In re Minor
| Decision Date | 07 June 1990 |
| Docket Number | Adv. No. 88 J 864.,No. 89-K-1516,Bankruptcy No. 88 B 6963 C,89-K-1516 |
| Citation | 115 BR 690 |
| Parties | In re Bruce Kenneth MINOR, d/b/a Minor Investments, Stuyvesant Investments Economy Autosupply, Debtors. Ronald L. CHILCOAT and Bunny Chilcoat, Plaintiffs-Appellees, v. Bruce K. MINOR, Defendant-Appellant. |
| Court | U.S. District Court — District of Colorado |
John Preston Baker, G. Stephen Long, Coghill & Goodspeed, Denver, Colo., Ronald D. Lee, Michael P. Joyce, Koenigsdorf & Wyrsch, Kansas City, Mo., for Chilcoats.
Robin Kert Hunt, Denver, Colo., for Minor.
The issue in this appeal is whether a debtor's waiver of dischargeability of a debt, made in settlement of a creditor's adversary action in state court, is enforceable in bankruptcy court. The debtor, Bruce Kenneth Minor, argues that the bankruptcy court erred in finding that his waiver was effective under § 727(a)(10) of the Bankruptcy Code. He contends that a waiver of the dischargeability of a single debt must comply with requirements of § 524(c), not § 727(a)(10), and that his waiver was ineffective. I agree, and remand.
On March 24, 1987, Ronald L. and Bunny Chilcoat commenced an action against Mr. Minor in Kansas state court. The Chilcoats alleged that Minor violated Kansas securities laws, engaged in common law fraud and conversion and breached his contract with the Chilcoats for the purchase of shares of stock in Minor's corporation. The Chilcoats also claimed that Minor owed Mr. Chilcoat back pay and statutory damages for wages earned during his employment with Minor's corporation. The Chilcoats additionally requested compensation for certain office equipment they purchased for the corporation. On May 27, 1988, the state court action was stayed by Mr. Minor's Chapter 7 bankruptcy filing.
Several months later, the Chilcoats filed a proof of claim in the bankruptcy court and a motion for relief from the stay to proceed with their state court action against Mr. Minor. On September 14, 1988, the bankruptcy court entered its order modifying the stay and permitting the state court action to go forward, expressly reserving to itself the determination of whether any resulting debt would be nondischargeable. On October 11, 1988, the Chilcoats filed a complaint in the bankruptcy court to have their claim against Mr. Minor declared nondischargeable under § 523(a)(2)(A) of the Bankruptcy Code.
The state court case was set for trial on March 27, 1989. After negotiations in the presence of the trial judge, the parties reached a settlement. The settlement was incorporated into a stipulated judgment, entered on April 5, 1989, whereby the Chilcoats dismissed all of their claims against Mr. Minor except for the securities and common law fraud claims (Counts I and II). The judgment further provided in paragraphs three and four:
R. Vol. I, Doc. 10, Ex. A at 1-2. Judgment was then entered in favor of the Chilcoats in the amount of $15,000.1 Mr. Minor was not represented by counsel during the settlement negotiations.
On April 21, 1989, the Chilcoats filed a motion requesting the bankruptcy court to take judicial notice of the state court judgment in their nondischargeability action. The court granted this motion on April 25, 1989. In their joint pre-trial statement, the parties listed two disputed issues: (1) whether the state court judgment should be given collateral estoppel effect in the nondischargeability action and (2) whether the state court judgment was otherwise nondischargeable under § 523(a)(2)(A). Id. Doc. 7 at 2. They further indicated that matter could be determined on the briefs. Id.
On June 28, 1989, the bankruptcy court entered its findings, conclusions and order on the Chilcoats' § 523(a)(2)(A) action. On the first issue, the court ruled that the state court judgment did not have preclusive effect:
Here, pursuant to the agreement of the parties which resulted in the settlement, there are no findings in the State court judgment that defendant committed securities or common law fraud, or any other wrongdoing, for that matter. As is clear from the transcript of proceedings in the State court action, the omission of any such findings was specifically agreed to by plaintiff as a "trade off" for defendant\'s assurances that he would not seek to discharge the judgment in bankruptcy and his concession that the same should be non-dischargeable.
Id. Doc. 19 at 5. Nevertheless, the bankruptcy court concluded that the state court judgment was nondischargeable because Mr. Minor had made a waiver of discharge under § 727(a)(10) of the Bankruptcy Code. The court reasoned that Mr. Minor's statements in the state court settlement negotiations "are susceptible of the construction that they constitute a waiver," id. at 6, even though "the state court judgment does not on its face meet the requirements of § 727(a)(10). . . ." Id. at 7. Finally, the court concluded that this was the equitable result:
Id. at 7-8. Mr. Minor now appeals this ruling.
Mr. Minor's first argument in this appeal is that § 727(a)(10) of the Bankruptcy Code does not apply to a waiver of an individual debt and that the bankruptcy court's reasoning was in error. The Chilcoats assert, however, that the § 727(a)(10) waiver of discharge is not necessarily a waiver of discharge as to all indebtedness and can apply to the waiver of a single debt. Mr. Minor's position is the correct one.
Section 727(a)(10) of the Bankruptcy Code provides:
11 U.S.C. § 727(a)(10). There is little authority interpreting this section of the Code. See Indiana Nat'l Bank v. Lones (In re Lones), 50 B.R. 801, 802 (Bankr. W.D.Ky.1985). One of the few cases on point is Klingman v. Levinson (In re Levinson), 58 B.R. 831 (Bankr. N.D.Ill.), aff'd, 66 B.R. 548 (N.D.Ill.1986), aff'd, 831 F.2d 1292 (7th Cir.1987). In that case, a creditor bringing a nondischargeability action moved for summary judgment based on the collateral estoppel effect of a state court stipulated judgment. The judgment recited that the debtor agreed that "`it was his intention that the obligation to the Plaintiff created by this Agreed Judgment Order not be dischargeable in any bankruptcy or similar proceeding. . . .'" Id. at 833.
Although the court in In re Levinson ultimately granted the motion for summary judgment based on collateral estoppel, it gave "no weight to that portion . . . of the state court's judgment order that specifically stated that the parties agreed that the debt would not be discharged in bankruptcy." Id. at 836. It reasoned that public policy does not permit the debtor, pre-bankruptcy, to contract away the right to the discharge of a debt, nor can a state court judgment limit the availability of the discharge. Id. at 836-37 & n. 4. Only those debts expressly delineated in the Bankruptcy Code are nondischargeable. Finally, the court found that there had been no effective waiver of discharge, making special note of the difference between a waiver of discharge under § 727(a)(10) and the reaffirmation of a single debt under § 524(c):
Three conditions must be met for a waiver of discharge to be valid under the Bankruptcy Code: it must be in writing, signed by the debtor after the order for relief, and approved by the court. Since there is no evidence of a postpetition waiver of discharge here, the debtor has not waived his right to a discharge. Waivers of dischargeability of any particular debts should be governed by the reaffirmation rules. In the context of this pre-Bankruptcy Amendments and Federal Judgeship Act of 1984 version of the Bankruptcy Code governing this case, that would have required the debtor to reaffirm the state court judgment (a nonconsumer debt) before discharge. Obviously, that procedure was not followed in this case.
Id. at 837 (citations and footnote omitted); see also In re Lones, 50 B.R. at 803 (); Taylor v. King (In re King), 18 B.R. 181, 182 (Bankr. D.R.I.1982) (same).
This analysis is echoed in 4 Collier on Bankruptcy ¶ 727.12 at 727-88 to 89 (L. King 15th ed.1990) (footnotes...
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