1996 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

5-7-1996

In Re: Martin

Precedential or Non-Precedential:

Docket 95-1581

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Recommended Citation

"In Re: Martin" (1996). 1996 Decisions. Paper 186.

http://digitalcommons.law.villanova.edu/thirdcircuit_1996/186
 UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT 

 __________________ 

 No. 95-1581 

 __________________ 

 IN RE: JOHN C. MARTIN; SALLY A. MARTIN, 

 Debtors 

 JO ANN MYERS; MELVIN MORANE 

 v. 

 JOHN C. MARTIN; SALLY A. MARTIN 

 John C. Martin and Sally Martin, husband and wife, 

 Appellants 

 __________________ 

 

 Appeal from the United States District Court 

 for the Eastern District of Pennsylvania 

 (D.C. Civil No. 94-01717) 

 __________________ 

 

 Argued: Tuesday, March 12, 1996 

 Before: NYGAARD, SAROKIN and ALDISERT, Circuit Judges 

 (Filed May 7, 1996) 

 __________________ 

 Michael B. Goodman 

 Steven H. Lupin (argued) 

 Carl N. Weiner 

 HAMBURG, RUBIN, MULLIN, 

 MAXWELL & LUPIN 

 375 Morris Road 

 P.O. Box 1479 

 Lansdale, PA 19446

 ATTORNEYS FOR APPELLANTS 

 Kevin J. Sommar (argued) 

 SOMMAR, TRACY & SOMMAR 

 210 South Broad Street 

 Lansdale, PA 19446

 ATTORNEY FOR APPELLEES 
 __________________ 

 OPINION OF THE COURT 

 __________________ 

ALDISERT, Circuit Judge 

 This appeal by a creditor arises from a district court 

judgment reversing a bankruptcy court's order disapproving a 

stipulation of settlement entered into by the Appellees and the 

trustee for the debtors that mutually released all claims between 

them relating to the sale of the debtors' home to the Appellees 

without any payment by either party. 

 The question for decision is whether the bankruptcy 

court abused its discretion by disapproving the stipulation after 

a jury verdict was entered in favor of the debtors and against 

the Appellees in a non-core proceeding in state court properly 

remanded there by the bankruptcy court. Eichenholtz v. Brennan, 

52 F.3d 478, 487 (3d Cir. 1995) (standard of review). The 

district court had jurisdiction under 28 U.S.C.  158(a), and 

reversed the bankruptcy court. We have jurisdiction under 28 

U.S.C.  158(d), and find no abuse of discretion by the 

bankruptcy court. We therefore will reverse the district court 

judgment. 

 I. 

 This contest began with a mine-run dispute between 

parties to a real estate contract. In the spring of 1988, John 

and Sally Martin contracted to sell their house in Green Lane, 

Pennsylvania to Jo Ann Myers and Melvin Morane (hereafter jointly 

referred to as "the Myers"). After the contract was executed, 

the Myers refused to complete the purchase of the house, 

alleging, inter alia, that the septic system was in need of 

repair. Both parties eventually initiated actions in the 

Pennsylvania Court of Common Pleas for breach of contract; the 

Martins prayed for damages, and the Myers sought specific 

performance. In addition, the Myers filed a lis pendens against 

the Martins' property, preventing its sale and limiting its value 

as a source of loan collateral. 

 Because the Martins were relying on the real estate 

sale proceeds to service accumulated debts, this dispute caused 

them to suffer extreme economic hardship. Indeed, on February 

12, 1992, the Martins filed a voluntary Chapter 7 bankruptcy 

petition. The Chapter 7 filing stayed the Myers' action, and the 

Martins' action became property of the estate. Both actions 

subsequently were labeled non-core proceedings and were remanded 

to the Court of Common Pleas. 

 The series of events that followed disclose some 

tension between the debtors and the trustee for the estate, or at 

least a fundamental breakdown in communications. The trustee 

announced to the bankruptcy judge on September 14, 1993, that she 

had reached an agreement with the Myers, resolving their dispute 

with the debtors, and providing for a mutual release of the two 

state court actions. Assuming that there was an open-ended trial 
date for the state court action (as this had been true for 

approximately a year-and-a-half), and that delay was detrimental 

to the estate, the trustee believed that she was acting in the 

best interests of the creditors by entering into this compromise. 

The terms were memorialized in a written stipulation of 

settlement filed by the trustee and the Myers on December 17, 

1993. On December 23, 1993, the bankruptcy court approved the 

stipulation. 

 The Martins then filed an objection to the stipulation, 

on the ground that the bankruptcy court had approved the 

stipulation in violation of Rule 9019(a), Federal Rules of 

Bankruptcy Procedure, which provides: 

 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. 

