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. e du/thir dc ir c uit_1996/186UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

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No. 95-1581

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IN RE: JOHN C. MARTIN; SALLY A. MARTI N,
Debtors

JO ANN MYERS; MELVIN MORANE

v.

JOHN C. MARTIN; SALLY A. MARTIN

John C. Martin and Sally Martin, husband an d wife, Appellants

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Appeal from the United States District Co urt for the Eastern District of Pennsylvani a (D.C. Civil No. 94-01717)

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Argued: Tuesday, March 12, 1996

Before: NYGAARD, SAROKIN and ALDISERT, Circuit Judges

(Filed May 7, 1996)

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Michael B. Goodman Steven H. Lupin (ar gued)
Carl N. Weiner
HAMBURG, RUBIN, MUL LIN,

MAXWELL & LUPIN
375 Morris Road
P.O. Box 1479 Lansdale, PA 19446

ATTORNEYS FO R APPELLANTS

Kevin J. Sommar (ar gued)
SOMMAR, TRACY & SOMMAR
210 South Broad Str eet Lansdale, PA 19446

ATTORNEY FORAPPELLEES__________________

OPINION OF THE COURT

__________________ ALDISERT, Circuit Judge This appeal by a creditor arises from a di strict court judgment reversing a bankruptcy court's order disap proving a stipulation of settlement entered into by the Appel lees and the trustee for the debtors that mutually released all claims between them relating to the sale of the debtors' home to t he Appellees without any payment by either party. The question for decision is whether the b ankruptcy court abused its discretion by disapproving the sti pulation after a jury verdict was entered in favor of the debtors and against the Appellees in a non-core proceeding in state cou rt properly remanded there by the bankruptcy court. Eichenholt z 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 jurisdictio n under 28

U.S.C.  158(d), and find no abuse of discretion by the bankruptcy court. We therefore will reverse the di strict court judgment.

I. This contest began with a mine-run dispute between parties to a real estate contract. In the spring o f 1988, John and Sally Martin contracted to sell their house in Green Lane, Pennsylvania to Jo Ann Myers and Melvin Morane (her eafter jointly referred to as "the Myers"). After the contract wa s executed, the Myers refused to complete the purchase of the h ouse, 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 co ntract; the Martins prayed for damages, and the Myers sought sp ecific performance. In addition, the Myers filed a lis pe ndens against the Martins' property, preventing its sale and limi ting its value

as a source of loan collateral. Because the Martins were relying on the re al estate sale proceeds to service accumulated debts, this di spute caused them to suffer extreme economic hardship. Indeed, on February 12, 1992, the Martins filed a voluntary Chapter 7 b ankruptcy petition. The Chapter 7 filing stayed the Myers' a ction, and the Martins' action became property of the estate. Bot h actions subsequently were labeled non-core proceedings and were remanded

to the Court of Common Pleas.
The series of events that followed disclos e some tension between the debtors and the trustee for the estate, or at
least a fundamental breakdown in communications. T he 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 releas e of the two state court actions. Assuming that there was an op en-ended trialdate for the state court action (as this had been t rue for

approximately a year-and-a-half), and that delay wa s detrimental to the estate, the trustee believed that she was ac ting in the best interests of the creditors by entering into th is compromise. The terms were memorialized in a written stipulatio n of settlement filed by the trustee and the Myers on De cember 17, 1993. On December 23, 1993, the bankruptcy court a pproved the stipulation. The Martins then filed an objection to the stipulation, on the ground that the bankruptcy court had approve d the stipulation in violation of Rule 9019(a), Federal R ules of Bankruptcy Procedure, which provides: On motion by the trustee and after notice and a hearing, the court may approve a comprom ise 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 ap proval was premature, and vacated the prior approval. The ban kruptcy court formally noticed the debtors and, on January 13, 19 94, held a hearing on the trustee's motion to approve the stip ulation. At the hearing, the debtors objected to th e stipulation because their state court action against the Myers was ready for trial. Apparently, the trustee had not informed th e debtors of her negotiations with the Myers regarding the possi bility of a mutual release of claims. And meanwhile, unbeknown st to the trustee and the bankruptcy court, the Martins had c onvinced the state court to grant an expedited trial date of Jan uary 31, 1994. Recognizing the potential to recover additional pro perty 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 t he best interest of the estate at the time she signed it, s he 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 m erits of both pending state court suits, the bankruptcy court eng aged in a discussion with counsel regarding the forthcoming t rial 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 stipu lation 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 be cause "thehearing had concluded on the trustee's motion to ap prove the

