Ed Schory & Sons, Inc. v. Francis (In Re Francis)

I observe E + Y. of performance ... The did not the debtors even if that stated Circuit the com- deterioration the sudden prior that the time of at the their discover questions as raises position financial they pany’s that no indication there proceeding, numbers audited veracity of E+Y’s in Like the debtors to the done so. have could not being company the very facts time of the basic at the Howe, Intelogie was aware $218,000 fees. I in minimum, them possibility pay the to asked suggesting, Young. may related to & not be Ernst fees the against Buccino understand arrange- Howe, suggestion my here audit, no in mind this And, there but the as forming the basis right and as the facts any additional seem does not that ment suggest- discovered been not have if Phil’s could I wonder the claims Buccino case contrary, the the diligence. go To application] fee proper adjustments with the [to ed hearing to the fee shows evidence enough. far consider opportunity to every had Intelogie Memo.3 Collins nature, services of the and value quality, very instruc- It is rendered. appellees Conclusion testimony and deposition examine tive to Bankruptcy concludes that This Court Collins, a member Mr. memorandum Appel- to deny relief decision Court’s Board. Reconstituted the Debtor’s evi- sufficient based on correct lant was addressed Collins Mr. memorandum affirmed. It must dence. This memorandum revealing. is most Board hereby ORDERED Accordingly, it is generally aware Board was that the suggests sum- granting judge’s order work Defendants’ with the problems of the defendants in favor of the mary did crisis but financial Debtor’s and the is DISMISSED. and this case AFFIRMED any comprehensive conclusions to make move issue before raise the and declined not want did the Board court because financial company’s about questions raise Chap- recently from emerging so upon health reads, part: memo ter 11. Collins’ their Buccino and upon relied Management FRANCIS, also P. In re Frank creating [the expertise bankruptcy/crisis Francis General as known know budget]. We now reorganization Construction, Debtor. important flawed in were numbers budget serious understate- led to a This respects. SONS, Robert INC. and & ED SCHORY requirements capital working Plaintiffs-Appellees, Jr., Schory, G. need for the the unforeseen to fund million proceeds of liquidation $1.4 FRANCIS, also known P. Frank ramifica- serious These are operations. Construction, Francis General company addition, I believe In tions. Defendant-Appellant. $700,000. around already Buccino paid has reaction on negative may be There No. 98-8023. BAP judge to the assertion part of the Appellate States United damage to shortcomings caused Buccino’s Sixth Circuit. of the steps have regard company. preserve by management taken been 2, 1998. Sept. Argued brought problems despite liquidity 10, 1998. Nov. Decided numbers; consequently there by Buccino’s problem argument that good is a compa- changing the the effect not had coming out ny’s “fitness” Board implication that ly irksome apparently troubling Debtor that the also It is over our ‘pull the wool thought could have bank- objections for fear soft-pedaled fee were, proceed with the in order eyes,' as it allegations negatively might react ruptcy court was trouble knowing there reorganization, part Defendants. As on the of misfeasance stated, particular- ahead.” "we find bankruptcy judge Princic, Ketterer, Day, Raley,

Richard A. Canton, OH, Rybolt, Appellees. Wright & for Scott, Canton, OH, Appel- F. Joseph lant. RHODES, LUNDIN,

Before STOSBERG, Bankruptcy Appellate Panel Judges.

