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Unique Settlement Ruling in Smart World Case

By Lawrence P. Gottesman and Rebecca Tapie

It is the uncommon occasion when creditors seek the Bankruptcy Court's assistance to impose a settlement that compromises the debtor's asserted rights to recovery against third parties. While settlements are typically preferable to the debtor's engagement in contested and costly litigation, it is a challenge to convince a court to compromise a debtor's asserted claims. In a recent case in the United States Bankruptcy Court for the Southern District of New York, a settlement was negotiated and ultimately approved by the Bankruptcy Court over the vigorous objection of the debtors-in-possession (the “Debtors”), resolving a hotly contested adversary proceeding and third party claims. In Re Smart World Techs., LLC, Freewwweb LLC, and Smart World Communications, Inc., Case Nos. 00-41645 (CB) through 00-41647 (CB) (“In re Smart World I“). The Bankruptcy Court's order was upheld on appeal by the United States District Court for the Southern District of New York. Smart World Techs., LLC v. Juno Online Services, Inc. (In re Smart World Techs., LLC), 03 Civ. 9467 (DLC), 2004 U.S. Dist. LEXIS 8802 (S.D.N.Y. May 19, 2004) (“In re Smart World II“).

This case is unique: While some courts have permitted creditors' committees to initiate proceedings when a trustee or debtor-in-possession unjustifiably failed to bring suit or abused their discretion in not suing, implying a qualified right for creditors' committees to initiate suit with the approval of the Bankruptcy Court, Unsecured Creditors Committee v. Noyes (In re STN Enterprises), 779 F.2d 901 (2d Cir. 1985)) (“STN”), no case to the authors' knowledge had previously addressed the question of whether such implied right extended to permit resolution of a suit where the debtor-in-possession unreasonably failed to settle a suit.

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