The bankruptcy court acknowledged that its prior approval was 

premature, and vacated the prior approval. The bankruptcy court 

formally noticed the debtors and, on January 13, 1994, held a 

hearing on the trustee's motion to approve the stipulation. 

 At the hearing, the debtors objected to the stipulation 

because their state court action against the Myers was ready for 

trial. Apparently, the trustee had not informed the debtors of 

her negotiations with the Myers regarding the possibility of a 

mutual release of claims. And meanwhile, unbeknownst to the 

trustee and the bankruptcy court, the Martins had convinced the 

state court to grant an expedited trial date of January 31, 1994. 

Recognizing the potential to recover additional property for the 

estate, the trustee "did not argue in favor of its ... [m]otion" 

to approve the stipulation. Brief of Appellees at 5. When 

called to testify by the Myers' counsel, who argued in favor of 

the trustee's motion, the trustee's counsel stated that, although 

she [the trustee] believed the stipulation was in the best 

interest of the estate at the time she signed it, she would not 

have agreed to the stipulation had she known of the expedited 

trial date arranged by the Martins. N.T. (1/25/94) at 3-8. 

 After hearing extensive testimony on the merits of both 

pending state court suits, the bankruptcy court engaged in a 

discussion with counsel regarding the forthcoming trial in the 

state court. In this dialogue, the Myers' counsel indicated that 

resolution of the state trial would have no effect on the 

validity of the stipulation. The bankruptcy court deferred 

ruling on the trustee's motion to approve the stipulation until a 

date certain, to wit, February 8, 1994. 

 Meanwhile, the Martins' state court action proceeded to 

trial on January 31, 1994, and the Martins obtained a jury 

verdict of $150,500 against the Myers. Thereafter, on February 

8, 1994, the bankruptcy court informed the parties that the court 

was aware that the state court trial had occurred, and inquired 

as to the results. The Myers' counsel objected to the 

introduction of the jury verdict into the record because "the 
hearing had concluded on the trustee's motion to approve the 

stipulation" and because the trustee had acted "in contravention 

of that stipulation [by] authoriz[ing] special counsel to proceed 

with the action that [s]he agreed was ended with respect to us." 

N.T. (2/8/94) at 3. 

 Faced with the potential increase of $150,500 in the 

bankruptcy estate, the bankruptcy court denied the pending motion 

to approve the stipulation, explaining: 

 [T]he result's pretty obvious what I have to 

 do. If I were going to grant that motion,

 and I felt sure it should be granted, I would 

 have granted it. I wouldn't have made the

 poor Court go through a jury trial. I mean I 

 wouldn't have wasted the taxpayers' money to 

 that extent if I had a question. But I 

 wanted to see whether it was actually going 

 to come off, because I thought there was a

 possibility. It may not come off again. And 

 then I wasn't going to piddle around anymore. 

 But it did come off, apparently. And I had 

 no idea what the result would be, obviously, 

 although the Judge did call me beforehand 

 because he wanted to make sure that he should 

 go forward with it. And I said, yeah, as far 

 as I know you can. And I assumed they would, 

 and they did, obviously. So I won't approve 

 that stipulation. 

N.T. (2/8/94) at 8. An order denying the motion was filed the 

following day. 

 On February 18, 1994, the Myers filed a notice of 

appeal with the district court, challenging the bankruptcy 

court's order denying the trustee's motion. The district judge 

scheduled a telephone conference with the counsel for the parties 

on May 19, 1995, after which the district court entered an order 

reversing the bankruptcy court's order and remanding the matter 

back to the bankruptcy court with instructions to approve the 

stipulation entered into between the trustee and the Myers. The 

district court determined that the trustee had violated her duty 

of good faith and fair dealing by refusing to support her own 

motion to approve the stipulation and by authorizing the Martins 

to pursue a state court claim subsequent to entering into a valid 

settlement agreement with the Myers. This appeal by the debtors 

followed. 

 II. 

 To minimize litigation and expedite the administration 

of a bankruptcy estate, "[c]ompromises are favored in 

bankruptcy." 9 Collier on Bankruptcy  9019.03[1] (15th ed. 

1993). Indeed, it is an unusual case in which there is not some 

litigation that is settled between the representative of the 

estate and an adverse party. Under Bankruptcy Rule 9019, a 

bankruptcy judge has the authority to approve a compromise of a 

claim, provided that the debtor, trustee and creditors are given 

twenty days' notice of the hearing on approval of a compromise or 
settlement by the trustee. Bankruptcy Rule 2002(a)(3). 

