In re Bachinski

• Decision Date: 31 July 2008
• Docket Number: Bankrutpcy No. 07-50801.,Adversary No. 07-2153.
• Parties: In re Gary J. BACHINSKI and Lisa Bachinski, Debtors. Simmons Capital Advisors, Ltd., Plaintiff, v. Gary J. Bachinski and Lisa Bachinski, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of Ohio

393 B.R. 522

In re Gary J. BACHINSKI and Lisa Bachinski, Debtors.

Simmons Capital Advisors, Ltd., Plaintiff, v. Gary J. Bachinski and Lisa Bachinski, Defendants.

Bankrutpcy No. 07-50801.

Adversary No. 07-2153.

United States Bankruptcy Court, S.D. Ohio, Eastern Division, at Columbus.

July 31, 2008.

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Brandi L. Dorgan, Jerry L. Kaltenbach, Timothy E. Miller, Isaac, Brant, Ledman & Teetor, LLP, Christopher L. Lardiere, Columbus, OH, for Plaintiff.

Joseph C. Pickens, Chester, Willcox & Saxbe, LLP, Columbus, OH, for Defendants.

MEMORANDUM OPINION ON MOTIONS FOR SUMMARY JUDGMENT

JOHN E. HOFFMAN JR., Bankruptcy Judge.

I. Introduction

Approximately two and one-half years before they filed a joint Chapter 7 bankruptcy petition, Gary J. Bachinski and Lisa Bachinski ("Bachinskis," "Debtors" or "Defendants") formed a friendship and a business relationship with Robert Simmons ("Simmons"), the managing member of Simmons Capital Advisors, Ltd. ("Simmons Capital" or "Plaintiff). By the time the Bachinskis commenced their bankruptcy case they owed Simmons Capital more than $200,000, and both the personal and business relationships had soured. To resolve their disputes, the parties entered into a settlement agreement ("Settlement Agreement"), which became effective less than three months before the Bachinskis sought bankruptcy relief. The Settlement Agreement resulted in the entry of a prepetition state court consent judgment in favor of Simmons Capital (as amended, "Amended Consent Judgment").

The parties' motions for summary judgment raise three issues: (1) whether either the Settlement Agreement and/or the Amended Consent Judgment establishes as a matter of law that the Bachinskis' debt to Simmons Capital is nondischargeable under 11 U.S.C. § 523(a)(2), (4) or (6); (2) whether Simmons Capital has failed as a matter of law to demonstrate the existence of the type of fiduciary relationship that will support a defalcation-based nondischargeability claim under § 523(a)(4); and (3) whether the purported deemed rejection of the Settlement Agreement by the Chapter 7 trustee would void or unwind transfers of property interests made by the parties pursuant to the Settlement Agreement prior to its rejection. For the reasons stated below, the Court concludes that: (1) neither the Settlement Agreement nor the Amended Consent Judgment renders the Bachinskis' debt nondischargeable as a matter of law; (2) the Bachinskis are entitled to summary judgment on Simmons Capital's defalcation claim under § 523(a)(4); and (3) even if the Settlement Agreement is executory, its rejection would not void or reverse transfers of property rights or interests made by the parties in accordance with the Settlement Agreement prior to its rejection.

II. Jurisdiction

The Court has jurisdiction to hear and determine this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding. See 28 U.S.C. § 157(b)(2)(I).

III. Procedural Background

On February 6, 2007 ("Petition Date"), the Bachinskis filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. On February 21, 2007, they filed their schedules of assets and liabilities (Doc. 17). On Schedule D — Creditors Holding Secured Claims — they characterized as disputed two debts owed to Simmons Capital: (1) a debt arising from a judgment lien in the amount of $150,000 agamst Debtors' real property located at 1393 Abbotsford Green Drive, Powell, Ohio; and (2) a debt arising from a judgment in the amount of $60,000, secured by a third mortgage on Debtors' real property located at 1245 Maple Road, Manistee, Michigan ("Manistee Property"). On Schedule F — Creditors Holding Unsecured Nonpriority Claims — they characterized as disputed a debt in the amount of $208,000 for a business loan from Simmons Capital. The Bachinskis included the Settlement Agreement on their Amended Schedule G — Executory Contracts and Unexpired Leases — filed on April 13, 2007 (Doc. 57).

Simmons Capital commenced this adversary proceeding by filing a complaint (Doc. 1) seeking a determination that the amounts due and owing under the Settlement Agreement should be excepted from discharge under § 523(a)(2)(A), (4) and (6). After a pretrial conference, the parties filed the following: (1) Plaintiff's Motion for Summary Judgment ("Plaintiffs Mot.") (Doc. 13); (2) Debtors' and Defendants' Gary J. and Lisa T. Bachinski's Memorandum in Opposition to Plaintiffs Motion for Summary Judgment ("Defendants' Mem. Opp'n") (Doc. 16); (3) Plaintiff's Reply to Debtors' and Defendants' Gary and Lisa Bachinski's Memorandum in Opposition ("Plaintiff's Reply") (Doc. 18); (4) Debtors' and Defendants' Gary and Lisa Bachinski's Motion for Summary Judgment ("Defendants' Cross-Mot.") (Doc. 14); (5) Plaintiffs Memorandum in Opposition to Debtors' and Defendants' Gary and Lisa Bachinski's Motion for Summary Judgment (Doc. 17) ("Plaintiffs Mem. Opp'n"); and (6) Debtors' and Defendants' Gary and Lisa Bachinski's Reply to Plaintiffs Memorandum in Opposition (Doc. 19).

