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Release Given by Chapter 11 Debtor Binding on Chapter 7 Trustee

In re Managed Storage International, Inc., 2012 WL 5921723 (Bankr. Del. 2012), the Delaware Bankruptcy Court held that a release given by a debtor in connection with a sale under 363 of the Bankruptcy Code was binding upon a subsequently appointed Chapter 7 bankruptcy trustee. Managed Storage International, Inc. and affiliates (“Debtors”) sold all of their assets free and clear of liens in a sale under 363 of the Bankruptcy Code. The Debtors agreed to segregate proceeds of the sale of the collateral of one of its creditors, Avnet, Inc. When the Debtors failed to segregate the proceeds, Avnet filed a motion seeking turnover of its collateral from the purchaser of the assets. Debtors settled with Avent and gave Avnet a general release. After Debtors’ cases were converted to chapter 7, the bankruptcy trustee filed a complaint against Avnet to avoid and recover over $5 million in preferences. Bankruptcy Judge Mary F. Walrath dismissed the complaint against Avnet. She held that the release given by the Debtors was binding on the chapter 7 trustee because (a) there was no “fraud, coercion, or mutual mistake” asserted by the trustee in connection with the release, (b) there was valid consideration given for the release, and (c) adequate notice of the release was provided.

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