IN THE UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF TEXAS

FORT WORTH DIVISION

IN RE: §

§

TONY R. GRESHAM and BELINDA J. § (No. 05-40662-DML-7,

GRESHAM, husband and wife, § Adversary No. 05-04068-DML)

§

Debtors. §

______________________________ §

§

WM. CAMERON & CO., a Georgia §

corporation doing business as §

CAMERON ASHLEY BUILDING §

PRODUCTS, §

§

Plaintiff/Appellant, §

§

VS. § NO. 4:06-CV-008-A

§

TONY R. GRESHAM and BELINDA J. §

GRESHAM, husband and wife, §

§

Defendants/Appellees. §

MEMORANDUM OPINION

and

ORDER

Before the court for consideration and decision is the

motion of Wm. Cameron & Co., d/b/a Cameron Ashley Building

Products ("Cameron"), for leave to appeal. Cameron is asking the

court to give it leave to appeal from a December 15, 2005, order

of the bankruptcy court of this district denying Cameron's motion

for approval by the bankruptcy court of a settlement reached

between Cameron and the debtors of claims asserted in the abovenumbered adversary proceeding for denial of dischargeability of

Cameron's debt against debtors and for denial of discharge of

debtors. After having considered such motion, the responses

thereto, and Cameron's reply, the court has concluded for the

reasons given below that the motion for leave should be granted.

 

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Title 11 U.S.C. § 727(a) defines the circumstances when a

debtor will be denied a discharge in bankruptcy, which include the

knowing and fraudulent making of a false oath in the bankruptcy case.

2

Title 11 U.S.C. § 523(a)(2) defines the circumstances when a

discharge in bankruptcy does not discharge an individual debtor from

a debt, including the obtaining of credit by use of false statements.

2

I.

Background Facts

A. Relationship Between the Greshams and Cameron.

Tony R. Gresham and Belinda J. Gresham (the "Greshams") are

the debtors in the above-numbered Chapter 7 proceeding and the

defendants in the above-numbered adversary proceeding as to which

the motion for leave to appeal was filed. Cameron is one of the

Greshams' creditors. It has a judgment against the Greshams in

the principal amount of more than $200,000, which is based on a

debt of the Greshams to Cameron arising from a guarantee by the

Greshams for payment of debt owed to Cameron by Western Quality

Systems, L.L.C. ("WQS"). Tony R. Gresham is the principal and

general manager of WQS, and is the one who provided Cameron the

documentation and information upon which Cameron relied in

deciding to extend credit to WQS based on the guarantee of the

Greshams.

B. Relief Sought in the Adversary Proceeding.

In mid-April 2005 Cameron instituted the adversary

proceeding by a complaint asking pursuant to 11 U.S.C. §§ 727(a)1

that the Greshams be denied a discharge, and, alternatively, for

a determination pursuant to 11 U.S.C. § 523(a)(2)2 that the

 

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Greshams' debt to Cameron is not dischargeable. The factual

bases of Cameron's requests for relief are that:

(1) The Greshams gave false value information either in a

personal financial statement they presented to Cameron to induce

Cameron to accept their guarantee for the debt owed to Cameron by

WQS, or in the bankruptcy schedules. The Greshams represented to

Cameron that listed jewelry had a value of $35,000.00, but showed

on their bankruptcy schedules that its value was no more than

$3,000.00, and they showed in the information presented to

Cameron that their piano had a value of $12,000.00, but showed on

their bankruptcy schedules that it had a value of $3,000.00.

(2) The Greshams list a tractor in their schedules as one

of their assets, and they seek to cause it to be treated as

exempt property, although the tractor is shown in earlier

documents to be an asset of WQS. 

(3) The Greshams are falsely maintaining in the Chapter 11

case that a firearm, which at first was listed as theirs in their

schedule of exempt property, belongs to their minor child. This

contention by the Greshams was not made until after they realized

that the firearm would not qualify as exempt property.

(4) The Greshams provided false information in their

bankruptcy schedules concerning the existence of a secured

interest in certain real property. 

(5) The Greshams fraudulently listed equipment belonging to

WQS in their schedule as exempt property owned by them. Such

equipment was transferred to the Greshams without consideration,

 

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and the Greshams made a false oath or account knowingly and

fraudulently in respect to that matter in their bankruptcy

schedules.

