Greenberg v. Schools
| Decision Date | 01 August 1983 |
| Docket Number | No. 82-5701,82-5701 |
| Citation | 711 F.2d 152 |
| Parties | 8 Collier Bankr.Cas.2d 1407, Bankr. L. Rep. P 69,315 Jay GREENBERG, Plaintiff-Appellee, v. Carl SCHOOLS, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
James K. Pedley, Fort Lauderdale, Fla., for defendant-appellant.
Keith, Winters & Schueler, Stephen G. Schueler, Bradley Beach, N.J., for plaintiff-appellee.
Appeal from the United States District Court for the Southern District of Florida.
Before GODBOLD, Chief Judge, ANDERSON, Circuit Judge, and GOLDBERG *, Senior Circuit Judge.
We AFFIRM on the basis of the district court opinion, 21 B.R. 1011 (1982). See Appendix.
APPENDIX
APPENDIX
UNITED STATES DISTRICT COURT FOR
THE SOUTHERN DISTRICT OF FLORIDA
JAY GREENBERG,
Appellant, : CASE NO. 82-13-CIV-JWK
V.
:
CARL SCHOOLS, : MEMORANDUM ORDER REVERSING
: --------------------------
: FINAL JUDGMENT
: -------------
Appellee. :
-------------------------- /
This bankruptcy appeal presents an interesting and novel legal issue: whether an obligation arising out of an agreement entered into in full settlement of a civil action involving a bankrupt's alleged fraud or defalcation is dischargeable in bankruptcy as an ordinary debt, or is an exception to discharge under the Bankruptcy Reform Act of 1978, 11 U.S.C.A. § 523(a)(4). After giving the matter careful consideration, it is the Court's determination that such an obligation incurred as a result of a settlement agreement is not discharged in bankruptcy where that settlement agreement extinguished a claim originally arising out of fraud or defalcation.
There is no material dispute as to the facts in this case. In the early 1970's the parties to this action, Jay Greenberg and Carl Schools, formed a corporation known as Greater Asbury Collections, Inc. The corporation was incorporated under the laws of the state of New Jersey and had its principal place of business in New Jersey. Later, when a dispute over the management of the company arose, Greenberg commenced a civil action in the New Jersey state court charging that Schools, in his capacity as managing director of the corporation, made unauthorized use of corporate funds for his own personal benefit. In his complaint in the New Jersey proceeding, Greenberg alleged that Schools engaged in, among other things, fraud, misappropriation and misuse of corporate funds while acting in a fiduciary capacity in managing the corporation. After the parties engaged in extensive discovery, the litigation was settled prior to trial. Under the terms of the settlement agreement, Schools agreed to pay Greenberg the sum of $100,000.00, with $10,000 due immediately and the remainder to be paid in installments over a 14 year period. Also as part of the agreement, Schools executed a promissory note payable to Greenberg on the $90,000.00 balance due.
Thereafter, Schools paid in excess of $50,000.00 in principal and interest on the note before defaulting. Consequently, Greenberg again brought suit against Schools, only this time Greenberg sued directly on the promissory note. This second action was also filed in the New Jersey state court and it too was settled by stipulation of the parties. Pursuant to the terms of the second stipulation, Schools agreed to pay Greenberg $78,102.66 in monthly payments of $892.20.
Subsequently, Schools moved from New Jersey to Florida and filed a petition in bankruptcy. Greenberg responded by filing his adversary complaint in the bankruptcy action objecting to any discharge of the debt and contending that his claim was an exception to discharge pursuant to 11 U.S.C.A. § 523(a)(4). 1 When a final judgment was entered by the Bankruptcy Court in favor of Schools, Greenberg perfected this appeal pursuant to applicable law. 2
The Court's analysis must begin with an examination of the pertinent statute, i.e. 11 U.S.C.A. § 523(a)(4). It is clear that if this statute applies to the obligation incurred by debtor Schools, that debt cannot be discharged in bankruptcy. The statute states in material part that:
[a] discharge under section 727, 1141, or 1328(b) of this title does not discharge an individual debtor from any debt--
(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny[.]
Appellee Schools urges the Court to accept the proposition that once the parties entered into a good faith settlement agreement, that agreement effectively extinguished the underlying action for fraud and limited any future relief solely to the enforcement of the settlement agreement itself. Accordingly, appellee maintains, the exception to discharge provided by § 523(a)(4) would not apply because the appellee's debt arises out of the failure to fully perform the terms of the settlement agreement and does not result directly from any fraud or defalcation. The Bankruptcy Court accepted this argument and ruled that the statute did not apply to appellant's claim.
