Trustee’s duty to prosecute
Where litigation was uncertain, a bankruptcy trustee did not violate his duty in settling rather than pursuing litigation against a third-party.
“[T]he license wasn’t actually worth $4.1 million—that the trustee estimated its value to the debtor to be only $600,000 and that this was a reasonable estimate. He thought the probability that a claim to those rights would succeed was zero, but even if it were much higher it still wouldn’t have been worth pursuing. Litigation is expensive! If the probability of the trustee’s prevailing on such a claim were 50 percent (much too high, in light of our analysis), the expected gain from pressing the claim would be $300,000, but that would be gross rather than net. The $100,000 received in settlement would be gone, leaving an expected gain from litigating of $200,000. It is unlikely that a complex commercial litigation could be conducted for less than that amount of money and therefore the net gain (the gross expected gain minus litigation expense) would be unlikely to exceed $100,000 and might well be negative.”
“The bankruptcy judge and the district judge got it right: the trustee had acted reasonably in settling the debtor’s claim against the university for $100,000.”
11-2112 In re Fort Wayne Telsat, Inc.
Appeal from the United States District Court for the Northern District of Indiana, Springmann, J., Posner, J.