West, Matter of

• Decision Date: 03 May 1994
• Docket Number: No. 93-3248,93-3248
• Citation: 22 F.3d 775
• Parties: , 25 Bankr.Ct.Dec. 975, Bankr. L. Rep. P 75,870 In the Matter of Pamela A. WEST, Debtor-Appellee. Appeal of John R. OLTMAN.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 775

22 F.3d 775

62 USLW 2754, 25 Bankr.Ct.Dec. 975, Bankr.

L. Rep. P 75,870

In the Matter of Pamela A. WEST, Debtor-Appellee.

Appeal of John R. OLTMAN.

No. 93-3248.

United States Court of Appeals, Seventh Circuit.

Argued Feb. 25, 1994.

Decided May 3, 1994.

Howard C. Emmerman (argued), Jonathan D. Sherman and Dennis T. Trainor, Katz, Randall & Weinberg, Chicago, IL, for appellant.

Jeffrey Schulman and Harold Rosen (argued), Wolin & Rosen, Chicago, IL, for debtor-appellee.

Before CUMMINGS and MANION, Circuit Judges, and MILLER, District Judge. ^*

MILLER, District Judge.

In Maryland Casualty Co. v. Cushing, 171 F.2d 257, 258-259 (7th Cir.1948), this court held that a promissory note generally does not discharge the debt for which it is given, but fully discharges the original debt if it is shown that the note 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. Appellant John Oltman asks us to overrule Maryland Casualty in this bankruptcy case. We decline the invitation and affirm the district court.

I.

After embezzling more than $100,000 while working as Mr. Oltman's bookkeeper, Pamela West executed a promissory note to Mr. Oltman for $75,000. In consideration for the note, Mr. Oltman executed a general release and covenant not to sue Ms. West for any obligations other than her obligation as maker of the note. Ten months later, Ms. West petitioned for relief under Chapter 7 of the Bankruptcy Code, listing the promissory note obligation as an unsecured debt. Mr. Oltman contended that the obligation was not dischargeable because it was based on Ms. West's fraud and embezzlement. 11 U.S.C. Sec. 523(a)(4). Relying on Maryland Casualty, the bankruptcy court disagreed: the obligation was based on the note, rather than on the fraudulent conduct that gave rise to the note. The district court affirmed, 157 B.R. 626.

We have jurisdiction pursuant to 28 U.S.C. Sec. 158(d). We review findings of fact under a clearly erroneous standard, but review conclusions of law de novo. Matter of Bonnett, 895 F.2d 1155, 1157 (7th Cir.1989).

II.

The bankruptcy court and the district court properly applied Maryland Casualty Co. v. Cushing, 171 F.2d 257 (7th Cir.1948). Even if the obligation arising from Ms. West's embezzlement would have been non-dischargeable due to its fraudulent nature, no allegations of fraud surround the note, and the note substituted a contractual obligation for a tortious one. Mr. Oltman agreed not to sue Ms. West on any obligation other than the note. Thus, pursuant to Maryland Casualty, dischargeability turns on the note, rather than the superseded obligation.

Mr. Oltman maintains that the holdings of numerous other cases have undermined Maryland Casualty. We read those cases differently than does Mr. Oltman.

Mr. Oltman appears to place his principal reliance upon Greenberg v. Schools, 711 F.2d 152 (11th Cir.1983), which held that a simple settlement of a nondischargeable debt does not render the debt dischargeable, but did not involve a release by the creditor of the underlying debt. Indeed, the bankruptcy court expressly found that there had been no novation of the original obligation. In re Schools, 14 B.R. 953, 955 (Bankr.S.D.Fla.1981), vacated on other grounds and remanded sub nom. Greenberg v. Schools, 21 B.R. 1011 (D.C.Fla.1982), aff'd, 711 F.2d 152 (11th Cir.1983). The creditor in Greenberg simply dismissed pending litigation in exchange for the note; no release was granted. Id. at 954. The ultimate holding in Greenberg is wholly consistent with the holding of Maryland Casualty: a promissory note does not discharge the underlying obligation unless the parties expressly release the old and substitute the new. Mr. Oltman released the old and substituted the new; the creditor in Greenberg did not.

The same is true of most of the lower court decisions upon which Mr. Oltman relies: because there was no release, the original debt was not extinguished by settlement. In re Bobofchak, 101 B.R. 465 (Bankr.E.D.Va.1989); In re Pavelka, 79 B.R. 228, 232 n. 15 (Bankr.E.D.Pa.1987); In re Castonguay, 77 B.R. 602, 606 (Bankr.E.D.Mich.1987); In re Rush, 33 B.R. 97 (Bankr.D.Me.1983); In re Covino, 12 B.R. 876 (Bankr.M.D.Fla.1981); Hartford Accident & Indemnity Co. v. Flanagan, 28 F.Supp. 415 (S.D.Ohio 1939); see also In re Behr, 42 B.R. 922, 926 (Bankr.E.D.Pa.1984) (release from criminal charges only). These cases, which held that settlements did not change the nature of the underlying obligation, are entirely consistent with Maryland Casualty because none involved a release.

Two other cases cited by Mr. Oltman are easily distinguishable on other grounds. The court in In re Peters, 90 B.R. 588, 604-605 (Bankr.N.D.N.Y.1988), considered the matters of a subrogor's rights with respect to non-dischargeable debts, and not the continuing vitality of a creditor's release of a nondischargeable debt. The debtor in In re Schmidt, 70 B.R. 634 (Bankr.N.D.Ind.1986), allegedly engaged in fraud in obtaining the release itself, a consideration absent in Maryland Casualty and in this case. Thus, even if Maryland Casualty never had been decided, neither Peters nor Schmidt would provide any guidance for decision in this case.

Only one reported case supports Mr. Oltman's position. In In re Spicer, 155 B.R. 795 (Bankr.D.D.C.1993), the government released the defendant, in exchange for a promissory note, from a fraud claim that had produced a criminal conviction and a restitution order. The restitution order was vacated. The defendant eventually reached bankruptcy court, which considered the nature of the underlying obligation despite the superseding release and note. The court explained:

At the outset, the court must reject the debtor's argument that its debt to the government is only a contract debt that can be discharged. Thus, the court rejects the holdings of Maryland Casualty Co. v. Cushing, 171 F.2d 257 (7th Cir.1948), and Gonder v. Kelley, 372 F.2d 94 (9th Cir.1967) (affirming on the basis of the district court opinion), and their progeny in favor of the analysis set forth in Greenberg v. Schools, 711 F.2d 152 (11th Cir.1983) (affirming on the basis of the district court opinion), for the reasons articulated by the dissent in Gonder v. Kelley, 372 F.2d at 94-95 (Koelsch, J., dissenting).

155 B.R. at 799. As explained above, we see no tension between Maryland Casualty and Greenberg, and accordingly cannot find the Spicer court's reasoning persuasive.

Mr. Oltman also contends that Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979), indicates that Maryland Casualty should be revisited. Again, we disagree. The holding in Brown is immaterial to Mr. Oltman's case: Brown addressed the preclusive effect of a state court judgment, not a creditor's voluntary release of a debtor. Brown called for a study of the nature of the claim underlying a judgment to determine dischargeability, much like the study Mr. Oltman seeks in this case with respect to the claim that triggered Ms. West's note. A judgment, however, is far removed from a release voluntarily given by a creditor.

For these reasons, we do not read Brown or Greenberg as providing authority for Mr. Oltman's position that a creditor should have a unilateral right to rescind a release upon the debtor's filing in bankruptcy. Nor do we see any policy reason to adopt such a rule. The Maryland Casualty...