Court Opinion

ID: 9494833
Source: CourtListenerOpinion
Date Created: 2023-08-05 15:48:11.420108+00
Date Added: 2024-06-11T17:56:39.266014
License: Public Domain

TRAXLER, Circuit Judge,
dissenting.
A unanimous Supreme Court reminded us as recently as four years ago that “[t]he Bankruptcy Code has long prohibited debtors from discharging liabilities incurred on account of their fraud, embodying a basic policy animating the Code of affording relief only to an ‘honest but unfortunate debtor.’ ” Cohen v. de la Cruz, 523 U.S. 213, 217, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998) (quoting Grogan v. Garner, 498 U.S. 279, 287, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991)). To this end, “Congress intended the fullest possible inquiry” into the nature of debts for purposes of determining dischargeability. Brown v. Felsen, 442 U.S. 127, 138, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979). Because I believe the approach employed by the D.C. and Eleventh Circuits in United States v. Spicer, 57 F.3d 1152 (D.C.Cir.1995), and Greenberg v. Schools, 711 F.2d 152 (11th Cir.1983) (per curiam), ultimately accomplishes the congressionally enacted policy objective embodied in the nondis-chargeability provisions, I respectfully dissent.
I.
There are two competing views to the main issue in this case and both have much *238to commend them. The bankruptcy court adopted the approach of the Ninth and Seventh Circuits reflected in In re West, 22 F.3d 775 (7th Cir.1994), and Key Bar Invs., Inc. v. Fischer (In re Fischer), 116 F.3d 388 (9th Cir.1997) (per curiam). The analysis employed in those cases is best illustrated by the test articulated by the Ninth Circuit in Fischer: “[I]f it is shown that the [promissory] note, by express agreement is given and received, as a discharge of the original obligation or tort action, then the execution of the note extinguishes the tort action and it would be error for the court to look behind the note.” Fischer, 116 F.3d at 390 (internal quotation marks omitted); accord West, 22 F.3d at 778 (“[I]f it is shown that the [promissory] note [that was executed pursuant to the settlement] was given and received as payment or waiver of the original debt and the parties agreed that the note was to substitute a new obligation for the old, the note fully discharges the original debt, and the nondischargeability of the original debt does not affect the dis-chargeability of the obligation under the note.”). The basic rationale of these cases is that, having accepted a settlement and released the underlying tort action, the plaintiff voluntarily accepted a contract debt, which is dischargeable under the bankruptcy laws, in lieu of pursuing a potentially non-dischargeable tort debt.
The competing approach adopted by the D.C. and Eleventh Circuits in Spicer and Greenberg can be quickly illustrated by examining Spicer. In that case, John Spi-cer had been convicted of one count of interstate transportation of money obtained by fraud from the United States Department of Housing and Urban Development and had thereafter settled the government’s multiple civil claims against him. In accord with the civil settlement agreement, Spicer executed two promissory notes and the government expressly released its civil claims against him. Spicer later filed for bankruptcy protection and, relying on West, sought to have the promissory notes discharged. Addressing West directly, the D.C. Circuit declared that it could not “agree with a rule under which, through the alchemy of a settlement agreement, a fraudulent debtor may transform himself into a non-fraudulent one, and thereby immunize himself from the strictures of § 523(a)(2)(A).” Spicer, 57 F.3d at 1155. The court found the government’s release of the underlying tort action immaterial, declaring that “a fraudulent debtor may not escape nondischarge-ability, imposed as a matter of public policy by Congress ..., merely by altering the form of his debt through a settlement' agreement.” Id. at 1156. Accordingly, the court affirmed the bankruptcy court’s holding that the promissory notes executed by Spicer were not dischargeable. Id. at 1157. Thus, simply stated, the Spicer approach is a policy-based approach intended to effectuate the considered judgment of Congress.
II.
The Archers urge us to adopt the Spicer approach and allow them the opportunity to prove in bankruptcy court that Arlene Warner committed fraud against them and that the promissory note executed as part of the settlement of the state-court tort action is therefore nondischargeable under § 523(a)(2)(A). In my judgment, Supreme Court precedent strongly suggests that the Spicer approach is the correct one.