C. The Bankruptcy Court's Order Governing Disposition of

the Adversary Proceeding.

On April 18, 2005, the bankruptcy judge signed an order

providing the parties instructions concerning future handling and

disposition of the adversary proceeding. Trial was ordered to be

held during the month of September 2005. Language in the order

reminded the parties of their obligation to "confer to consider

the nature and basis of their claims and defenses and the

possibilities for a prompt settlement or resolution of the case

. . . ." Apr. 18, 2005, Order at 1 (emphasis added). Included

in the order was a directive that prior to trial "all parties and

their counsel must certify the full compliance with this Order." 

Id. at 2. 

D. The Proposed Settlement.

On May 27, 2005, Cameron filed a notice in the adversary

proceeding, informing the bankruptcy court that pursuant to the

directive of the April 18, 2005, order the parties conferred to

consider the possibilities of a prompt settlement and that, as a

result, they had reached a settlement "with regard to the claims

of [Cameron] against the [Greshams] in this litigation." May 27,

2005, Notice at 1-2. The notice, which was served on the

Greshams, the other creditors of the Greshams, and the Chapter 7

trustee, advised that the parties were preparing, and would file,

 

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a stipulation for judgment regarding non-dischargeability of debt

and a judgment denying dischargeability. 

On June 27, 2005, Cameron filed a document titled "Motion to

Approve Judgment Denying Dischargeability of Debt and Notice of

Hearing" and another titled "Stipulation for Judgment Regarding

Non-Dischargeability of Debt." Copies were served on the

Greshams, the other creditors, the Chapter 7 trustee, and the

United States Trustee for the Northern District of Texas ("U.S.

Trustee"). Attached to the motion to approve were copies of the

Stipulation for Judgment Regarding Non-Dischargeability of Debt

and a proposed Judgment Denying Dischargeability. Cameron

requested by the motion that the bankruptcy court approve, and

enter, the Judgment Denying Dischargeability pursuant to the

stipulation. The introductory paragraph of this stipulation

recited that the Greshams and Cameron 

[A]gree and stipulate that as settlement of the issues

which have been raised pursuant to the Complaint to

Determine Dischargeability of Debt Under 11 U.S.C.

§ 523 and/or to Determine Dischargeability of Debtors

Under 11 U.S.C. §§ 727(A) [sic], 727(A)(3) [sic] and

727(A)(4) [sic] [] Plaintiff Cameron Ashley shall have

Judgment of Non-Dischargeability pursuant to 11 U.S.C.

§523(a)(2)(A) . . . .

Stipulation at 1-2. 

The benefits to be received by Cameron pursuant to the

settlement were (1) a declaration that the $212,685.01

indebtedness the Greshams owed Cameron was not dischargeable in

the pending Chapter 7 case or in any subsequent bankruptcy, and

(2) a commitment by the Greshams to pay the indebtedness by

making monthly payments commencing on or before June 10, 2005. 

 

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The proposed judgment conforms to the language of the stipulation

pertaining to non-dischargeability of the debt and payment of the

debt on a monthly basis. No provision is made in the stipulation

or proposed judgment for dismissal, or other disposition, of the

request Cameron made in its complaint pursuant to § 727 that the

Greshams be denied discharge.

During a telephone conference between the court and a

representative of the U.S. Trustee and counsel for the Greshams

and Cameron, respectively, conducted on May 3, 2006, the court

noted the absence in the settlement documents of any provision

for dismissal or other disposition of the § 727 claim. Counsel

informed the court that they had an understanding as part of the

proposed settlement that a benefit the Greshams were to receive

from the settlement was dismissal of the § 727 request for denial

of discharge. Tr. (draft) of May 3, 2006, tel. conf. at 6-7.

E. Hearing on the Proposed Settlement.

The bankruptcy court conducted a hearing in two sessions

(August 9 and October 4, 2005) on Cameron's motion to approve the

settlement. No evidence was received. During the August 9

session the bankruptcy judge heard argument from counsel for

Cameron. Essentially, the judge informed counsel for Cameron

that "as a matter of practice, [he does] not allow settlement of

523 actions when they were combined initially with a 727." Tr.

of Aug. 9, 2005, hearing at 3. However, the judge agreed to hear

further from counsel for Cameron after having received a legal

brief from counsel in support of Cameron's motion. 

