'Even If a Party Has a Change of Heart': A Framework for Enforcement of Courthouse-Steps Settlements in Cases and Proceedings in the Texas Bankruptcy Courts

Settlements are a key means by which cases and related proceedings, or discrete issues within them, are resolved in bankruptcy courts. For the lawyers involved, there is strong incentive to compromise on issues and to resolve disputes, to obtain certainty and to protect against worse outcomes were the matter to go to a court’s decision after a contested, evidentiary hearing. Often in such matters, the bankruptcy lawyers reach settlements on behalf of their clients “on the courthouse steps,” that is, just moments before the court would otherwise commence such a hearing. The appellate courts and the bankruptcy courts are in harmony in urging parties to settle their disputes, and the courts have shown a strong interest in making such deals effective. When a courthouse-steps settlement is reached, the courts normally require that the parties’ counsel announce the terms of the deal “on the record” or “in open court.” Such announcement serves the purposes of assuring the court that there is indeed a good reason not to commence the scheduled hearing and of preventing the parties from later seeking to escape the deal made. Most courthouse-steps settlements are approved by the court and performed by the parties. But from time to time one settling party will develop a significant regret about the terms or discover that it is financially incapable of paying an agreed amount. Such reneging or default on the announced deal creates problems for everyone, the judge, the lawyers, and the parties. An underappreciated Fifth Circuit Court of Appeals case of a quarter century ago is the landmark. The decision, Omni Video, directs that bankruptcy courts in Texas apply an unusual rule — formally a rule of Texas state court procedure but actually of substantive state contract law — to deal with the default of a courthouse-steps settlement. That rule, Texas Rule of Civil Procedure 11, provides that “no agreement between attorneys or parties touching any suit pending will be enforced . . . unless it be made in open court and entered of record.” The Texas cases interpret Texas Rule 11 to require both an oral announcement by both lawyers on the record and the finding by the court of a resulting contract. In Omni Video, the Fifth Circuit affirmed a bankruptcy court decision that had matter-of-factly enforced just such a courthouse-steps settlement over later objections that the parties had been unable to document and to perform the deal that was announced. Dependent as it is on Texas substantive law, Omni Video is applicable in all the bankruptcy courts of the four federal judicial districts of the state, but the Fifth Circuit there and subsequently has not provided complete guidance, and the judges of those bankruptcy courts have necessarily had to apply it in varying situations and to diverse disputes in cases under both Chapters 11, 13, and 7 of the Bankruptcy Code. This article collates all applicable bankruptcy-settlement authorities, ranging across scanty provisions of the Bankruptcy Code, the few applicable subdivisions of Bankruptcy Rules, the applicable legal-ethical rules, the jurisprudential standards for approval of settlements, and considerations of notice and of court authority. Based on those authorities, the conclusion posits a step-by-step framework by which the judges of the bankruptcy courts in Texas may logically assess and determine the enforceability of courthouse-steps settlements on those unhappy occasions when a party defaults or reneges after the announcement of a deal.