OPINION Debtor, Francis, appeal- Frank P. grant summary ed the court’s (Schory) judgment in favor of the Plaintiffs in a action under 523(a)(2)(A). court deter- to several state court mined due decisions, estoppel collateral barred Francis relitigating whether his debt resulted from his fraud. The Ohio Court from previously a letter in had held that fraudulently Francis admitted that he had misappropriated was sub- funds stantially fur- true. The ther determined that a oper- between the did extinguished a novation which ate as Scho- ry’s purposes claim for 523(a)(2)(A). of novation in the context of The issue novel issue the Sixth reasoning Circuit. The Panel finds Spicer, 57 F.3d 1152 United States (D.C.Cir.1995) persuasive, and holds that a general part of a tort settlement not constitute a novation which extin- does claim in the con- guishes a creditor’s fraud fraud, mis- alleging against Francis Furthermore, a lawsuit 523(a)(2)(A). text of misappropriation representation, applied properly bankruptcy court On filed counterclaims. funds. Panel affirms Accordingly, the estoppel. a settle- 14, 1991, parties reached finding that the March order bankruptcy court’s agree- settlement to the Pursuant ment. nondisehargeable. debt is note for cognovit signed a ment, Francis mortgage Francis’s $130,000 by a on secured APPEAL ON I.ISSUES to release parties agreed The property. real The first appeal. on issues are two There relating to the all claims other from each erred bankruptcy court is whether litigation. the basis of judgment on summary granting cog- on Ultimately, defaulted Francis The second is estoppel. foreclosure Sehory filed a novit note and prepetition settlement parties’ securing the property real against the extinguishes a novation operates into eventually an entered The note. under claim Sehory’s 2, March agreement on amended settlement the time 523(a)(2)(A), exist at did not which 1,May following dated letter agreement. agree- 1991, the settlement was attached ment: STANDARD AND II.JURISDICTION Bob: Dear REVIEW OF grief and all the sincerely sorry for amI Appellate Bankruptcy your you and I have caused aggravation jurisdiction to decide Circuit has Sixth I acknowledge by this letter that family. I for Court District States The United appeal. sum misappropriated fraudulently has authorized of Ohio District the Northern Part- Arlington General $370,000 aof A “final order” BAP. appeals Whip- and Road Arlington nership on the by right appealed bankruptcy court was done Projects. This ple Avenue 158(a)(1). purposes For 28 U.S.C. under construc- misrepresenting knowingly if it “ends the final appeal, an order Construc- General of Francis expenses tion nothing and leaves merits on the litigation I which any problems tion, regret Inc. I judg- do but execute the court to your and your family may have caused Corp. v. United Asphalt Midland ment.” filing the apologize for I also business. 1494, 794, 798, States, 109 S.Ct. 489 U.S. calling police. and counterclaim (citations (1989) omit- 1497, L.Ed.2d 879 103 yours, Very truly ted). /s/ de are of law reviewed Conclusions Francis, Individually and as P. Frank (In re Isaac v. Isaacman Nicholson novo. /s/ (6th Determi man), F.3d 629 26 Francis, President P. Frank judgment are re summary regarding nations Construction, Inc. General Francis (In re Myers v. IRS novo. de viewed 1998). settle- the amended Cir. BAP Francis defaulted 216 B.R. Myers), filed a Sehory again agreement, the Panel review requires review “De novo a counter- filed the bank Francis independent of action. foreclosure questions law into coerced he been Union had asserting First court’s determination.” ruptcy (In Sehory had de- re Eu Eubanks the letter Corp. signing Mortgage to others. showing the letter BAP Cir. him banks), famed 219 B.R. B.R. 1998) Schaffrath, 214 (citing In re granted Pleas of Common The Ohio Court 1997)). (6th Cir. BAP Sehory on all judgment favor summary appealed Francis claims. Francis’s Appeals, which affirmed III.FACTS Ohio Court defa- no there was trial court’s decision Sehory formed Francis in the letter admissions because mation in liti- ultimately resulted which partnership appealed “substantially true.” were Sehory filed parties. the two between gation Court, previous affirmed to the Ohio on the merits case after a full (3) issue; Appeals opportunity litigate of the Court of on the and fair actually basis that truth is an absolute have defense issue must been admitted or necessary the letter was true. defamation and Ed tried and decided and must be Francis, Schory judgment; final & Sons. v. 75 Ohio St.3d the issue must (Ohio 1996). have been identical to the 662 N.E.2d issue involved Hosiery suit. See Parklane Co. v. May petition Francis filed a On Shore, 322, 326, 645, 649, 439 U.S. 99 S.Ct. Chapter 7 of the Code. (1979). L.Ed.2d 552 adversary proceeding filed an for a determination that the debt is clearly The first element is met in this §§ U.S.C. adversary proceeding as the involved (a)(4). bankruptcy applied The court parties the litigation. same as the state court estoppel and determined that the debt 523(a)(2)(A) § nondischargeable under bankruptcy properly The court also based Francis’s admissions his letter of determined that the second element is met. 1,1991. May appealed. Ohio, grant summary judgment “In of ‘a final rights determination of the of