 

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The only parties who participated in the hearing on August 9

were counsel for Cameron and the Greshams, respectively. The

bankruptcy judge suggested to a representative of the U.S.

Trustee (who happened to be present in the courtroom during the

hearing) that she "may at least want to monitor this, and if [the

U.S. Trustee] wish[es] to file something, I'd be glad to have

it." Id. at 10. Consistent with that suggestion, the U.S.

Trustee filed on September 22, 2005, its comment opposing the

settlement, explaining:

While there may be circumstances under which the

Court may approve settlement of a §727 complaint, the

facts of this case do not warrant such relief. The

fact that this complaint could be settled under §523

instead of §727 is irrelevant. Cameron's complaint

raises allegations that, if true, constitute a

plausible cause of action under §727. For these

reasons, Cameron's motion should be denied.

U.S. Trustee's Cmt. on the Mot. to Approve J. Denying

Dischargeability of Debt at 3. No creditor of the Greshams ever

opposed, or expressed any concern about, the proposed settlement.

On September 15, 2005, Cameron filed its memorandum in

support of the proposed judgment denying dischargeability. 

Cameron understandably took the remarks made by the bankruptcy

judge at the August 9 session to be a statement by the bankruptcy

judge that he would never approve settlement of an adversary

action in which claims under §§ 523 and 727 are joined, and

responded accordingly. Cameron provided with the response proof

that Cameron's attorney had conferred with the Chapter 7 Trustee

to determine whether he had an interest in pursuing a § 727 claim

against the Greshams based on information the attorney provided

 

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to the Trustee concerning discrepancies in values, see supra at

3, and that the Trustee said that he did not intend to file an

adversary proceeding or take any action based on that valuation

information. Cameron Ashley's Mem. in Supp. of Stipulated J.

Denying Dischargeability, Ex. 2 at 2. In conclusion, Cameron

made the following request of the bankruptcy court:

Therefore, this Court should review the settlement

and approve the settlement under the circumstances. 

This Court could also seek to impose reasonable

conditions on the settlement, such as an additional

notice that creditors or the trustee will be allowed to

substitute by a specific date. Such a condition is not

required and the Court should hesitate to impose it

because no other creditor nor the trustee has objected

or sought to be substituted despite the disclosure of

the terms of the settlement or the bases for the

claims.

Cameron Ashley's Mem. in Supp. of Stipulated J. Denying

Dischargeability at 13.

On October 4, 2005, the hearing resumed with counsel for

Cameron and the Greshams, respectively, and a representative of

the U.S. Trustee present. Again, no evidence was received. The

bankruptcy judge heard argument from counsel for Cameron. Upon

questioning by the bankruptcy judge, counsel for the Greshams

informed him that the Greshams would not conclude a settlement

unless the objection to the discharge of the Greshams was

dismissed as part of the settlement. The representative of the

U.S. Trustee informed the bankruptcy judge that the U.S. Trustee

"opposes the settlement of this case based on public policy

reasons." Tr. of Oct. 4, 2005, hearing at 19.

 

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The comments of the bankruptcy judge during the October 4

session suggest that he did not have an inflexible policy of not

approving a settlement of a § 523 action that was joined by the

creditor with a § 727 action. Tr. of Oct. 4, 2005, hearing at 3-

4, 19-20, 23-24. The judge took the matter under advisement. 

F. The Bankruptcy Judge Denies Cameron's Motion.

By letter memorandum dated November 30, 2005, the bankruptcy

judge informed the parties that he was denying Cameron's motion

without prejudice to settlement of the adversary proceeding "on a

basis beneficial to all creditors." Nov. 30, 2005, letter mem.

at third page. The bankruptcy judge summed up his reasons for

the denial by saying:

To allow a creditor to use freely a right shared

by all estate creditors to persuade a debtor to settle

with just that creditor would destroy the delicate

system of checks and balances respecting the rights

under the Bankruptcy Code of debtors and creditors. 

