Opinion
BANKRUPTCY CASE NO. 01-65592-PWB, ADVERSARY CASE NO. 01-6250
July 18, 2003
ORDER DISMISSING OBJECTION TO DISCHARGE
Plaintiff's complaint in this adversary proceeding seeks denial of Debtor's discharge under 11 U.S.C. § 727 (a)(4) and a determination that indebtedness owed to Plaintiff is excepted from discharge under 11 U.S.C. § 523 (a)(2)(A). The parties have entered into an agreement pursuant to which a portion of the debt will be determined to be nondischargeable and will be paid in installments. The Plaintiff requests that the objection to discharge be voluntarily dismissed.
Notice of the proposed dischargeability settlement and dismissal of the objection to discharge was provided to the United States Trustee, the Chapter 7 Trustee and to all creditors. No one has objected to the dismissal of the objection to discharge, no one has sought to be substituted as a plaintiff to continue prosecution of the objection, and no one appeared at the hearing in opposition to the dismissal. In addition, no one has objected to settlement of the dischargeability claim. Of course, settlement of dischargeability litigation is ordinarily a private matter between a creditor and the debtor. Unlike dismissal of a discharge objection, notice to creditors and a court order are not required.
Rule 7041 provides that an objection to discharge shall not be dismissed at the plaintiffs instance "without notice to the trustee, the United States trustee, and such other persons as the court may direct, and only on order of the court containing terms and conditions which the court deems proper." FED. R. BANKR. P. 7041. The reason for this exception to the general rule permitting a plaintiff to dismiss a complaint voluntarily without leave of court is stated in the Advisory Committee Note:
Dismissal of a complaint objecting to a discharge raises special concerns because the plaintiff may have been induced to dismiss by an advantage given or promised by the debtor or someone acting in his interest.
Objections to discharge involve "allegations of conduct by the debtor that are contrary to public policy as offensive to the creditor body as a whole" and are "directed toward protecting the integrity of the bankruptcy system by denying discharge to debtors who are engaged in objectionable conduct that is of a magnitude and effect broader and more pervasive than fraud on, or injury to, a single creditor" Royal Bank v. Grosse (In re Grosse), 1997 WL 668059 at *3 (Bankr. E.D. Pa. 1997) ( quoting ITT Financial Servs. v. Corban (In re Corban,), 71 B.R. 327, 329 (Bankr. M.D. La. 1987) and Austin Farm Center v. Harrison (In re Harrison), 71 B.R. 457, 459 (Bankr. D. Minn. 1987)). Courts have been particularly concerned when the dismissal of an objection to discharge is connected with settlement of some other matter, often dischargeability litigation with the objecting creditor in the same proceeding. E.g., Royal Bank v. Grosse (In re Grosse), supra; Palmer v. Hayden an re Hayden), 246 B.R. 795 (Bankr. D. S.C. 1999); Russo v. Nicolosi (In re Nicolosi), 86 B.R. 882, 886 (Bankr. W.D. La. 1988); see Moister v. Vickers (In re Vickers), 176 B.R. 287 (Bankr. N.D. Ga. 1994).
The courts have identified three potential problems in such situations. First, they note the possibility that the debtor may be tempted to "buy" a discharge from the objecting creditor by agreeing to pay the debt owed to that creditor in exchange for dismissal of the objection to discharge. Related to this is the potential for the objecting creditor to receive, for its own exclusive benefit, a benefit that might be available to creditors generally if the discharge objection were successfully pursued instead of dismissed. Finally, there is the danger that a creditor could use a non-meritorious discharge objection as bargaining leverage to coerce the debtor into paying the creditor's debt, either through reaffirmation or settlement of dischargeability litigation.
Most courts appear to permit the dismissal of a creditor's objection to discharge in connection with settlement of the dischargeability of the creditor's debt if there has been adequate disclosure to creditors, the United States trustee, and the case trustee, and if other creditors have had the opportunity to substitute themselves as the objecting plaintiff and continue the litigation. E.g., Palmer v. Hayden an re Hayden,), supra; In re Margolin, 135 B.R. 671 (Bankr. D. Col. 1992). These requirements have been met in this proceeding and provide sufficient basis to permit Plaintiff to dismiss her objection to discharge. The Court will enter judgment accordingly, as set forth below.
An additional requirement is necessary, however, to protect the integrity of the bankruptcy process, to insure that Plaintiff has not received an improper benefit at the expense of creditors generally, to prevent Debtor from "buying" a discharge, and to guard against the possibility of the Debtor being coerced into a settlement of the dischargeability dispute.
The additional requirement is that the objection to discharge be dismissed before the proposed dischargeability settlement is permitted. Making this a condition to dismissal of the objection to discharge effectively requires that the two issues be resolved separately; separate resolution necessarily means that the parties must evaluate each issue independently and on its own merits.