IV. Undisputed Facts

In August 2004, Simmons Capital and the Bachinskis entered into a contract under which Simmons Capital agreed to provide investment banking and turnaround management services to The Kendall Group, Ltd. ("Kendall"), a limited liability company in which the Bachinskis hold equity interests. After the Bachinskis executed a Revolving Cognovit Promissory Note in the amount of $150,000, which was dated August 12, 2004 ("Note"), Simmons Capital began advancing funds to Kendall and to the Bachinskis. Plaintiffs Mot., Ex. A; Defendants' Cross-Mot., Ex. C. In addition to the Note, the Bachinskis executed a mortgage in favor of Simmons Capital on the Manistee Property to secure the obligation due and owing under the Note. Plaintiffs Mot., Ex. B; Defendants' Cross-Mot., Ex. D.

Simmons Capital asserted that the Note matured on December 31, 2004, but that the Bachinskis failed to tender payment. Plaintiffs Mot., Ex. R, Robert M. Simmons Aff. at ¶¶ 13-15. Based on this alleged payment default, Simmons Capital commenced a lawsuit against the Bachinskis in the Court of Common Pleas, Franklin County, Ohio ("State Court") captioned Simmons Capitol Advisors, LTD. v. The Kendall Group, Limited, et al., Case No. 05 CVH 493 ("State Court Case"). See id. at ¶ 16. According to the Bachinskis, the State Court Case arose from a dispute between the parties over the payment of fees allegedly due and owing Simmons. Defendants' Cross-Mot., Gary J. Bachinski Aff. at ¶ 12; Lisa T. Bachinski Aff. at ¶ 12.

On October 4, 2006 — two days before a scheduled jury trial in the State Court Case — the parties entered into the Settlement Agreement, effective as of November 9, 2006.¹ Under the terms of the Settlement Agreement the Bachinskis agreed, among other things, to: (1) entry of a consent judgment in the amount of $150,000; (2) not oppose the filing of an amended complaint ("Amended Complaint") by Simmons Capital; and (3) entry of an agreed order granting Simmons Capital leave to file the Amended Complaint. Settlement Agreement at ¶ 1. The original consent judgment entry was entered in the State Court Case on November 13, 2006. See Plaintiffs Mot., Ex. H. Subsequently, the parties executed the Amended Consent Judgment. Under the Amended Consent Judgment, the Bachinskis agreed to increase the judgment amount from $150,000 to $220,000. See Plaintiffs Mot., Ex. O; Defendants' Cross-Mot., Ex. F.

The Court need not detail the allegations the parties raise in their respective briefs regarding fraud and other conduct, particularly since those facts are in dispute. What is critical to a ruling on the motions, however, is the language of the Settlement Agreement and the Amended Consent Judgment. There is no dispute that the parties executed those documents.

Paragraph 1 of the Settlement Agreement provides, in relevant part, as follows: "Defendants acknowledge that the Amended Complaint includes allegations of fraud, and acknowledge and agree that the obligations imposed upon Defendants by this agreement shall be non-dischargeable in any bankruptcy, regardless of the party that is brought into bankruptcy and regardless of whether the bankruptcy is voluntary or involuntary."

The Amended Consent Judgment makes no reference to the parties' agreement that the Bachinskis' debt to Simmons Capital would be deemed nondischargeable.² The Amended Consent Judgment, however, does state that:

[T]his Court finds that [the Amended Complaint] alleges that the debts owed to Plaintiff by Defendants arise from a claim for money and services obtained by false pretenses, false representations, fraud or defalcation, and/or for willful and malicious injury by Defendants to Plaintiff and that the record reflects evidence of this claim.

The Amended Consent Judgment does not identify what part of the record "reflects evidence of this claim." In support of its allegation that "[t]he record reflects evidence of fraud[,]" Simmons Capital relies only on the Amended Complaint. See Plaintiffs Reply at 3.

V. Arguments of the Parties

Simmons Capital contends that the $220,000 debt due and owing under the Amended Consent Judgment is nondischargeable under 11 U.S.C, § 523(a)(2), (4) and (6) as a matter of law. See Plaintiffs Mot. at 2. In support of its position, Simmons Capital advances three arguments. First, it preemptively raises the doctrine of novation, which is the "substitution of a new contract, debt, or obligation for an existing one, between the same or different parties." Jason v. Carpet Cleaning, Inc. (In re Jason), 2007 WL 4553608 at *4 (Bankr.E.D.Va. Dec.19, 2007). Apparently anticipating an argument from the Bachinskis that their obligations under the Settlement Agreement and the Amended Consent Judgment replaced, and thus wiped...