litigation;
2. likely difficulties in collection;
3. complexity, expense and delay of continued litigation; and
4. paramount interests of creditors.

–Probability of Success

This factor is neutral.

Creditor alleges that Debtor made these false statements:

• Creditor raped her;
• Creditor was dishonorably discharged from the military;
• Creditor was anti-semitic;  
• Creditor was an abuser and abandoned his child; and
• Etc. 

Creditor argues that Debtor’s statements about him are false, based on such undisputable facts as:

• Debtor’s admission to the Police that her sexual relations with Creditor were consensual; and
• Creditor received an honorable discharge from the U.S. Military on October 14, 2015.

However, the Court finds that Debtor believed Creditor sexually assaulted her because she was allegedly tricked by Creditor into having unprotected sex.

So, a dispute of fact exists in the defamation lawsuit that would likely go before a jury.

–Collection Difficulties

This factor favors Creditor.  That’s because:

• Settlement Term Sheet provides for Debtor’s Husband—not Debtor—to pay Creditor;
• at bankruptcy filing, Debtor was unemployed, had limited assets, and relied on the income of her Husband;
• absent the settlement, collection of any amount from Debtor would be problematic;  
• Debtor’s Husband has a stable gross income (i.e., $14,895/month); and
• so, Creditor will have much less difficulty collecting funds under the settlement than if Debtor had to pay a judgment in the defamation lawsuit.

–Complexity, Cost and Delay of Litigation

Creditor argues that pursuing the defamation lawsuit would be expensive and complex and would cause further delay:

• fact witnesses live far away;
• discovery is stayed by the bankruptcy;
• the pending lawsuit has complex legal issues related to defamation and defamation per se;
• various disputes of fact need to be resolved; and
• additional discovery is needed.

The Settlement Term Sheet resolves these expense, complexity and delay problems.

–Interests of Creditors

The settlement benefits Debtor’s other creditors because payments to Creditor will come from Debtor’s Husband.  That preserves Debtor’s assets for distribution to other creditors.

Even if Creditor’s claim amount is only $18,000, rather than the $525,000 stated in his proof of claim, it is still one of the largest claims in Debtor’s estate.

So, the settlement is in the best interest of all Debtor’s creditors.

Court Ruling

Based on the foregoing, the Court declares that the Settlement Term Sheet is a binding contract that should be approved under Bankruptcy Rule 9019.

Therefore, the enforcement motion is granted, the Rule 9019 Motion is granted, and the Court retains jurisdiction over the Settlement Term Sheet, Debtor, Debtor’s Husband and Creditor to ensure compliance.

Conclusion

Mediated settlement terms in a bankruptcy, containing all the essential terms of a contract, can be approved under Fed.R.Bankr.P. 9019 over debtor’s objection and enforced. Is this the lesson?

But what if a timely, substantive objection had been filed?

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