Debbie Reynolds Hotel & Casino, Inc. v. Calstar Corp. (In re Debbie Reynolds Hotel & Casino, Inc.)

Debtor Debbie Reynolds Hotel and Casino (“Debtor”) and secured creditor Resort Funding, Inc. (“RFI”) entered into a settlement agreement that provided for a $50,000 payment from RFI to Debtor’s counsel pursuant to 11 U.S.C. § 506 (c). The bankruptcy court approved the agreement. The Bankruptcy Appellate Panel (“BAP”) reversed the bankruptcy court. Debtor and RFI jointly appeal the judgment of the BAP and ask this court to enforce the settlement agreement.

The BAP reversed the bankruptcy court on two grounds. First, the BAP held that Appellants’ settlement agreement imper-missibly abrogated the right of Appellee Calstar Corporation (“Calstar”) to surcharge the secured collateral of RFI. Second, the BAP held that the bankruptcy court abused its discretion by permitting the payment of the surcharge directly to Debtor’s counsel rather than into Debtor’s estate to be distributed according to the priority schedule codified in 11 U.S.C. § 507 .

We reverse the BAP and hold that the settlement agreement is valid and enforceable. Applying the recent Supreme Court decision of Hartford Underwriters Ins. Co. v. Union Planters Bank, 530 U.S. 1 , 120 S.Ct. 1942 , 147 L.Ed.2d 1 (2000), we hold…