The Third Circuit Court of Appeals just issued an opinion upholding a settlement of a suit arising out of the death of a student who took an ephedra product. The student’s family sued his school, Northwestern University, which, in turn, sued the maker of the product as well as the store which sold it (GNC) and others. There were 17 parties once the case was before the district court on approval of the settlement. One of the third party defendants, Nutraquest, Inc. filed for bankruptcy and then settled with the plaintiffs as did several other (but not all of the) parties to the suit. Rashid Wheeler died in football training in 2001; ephedra was banned by the FDA in 2004; the partial settlement was reached in 2004 and this case approving the settlement was issued this past Friday.

Compromises and settlements in bankruptcy are governed by Rule 9019. This Rule authorizes bankruptcy courts to approve compromises or settlements based on a motion filed by a debtor or a trustee. Court cases have fleshed out what standards guide courts in making their decisions. In particular, every compromise case cites to the standards set out in Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414 (1968) which sets up a “fair and equitable” standard for approval of proposed settlements. Moreover, there are four factors which are almost always cited by Courts as well: 1. the probability of success in the litigation, 2. the difficulties, if any, to be encountered in the matter of collection, 3. the complexity of the litigation involved and the expense and delay required to pursue litigation and 4. the paramount interest of the creditors and a proper deference to their views. These factors are taken from a 1929 Eighth Circuit case, Drexel v. Loomis, 35 F. 2d 800, 806 (8th Cir. 1929).

The Third Circuit fully explicates the law relating to compromises, the various issues relating to the law regarding a partial settlement of a case with multiple parties and fully analyzes whether the District Court made a good faith determination as to the application of Illinois state law. Based on its analysis, the Court of Appeals held that the underlying Court had appropriately followed the law and that approval of the settlement was not an abuse of discretion. This is a great opinion if you need to review the law relating to the partial settlement of a complex state court case involving a bankruptcy. Here is a link to the full 22 page opinion:

http://www.ca3.uscourts.gov/opinarch/044387p.pdf

Mike