In 1979, for example, the Supreme Court decided Brown. In that case, G. Garvin Brown had been guarantor of a loan that financed Mark Paul Felsen’s business. When the creditor instituted a collection action against Brown and Fel-sen, Brown filed a counterclaim against *239Felsen alleging that Felsen had induced Brown to sign the guarantee “by misrepresentations and non-disclosures of material facts.” Brown, 442 U.S. at 128, 99 S.Ct. 2205 (internal quotation marks omitted). The suit settled and was reduced to a consent judgment indicating that Brown should have judgment against Felsen but not indicating the cause of action upon which the liability was based or whether Felsen had in fact engaged in fraud. Fel-sen subsequently filed for bankruptcy, and Brown sought to challenge in bankruptcy court the dischargeability of Felsen’s debt to him. Felsen argued that because the state-court suit had been reduced to a consent judgment and the documents evidencing that judgment did not result in a finding that he had in fact committed' fraud, res judicata barred further inquiry into the nature of the debts. Gleaning from the legislative history of the Bankruptcy Act “[s]ome indication that Congress intended the fullest possible inquiry” into the true nature of debts for purposes of determining dischargeability, the Supreme Court unanimously rejected that argument. Id. at 138, 99 S.Ct. 2205. After “careful inquiry,” the Court concluded that “the policies of the Bankruptcy Act” would best be served by allowing Brown to “submit[ ] additional evidence to prove his case.” Id. at 132, 99 S.Ct. 2205.
Twelve years after Brown, the Supreme Court was asked in Grogan to resolve a circuit split on the question of whether, in bankruptcy court, a creditor was required to prove the nondischargeability of his claim by a preponderance of the evidence or by clear and convincing evidence. The Court unanimously found that the preponderance standard best reflected the “congressional decision to exclude from the general policy of discharge certain categories of debts — such as ... liabilities for fraud,” and the Court therefore held that a creditor need only prove that his claim was nondischargeable under the preponderance standard. Grogan, 498 U.S. at 287, 111 S.Ct. 654. “We think it unlikely,” the Court declared, “that Congress, in fashioning the standard of proof that governs the applicability of these provisions, would have favored the interest in giving perpetrators of fraud a fresh start over the interest in protecting victims of fraud.” Id.
And finally, in 1998, in Cohen, a unanimous Supreme Court yet again stressed the importance of reinforcing the congressional policy objective underlying the non-dischargeability provisions. In Cohen, the Court decided that a treble damages award that was imposed as punishment for a state-court defendant’s fraudulent conduct was non-dischargeable under the fraud exception to dischargeability, rejecting the debtor’s argument that only an amount equal to the actual value obtained by fraud should be nondischargeable. Cohen, 523 U.S. at 219, 118 S.Ct. 1212. In support of its decision, the Court cited “the historical pedigree of the fraud exception, and the general policy underlying the exceptions to discharge.” Id. at 223, 118 S.Ct. 1212.
Thus, the message delivered by a unanimous Supreme Court on three separate occasions has been clear. In deciding cases dealing with the fraud exceptions to dischargeability, courts should effectuate congressional policy objectives by conducting the fullest possible inquiry into the nature of the debt and limiting relief to the honest but unfortunate debtor. The Spi-cer approach is squarely grounded in these policy interests.
Under any other approach, a defendant can completely immunize himself from § 523 by simply settling any fraud claims against him with a promise to pay, having the plaintiff release the underlying tort *240action as part of the settlement, and then filing for bankruptcy. The acceptance of the defendant’s promise to make payment should not prevent the plaintiff, upon a default by the defendant and subsequent filing of bankruptcy, from showing the bankruptcy court that the debt had its genesis in fraud. If, as the Supreme Court has declared, “the mere fact that a conscientious creditor has previously reduced his claim to judgment should not bar further inquiry into the true nature of the debt,” Brown, 442 U.S. at 138, 99 S.Ct. 2205, then I see no reason why the mere fact that a conscientious creditor has previously reduced his claim to settlement should bar such an inquiry. See Ed Schory & Sons, Inc. v. Francis (In re Francis), 226 B.R. 385, 391 (6th Cir. BAP 1998) (choosing to “follow[ ] Spicer because Brown v. Felsen compels the Spicer result”); see also Giaimo v. Detrano {In re Detrano), 266 B.R. 282, 288 (E.D.N.Y. 2001) (finding Brown “[instructive”). Moreover, because the nondischargeability provisions of the Bankruptcy Code evidence a considered congressional policy to favor “the interest in protecting victims of fraud” over “the interest in giving perpetrators of fraud a fresh start,” Grogan, 498 U.S. at 287, 111 S.Ct. 654, and because the Supreme Court has so strongly and unwaveringly signalled through three unina-mimous opinions over the course of twenty years that that policy objective is to be jealously protected, I would adopt the Spi-cer approach.* Cf. Foley & Lardner v. Biondo (In re Biondo), 180 F.3d 126, 130 (4th Cir.1999) (noting the importance of “ensuring that perpetrators of fraud are not allowed to hide behind the skirts of the Bankruptcy Code”).
III.
For these reasons, I would elevate substance over form and allow the Archers to offer such proof as they might have to show that Arlene Warner’s debt resulted from a fraud perpetrated upon them. Therefore, I respectfully dissent.

 I do not view the settlement documents as forbidding the Archers from proving in bankruptcy court the nondischargeability of the debt because, among other things, the releases specifically excepted the Warners’ obligations under the promissory note and deeds of trust, (J.A. 45, 48), which I would interpret as permitting a full and fair hearing on the dischargeability of the debt in bankruptcy court.