There is, in principle, no problem with dismissal of an objection to discharge that does not have merit and the fair settlement of dischargeability litigation. If that occurs, the objecting creditor has not obtained an improper advantage, the debtor has not "bought" a discharge or been coerced into an unwarranted dischargeability settlement, and the integrity of the bankruptcy process is protected. The concerns that courts have about these matters when a creditor seeks to dismiss an objection to discharge in connection with a dischargeability settlement arise in large part because of the connection between them. The connection creates the possibility that the dismissal and settlement have not been resolved independently on their merits but, instead, are causally connected for improper purposes arising out of improper motivations.
Elimination of any possibility of causal connection between the two issues prevents the parties from accomplishing an improper purpose and encourages proper motivations for resolving both issues appropriately. If the dischargeability settlement and the dismissal of the objection to discharge are not conditioned on each other, a creditor cannot have an improper motive in, or obtain an advantage by, dismissing the discharge objection in order to obtain settlement of dischargeability litigation; a debtor will not be able to "buy" a discharge by agreeing to such a settlement. Similarly, if the two matters are not conditioned on each other, there is no danger that a debtor will be coerced into a dischargeability settlement. Separation of the issues, then, helps to make sure that the resolution of both matters is on the merits and consistent with the purposes and policies of the Bankruptcy Code, thus protecting the integrity of the bankruptcy process.
The fact that the two matters must be resolved separately does not mean that they should be presented separately. Indeed, the voluntary dismissal of an objection to discharge without disclosure of a separate agreement for the settlement of the dischargeability litigation could give rise to the appearance, even if not the fact, that the parties had secretly agreed to the dischargeability settlement and that the creditor had secretly obtained a benefit at the expense of creditors generally or that the debtor had "bought" a discharge. A knowing and fraudulent attempt to obtain money, property, or advantage in exchange for acting or forbearing to act in a bankruptcy case is a federal bankruptcy crime. 18 U.S.C. § 152 (6). Thus, the parties here proceeded properly by disclosing the proposed dischargeability settlement in connection with the request for dismissal of the discharge objection. The procedure of full disclosure followed in this case indicates that no impropriety has occurred.
To make sure that the dischargeability settlement is in fact, and also appears to be, totally independent from dismissal of the discharge objection, the Court will require, as a condition pursuant to FED. R. BANKR. P. 7041 of the dismissal of the objection to discharge, that the proposed settlement of the dischargeability issues not occur unless the Debtor affirmatively chooses to go forward with settlement after the objection to discharge has been dismissed by a judgment that has become final. To facilitate this, the Court expressly determines, pursuant to FED. R. CIV. P. 54(b), that there is no just reason to delay entry of judgment dismissing the discharge objection and expressly directs the entry of such judgment forthwith.
The dischargeability dispute will remain pending. After the judgment dismissing the discharge objection has become final, the Debtor may decide whether to defend or to settle the dischargeability litigation on acceptable terms. Because the Debtor's decision will be made after dismissal of the discharge objection, the two issues will not be linked; therefore, it will be clear that Debtor did not "buy" his discharge, that Plaintiff's dismissal of the discharge objection gave her no improper benefit, and that dismissal was not a factor in the negotiations concerning dischargeability.
By requiring these procedures, the Court does not intend to comment on the propriety of the conduct of the parties or their counsel or the terms of the settlement. The parties appear to be acting in good faith, and nothing indicates that the terms of the settlement are unfair or oppressive. Thus, the parties are certainly free to resolve their remaining dispute precisely as proposed, provided they do so after the dismissal of the discharge objection is final.
Accordingly it is hereby ORDERED and ADJUDGED as follows:
1. The claims in Plaintiff's complaint objecting to the Debtor's discharge are hereby DISMISSED. The claims in Plaintiff's complaint that the debt owed by Debtor is excepted from discharge shall remain pending. Pursuant to FED. R. CIV. P. 54(b), the Court having expressly determined that there is no just reason for delay of entry of judgment on Plaintiff's claims objecting to discharge, the Court expressly directs that judgment on those claims be entered.
2. If Debtor decides, after the dismissal of the discharge objection has become final, to settle the remaining issues, the parties may submit appropriate papers and a proposed order or judgment to do so. The papers submitted shall be signed and dated by the Debtor and her counsel so as to evidence the fact that the Debtor agreed to the settlement after the dismissal became final.
3. If the matter is not settled within 45 days, counsel for Plaintiff shall confer with counsel for Debtor and file a report with the Court as to whether this proceeding should be scheduled for a status conference, pre-trial conference, or trial with regard to the remaining issues.