stipulation" and because the trustee had acted "in contravention of that stipulation [by] authoriz[ing] special coun sel to proceed with the action that [s]he agreed was ended with re spect 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 wo uld have granted it. I wouldn't have made the poor Court go through a jury trial. I mea n 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 goin g 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 anymo re. But it did come off, apparently. And I ha d no idea what the result would be, obviousl y, although the Judge did call me beforehand

because he wanted to make sure that he sho uld go forward with it. And I said, yeah, as far as I know you can. And I assumed they wou ld, and they did, obviously. So I won't appro ve that stipulation. N.T. (2/8/94) at 8. An order denying the motion wa s filed the following day. On February 18, 1994, the Myers filed a no tice of appeal with the district court, challenging the ban kruptcy court's order denying the trustee's motion. The di strict judge scheduled a telephone conference with the counsel f or the parties on May 19, 1995, after which the district court ent ered an order reversing the bankruptcy court's order and remandin g the matter back to the bankruptcy court with instructions to a pprove the stipulation entered into between the trustee and th e Myers. The
district court determined that the trustee had viol ated her duty of good faith and fair dealing by refusing to suppo rt her own motion to approve the stipulation and by authorizin g the Martins to pursue a state court claim subsequent to enterin g into a valid settlement agreement with the Myers. This appeal b y the debtors

followed.

II. To minimize litigation and expedite the ad ministration 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 ther e is not some litigation that is settled between the representati ve of the estate and an adverse party. Under Bankruptcy Rule 9019, a bankruptcy judge has the authority to approve a com promise of a claim, provided that the debtor, trustee and credit ors are given twenty days' notice of the hearing on approval of a compromise orsettlement by the trustee. Bankruptcy Rule 2002(a) (3).

Here, the ultimate issue on appeal is whet her the bankruptcy court abused its discretion when it disa pproved the compromise. This particular process of bankruptcy court approval requires a bankruptcy judge to assess and balance t he value of the claim that is being compromised against the val ue to the estate of the acceptance of the compromise proposal . Taking our
cue from Protective Committee Stockholders of TMT T railer Ferry, Inc. v. Anderson, 390 U.S. 414, 424-25 (1968), we r ecognize four criteria that a bankruptcy court should consider in striking this balance: (1) the probability of success in litigat ion; (2) the likely difficulties in collection; (3) the complexi ty of the litigation involved, and the expense, inconvenience and delay necessarily attending it; and (4) the paramount int erest 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 su pports the bankruptcy court's decision to disapprove the stipu lation. First, when the stipulation was disapproved, the de btors' probability of success was 100 percent, because the verdict already had been obtained. Second, the record reve als no expected difficulty in collection. Third, again be cause the verdict already had been obtained, there was neithe r inconvenience nor delay. And fourth, the interest of all creditors was served by collecting an additional $1 50,500 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 t here was no
abuse of discretion.

III. The district court reversed the bankruptcy court, however, because "the trustee did not act consisten tly with her obligation of good faith and fair dealing." 1995 W L 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 o f good faith and fair dealing. The district court concluded the refrom that the bankruptcy court should not have taken the expe dited trial
date or the outcome of the state court trial into c onsideration 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 Myer s with "honesty in fact in the conduct or transaction conc erned ... and [to] refrain from doing anything that would destroy or injure the other party's right to receive the fruits of the co ntract." 1995 WL 389592 at *11 (citations and quotations omi tted). The Restatement (Second) of Contracts  205 implies a duty of good faith and fair dealing for all contracts; the Resta tement position has been adopted in Pennsylvania in limite d situations, including a trustee's duty as a fiduciary to the cr editors of an estate. Commodity Futures Trading Comm'n v. Weintr aub, 471 U.S.343, 354-55 (1985); Parkway Garage, Inc. v. City of Philadelphia,

