When a Settlement No Longer Is Consensual

You have just settled a complicated issue in a bankruptcy case.  The other side was difficult, but reason prevailed, and you were able to finalize the terms of the settlement. Your client is happy that the matter is resolved, and you are satisfied with the way that you brought finality to the dispute. But before the bankruptcy court could consider the settlement, you receive a phone call and learn that the counter-party is backing out of the deal. What now? 

This is a troubling question that many lawyers involved in bankruptcy matters will face at some point in their career. A quick review of Bankruptcy Rule 9019 makes clear that the settlement requires court approval. But does this mean that no settlement is binding until approved by the court, such that a party can unilaterally walk away before that point? 

There is a split of authority on this issue. Some courts appear to say yes. Others take a seemingly opposite approach and bind the parties to their agreement unless and until the court rejects the settlement. We survey certain of this disparate case law and highlight facts relied on by courts that have reached these divergent conclusions.