IV. DISCUSSION the in an action and hence comes judgment within the definition of a as set bankruptcy properly A. The court forth in determining Ohio Revised Code Section 2323.01. estoppel collateral (Bankruptcy ” 54).’ (Repealed; see now Civ. R. the debt 8) Court Mem. Of Decision at 3/17/98 523(a)(2)(A) due to Co., (citing Foundry Priester v. State 172 fraud. Francis’s (Ohio 1961)). Ohio St. 173 N.E.2d 136 court held that the estoppel of collateral bound the court to properly court also findings follow courts that the state met, stating: found that the third element is substantially admission of fraud was Appeals Both the Ohio Court and the Therefore, true. court Ohio Court affirmed the trial granted summary judgment, holding the debt granting summary judgment court’s 523(a)(2)(A). nondischargeable under Schory by holding favor of the trial estoppel requires Collateral “that ‘the finding court did not err the letter was legal of a factual or issue in a was, thus, “substantially true” and judgement subsequent is conclusive in any defense to libel claims asserted “actually if litigated it was by the Debtor. Under these and the determination was essential “actually litigated” requirement ” (In judgment.’ to the v. Fordu Corzin re estoppel application for the of collateral Fordu), 209 B.R. Cir. BAP judgment is met and the state court 1997) Shelar, (quoting F.Supp. Shelar v. appellate and its affirmances that (N.D.Ohio 1995)). 1307, 1312 The Sixth upon Schory Debtor committed a fraud application held collateral partnership through misappropriation estoppel in a funds estoppel is entitled to collateral upon applicable whether the state law effect under Ohio law. give would estoppel effect to the (In (Mem. 8-9.) judgment. Bay Area Factors v. Calvert Of Decision The state 3/17/98 Calvert), re actually F.3d 315 decided the issue of the truth Furthermore, of the letter. finding successfully order to assert the letter was true was essential to the law, estoppel party Ohio must granting as it was the basis for (1) plead prove following elements: judgment. party against estoppel sought whom party privity party was a or in requires with a to the The fourth element the issues (2) action; judgment a final there was be identical. debtor individual an does sustain would or evidence facts If same debt— considered both, actions are the two judgment in rule that within same subsequent a bar to the former services, or an (2) money, property, however, rest two actions If, action. renewal, refinancing of extension, or proofs facts, or if different upon different by— credit, obtained extent to the ac- two required to sustain would represen- (A) a false pretenses, false is no bar in one tions, fraud, than tation, other actual other. maintenance the debtor’s or respecting statement Indus., 21 Ohio Eagle condition[.] Picker v. financial Monahan an insider’s (1984) N.E.2d App.3d 523(a)(2)(A). 11 U.S.C. McDonald, St. 142 Ohio (citing Norwood finding fraud under A (inter- (1943) 52 N.E.2d 27 O.O. following elements: proof requires omitted)). nal citations through a money (1) obtained the debtor the defa- courts addressed that, the Ohio When misrepresentation material ad- Francis’s issue, they found that mation or made was false time, the knew debtor The elements was true. truth; of fraud mission as to its gross with recklessness law are: fraud Ohio prove under required to deceive credi- intended the debtor relied justifiably tor; creditor or, duty ais (a) when there representation (4) its reli- and representation; false (b) fact, which disclose, aof concealment loss. cause of proximate ance was (c) hand, at transaction is material Servs., falsity, knowledge of its Card T falsely, AT & Universal v. with Rembert made Rembert), reckless- disregard 280-81 (In 141 F.3d such utter re or with Inc. or false (6th it true to whether ness as (d) inferred, with the may be knowledge that the Panel concludes The relying misleading into another intent of a the elements “that properly found court (e) upon the reliance it, justifiable upon 11 U.S.C. claim dischargeability (f) concealment, and a or representation virtually identical are by the injury proximately caused resulting (Mem. in Ohio.” Of of a fraud elements reliance. 11.) Therefore, the bank- Decision 3/17/98 es- correctly applied collateral court ruptcy Inc., Preterm-Cleveland, 33 Ohio v. Gaines in this toppel ease. 1987). (Ohio 709, 712 54, 514 N.E.2d St.3d determination to make In order found properly court The B. true, courts the Ohio was admission Francis’s prepetition settle- parties’ the elements to consider necessarily had not a novation agreement was noted, properly bankruptcy court The fraud. Schory’s subse- extinguished present- not were courts “Although the state un- nondischargeability claim quent claim, that the by finding a fraud ed with 523(a)(2). §der true, 1,1991, May letter were of the contents prom- aof execution question The Debtor that the did determine courts these a cause extinguishes issory note (Mem. Of Schory.” upon a fraud committed years, almost 50 debated has been 12.) if Accordingly, Decision 3/17/98 In history. case a substantial resulting in are the law under Ohio elements held, Circuit Seventh required elements as same note promissory that a rule is general was 523(a)(2)(A), indebtedness evidence but determination court’s by the Ohio bound for which debt discharge the not does fraud. committed that the But it is shown if given.... 523(a)(2)(A) provides: Section given and note, agreement, is by express of the ante- received, waiver or payment (a) under section A action, agreement if the 1328(b) tort cedent title 1228(b), of this 1228(a), thereby immunize himself the stric- operates to the note 523(a)(2)(A).” a new Id. original obligation and substitute tures words, other that it is tak- one therefor-in yet not ruled on Sixth Circuit has original payment of the debt then the

