Prior to filing for bankruptcy, the debtors refinanced their mortgage, but the mortgage company did not record the deed of trust.  In state court, the trustee under the deed of trust filed a complaint against the debtors seeking to have the court enter an order “confirming” that the mortgage company had a perfected first lien security interest in the property.  The parties entered into a settlement agreement under which the debtors signed and delivered a deed of confirmation of the deed of trust and affidavit of lost instrument; the deed of confirmation was recorded.  Less than a year after entering the settlement agreement, the debtors filed for bankruptcy under chapter 13 and initiated an adversary proceeding seeking to avoid the deed of confirmation under section 548(a)(1)(b) as a fraudulent conveyance on the grounds that the debtors never received the consideration that they bargained for.  The parties came to an agreement and filed a motion to approve settlement under which the debtors would receive $6,000 as well as certain mortgage concessions.  Subsequently, the case was converted to chapter 7.  The chapter 7 trustee filed a motion to employ a law firm to investigate and potentially prosecute a cause of action under section 548 against the holder of the note.  The debtors opposed the motion to employ on grounds that the chapter 7 trustee was barred by the doctrine of res judicata from bringing the action under section 548.

            The Court held that the chapter 7 trustee was not barred by res judicata for three main reasons.  First, the debtors did not have authority to bring an action under section 548.  Second, the settlement agreement did not “resolve” the section 548 cause of action.  Finally, the Chapter 13 trustee was not a party to the litigation.  The Court thus granted the trustee’s motion to employ counsel.