IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 11-40301

Summary Calendar

In the Matter of: AMERICAN RICE, INC.,

Debtor.

-------------------------------------

SANDBURG FINANCIAL CORP.,

Appellant,

versus

AMERICAN RICE, INC.,

Appellee.

Appeal from the United States District Court

for the Southern District of Texas

USDC Case No. 2:10-CV-280

Before KING, SMITH, and GRAVES, Circuit Judges.

PER CURIAM:*

AppellantSandburgFinancial Corporation ("SandburgFinancial") appeals

from an order of the United States District Court for the Southern District of

United States Court of Appeals

Fifth Circuit

F I L E D

September 22, 2011

Lyle W. Cayce

Clerk

 Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not *

be published and is not precedent except under the limited circumstances set forth in 5TH CIR.

R. 47.5.4.

Case: 11-40301 Document: 00511611034 Page: 1 Date Filed: 09/22/2011
No. 11-40301

Texas (Case No. 2:10-cv-00280), affirming the bankruptcy court's finaljudgment

1

(Bankr. Adv. Proc. 98-21254-C-11). Both the bankruptcy court and the district

court issued detailed opinions. See In re American Rice, Inc., No. 98-21254-C-11,

Dkt. No. 1494 (Bankr. S.D. Tex. April 27, 2010), aff'd sub nom. In re Sandburg

Financial Corp., No. 2:10-cv-00280, Dkt. No. 7 (S.D. Tex. Feb. 11, 2011). 

Specifically, Sandburg Financial challenges the district court's order as to the

enforceability of certain contracts between Sandburg Financial and

debtor-appellee American Rice, Inc. ("American Rice"). For the reasons stated

herein, the district court's judgment is AFFIRMED.

I. Essential Facts and Procedural History

The underlying matter involves a 1988 commercial real estate transaction

in California. Sandburg Financial's predecessor-in-interest, Barrington Capital

Corp. ("Barrington Capital"), contracted with Hansen foods for Barrington

Capital to purchase Hansen's facility in Los Angeles County and lease it back to

Hansen. At the time, ERLY Industries, Inc. ("ERLY"), a very large foods

company, was interested in purchasing Hansen and had loaned Hansen over $20

million. In connection with and as a prerequisite to the real estate transaction,

Barrington Capital and its lender, GMAC, required ERLY, several of its

affiliates, as well as its chairman and Chief Executive Officer, Gerald Murphy,

personally, to guarantee to pay Barrington Capital any damages incurred or

judgments obtained in connection with the real estate transaction. Sandburg

Financial obtained a judgment against ERLY and entities related to American

Rice, entered in State of California Superior Court on April 24, 1998 (Sandburg

Financial Corp. et al v. ERLY Industries, et al.) (the "Judgment"). American

Rice commenced its Chapter 11 bankruptcy on August 11, 1998 (the "Petition

A district court has jurisdiction over a bankruptcy appeal under 28 U.S.C. § 158(a)(1), 1

and in reviewing the findings of a bankruptcy court, a district court acts in an appellate

capacity. See Perry v. Dearing, 345 F.3d 303, 308–09 (5th Cir. 2003).

2

Case: 11-40301 Document: 00511611034 Page: 2 Date Filed: 09/22/2011
No. 11-40301

Date") in the United States Bankruptcy Court for the Southern District of Texas. 

On July 7, 1999, the bankruptcy court issued its order confirming American

Rice's plan of reorganization pursuant to Chapter 11 ("Confirmation Order").

A. Contracts

Sandburg Financial seeks to collect approximately $19 million from

American Rice, which it claims to be due based upon contracts entered into over

the course of several years, both before and after American Rice filed for Chapter

11 bankruptcy. These contracts fall into three categories: (1) pre-petition

contracts (prior to the Petition Date), (2) post-petition contracts (between the

Petition Date and the Confirmation Order), and (3) post-confirmation contracts

(after the Confirmation Order) – the only contracts relevant to the issue here.

1. Post-Confirmation Order Covenant Not to Sue Contract

American Rice and related entities entered into a covenant not to sue

contract with Sandburg Financial on August 9, 1999, after confirmation of the

bankruptcy plan. Under this contract, American Rice stated that it was a new

contract to pay any new claims Sandburg Financial may have against American

Rice. In exchange, Sandburg Financial agreed not to sue or assert any new

claims against American Rice and related entities prior to June 30, 2008, nor to

do any discovery prior to that time.