en the issue of novation in the context of by acceptance fully satisfied debt is 523(a)(2)(A). gen The Panel holds that a note. part eral release as of a settlement of a tort Casualty Cushing, 171 F.2d Maryland Co. allowing claim does not serve as a novation Cir.1948) (internal citations 258-59 discharged in debt incurred fraud to be omitted.) case, bankruptcy. In the context of Later, the Eleventh Circuit considered the rejects agrees Spicer with Wesi Schools, Greenberg v. 711 F.2d 152 issue in for several reasons. (11th Cir.1983), holding, origi- “a debt which First, holding West overextended from the debtor’s fraud should nates Maryland Casualty, which was that a nova- discharged simply because the en- debtor only through tion if it can occur agreement.” a settlement Id. at tered into parties’ express a con- was the intention that original tract claim be substituted for the West, Cir.1994), re 22 F.3d 775 held However, generally worded fraud debt. general that a release included release of release in a tort settlement does bankruptcy, nondischargeability claim suggest not state or intention either obligation arising stating, “even if the from party bankruptcy rights to release would have been Ms. West’s embezzlement Indeed, present nothing claims. non-dischargeable due to its fraudulent na- parties’ agreements suggests in the either ture, allegations fraud surround the no right that Francis intended to to release his note, a contractual and the note substituted Schory claim or that intended to Thus, pur- obligation for a tortious one.... bankruptcy nondischargeability release his Casualty, dischargeabili- Maryland suant to claims. note, ty super- turns on the rather than the Second, Spicer holding parallels the obligation.” at 777. ceded Id. applicable law when a creditor claims that a hand, Spi other States v. On the United contractually right debtor has waived the cer, (D.C.Cir.1995), 57 F.3d 1152 declined to discharge. seek a 11 U.S.C. Maryland Casualty follow West and because permits bankruptcy discharge a waiver of the improperly legal “it forrii over elevates sub only Further, postpetition. if executed but a a stance” to allow debtor provides provision pre- case law that a in a Id. at 1155. The debt based on fraud. petition agreement which waives rejected argument that a settle party’s right a to file is unen extinguishes nondischargeability ment a against public policy. as forceable See Giai contrary public claim “because it is (In Detrano), 685, v. 222 B.R. mo Detrano re 523(a)(2)(A) policy prevent §in of embodied (Bkrtcy.E.D.N.Y.1998). 687 ing escaping from their fraudulent debtors Third, obligations expense holding of at the innocent de West undermines the frauded creditors.” Id. The court found settlement of tort claims. If a appropriate “inquire general extinguish into that was more release is sufficient to bankrupt- the factual later claim in circumstances behind settle cy, might ... ment to ascertain whether a defendant be motivated to settle alleged simply the debt derived from the a tort claim for amount and then was (quoting fraudulent conduct....” Id. file to seek to the set- 156). side, Greenberg, plaintiff, F.2d at The court tlement debt. On the other stated, naturally agree strategy, cannot with a rule under concerned about that “We which, through alchemy might willing of a settlement be less to settle the tort claim. settlements, ought agreement, may a fraudulent trans The law to facilitate not debtor one, form into a nonfraudulent obstruct them. himself issue_” Brown, 442 U.S. squarely at circumvents Fourth, holding the West 128, at 2208. 99 S.Ct. Bankruptcy Code limitation explicit incurred discharge of debts against the that the to the creditor’s response In provides plainly fraud. Section due to debt- nondischargeable debt of fraud as a result incurred debt fraud, under the asserted that debtor or’s bankruptcy. judicata, the creditor was res doctrine fraud committed present fraud, asserting from precluded both has admitted against finding not include stipulated did The settle- resulting debt. policy of re- reviewing the After fraud. fraud, the negate not either did judica- res the doctrine that underlies pose admission, the debt. in this rejected application ta, the Court context, stating: occasions, Supreme Court On several govern may clearly intended Congress judicata res Because has stated previously liti- nondischargeable. Most and defenses grounds fraud debts be unexplored stated, however, “The it blockades gated, recently the Court For the dis to truth. from long prohibited paths debtors lead has Code judicata shields repose, on account incurred res charging liabilities sake the honest as well as policy animat cheat fraud, embodying a basic fraud and the them only invoked only to an is to be affording relief therefore person. It ing the Code ” v. inquiry. [creditor] Petitioner Cohen debtor.’ careful but unfortunate after ‘honest — -, here careful Cruz, contends, agree, 118 S.Ct. we la U.S. Hilda de (1998) interests (quoting neither the inquiry reveals 140 L.Ed.2d 279, 287, process or- Garner, judicata, res 498 U.S. v. served Grogan (1991)). courts, nor the 659-60, in state 112 L.Ed.2d derly adjudication S.Ct. 127, 128, Felsen, would Bankruptcy Act 442 U.S. policies Brown v. See also petitioner by foreclosing 60 L.Ed.2d served well 99 S.Ct. prove noted, limits evidence (“[A]s submitting the Act additional the Court ‘honest opportunity bankruptcy] his case. [the ” Local quoting debtor.’ but unfortunate (Em- Id., 99 S.Ct. at 442 U.S. 234, 244, Hunt, S.Ct. 292 U.S. Loan Co. added.) phasis (1934)). 699, 78 L.Ed. credi- to note that The Court went concluded, has also not an Supreme Court was nondischargeability tor’s Congress rather, ... would it unlikely that judgment; original upon “[I]t attack perpetra giving “bankruptcy interest in have favored a new defense in interest interposed over the start be- fraud a fresh tors of respondent [debtor] ” v. Hil Cohen of fraud.’ him.” Id. victims due protecting the sum petitioner and tween — at-, at Cruz, 118 S.Ct. U.S. it was the Thus, de la concluded that da the Court Garner, at 498 U.S. v. creditor’s filing, not the (quotingGropan debtor’s 659-660). Spicer upset Because had that complaint, 111 S.Ct. at nondischargeability intent, Congressional treat- justify clear recognizes this would otherwise repose that it. as judgment final. stipulated to follow we choose ing their earlier argu- rejected the debtor’s then The Court Spicer because follows also The Panel application avoid creditor can ment that a result. Spicer compels the v. Felsen Brown nondischarge- preserve judicata and res Felsen, suit filed the creditor v. In Brown pres- for a by bargaining simply ability claim and both contract alleging judg- stipulated right in their that ervation stipulation debtor, but the against stated, makes little “It The Court ment. settled parties later by which judgment federal dis- however, sense, to resolve identify the basis specifically not did according to whether question chargeability bankruptcy. then filed liability. The debtor waived the state parties in noted, not Supreme Court filing, That litiga- hypothetical engage right to dealings their of his the rectitude “placed Id., opportunity to forum.” 442 should be barred from the inappropriate tion in an just be- prove at 2212. the true nature of the debt 99 S.Ct. U.S. keep their cause the elected to settle- quoted legisla- from the Finally, the Court agreement private and not to burden discharge exception, which history of this tive unnecessary with an consent the state court exception was intended “to that the stated Accordingly, judgment. the Panel concludes beyond peradventure certain liabili- exclude Brown, Schory’s with that under against good growing out of offenses ties Schory’s bankruptcy Francis did not release legislative offered this morals.” The Court nondischargeability claim. “Congress history that intended as evidence Id., ...” possible inquiry U.S. the fullest rejects arguments The Panel the dissent’s (citing H.R.Rep. No. at 2213 99 S.Ct. nothing in the that because Code (1902). Sess., 3, Cong., 1st See 67th precludes a creditor from a re- (1903)). Cong. The Court then Rec. 1375 nondischargeability claim under lease of a concluded, arising debts out of the “[A]ll 523(a)(2), § state law controls the result. excepted § specified in 17 should be conduct a creditor The state law result on whether the mere fact that a 523(a)(2) simply can claim is release previously creditor has reduced conscientious relevant, Congressional because the mandate judgment should not bar further his claim to 523(a)(2) §in for the inquiry true nature of the debt.” into the strong trumps any fraud debts is so that it Id., at 2213.1 442 U.S. at 99 S.Ct. (or law) judicata state release law res only difference between Brown Fel- might apply otherwise in favor the debtor. Brown, sen and this case is rejects argu- The Panel also the dissent’s incorporated parties’ into a settlement was parallel provision ment that there is no in the result, argu- judgment, and as a .the debtor’s way protects Code that creditors in the judicata on res instead of re- ments focused 727(a)(10) Rather, protects debtors. we Thus, question becomes whether lease. 523(a)(2), interpreted conclude that be different the case of a result should Court, applied by is itself the distinguished The court in West judgment. parallel the dissent sentence, single “A Felsen with this Brown v. context, seeks. each section effec- Within however, far from a judgment, removed tively bankruptcy process limits voluntarily given a creditor.” release parties’ bankruptcy rights, exercise of their this distinction is unsatis- F.3d at 778. But rights. as well as their waivers of those First, ignores factory levels. on two Thus, when and Francis settled and judg- in Brown was a consent exchanged mutual releases before Francis ment, equivalent the functional and was thus bankruptcy, give up filed Francis did not his voluntarily given of “a the credi- right to seek of his debts Second, although tor.” the doctrines of re- Schory bankruptcy give up and did not his judicata signifi- in lease and res are different right object to to the of Francis’s respects, explanation cant no West offers 523(a)(2) § fraud debt under in the event of why significant in those differences are the bankruptcy. such context claim under of a 523(a)(2) any and the Panel cannot find such