Section 727 may be invoked by creditors because a

trustee may lack the economic resources to seek denial

of a debtor's discharge, whereas a creditor may have

the economic incentive - and peculiar knowledge -

necessary to pursue such a claim. But § 727 also poses

the most potent threat to a debtor's fresh start. See

State Bank of India v. Chalasani (In re Chalasani), 92

F.3d 1300, 1309 (2d Cir. 1996). Allowing use of that

threat by a creditor for its own advantage could lead 

to serious abuses surely not intended by Congress. Cf.

18 U.S.C. § 152(6).

Id. In the course of the letter memorandum, the bankruptcy judge

noted that he has allowed settlements in proceedings where claims

under both §§ 523 and 575 have been asserted, but only in limited

circumstances, such as when the "§ 727 portion of the suit would

survive and be pursued by another party." Id. at second page.

 

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On December 15, 2005, the bankruptcy judge issued an order

denying Cameron's motion. The entire text of the order is as

follows:

On October 4, 2005, the Court held a hearing on

Wm. Cameron & Co.'s Motion to Approve Judgment Denying

Dischargeability of Debt and Notice of Hearing. The

issue presented is whether a creditor-plaintiff, having

commenced suit against a debtor under 11 U.S.C. §523

and/or 727, may settle the suit for post-petition

consideration from the debtor that benefits only the

plaintiff-creditor. Having found that the only benefit

of the proposed settlement to the estate and creditors

other than the creditor-plaintiff is the withdrawal of

the creditor-plaintiff's claim, the Court hereby

ORDERS that Wm. Cameron & Co.'s motion is denied

without prejudice to settlement of this adversary on a

basis beneficial to all creditors; the Court further

ORDERS that the letter memorandum from the Court

dated November 30, 2005 [docket entry 22] shall be

incorporated by reference into this order.

Order Denying Mot. to Approve J. Denying Dischargeability of Debt

at 1-2. 

II.

Cameron's Motion for Leave to

Appeal and Responses Thereto

The text of Cameron's motion for leave to appeal is devoted

primarily to argument and authorities in support of the issues

Cameron would raise on appeal if leave to appeal from the

bankruptcy court's denial of Cameron's motion to approve the

settlement were to be granted. Cameron defined the main issues

that it would present on the appeal as follows:

1. Whether an adversary proceeding containing an

objection to dischargeability of a debt pursuant to

§523 and an objection to discharge pursuant to §727 can

be settled and if the §523 claim is settled by a

stipulation for judgment of non-dischargeability of the

 

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debt, payment going to only the objecting creditor and

the §727 claim dismissed.

2. Whether a per se practice denying a

stipulation for judgment of nondischargeability of a

debt pursuant to §523 and the dismissal of claims under

§§727(A) [sic], 727(A)(3) [sic] and 727(A)(4) [sic] is

appropriate.

Mot. for Leave to Appeal at 3. 

The Greshams responded to the motion for leave, saying that

since they "did sign the settlement agreement, they do not oppose

the Motion to Appeal filed by [Cameron]." Unopposed Resp. By

Defendants/Appellees to Plaintiff/Appellant's Mot. for Leave to

File Appeal at 2. The U.S. Trustee responded that not only does

he not oppose the motion for leave to appeal, he encourages the

grant of the motion by saying that "a determination of the issue

on appeal would assist in resolving the underlying adversary

proceeding between Cameron and the [Greshams]." U.S. Trustee's

Resp. to Mot. for Leave to Appeal at 3.

III.

Analysis

During a telephone conference the court conducted on May 3,

2006, with counsel for Cameron and the Greshams, respectively,

and a representative of the U.S. Trustee present, the court

expressed the tentative conclusion that the motion for leave

should be denied. Upon further study, the court has concluded

that it should be granted. 

At the outset, the court notes its concurrence with the

litigants that the ruling of the bankruptcy court in question is

interlocutory, see In re Tidewater Group, Inc., 734 F.2d 794, 796

 

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Title 28 U.S.C. § 1292(b), which governs appeals of

interlocutory orders from district courts to circuit courts of

appeals, provides:

When a district judge, in making in a civil action an

order not otherwise appealable under this section, shall

be of the opinion that such order involves a controlling

question of law as to which there is substantial ground

for difference of opinion and that an immediate appeal

from the order may materially advance the ultimate

termination of the litigation, he shall so state in

writing in such order. . . .

