Rule 9019 requires that all settlements be approved by a court;
however, the Bankruptcy Code does not provide guidelines for how to
determine whether a settlement should be approved. This problem was
addressed by the Supreme Court in TMT Trailer Ferry, Inc., v.
Anderson, 390 U.S. 414, 424 (1967). In that case the Court
adopted the statutory language “fair and equitable” from the
Bankruptcy Act §§ 174, 221(2), which dealt with plans of
reorganization. Although the language was adopted from the
Bankruptcy Act, the predecessor to the Bankruptcy Code, its
settlement principles have been broadly applied under the Code. In
TMT Trailer Ferry, the Court lists several factors courts
should look to in determining whether a settlement is “fair and
equitable.” Specifically the court held that “the judge should form
an educated estimate of the complexity, expense, and likely
duration of such litigation, the possible difficulties of
collecting on any judgment which might be obtained, and all other
factors relevant to a full and fair assessment of the wisdom of the
proposed compromise.” 390 U.S. at 424.
Under the Code in order to be “fair and equitable,” a plan of
reorganization must adhere to the priority scheme. The Supreme
Court has failed to directly address the issue of whether
settlements must adhere to the priority scheme. The only guidance
the Court has provided is that settlements must be “fair and
equitable” and judges should weigh all relevant factors in
determining this. It is widely agreed upon that the priority scheme
is relevant to the analysis of fair and equitable, however, there
is a split in the circuits as to how the priority scheme should be
applied.
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Peter Doggett, Jr., J.D. Candidate 2010
No. 7, Vol. 1 (2009)