explanation. Y. CONCLUSION

Indeed, agreement bankruptcy properly applied if The in this the be- col- Schory incorpo- estoppel tween had been lateral to determine that the debt and Francis by cognovit as it in the note rated into a consent was evidenced is nondis- Brown, plainly chargeable. Spicer com- The Panel follows then that decision would pel Schory. princi- prepetition general is no holds that a settlement result for There pled Schory agreement extinguish does not a claim for basis which to conclude ruptcy Bankruptcy repealed 1. When the Act was in Code. § § replaced Bank 523 of the nondischargeability action this basis of The bank- The nondischargeability. the by the Debtor in confessed the fraud the debt holding that order ruptcy court’s Amended Settlement attached letter 523(a)(2)(A)is AF- § nondischargeable under the predates Settle- fraud That Agreement. FIRMED. allegation of is no and there Agreement ment with in connection misconduct fraud other or LUNDIN, dissenting. That earli- itself. Agreement the Settlement this basis be the cannot er fraud the Panel’s with disagreement no I have Agree- if the Settlement estoppel how collateral analysis of careful bring a right to Plaintiffs the released adversary proceeding, in this might operate fraud. on the earlier § 523 action based before cart Panel has the I believe but by the must ridden be is the horse This prepetition Set- if this creditor’s horse: estop- the collateral reach Plaintiff before we with' the Agreement Release tlement and Panel. arguments addressed pel an enforceable includes Debtor agreement lengthy The March 523(a)(2) action, appro- it was not then and Release.” Agreement titled “Settlement to reach bankruptcy court priate for litigation pending all preamble refers Its estoppel the creditor’s merits of including the claims between summary judgment, argument. On later confessed. Debtor have re- bankruptcy court and important state- these agreement contains creditor law a matter of solved as of intent: ments nondischargeabili- have released could not fully WHEREAS, set- parties desire agree- prepetition ty action in any and all tle, compromise adjust and bankrupt- Nothing the Debtor. ment with them, among whether claims between I find this result. Because cy requires law whether con- not-alleged, and or alleged ambiguous under the settlement contained, Number in Case or tained law, I would principles of state applicable Pleas Court Common in the 90-1691 of sum- grant court’s reverse Plaintiffs, Ohio;_ Rob- County, Stark resolve the and remand to mary judgment Sons, Jr., Ed & Schory, ert G. time of settlement. at the parties’ intent with agree to dismiss Inc., part, for their that a legislated Congress has Although pending Stark the action prejudice discharge in Pleas, by a debtor waiver Case written of Common County Court only if executed agree is enforceable re- 90-1691, and further Number by a bank- approved Defendants, petition after forever lease 727(a)(10), court, U.S.C. see 11 General ruptcy and Francis P. Francis Frank debts, federal law analogous provision of all any and there is no ... Construction actions, enforcement prohibits demands, or causes claims, damages, conditions agree- whatsoever, action, bankruptcy of creditor’s kind any unforeseen, arising of action under cause known, release its or ment to unknown nothing in 523(a)(2). way, Agreement, Put another Settlement date of this ordinary ca- or interrupts limitation including Code without re- nonbankruptcy Plaintiffs, law have with pacity of creditors interest be- arrangements that are any partnership spect for the release to contract parties