2. Post-Confirmation Order Indemnity and Release Contract

On November 22, 1999, American Rice and related entities entered into

an indemnity and release contract with Sandburg Financial. This contract

similarly provided that American Rice and related entities agreed and

guaranteed to pay after June 30, 2008, any damages Sandburg Financial incurs

and any judgment Sandburg Financial obtains. American Rice also "reaffirmed"

its guaranty to pay after June 30, 2008 all of the obligations of any of its related

entities to Sandburg Financial. In exchange, Sandburg Financial again agreed

not to execute upon or enforce any judgment, not to enforce any guaranty

3

Case: 11-40301 Document: 00511611034 Page: 3 Date Filed: 09/22/2011
No. 11-40301

contracts, and not to sue or assert any claims against American Rice prior to

June 30, 2008.

B. State Court Lawsuit

The agreed-upon tolling period for the enforcement of the Judgment ended

on June 30, 2008. Thereafter, on October 23, 2009, Sandburg Financial filed suit

inTexas state court against American Rice (the "Post Confirmation Complaint"),

seeking to collect amounts allegedly due from American Rice, Rice Corporation

of Haiti, Comet Rice of Puerto Rico, Inc., and Comet Ventures, Inc. under the

Pre-Petition Contracts only, including amounts due under the Judgment.

C. Reopening of Chapter 11 Case and District Court Procedures

After Sandburg Financial filed the Post Confirmation Complaint,

American Rice filed a motion on November 24, 2009 to reopen the Chapter 11

case and filed a "Motion for Order that Sandburg Financial Corporation Appear

and Show Cause as to Why Sandburg Financial Should Not be Found in

Contempt and Sanctioned for Violations of the Discharge Injunction." The

district court granted the motions on November 24, 2009. Appellee later moved

for summary judgment on the motion (on January 27, 2010), arguing that the

Post Confirmation Complaint violated the district court's discharge injunction

and Confirmation Order.

The district court heard the motion on March 8, 2010, and issued an

opinion on April 27, 2010, finding that Sandburg Financial's Post Confirmation

Complaint violated the discharge injunction and Confirmation Order. 

Specifically, the district court found: (a) Sandburg Financial's claim based on

the pre-petition contracts and post-petition contracts was discharged by the

Confirmation Order, (b) the post-petition contracts and post-confirmation

contracts are unenforceable, and (c) the Post-Confirmation Complaint violates

the court's discharge injunction.

4

Case: 11-40301 Document: 00511611034 Page: 4 Date Filed: 09/22/2011
No. 11-40301

The district court entered final judgment on August 10, 2010, finding that

Sandburg Financial's claims were discharged during the bankruptcy, and that

Sandburg Financial was permanently barred from pursuing the claims against

American Rice. The claims were dismissed with prejudice.

II. Issue on Appeal

Sandburg Financial argues that the two post-confirmation contracts were

not discharged by the Confirmation Order of American Rice's reorganization

plan, and are thus valid and enforceable, because the contracts represent new

contracts supported by newand independent consideration. Sandburg Financial

does not appeal any findings with respect to the pre- or post-petition contracts. 

Therefore, the sole issue on appeal is whether the district court erred in finding

the two post-confirmation contracts between Sandburg Financial and American

Rice void and unenforceable, because each of the contracts failed to comply with

11 U.S.C. § 524(c) of the United States Bankruptcy Code.

III. Standard of Review

This court has jurisdiction over appeals of “all final decisions of the district

courts", including final judgments in bankruptcy appeals. 28 U.S.C. § 1291;

Conn. Nat'l Bank v. Germain, 503 U.S. 249, 253 (1992). Fact findings of the

district court and the bankruptcy court are reviewed under a clearly erroneous

standard, and issues of law are reviewed de novo. U.S. ex rel. FCC v. GWI PCS

1, Inc., 230 F.3d 788, 799-800 (5th Cir. 2000) (citing In re Berryman Products,

Inc., 159 F.3d 941, 943 (5th Cir. 1998)).