It is this Court's considered judgment, however, that the approach taken by the Bankruptcy Court is overly restrictive and not justified by the language of the statute itself, and would permit the discharge of debts that Congress intended to survive bankruptcy. The interpretation urged by the appellee would allow a debtor to discharge a debt incurred by his own fraud by simply entering into a settlement agreement prior to declaring bankruptcy. The debtor could even accept a substantially adverse settlement with the knowledge that its terms and conditions would be nullified by the subsequent petition in bankruptcy. Neither the statute, nor its legislative history nor cases construing the reach of the statute, support this position. 3
Since § 523(a)(4) has not materially changed prior law on the point, 4 an examination of the precedent arising out of both the old bankruptcy act and the 1978 revision may prove dispositive. Two cases appear particularly noteworthy.
In Hartford Accident & Indemnity Co. v. Flanagan, 28 F.Supp. 415 (S.D.Ohio 1939), the district court encountered the issue of whether a debt arising from an act of embezzlement was discharged by a subsequent bankruptcy proceeding where the debtor and creditor had previously entered into an express contract of indemnity to satisfy the amount outstanding. The defendant bankrupt had been convicted for the fraudulent embezzlement and misappropriation of funds belonging to the bank where he worked. The bank's surety paid a portion of the loss under a surety bond contract and sought indemnity from the defendant bankrupt for the amount paid. The bankrupt sought discharge of this debt on the ground that the obligation the surety wanted to enforce was one arising from contract and not from the embezzlement itself. The court ruled that the bankrupt's debt could not be discharged in bankruptcy inasmuch as it was one created by the bankrupt's embezzlement and misappropriation while acting in a fiduciary capacity, notwithstanding that the nature of the claim was subsequently changed by the indemnity contract. The court observed,
It is the purpose of the Bankruptcy Act, among other things, to release an honest unfortunate, and insolvent debtor from the burden of oppressive debts and to restore him to business activity....
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In re Fultz
...from the debtor's fraud should not be discharged simply because the debtor entered into a settlement agreement." Greenberg v. Schools, 711 F.2d 152, 156 (11th Cir. 1983). In a § 523(a)(2)(A) context, the D.C. Circuit chose to follow Greenberg rather than West, noting that such an approach e......
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In re Peters
...and the debt now arises from a contract rather than a tort. See Greenberg v. Schools, 21 B.R. 1011 (S.D.Fla.1982), aff'd. 711 F.2d 152 (11th Cir.1983); Fireman's Fund Ins. Co. v. Covino (In re Covino), 12 B.R. 876 Moreover, the use of the term "subrogation" in Code §§ 502(e)(1)(C) and 507(d......
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In re Turner
...the lower courts have struggled on. Some Circuit-level cases under the Code have barely touched on the issue. See Greenberg v. Schools, 711 F.2d 152 (11th Circ.1983) aff'g and adopting 21 B.R. 1011 (S.D.Fla.1982), declaring without discussion that nondischargeability of a corporate managing......
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In re Gamble-Ledbetter
...West, 22 F.3d 775 (7th Cir. 1994) and Gonder v. Kelley, 372 F.2d 94 (9th Cir. 1967) [applying novation doctrine]; with Greenberg v. Schools, 711 F.2d 152 (11th Cir. 1983) and U.S. v. Spicer, 57 F.3d 1152 (D.C.Cir.1995) [rejecting that 19. The Brown court held that res judicata was inapplica......
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Supreme Court Docket Report - 2001 Term, Number 20 / June 24, 2002
...derived from the alleged fraudulent conduct. See United States v. Spicer, 57 F.3d 1152, 1155-1156 (D.C. Cir. 1995); Greenberg v. Schools, 711 F.2d 152, 156 (11th Cir. 1983). The Seventh and Ninth Circuits, in contrast, have held that a settlement agreement and release that resolves a debt t......
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...debt in question was the result of a settlement agreement did not prevent it from being a debt for fraud. Id. See Greenberg v. Schools, 711 F.2d 152, 156 (11th Cir. 1983). 204. 90 F.3d 444 (11th Cir. 1996). 205. 90 F.3d at 446. 206. Id. 207. Id. (citing 11 U.S.C. Sec. 523(a)(5) (1994) (debt......
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