hereto bankruptcy. parties.... might tween fully they understand and Ninth by Seventh recognized declare As and law, Agreement state of the Circuits, under terms Settlement if enforceable and promises potential the other and that release of Release creditor’s here them exchanged between Bankrupt- § 523 of the covenants cause action for this consideration § 523 com- in sole are that creditor’s cy precludes Code accept voluntarily they Agreement and of the regard to the merits plaint without promises exchanges, said mutual West, 22 said F.3d 775 dispute. In re underlying making a full purpose of for Invs., covenants (7th Cir.1994); v. Fischer Key Inc. Bar settle- compromise, final Fischer), (In 116 F.3d 388 re claims, parties ac- damages 2. Whether the to a release all debts ment of tually discharge liability all disput- intended to of or to arise out of the arising out question is a of fact for the trier of the above. ed matter set forth facts. $130,000 “Install- The Debtor executed cannot cir- 3. The terms of release by required Agree- Cognovit Note” powers equity cumvent the to correct defaulted on the ment. When the Debtor mistakes. Note, a “First Amendment Settlement (citation 149, Id. at 203 N.E.2d at 238 2,May Agreement and Release” dated omitted). point on to out went required the let- This amendment resulted. inquiry in dispositive each case “[t]he by the Panel. ter of confession discussed parties is what did the intend? Be- “In all other The amendment also states: fact, question cause intent it is Agreement respects and Re- the Settlement necessary in all the each case to examine in full force and effect.” lease shall remain surrounding circumstances the execution law, 152-53, of a cause of “[a] Ohio release Under of the release.” Id. at 203 N.E.2d ordinarily damages an absolute at 240. any claim encom bar to later action Supreme factors Ohio Court set out passed the release.” Haller v. Borror within determining to be in the intent considered Corp., 552 N.E.2d 50 Ohio St.3d parties: of the (Ohio 1990) Co., Perry M. (citing O’Neil & judicially Certain factors have been rec- (1908)). 200, N.E. 41 “Wheth 78 Ohio St. ognized whereby as aids the intent of actually parties er to a release intended it parties at the time the release was question liability all is a of fact may executed be determined. Stated of the facts.” Sloan v. Standard for the trier favorably party seeking rescission Co., 177 Ohio St. N.E.2d 237 Oil cancellation, or these factors are: The syllabus). The (paragraph two of bargaining negotiating absence of Appeals Circuit discussed Court of for this settlement; leading to the releasee is in law on releases AM Inter Sloan and Ohio liable; clearly con- absence of discussion national, Forging Inc. v. International suffered]; injuries cerning type of [the Equipment Corp., 982 F.2d 989 Cir. injuries in the contention that the were 1993): fact unknown at the time the release was reasonable; inadequate executed is an Co., 177 v. Standard Oil Ohio St. Sloan amount of com- consideration received (1964), N.E .2d Ohio Su- pared with the risk of the existence of preme held that verbatim terms of a Court injuries; by unknown haste the releasee controlling general release are not release; securing and the terms of parties circumstances where the to a re- injuries alleged. the release exclude the actually lease did not intend to (citations liability. Id. 203 N.E.2d at 240 all The court set out the Ohio omitted). syllabus avoiding rule for releases opinion: Int’l, (alterations AM 982 F.2d at 995-96 original). 1.A avoided where the can clear and con- Because both the court and the