IV. Analysis

The United States Bankruptcy Code, 11 U.S.C. § 524(c), governs the

enforcement of a contract between a creditor and a debtor involving

dischargeable debt (also known as a "reaffirmation contract"), and states: 2

 The district court concluded that the debt at issue here (American Rice's guarantee 2

of payment of the Judgment under the Pre- and Post-Petition Agreements) was dischargeable

5

Case: 11-40301 Document: 00511611034 Page: 5 Date Filed: 09/22/2011
No. 11-40301

(c) An agreement between a holder of a claim and the debtor, the

consideration for which, in whole or in part, is based on a debt that

is dischargeable in a case under this title is enforceable only to any

extent enforceable under applicable nonbankruptcy law, whether or

not discharge of such debt is waived, only if-

(1) such agreement was made before the granting of the

discharge under section 727, 1141, 1228, or 1328 of this title [11

USCS § 727, 1141, 1228, or 1328];

(2) the debtor received the disclosures described in subsection

(k) at or before the time at which the debtor signed the agreement;

(3) such agreement has been filed with the court and, if

applicable, accompanied by a declaration or an affidavit of the

attorney that represented the debtor during the course of

negotiating an agreement under this subsection, which states that--

(A) such agreement represents a fully informed and

voluntary agreement by the debtor;

(B) such agreement does not impose an undue hardship

on the debtor or a dependent of the debtor; and

(C) the attorney fully advised the debtor of the legal

effect and consequences of--

(i) an agreement of the kind specified in this

subsection; and

(ii) any default under such an agreement;

(4) the debtor has not rescinded such agreement at any time

prior to discharge or within sixty days after such agreement is filed

with the court, whichever occurs later, by giving notice of rescission

to the holder of such claim;

(5) the provisions of subsection (d) of this section have been

complied with; and

(6) (A) in a case concerning an individual who was not

represented by an attorney during the course of negotiating an

agreement under this subsection, the court approves such

agreement as--

(i) not imposing an undue hardship on the debtor

or a dependent of the debtor; and

(ii) in the best interest of the debtor.

(B) Subparagraph (A) shall not apply to the extent that

such debt is a consumer debt secured by real property.

and was in fact discharged.

6

Case: 11-40301 Document: 00511611034 Page: 6 Date Filed: 09/22/2011
No. 11-40301

"The reaffirmation rules are intended to protect debtors from

compromising their fresh start by making unwise contracts to repay

dischargeable debts. Because of the danger that creditors may coerce debtors

into undesirable reaffirmation contracts, they are not favored under the

Bankruptcy Code and strict compliance with the specific terms in Section 524 is

mandatory. A reaffirmation contract which does not comply fully with Section

524 is void and unenforceable." Republic Bank, N.A. v. Getzoff (In re Getzoff),

180 B.R. 572, 180 B.R. 572, 574 (B.A.P. 9th Cir. 1995) (citations omitted); Chase

Auto. Fin., Inc. v. Kinion (In re Kinion), 207 F.3d 751, 756 (5th Cir. 2000)

(reaffirmation contract "flawed" under 11 U.S.C. § 524(c) is "unenforceable").

Here, Sandburg Financial argues that the district court erred in finding

the post-confirmation contracts to be unenforceable. This court holds that the

district court did not err in finding that the post-confirmation contracts failed to

comply with the requirements of 11 U.S.C. § 524(c). Specifically, (1) the

post-confirmation contracts were not made before the granting of discharge, (2)

the post-confirmation contracts do not contain the disclosures required by 11

U.S.C. § 524(c), and (3) the post-confirmation contracts were not filed with the

court thus precluding enforcement pursuant to 11 U.S.C. § 524(c). See Kinion,

207 F.3d at 756.

Sandburg Financial further argues that the post-confirmation contracts

are new contracts, supported by new and independent consideration, rather than

reaffirmation contracts. Sandburg Financial cites to a few decisions to have

found an exception to 11 U.S.C. § 524(c) for post-confirmation contracts

supported by new and independent consideration, and thus considered such

contracts to be enforceable. Watson v. Shandell (In re Watson), 192 B.R. 739

(B.A.P. 9th Cir. 1996); In re Petersen, 110 B.R. 946 (Bankr. D. Colo. 1990); In re

Button, 18 B.R. 171 (Bankr. W.D.N.Y. 1982); Minster State Bank v. Heirholzer

7

Case: 11-40301 Document: 00511611034 Page: 7 Date Filed: 09/22/2011
No. 11-40301

(In re Heirholzer), 170 B.R. 938 (Bank. N.D. Oh. 1994); Antonino v. Kenny (In re

Antonino), 241 B.R. 883 (Bankr. N.D. Ill. 1999).

However, the cases upon which Sandburg Financial relies have been

widely and seriously questioned since their issuance. See, e.g., Liptz & Roberts,

Chtd. Pension Plan Trust v. Stevens (In re Stevens), 217 B.R. 757, 761 (Bankr.