 Here, the ultimate issue on appeal is whether the 

bankruptcy court abused its discretion when it disapproved the 

compromise. This particular process of bankruptcy court approval 

requires a bankruptcy judge to assess and balance the value of 

the claim that is being compromised against the value to the 

estate of the acceptance of the compromise proposal. Taking our 

cue from Protective Committee Stockholders of TMT Trailer Ferry, 

Inc. v. Anderson, 390 U.S. 414, 424-25 (1968), we recognize four 

criteria that a bankruptcy court should consider in striking this 

balance: (1) the probability of success in litigation; (2) the 

likely difficulties in collection; (3) the complexity of the 

litigation involved, and the expense, inconvenience and delay 

necessarily attending it; and (4) the paramount interest of the 

creditors. See In re Neshaminy Office Bldg. Assocs., 62 B.R. 

798, 803 (E.D. Pa. 1986). 

 Our consideration of these four factors supports the 

bankruptcy court's decision to disapprove the stipulation. 

First, when the stipulation was disapproved, the debtors' 

probability of success was 100 percent, because the verdict 

already had been obtained. Second, the record reveals no 

expected difficulty in collection. Third, again because the 

verdict already had been obtained, there was neither 

inconvenience nor delay. And fourth, the interest of all 

creditors was served by collecting an additional $150,500 as 

property of the estate. Considered together, these factors 

clearly militate in favor of the bankruptcy court's decision to 

disapprove the stipulation, and thus suggest that there was no 

abuse of discretion. 

 III. 

 The district court reversed the bankruptcy court, 

however, because "the trustee did not act consistently with her 

obligation of good faith and fair dealing." 1995 WL 38952 at 

*11. The district court reasoned that the trustee was obliged to 

honor the compromise she had struck with the Myers, and that her 

failure to do so constituted a breach of the duty of good faith 

and fair dealing. The district court concluded therefrom that 

the bankruptcy court should not have taken the expedited trial 

date or the outcome of the state court trial into consideration 

in deciding the motion to approve the stipulation. 

 We have no quarrel with the district court's statement 

that the trustee was required to deal with the Myers with 

"honesty in fact in the conduct or transaction concerned ... and 

[to] refrain from doing anything that would destroy or injure the 

other party's right to receive the fruits of the contract." 

1995 WL 389592 at *11 (citations and quotations omitted). The 

Restatement (Second) of Contracts  205 implies a duty of good 

faith and fair dealing for all contracts; the Restatement 

position has been adopted in Pennsylvania in limited situations, 

including a trustee's duty as a fiduciary to the creditors of an 

estate. Commodity Futures Trading Comm'n v. Weintraub, 471 U.S. 
343, 354-55 (1985); Parkway Garage, Inc. v. City of Philadelphia, 

5 F.3d 685, 701 (3d Cir. 1993). Accordingly, the district court 

was correct in emphasizing the role of the trustee as a 

fiduciary. 

 However, a trustee has a fiduciary relationship with 

all creditors of the estate. See Weintraub, 471 U.S. at 354-55. 

Indeed, under the Code a trustee must investigate all sources of 

income for the estate and "collect and reduce to money the 

property of the estate." 11 U.S.C.  704(1). She has the duty 

to maximize the value of the estate, Weintraub, 471 U.S. at 353, 

and in so doing is "bound to be vigilant and attentive in 

advancing [the estate's] interests." In re Baird, 112 F. 960, 

960 (D.C. Cir. 1902). In sum, "it is the trustee's duty to both 

the debtor and the creditor to realize from the estate all that 

is possible for distribution among the creditors." 4 Collier on 

Bankruptcy  704.01 (15th ed. 1993). Thus, this trustee was 

faced with a conflict between her fiduciary duty to the creditor 

body as a whole and the alleged duty to go forward with a 

settlement agreement favoring one creditor but otherwise 

detrimental to the estate. 

 We cannot require a trustee herself to choose between 

these conflicting legal obligations. Rather, Rule 9019(a) 

demonstrates the legislature's intent to place this

responsibility with the bankruptcy court. In order to make such 

a determination, the bankruptcy court must be apprised of all 

relevant information that will enable it to determine what course 

of action will be in the best interest of the estate. 

Accordingly, the trustee should inform the court and the parties 

of any changed circumstances since the entry into the stipulation 

of settlement. The trustee may even opt not to argue in favor of 

the stipulation, as was done here, if she no longer believes the 

settlement to be in the best interest of the estate. The trustee 

does not breach any term of the stipulation by doing so, for the 

bankruptcy court may nonetheless approve the settlement. 

 Hence, we reject the proposition that a trustee is 

required to champion a motion to approve a stipulation that is no 

longer in the best interest of the estate. This trustee did not 

flout or breach any term of the stipulation. Nor did she 

withdraw the motion to approve the stipulation. Rather, at the 

hearing, the trustee simply elected not to argue in favor of her 

motion. Thus, the very nice question before us is the proper 

conduct of a trustee in her responsibility to all creditors, the 

debtor and the court. This appeal raises a very narrow issue, 

and we will not expand the matter beyond its perimeters. 