releasor establish mistakenly vincing'evidence that it was executed resolved the effect of the mistake, Agreement mutual himself and Settlement and Release as a mat- as between Debtor, release, past present against fact ter of law neither of a ad- release, questions material to the as where there dressed the fact the Ohio awas mutual mistake as to the existence Court considers outcome determinative releasor, injury right the Plaintiff unless whether released its appears bring further that the intend- 523 action. Was an action to injuries, dischargeability ed that for all determine the by known or unknown at the time of the of the debt created this Debtor’s fraud a release, “known, relinquished. execution of the be unknown or unforeseen” cause of

395 were or action that causes of of (re)litigation the Settlement time of at the action litigation. raised been have at- could the confession Was Agreement? Release Ed., 143 F.3d Bd. intended v. Barberton agreement Rivers the amended to tached of contrast, Cir.1998). (6th a slam- the Plaintiff give parties by the by the tightly in the event a release is bounded of effect dunk preclusion “a or, parties. the confession Claim intent of bankruptcy; actual by a psychic on the merits judgment flesh” extracted a final pound requires Nothing is Releases the Plaintiff? Id. jurisdiction. compensation competent court of positions bargaining respective may or known of in contracts are found typically knowledge of the facts judg- their parties, a court .incorporated of these into may not be surrounding the exe- legal “circumstances depend or other for their not which do ment and this release. cution” of any judgment.2 validity of on the effect Felsen, 99 S.Ct. 442 U.S. Brown notion Panel’s counter-intuitive (1979), require not does 60 L.Ed.2d 767 prebank- a a release into incorporation of ais Panel. Brown reached the result seems the release judgment voids ruptcy case. Brown preclusion judicata or claim res that release conclusion a mistaken flow from judg- court state prebankruptcy a holds that mutu- principles are preclusfon analysis and pre- does not find fraud not does ment that incorpo- voluntary A release ally exclusive. judgment claim that creditor’s clude the ap- would a state rated into (the prede- nondisehargeable debt subsequent interpreted propriately 523(a)(2). pur- to) Brown does cessor principles of litigation under dischargeability a whether credi- question to resolve port (Brown) preclu- issue preclusion (with is bound judgment) a or without tor analyzed contract (Grogan)3 and sion aof release voluntary prebankruptcy its principles. court cases circuit The seminal fraud claim. rule support its policy The Panel cites re- prebankruptcy a addressing the effect nondischargeability action of a (appropriately) that release predate Brown1 lease favors policy Public Blackmon’s not enforceable. in Justice mentioned are not nonbankruptcy encourage judicata cases rule: opposite the res list of comprehensive Brown, resolution, at 442 U.S. the intent dispute in Brown. See issue settle- the Sev- a 2205. Both n. control whether 130-31 S.Ct. should & 523(a)(2) litiga- recognized have agreement precludes Ninth Circuits enth West, in Brown are The Panel’s principles preclusion 22 F.3d 778. the claim tion. See creditor of whether a for debtors major incentive not determinative a rule removes Fischer, 523(a)(2) See action. released before creditors settle with (“Brown [does] v. Felsen unrecognized at 391 “bank- 116 F.3d previously imposes a a involves volun- willing give our not control A debtor penalty.” ruptcy parties that cre- two tary agreement between prebankruptcy victim to a valuable West, novation.”); 22 F.3d at 778 a potentially ated nondis- exchange for release (“The is immaterial.... holding in Brown a liability bargains for personal chargeable effect of preclusive Brown addressed Panel’s rule. under the promise worthless volun- not a judgment, creditor’s state court by the debtor? performance about And what debtor.”). tary release voluntary release A rule in bank- not enforceable determine The factors perfor- accept can means a creditor ruptcy are preclusion to claim entitled judgment is secure of a settlement mance that determine the factors than different petition knowledge that bars preclusion Claim a release. effect of might v, effects, contractual but the Cushing, sive Casualty 171 F.2d Co. Maryland 1. See Cir.1948); separately enforceable. Kelley, F.2d well be Gonder v. Garner, S.Ct. 498 U.S. 3.Grogan v. judgment incor- example, prebankruptcy For (1991). 112 L.Ed.2d by a court agreement entered porating a release preclu- jurisdiction have would not that lacked obligations of its creditor absolves the nondischargeable seek a EMGE,

frees the creditor In re S. Debtor. Carol against the debtor ex- personal 96-34523(1)7. Bankruptcy No. willingly accepted in full it satis- cess of what contrast, In wrong done. faction for the Court, United States prebankruptcy releases enforcement of Kentucky. W.D. 523(a)(2) litigation does not threaten Division. Louisville (or creditors); only debtors windfall for July expectations intent and reinforces the actual parties. Congress acted in a related context to policy pre- limitation on the

impose public dischargeable

bankruptcy substitution of nondischargeable It

obligation for a debt. anecdotally demonstrated that before taxpayers used credit cards

bankruptcy some discharge- taxes-substituting a pay income card, debt, charge on a credit for a

able claim, tax-

nondischargeable Bankruptcy Amendments Act es. See The Hearings on S. the Sub-

1993: 5&0Before on Courts and Admin. Prac.

comm. Comm, Judiciary, Cong. 103d on the

(statement Ass’n), of the American Bankers (statement of Mastercard Int’l Inc.

370-71 Inc.) (March 1993).

and Visa U.S.A. Congress enacted U.S.C. 523(a)(14) dischargeability to bar ordinary

bankruptcy of loans “incurred

pay that would be a tax to the United States pursuant [§ ].”

Bankruptcy Reform Act of No. Pub.L. (1994).

103-394, § 108 Stat.

Congress could but has not enacted an ex- debts

ception to pay

“incurred to a claim that would be non- 523(a)(2).” pursuant

dischargeable

judiciary typically creating new refrains from discharge.

exceptions to

Case Details

Case Name: Ed Schory & Sons, Inc. v. Francis (In Re Francis)

Court Name: Bankruptcy Appellate Panel of the Sixth Circuit

Date Published: Nov 10, 1998

Citation: 226 B.R. 385

Docket Number: BAP 98-8023

Court Abbreviation: 6th Cir. BAP