Court Opinion

ID: 9647167
Source: CourtListenerOpinion
Date Created: 2023-08-23 13:25:26.348631+00
Date Added: 2024-06-11T18:11:46.101629
License: Public Domain

LUNDIN,
dissenting.
I have no disagreement with the Panel’s careful analysis of how collateral estoppel might operate in this adversary proceeding, but I believe the Panel has the cart before the horse: if this creditor’s prepetition Settlement and Release Agreement with' the Debtor includes an enforceable release of this § 523(a)(2) action, then it was not appropriate for the bankruptcy court to reach the merits of the creditor’s collateral estoppel argument. On summary judgment, the bankruptcy court and the Panel have resolved as a matter of law that the creditor could not have released its nondischargeability action in the prepetition settlement agreement with the Debtor. Nothing in bankruptcy law requires this result. Because I find the settlement agreement ambiguous under applicable principles of state law, I would reverse the bankruptcy court’s grant of summary judgment and remand to resolve the parties’ intent at the time of settlement.
Although Congress has legislated that a written waiver by a debtor of discharge in bankruptcy is enforceable only if executed after the petition and approved by a bankruptcy court, see 11 U.S.C. § 727(a)(10), there is no analogous provision of federal law that conditions or prohibits enforcement in bankruptcy of a creditor’s prepetition agreement to release its cause of action under § 523(a)(2). Put another way, nothing in the Bankruptcy Code interrupts the ordinary capacity of creditors under nonbankruptcy law to contract for the release of claims that are or might be nondischargeable in bankruptcy. As recognized by the Seventh and Ninth Circuits, if enforceable under state law, a creditor’s prepetition release of a potential cause of action under § 523 of the Bankruptcy Code precludes that creditor’s § 523 complaint without regard to the merits of the underlying dispute. In re West, 22 F.3d 775 (7th Cir.1994); Key Bar Invs., Inc. v. Fischer (In re Fischer), 116 F.3d 388 (9th Cir.1997).
The basis of this nondischargeability action is the fraud confessed by the Debtor in the letter attached to the Amended Settlement Agreement. That fraud predates the Settlement Agreement and there is no allegation of fraud or other misconduct in connection with the Settlement Agreement itself. That earlier fraud cannot be the basis for this § 523(a)(2) action if the Settlement Agreement released the Plaintiffs right to bring a § 523 action based on the earlier fraud. This is the horse that must be ridden by the Plaintiff before we reach the collateral estop-pel arguments addressed by the Panel.
The lengthy March 14, 1991, agreement is titled “Settlement Agreement and Release.” Its preamble refers to all pending litigation between the parties including the claims of fraud that the Debtor later confessed. The agreement contains these important statements of intent:
WHEREAS, the parties desire to fully settle, adjust and compromise any and all claims between and among them, whether alleged or not-alleged, and whether contained or not contained, in Case Number 90-1691 in the Common Pleas Court of Stark County, Ohio;_ Plaintiffs, Robert G. Schory, Jr., and Ed Schory & Sons, Inc., for their part, agree to dismiss with prejudice the action pending in Stark County Court of Common Pleas, Case Number 90-1691, and further agree to release and forever discharge Defendants, Frank P. Francis and Francis General Construction ... from any and all debts, claims, demands, damages, actions, causes of action, of any kind whatsoever, whether known, unknown or unforeseen, arising to the date of this Settlement Agreement, including without limitation any claim or interest Plaintiffs, ... may have with respect to any partnership arrangements between the parties.... The parties hereto declare that they fully understand the terms of the Settlement Agreement and Release and that the other promises and covenants exchanged between them here in are the sole consideration for this Agreement and they voluntarily accept said exchanges, said mutual promises and covenants for the purpose of making a full and final compromise, judgment and settle*394ment of all claims, debts and damages arising out of or to arise out of the disputed matter set forth above.
The Debtor executed the $130,000 “Installment Cognovit Note” required by the Agreement. When the Debtor defaulted on the Note, a “First Amendment to Settlement Agreement and Release” dated May 2, 1991, resulted. This amendment required the letter of confession discussed by the Panel. The amendment also states: “In all other respects the Settlement Agreement and Release shall remain in full force and effect.”