12

(11th Cir. 1984); In re Merl's, Inc., 481 F.2d 1016, 1018 (9th

Cir. 1973), with the consequence that for there to be an appeal

leave would have to be granted, see 28 U.S.C. § 158(a)(3)

(authorizing a district court to hear appeals with leave of court

from interlocutory orders and decrees of the bankruptcy judge). 

Due to the absence in 28 U.S.C. § 158(a)(3) of a criteria to

assist district courts in determining when to grant leave to

appeal from an interlocutory order, the court can look to the

language of 28 U.S.C. § 1292(b)3 for guidance. See Watson v.

Boyajian, 309 B.R. 652, 659 (1st Cir. B.A.P. 2004), aff'd 2005

U.S. App. LEXIS 4857 (1st Cir. 2005). 

The court has concluded that the appeal will present a

controlling question of law as to which there is substantial

ground for difference of opinion. Though the bankruptcy judge's

comments concerning the legal principles he thought applicable to

the matter of whether the proposed settlement should be approved

do not appear to be entirely consistent, one thing that comes

through quite clear is that the bankruptcy judge concluded that

he could not approve the settlement because the only benefit the

 

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bankruptcy estate and other creditors would receive from the

settlement would be the withdrawal of Cameron's claim from

consideration in the distribution of the bankrupt estate. The

bankruptcy judge's view of the limits of his discretion in

approving a proposed settlement of the kind presented to him by

the Greshams and Cameron is not without judicial precedent. See,

e.g., In re De Armond, 240 B.R. 51, 55 (Bankr. C.D. Cal. 1999);

In re Moore, 50 B.R. 661, 664 (Bankr. E.D. Tenn. 1985) (stating

that: "Tying withdrawal of objections to discharge to the

settlement of other actions is contrary to public policy. Under

no circumstances, not even where the intent is innocent, may a

debtor purchase a repose from objections to discharge.").

As was noted in the opinion in In re De Armond, the court

decisions have presented three different approaches to whether

settlement of combined claims under §§ 523 and 727 should be

approved. 240 B.R. at 55-60. The In re De Armond court

concluded that the majority view is that a § 727 claim can be

settled where the terms of the settlement are fair and equitable

and in the best interests of the estate. Id. at 56. However,

that court narrowly interpreted the majority view when it reached

the following conclusion:

Where a creditor brings claims against a debtor

under both § 727 and § 523, the plaintiff may not

settle the claims by dismissing the § 727 claim and

taking payment individually on the § 523 claim. Such

conduct violates the fiduciary duties to the other

creditors that the plaintiff has undertaken in

asserting the § 727 claim. The fiduciary duty

violation and the resulting tainted settlement can only

be cured by turning the settlement over to the trustee

for distribution to all creditors.

 

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Id. at 60.

Such a restrictive view of when a proposed settlement should

be approved does not seem to give proper weight to the policy of

encouraging settlement, or agreed resolutions, of disputes in

bankruptcy proceedings. See In re Mavrode, 205 B.R. 716, 719

(Bankr. D.N.J. 1997) (expressing the rule that "[s]ettlements are

generally favored in bankruptcy proceedings, in that they provide

for an often needed and efficient resolution of the bankruptcy

case.").

A persuasive argument can be made that the reasoning in the

Mavrode case should be followed in the instant action, and that

the Mavrode outcome provides an acceptable guide for resolving

the settlement dispute in this case. The settlement between the

creditor and the debtor in Mavrode was very similar to the

proposed settlement here. The creditor filed an adversary

proceeding objecting under § 727 to the debtor's discharge. To

avoid the expense and risk of litigation, the creditor and the

debtor agreed to settle both the objection to discharge and the

creditor's claim by providing that the debtor's son would supply

funds to make payment to the creditor over a period of months,

and that, in exchange, the creditor would seek dismissal of his

action challenging the discharge. In the course of approving the

settlement, the court thought important to note that all funds to

be used in the settlement were non-estate funds. Although the

trustee and the other creditors were served with notice of the

settlement, no party objected to the settlement or asked to be

 

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substituted for the creditor in pursuit of the objection to the

debtor's discharge. The Mavrode court took the realistic view

that the entire creditor body would benefit from the settlement,

explaining:

Since the money will be paid not out of the estate, but

from a separate outside source, the creditors will not

only not be injured by the proposed settlement, but

would benefit from it if there were to be a dividend

from which the plaintiff's claim would be excluded.