5 F.3d 685, 701 (3d Cir. 1993). Accordingly, the d istrict court was correct in emphasizing the role of the trustee as a fiduciary. However, a trustee has a fiduciary relatio nship with all creditors of the estate. See Weintraub, 471 U. S. at 354-55. Indeed, under the Code a trustee must investigate a ll sources of
income for the estate and "collect and reduce to mo ney 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 attent ive 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 est ate 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 othe rwise
detrimental to the estate. We cannot require a trustee herself to cho ose 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 appri sed of all
relevant information that will enable it to determi ne what course
of action will be in the best interest of the estat e. Accordingly, the trustee should inform the court an d the parties of any changed circumstances since the entry into t he stipulation of settlement. The trustee may even opt not to arg ue 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 doin g so, for the bankruptcy court may nonetheless approve the settle ment. Hence, we reject the proposition that a t rustee is required to champion a motion to approve a stipulat ion that is no longer in the best interest of the estate. This tr ustee did not flout or breach any term of the stipulation. Nor d id she withdraw the motion to approve the stipulation. Ra ther, 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 c reditors, the debtor and the court. This appeal raises a very na rrow issue, and we will not expand the matter beyond its perime ters. Accordingly, we will not constrain a bankruptcy tru stee from fulfilling her statutory duty to the estate and the creditor body as a whole by preventing her from informing the cou rt and the parties of changed circumstances. This interpretation comports with our unde rstanding of the Bankruptcy Rules and Code. Settlement agreemen ts frequently involve the disposition of assets of the estate. T he Code contemplates these transactions, but restricts a tr ustee's ability to use and sell such assets. Section 363 p rovides: The trustee, after notice and a hearing, m ayuse, sell, or lease, other than in the

ordinary course of business, property of t he

estate.
11 U.S.C.  363(b)(1) (emphasis added); see In re Roth America n, Inc., 975 F.2d 949, 953 (3d Cir. 1992) (post-petiti on extension of collective bargaining agreement was outside ordi nary course of business and was not enforceable where not approved under Section 363). The instant agreement compromised an asset o f the debtors' estate. And clearly, this act ventured beyond the domain of
transactions that the Martins encountered in the or dinary course of business prior to the filing of bankruptcy, ther eby implicating Section 363. See In re Roth American, Inc., 975 F.2d at 954. The import of Section 363 is that a t rustee is prohibited from acting unilaterally; this schema is intended to protect both debtors and creditors (as well as trus tees) by subjecting a trustee's actions to complete disclosu re and review by the creditors of the estate and by the bankruptc y court. The approval process thus is integral to t he 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 i nforming the court of changed circumstance, or from advocating o n behalf of creditors in light of changed circumstances, a bank ruptcy court could proceed without full information, and the cre ditor body

could suffer. Accordingly, we conclude that the better c ourse 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; su ch an act
without more would not constitute a breach of contr act. 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 vi gorously urge the court to accept it in light of changed circumst ances that added $150,500 to the corpus of the bankruptcy esta te. 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 sett lement. While we recognize that some jurisdictions have concluded that a stipulation of settlement is binding upon the parti es pending approval of the settlement by the bankruptcy court, see, e.g., In re Lyons Trans. Lines, Inc., 163 B.R. 474, 476 (Ban kr. 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 pre requisite toenforceability), we think that such a rule is inapp licable to the

unique facts of this case. Here, the bankruptcy judge deferred his de termination of whether to approve the settlement for the expres s purpose of seeing whether the trial would actually take place. The judge thus essentially issued a stamp of approval to beha vior on the part of the trustee that is violative of the settle ment -- i.e., permitting the Martins to proceed with the trial de spite the agreement to settle the litigation. We conclude th at where a bankruptcy court formally endorses a course of acti on pending its approval of a stipulation of settlement, no party w ho follows
this course of action can be found to have breached the settlement. We emphasize that in reaching this con clusion we do not decide the broader issue of whether, absent int ervention 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 occurre d, the district court erred. The bankruptcy court's subse quent 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 distri ct court reversing the bankruptcy court.