Under Ohio law, “[a] release of a cause of action for damages is ordinarily an absolute bar to a later action on any claim encompassed within the release.” Haller v. Borror Corp., 50 Ohio St.3d 10, 552 N.E.2d 207, 210 (Ohio 1990) (citing Perry v. M. O’Neil & Co., 78 Ohio St. 200, 85 N.E. 41 (1908)). “Whether the parties to a release actually intended it to discharge all liability is a question of fact for the trier of the facts.” Sloan v. Standard Oil Co., 177 Ohio St. 149, 203 N.E.2d 237 (1964) (paragraph two of syllabus). The Court of Appeals for this Circuit discussed Sloan and Ohio law on releases in AM International, Inc. v. International Forging Equipment Corp., 982 F.2d 989 (6th Cir. 1993):
In Sloan v. Standard Oil Co., 177 Ohio St. 149, 203 N.E .2d 237 (1964), the Ohio Supreme Court held that verbatim terms of a general release are not controlling under circumstances where the parties to a release did not actually intend to discharge all liability. The court set out the Ohio rule for avoiding releases in the syllabus to that opinion:
1.A release may be avoided where the releasor can establish by clear and convincing'evidence that it was executed by mutual mistake, as between himself and the release, of a past or present fact material to the release, as where there was a mutual mistake as to the existence of any injury of the releasor, unless it appears further that the parties intended that claims for all injuries, whether known or unknown at the time of the execution of the release, be relinquished.
2. Whether the parties to a release actually intended to discharge all liability is a question of fact for the trier of the facts.
3. The terms of a release cannot circumvent the powers of equity to correct mistakes.
Id. at 149, 203 N.E.2d at 238 (citation omitted). The court went on to point out that “[t]he dispositive inquiry in each case is what did the parties intend? ... Because intent is a question of fact, it is necessary in each case to examine all the circumstances surrounding the execution of the release.” Id. at 152-53, 203 N.E.2d at 240.
The Ohio Supreme Court set out factors to be considered in determining the intent of the parties:
Certain factors have been judicially recognized as aids whereby the intent of the parties at the time the release was executed may be determined. Stated favorably to the party seeking rescission or cancellation, these factors are: The absence of bargaining and negotiating leading to settlement; the releasee is clearly liable; absence of discussion concerning [the type of injuries suffered]; the contention that the injuries were in fact unknown at the time the release was executed is reasonable; an inadequate amount of consideration received compared with the risk of the existence of unknown injuries; haste by the releasee in securing the release; and the terms of the release exclude the injuries alleged.
Id. at 153, 203 N.E.2d at 240 (citations omitted).
AM Int’l, 982 F.2d at 995-96 (alterations in original).
Because both the bankruptcy court and the Panel mistakenly resolved the effect of the Settlement and Release Agreement as a matter of law against the Debtor, neither addressed the fact questions the Ohio Supreme Court considers outcome determinative of whether the Plaintiff released its right to bring this § 523 action. Was an action to determine the dischargeability in bankruptcy of the debt created by this Debtor’s fraud a “known, unknown or unforeseen” cause of *395action at the time of the Settlement and Release Agreement? Was the confession attached to the amended agreement intended by the parties to give the Plaintiff a slam-dunk nondischargeability action in the event of bankruptcy; or, was the confession “a pound of flesh” extracted for the psychic compensation of the Plaintiff? Nothing is known of the respective bargaining positions of these parties, their knowledge of the facts or other “circumstances surrounding the execution” of this release.
Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979), does not require the result reached by the Panel. Brown is a res judicata or claim preclusion case. Brown holds that a prebankruptcy state court judgment that does not find fraud does not preclude the creditor’s claim that the judgment debt is nondisehargeable under (the predecessor to) § 523(a)(2). Brown does not purport to resolve the question whether a creditor (with or without a judgment) is bound by its voluntary prebankruptcy release of a fraud claim. The seminal circuit court cases addressing the effect of a prebankruptcy release predate Brown1 and (appropriately) are not mentioned in Justice Blackmon’s comprehensive list of the res judicata cases at issue in Brown. See Brown, 442 U.S. at 130-31 & n. 4, 99 S.Ct. 2205. Both the Seventh and Ninth Circuits have recognized that the claim preclusion principles in Brown are not determinative of whether a creditor has released its § 523(a)(2) action. See Fischer, 116 F.3d at 391 (“Brown v. Felsen ... [does] not control our case, which involves a voluntary agreement between two parties that created a novation.”); West, 22 F.3d at 778 (“The holding in Brown is immaterial.... Brown addressed the preclusive effect of a state court judgment, not a creditor’s voluntary release of a debtor.”).