Id. at 721. The court gave particular significance to the

failure of any other creditor to offer to step in to prosecute

the § 727 action, explaining:

The creditors as well have been afforded ample time to

object to the settlement and supplant themselves as

plaintiff in order to prosecute the original

plaintiffs' claim. Given the fact that the creditors

have chosen not to do so, there would be no benefit

inured to the estate in requiring further litigation of

the claim.

Id. at 722.

In the instant action, the proposed settlement does not

contemplate that money from the bankruptcy estate will be used in

payment of Cameron's claim--rather, the payment proceeds are to

be from post-petition funds of the Greshams. Thus, the other

creditors will not be injured by the proposed settlement. 

Instead, they will benefit from it because Cameron's rather

significant claim will be excluded from the liquidation

distribution. As was true in Mavrode, the creditors here were

afforded ample opportunity to object to the proposed settlement

and ask to be substituted as plaintiff as to the § 727 claim, but

none did so. There appears to be no valid reason why the

 

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proposed settlement here should not be approved as it was in

Mavrode. See also In re Levine, 287 B.R. 683 (Bankr. E.D. Mich.

2002); In re Hass, 273 B.R. 45 (Bankr. S.D.N.Y. 2002); In re

Hayden, 246 B.R. 795 (Bankr. D.S.C. 1999); In re Margolin, 135

B.R. 671 (Bankr. D. Colo. 1992); In re Short, 60 B.R. 951 (Bankr.

N.D. La. 1986). 

The appearance in this case is that Cameron made a goodfaith decision to assert both a claim for nondischargeability

under § 523 and an objection to discharge under § 727. Both the

Greshams and Cameron decided that it would be financially

beneficial if they resolved the disputes by compromise. 

Consistent with the instructions they received from the

bankruptcy judge in his April 18, 2005, order, they considered

the possibilities of a settlement, and reached a settlement

agreement that was presented to the bankruptcy court for

approval.

The filing by Cameron of the § 727 action did not prejudice

the bankruptcy estate or the creditors. It benefitted them by

putting on record facts that might be used to oppose the

discharge of the Greshams. Nor did Cameron and the Greshams take

action harmful to the other creditors when they reached an

agreement that contemplated dismissal of the § 727 action if the

bankruptcy court were to approve it. Presumably the creditors,

after receiving notice of the proposed settlement, chose not to

object because they concluded either that they simply did not

want to incur the expense of pursuing such an action or that such

 

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an action did not have enough potential merit to justify its

pursuit. Under those circumstances, there does not appear to be

good reason to force Cameron to continue to pursue the action to

its financial detriment. Rather, the reasonable course would

seem to be to approve the settlement so that the bankruptcy

estate and the other creditors would benefit from the elimination

of Cameron and the rather significant debt owed to it from the

liquidation process. Moreover, a settlement of the § 523(a)

action would be beneficial to all concerned because it would

eliminate the expense of litigating that action and would serve

the salutary goal of eliminating the need for the bankruptcy

judge to devote further time and attention to that controversy. 

The views expressed by the court above necessarily are

tentative. They have been expressed for the purpose of

articulating why the court has concluded that the 28 U.S.C.

§ 1292(b) standard has been met. For the reasons stated above,

the appeal Cameron proposes to pursue involves a controlling

question of law as to which there is substantial ground for

difference of opinion. The court concurs with Cameron and the

U.S. Trustee that an immediate appeal from the bankruptcy judge's

December 15, 2005, order denying Cameron's motion for approval of

the settlement will materially advance the ultimate termination

of the adversary proceeding in which the order was entered.

Therefore,

The court ORDERS that Cameron's motion for leave to appeal

be, and is hereby, granted, and that Cameron may take on a timely 

 

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basis the steps necessary and appropriate to pursue an appeal

from the bankruptcy judge's December 15, 2005, order.

SIGNED May 26 , 2006.

 /s/ John McBryde 

JOHN McBRYDE

United States District Judge

 

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