Accordingly, we will not constrain a bankruptcy trustee from 

fulfilling her statutory duty to the estate and the creditor body 

as a whole by preventing her from informing the court and the 

parties of changed circumstances. 

 This interpretation comports with our understanding of 

the Bankruptcy Rules and Code. Settlement agreements frequently 

involve the disposition of assets of the estate. The Code 

contemplates these transactions, but restricts a trustee's 

ability to use and sell such assets. Section 363 provides: 

 The trustee, after notice and a hearing, may 
 use, sell, or lease, other than in the 

 ordinary course of business, property of the 

 estate. 

11 U.S.C.  363(b)(1) (emphasis added); see In re Roth American, 

Inc., 975 F.2d 949, 953 (3d Cir. 1992) (post-petition extension 

of collective bargaining agreement was outside ordinary course of 

business and was not enforceable where not approved under Section 

363). The instant agreement compromised an asset of the debtors' 

estate. And clearly, this act ventured beyond the domain of 

transactions that the Martins encountered in the ordinary course 

of business prior to the filing of bankruptcy, thereby 

implicating Section 363. See In re Roth American, Inc., 975 

F.2d at 954. The import of Section 363 is that a trustee is 

prohibited from acting unilaterally; this schema is intended to 

protect both debtors and creditors (as well as trustees) by 

subjecting a trustee's actions to complete disclosure and review 

by the creditors of the estate and by the bankruptcy court. 

 The approval process thus is integral to the proper 

functioning of a liquidation, and the court relies heavily on the 

trustee, who is entrusted to represent the creditor body. 

Indeed, under normal circumstances the court would defer to the 

trustee's judgment so long as there is a legitimate business 

justification. In re Schipper, 933 F.2d 513, 515 (7th Cir. 

1990). If, however, a trustee is prohibited from informing the 

court of changed circumstance, or from advocating on behalf of 

creditors in light of changed circumstances, a bankruptcy court 

could proceed without full information, and the creditor body 

could suffer. 

 Accordingly, we conclude that the better course is to 

allow a trustee who fulfills her statutory duty to maximize 

assets of the estate the opportunity to report the change in 

circumstances to the court and to the creditors; such an act 

without more would not constitute a breach of contract. What the 

trustee did here was to fulfill her obligations to all creditors, 

as required by, inter alia, 11 U.S.C.  704(1). Although a party 

to the stipulation, the trustee was not bound to vigorously urge 

the court to accept it in light of changed circumstances that 

added $150,500 to the corpus of the bankruptcy estate. Indeed, 

had she done so, a serious question of breach of a fiduciary 

responsibility to all creditors would have arisen. Moreover, she 

took no affirmative steps to withdraw the motion to approve, but 

simply supplied additional information to the court, disclosing 

the state court verdict. 

 Thus we conclude that the trustee did not breach the 

settlement by allowing the Martins to proceed with the trial 

pending the bankruptcy court's approval of the settlement. While 

we recognize that some jurisdictions have concluded that a 

stipulation of settlement is binding upon the parties pending 

approval of the settlement by the bankruptcy court, see, e.g., In 

re Lyons Trans. Lines, Inc., 163 B.R. 474, 476 (Bankr. W.D. Pa. 

1994); In re Columbus Plaza, Inc., 79 B.R. 710, 715 (Bankr. S.D. 

Ohio 1987); In re Tidewater Group, 8 B.R. 930, 933 (Bankr. N.D. 

Ga. 1981); but see In re Sparks, 190 B.R. 842, 845 (Bankr. N.D. 

Ill. 1996) (holding bankruptcy court approval a prerequisite to 
enforceability), we think that such a rule is inapplicable to the 

unique facts of this case. 

 Here, the bankruptcy judge deferred his determination 

of whether to approve the settlement for the express purpose of 

seeing whether the trial would actually take place. The judge 

thus essentially issued a stamp of approval to behavior on the 

part of the trustee that is violative of the settlement -- i.e., 

permitting the Martins to proceed with the trial despite the 

agreement to settle the litigation. We conclude that where a 

bankruptcy court formally endorses a course of action pending its 

approval of a stipulation of settlement, no party who follows 

this course of action can be found to have breached the 

settlement. We emphasize that in reaching this conclusion we do 

not decide the broader issue of whether, absent intervention of a 

bankruptcy court, parties are bound by the terms of a settlement 

pending final approval of the bankruptcy court. 

 Accordingly, we conclude that the conduct of this 

trustee did not constitute a breach of her duty of good faith and 

fair dealing. In ruling that such a breach occurred, the 

district court erred. The bankruptcy court's subsequent 

disapproval of the stipulation agreement was within the sound 

discretion of the bankruptcy court. 

 IV. 

 We have considered all arguments advanced by the 

parties and conclude that no further discussion is necessary. 

 We will reverse the judgment of the district court 

reversing the bankruptcy court.