The factors that determine whether a judgment is entitled to claim preclusion are different than the factors that determine the effect of a release. Claim preclusion bars (re)litigation of causes of action that were or could have been raised in prior litigation. Rivers v. Barberton Bd. of Ed., 143 F.3d 1029, 1031 (6th Cir.1998). In contrast, the effect of a release is tightly bounded by the actual intent of the parties. Claim preclusion requires a final judgment on the merits by a court of competent jurisdiction. Id. Releases typically are found in contracts that may or may not be .incorporated into a court judgment and which do not depend for their legal effect on the validity of any judgment.2
The Panel’s counter-intuitive notion that incorporation of a release into a prebank-ruptcy judgment voids the release seems to flow from a mistaken conclusion that release analysis and preclusfon principles are mutually exclusive. A voluntary release incorporated into a state court judgment would appropriately be interpreted in subsequent dischargeability litigation under principles of claim preclusion (Brown) and issue preclusion (Grogan)3 and analyzed under contract principles.
The Panel cites policy to support its rule that release of a nondischargeability action is not enforceable. Public policy favors the opposite rule: to encourage nonbankruptcy dispute resolution, the intent of the parties should control whether a prepetition settlement agreement precludes § 523(a)(2) litigation. See West, 22 F.3d at 778. The Panel’s rule removes a major incentive for debtors to settle with creditors before bankruptcy and imposes a previously unrecognized “bankruptcy penalty.” A debtor willing to give valuable collateral to a prebankruptcy victim in exchange for release of potentially nondis-chargeable personal liability bargains for a worthless promise under the Panel’s rule. And what about performance by the debtor? A rule that the voluntary release of § 523(a)(2) claims is not enforceable in bankruptcy means a creditor can accept performance of a settlement agreement secure in the knowledge that a bankruptcy petition *396absolves the creditor of its obligations and frees the creditor to seek a nondischargeable personal judgment against the debtor in excess of what it willingly accepted in full satisfaction for the wrong done. In contrast, enforcement of prebankruptcy releases in § 523(a)(2) litigation does not threaten a windfall for debtors (or creditors); it only reinforces the actual intent and expectations of the parties.
Congress has acted in a related context to impose a public policy limitation on the pre-bankruptcy substitution of a dischargeable obligation for a nondischargeable debt. It was anecdotally demonstrated that before bankruptcy some taxpayers used credit cards to pay income taxes-substituting a discharge-able debt, the charge on a credit card, for a nondischargeable claim, the prepetition taxes. See The Bankruptcy Amendments Act of 1993: Hearings on S. 5&0 Before the Sub-comm. on Courts and Admin. Prac. of the Comm, on the Judiciary, 103d Cong. 265 (statement of the American Bankers Ass’n), 370-71 (statement of Mastercard Int’l Inc. and Visa U.S.A. Inc.) (March 31, 1993). In 1994, Congress enacted 11 U.S.C. § 523(a) (14) to bar the dischargeability in bankruptcy of ordinary loans “incurred to pay a tax to the United States that would be nondischargeable pursuant to [§ 523(a)(1) ].” Bankruptcy Reform Act of 1994, Pub.L. No. 103-394, § 221, 108 Stat. 4106, 4129 (1994). Congress could but has not enacted an exception to discharge in bankruptcy for debts “incurred to pay a claim that would be non-dischargeable pursuant to § 523(a)(2).” The judiciary typically refrains from creating new exceptions to discharge.

. See Maryland Casualty Co. v, Cushing, 171 F.2d 257 (7th Cir.1948); Gonder v. Kelley, 372 F.2d 94 (9th Cir.1967).

. For example, a prebankruptcy judgment incorporating a release agreement entered by a court that lacked jurisdiction would not have preclu-sive effects, but the contractual release might well be separately enforceable.

.Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).