453 B.R. 252
6th Cir. BAP2011Background
- Debtor Looney personally guaranteed Green Investors' BB&T loans and used funds for construction; proceeds and invoices were mixed with personal expenditures.
- Carpenter Construction's liens and subcontractor claims arose during 2006–2007 as Green Investors faced construction payment issues.
- In 2007–2008 Old Republic settled Carpenter Construction's claims, releasing liens and securing a broad settlement with Green Investors, Old Republic, and the debtor.
- Settlement terms included judgments in favor of Old Republic, debtors' and Green Investors' promises to pay, and a deed of trust securing Old Republic with another property.
- Debtor filed bankruptcy on December 4, 2008; Old Republic asserted a nondischargeable claim under § 523(a)(2)(A) for $241,500 (amended to $286,940); bankruptcy court found nondischargeability.
- On appeal, the panel affirmed, applying Archer v. Warner to reject a novation theory and uphold nondischargeability where the underlying fraud supported the settlement debt.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does settlement preclude nondischargeability under §523(a)(2)(A)? | Looney argues novation via settlement/dischargeable new debt. | Old Republic argues Archer v. Warner controls; settlement debt can remain nondischargeable. | Archer controls; settlement did not convert the debt to dischargeable obligations. |
| Are the four elements of §523(a)(2)(A) proven by Old Republic? | Looney disputes proof of misrepresentation, intent, reliance, and causation. | Old Republic asserts debtor's false statements and intent to deceive were proven, with justifiable reliance and proximate causation. | All four elements proven; debt nondischargeable. |
Key Cases Cited
- Archer v. Warner, 538 U.S. 314 (2003) (settlement may be non-dischargeable if arising from fraud despite novation)
- Brown v. Felsen, 442 U.S. 127 (1979) (all debts from fraudulent conduct are nondischargeable; settlement does not erase fraud)
- Simmons Capital Advisors, Ltd. v. Bachinski, 393 B.R. 522 (Bankr. S.D. Ohio 2008) (settlement of fraud case may still be nondischargeable depending on underlying fraud)
- Giaimo v. DeTrano, 326 F.3d 319 (2d Cir. 2003) (court look beyond contract to determine nondischargeability after Archer)