On January 16, 2015, Chief Judge Leonard P. Stark of the United States District Court for the District of Delaware issued an opinion that reversed an order of the Delaware Bankruptcy Court that approved a settlement, and remanded to the Bankruptcy Court for further proceedings.

In the underlying bankruptcy case, debtor ManagedStorage International, Inc., and certain affiliates, filed bankruptcy in February 2009, and immediately filed a motion to sell substantially all of their assets.  Avnet Inc. objected to the sale and asserted a purchase money security interest in certain of the assets.  In order to resolve the objection, the debtors, creditors’ committee and Avnet entered into a stipulation requiring the debtor to segregate and maintain the Avnet collateral.

Nearly a year later, Avnet filed a motion asserting that the debtors had not segregated the collateral as required by the earlier stipulation and moved to enforce the earlier stipulation (the “Enforcement Motion”).  The Enforcement Motion was noticed and set for a hearing.  Shortly before the hearing, the debtors filed an agenda indicating that the Enforcement Motion was “going forward” but also indicating that the debtors, the buyer and Avnet were working on a stipulation (the “Stipulation”) to resolve the Enforcement Motion.

Ultimately, the negotiated Stipulation proposed that Avnet would be paid nearly $1 million, and included broad releases of Avnet by the debtors.  On the scheduled day of the original hearing on the Enforcement Motion, the debtors filed an amended agenda, indicating that the parties would be submitting the Stipulation under certification of counsel, and that the hearing was cancelled.  The amended agenda was served on all parties in interest – including the creditors’ committee.

Avnet filed the certification of counsel along with the proposed Stipulation, and the Bankruptcy Court entered an order approving the Stipulation the same day.  There was no hearing.

Six months later, the Bankruptcy Court converted the cases from chapter 11 to chapter 7, and the Chapter 7 Trustee filed a preference action against Avnet under 11 U.S.C. §§ 547 and 550.  Avnet filed a motion to dismiss the preference based upon the debtors’ broad releases granted to Avnet in the Stipulation.  The Bankruptcy Court dismissed the preference action, and the Chapter 7 Trustee appealed.

Among other reasons not discussed here, the Chapter 7 Trustee challenged the Bankruptcy Court’s approval of the Stipulation on the basis that adequate notice of the Stipulation, including the broad releases, had not been provided.  The District Court agreed, finding that “no notice was given for the Stipulation . . . and particularly of the broad language used in the general release provision.”  In light of the fact that there was “no notice” of the terms of the Stipulation, the Bankruptcy Court had committed “a clear error of fact” in finding that it was “probable” that the unsecured creditors committee had notice of the Stipulation.

Moreover, the District Court held that the Bankruptcy Court had not evaluated the Stipulation under Fed. R. Bankr. P. 9019, while also acknowledging that the Bankruptcy Court had not been asked to do so.  Critical to the District Court was that the Enforcement Motion did not deal with issues like releases.  Rather, the Enforcement Motion only addressed disputed issues over segregation of collateral.  Therefore “the interested parties which were not parties to the Stipulation . . . , did not assent to such a waiver.”

The District Court therefore remanded with instructions that the Bankruptcy Court consider the Stipulation in light of In re Martin.

While it remains to be seen if this case will impact how parties deal with each other when resolving motions, it might be wise to consider whether one’s resolution of a motion seeks relief that goes well beyond the relief sought in the motion itself, thus necessitating additional notice, or perhaps a 9019 motion.  Otherwise, one may find that a last minute stipulation, submitted as a settlement, may later be challenged or possibly undone by a Chapter 7 Trustee.

Look here later for an update to this post once the Bankruptcy Court reviews the Stipulation on remand.