Source: https://mediatbankry.com/2018/11/27/filing-bankruptcy-to-reject-a-mediated-settlement-agreement-will-it-work/
Timestamp: 2019-04-19 02:35:31+00:00

Document:
Standing guard and providing protection?
Debtor Amir Safakish filed Chapter 13 bankruptcy for one purpose: to reject a mediated Settlement Agreement [Fn. 1]. The Bankruptcy Court stood guard over and protected the mediated agreement — this time. But what about similar circumstances in other cases?
Safakish filed suit in state court against creditors over condominium association obligations. The creditors counterclaimed.
The parties mediated their disputes and entered into a Settlement Agreement, signed by the parties, their attorneys, and the mediator. Under that document, the parties agreed to such terms as a mutual release and Safakish paying $275,000 to one creditor, prepaying 12 months of assessments, and selling his condominium unit.
The next day, Safakish told creditors he wanted to cancel or change the Settlement Agreement.
Two weeks later, the creditors notified Safakish of their intent to seek Court enforcement of the Settlement Agreement under California Code of Civil Procedure § 664.6 [Fn. 2].
The next day (April 4, 2018), Safakish filed his Chapter 13 case.
– determining damages, attorney fees, costs and other remedies, under 11 USC §365.
The Court denied Safakish’s rejection attempt (Docs. 119 & 121) on two interesting-and-alternative grounds. Here’s an attempt at summarizing both.
Since none of the parties had outstanding obligations to perform at the petition date, the contract cannot be considered executory for rejection purposes under § 365.
Rejection, therefore, is not in the best interests of creditors.
Meanwhile, Safakish’s creditors filed a Motion to dismiss his Chapter 13 case (Doc. 119 & 120), alleging that the plan and petition were not proposed in good faith.
Specifically, the Court found that “Safakish seeks to defeat the state court litigation by gaining an advantage in this court” and that Safakish had “no other need” for filing his Chapter 13 case.
Safakish did not appeal any of the Bankruptcy Court’s orders.
The net effect is that Safakish’s disputes over the mediated Settlement Agreement are unaffected by the bankruptcy, and creditors are free to enforce the Settlement Agreement, back in State court, under California Code of Civil Procedure § 644.6.
Whether Safakish’s strategy might work in another case is still an interesting question. The In re Safakish circumstances are unusual, so the result might be different in other cases.
What if the debtor had been insolvent, instead of having millions of dollars of equity? And what if multiple creditors were pursuing collection when debtor filed bankruptcy? Under such circumstances, the Motion to dismiss would probably have been denied.
What if, (i) anticipatory repudiation had not occurred so that the mediated Settlement Agreement was still an executory contract that could be rejected under § 365, and (ii) the Bankruptcy Court allowed rejection?
Would their rights have vaporized?
Would their rights remain fully enforceable?
Or would their rights have some other status and effect?
Filing bankruptcy to avoid the effects of a mediated Settlement Agreement did not work in the In re Safakish case.
But that case involve unusual facts (i.e., a solvent debtor, an anticipatory repudiation, and a bad faith filing). It’s hard to say what might happen in other contexts.
Hopefully, the U.S. Supreme Court’s resolution of Mission v. Tempnology will help shed light on what happens to the rights of non-bankruptcy parties under an executory contract that is rejected in bankruptcy.
Footnote 1: The bankruptcy is In re Safakish, Case No. 18-50769 in the U.S. Bankruptcy Court for the Northern District of California.

References: § 664
 §365
 § 365
 § 644
 § 365
 v.