D. Md. 1998) ("[T]he Heirholzer court take[s] the opposite approach to § 524(c)

than that which is intended by Congress"); In re Zarro, 268 B.R. 715, 722

(Bankr. S.D.N.Y. 2001) ("To the extent [creditor's] authorities suggest that a

post-petition contract to pay a discharged debt is valid simply because the

creditor offers something extra, I join the growing chorus that questions their

correctness."); In re Arnold, 206 B.R. 560, 566 (Bankr. N.D. Ala. 1997) ("The

Court believes [Heirholzer] and [Button] are wrong.").

Many courts have in fact considered and rejected the "new and

independent consideration" exception. One court has stated, "[i]f the

consideration for the [contract] is based, in whole or in part, on a dischargeable

debt, then the contract must comply with § 524. Therefore, even if it could be

argued that the [contract] was based upon new consideration, this Court finds

that the [contract] was at least based in part upon the discharge debt and

therefore must comply with § 524 to be valid." In re Cruz, 254 B.R. 801, 815

(Bankr. S.D.N.Y. 2000); see also TD BankNorth, N.A. v. Ewing (In re Ewing), 365

B.R. 347, 350 (Bankr. D. Mass. 2007) ("[T]he forbearance contract . . . was a form

of ‘reaffirmation contract.' Such contracts, though they arise post-petition, are

not enforceable unless statutorily prescribed procedures are followed with respect

to those contracts.") (emphasis added). Another court has explained: "Section

524(c) is not concerned with the consideration that the debtor received; instead,

it invalidates non-complying contracts where any part of the consideration given

by the debtor involves his promise to pay a discharged debt. Every reaffirmation

contract involves some element of new consideration. Otherwise, the debtor

8

Case: 11-40301 Document: 00511611034 Page: 8 Date Filed: 09/22/2011
No. 11-40301

would not agree to pay the discharged debt. If new consideration saved a

non-complying reaffirmation contract, little would remain of the protection

afforded by § 524(c)." Zarro, 268 B.R. at 720-21 (emphasis added) (citations

omitted). The one Texas court to have discussed the exception and considered

the cases upon which Sandburg Financial relies in fact declined to follow those

cases. Lindale Nat'l Bank v. Artzt, 145 B.R. 866 (Bankr. E.D. Tex. 1992). That

court reasoned, "[a]s enacted, § 524(c) is purposefully rigorous in application. 

This Court agrees . . . that supporting [creditor's] position would be counter to

the policy goals of § 524(c), in protecting debtors from creditors and in many

instances from their own improvident actions." Id. at 870.

Here, given the lack of authority in this court permitting enforcement of

the post-confirmation contracts at issue under a new and independent

consideration exception and the significant authority to the contrary, this court

concludes that the post-confirmation contracts would be enforceable only upon

compliance with 11 U.S.C. §524(c). The district court did not err when it

required that the Post-Confirmation Contracts comply with 11 U.S.C. § 524(c). 

The district court properly noted that the Post-Confirmation Contracts

purported to reaffirm American Rice's pre-confirmation debt, which was

discharged, to Sandburg Financial. The district court correctly found that the

post-confirmation contracts did not satisfy the requirements of 11 U.S.C. §

524(c).

Notwithstanding the lack of authority to support a "new and independent

consideration" exception to 11 U.S.C. § 524(c), the district court also considered

whether the post-confirmation contracts could be enforceable in light of such an

exception, were it viable. Sandburg Financial argues that its new consideration

was its contract to forbear on executing the Judgment against American Rice's

subsidiary, Rice Haiti, since it was unclear whether Rice Haiti was an intended

beneficiary of a pre-petition contract. As the district court correctly recognized,

9

Case: 11-40301 Document: 00511611034 Page: 9 Date Filed: 09/22/2011
No. 11-40301

Sandburg Financial's consideration in the post-confirmation contracts included

the same promise to forbear on enforcement of the Judgment as contained in the

previous contracts.

The district court did not err in concluding that the post-confirmation

contracts were not supported by new and independent consideration. Sandburg

Financial's argument relying upon the unenforceability of the pre-confirmation

contracts must also be rejected, as it would essentially allow any

post-confirmation contract to be enforceable under the proposed new and

independent consideration exception, whenever pre-discharge contracts were

declared unenforceable. These contracts would essentially be written on a clean

slate, and would always be supported by new and independent consideration. In

effect, Sandburg Financial's position, if this court accepted it, would greatly

expand the scope of a new consideration exception, and greatly diminish the

import of 11 U.S.C. § 524(c), which governs such reaffirmation contracts.

V. Conclusion

The district court did not err in finding the post-confirmation contracts

void and unenforceable. AFFIRMED.

10

Case: 11-40301 Document: 00511611034 Page: 10 Date Filed: 09/22/2011