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The appeals court affirmed. The court found that ' 365(b)(2)(D) “can plausibly be interpreted in at least two ways and that the legislative history is not helpful. Therefore, the court relied on one of the Bankruptcy Code's basic premises to conclude that permitting debtors to shed disadvantageous contracts but keep beneficial ones under ' 365 “advances one of the core purposes of the Bankruptcy Code: 'to give worthy debtors a fresh start.'” As written, ' 365(b)(1) (D) provides that one of the exceptions to the requirement that a debtor cure lease defaults prior to assumption is “the satisfaction of any penalty rate or provision relating to a default arising from any failure by the debtor to perform nonmonetary obligations under the executory contract or unexpired lease.” The lessees here argued that the word “penalty” describes both “rate” and “provision.” This interpretation, and the one endorsed by the Ninth Circuit in Claremont, interprets the statute to read: “the satisfaction of any penalty rate[, or any penalty provision] relating to a default arising from any failure by the debtor to perform nonmonetary obligations under the executory contract or unexpired lease.” The court rejected this interpretation, choosing to adopt the reading favored by the debtor that “the word 'penalty' describes only the term 'rate,' and that the second half of subparagraph (2)(D) creates a distinct exception for non-monetary defaults.” This interpretation would, therefore, have the statute read: “the satisfaction of any penalty rate [or any] provision relating to a default arising from any failure by the debtor to perform nonmonetary obligations under the executory contract or unexpired lease.”

Noting that “the Claremont decision has drawn sharp criticism from bankruptcy commentators, who nearly unanimously regard that case as an obstacle to the successful reorganization of many debtors in bankruptcy,” the court observed that “many non-monetary defaults are 'historical facts' that are impossible to cure after the fact.” The court concluded that “to prevent a debtor from assuming a contract based on historical events that it cannot remedy undermines Congress's basic purpose in ' 365: to promote 'the successful rehabilitation of the business for the benefit of both the debtor and all its creditors.'” To require a debtor to cure an incurable event the court stated, “is plainly inconsistent with Congress's purpose in the Bankruptcy Code to maximize the value of the estate for all creditors.”

Editor's Note: The creditors in this case, Newark Insurance Company and Eagle Insurance Company, have filed a writ of certiorari with the U.S. Supreme Court.

Chapter 7 Trustee May Pursue a Debtor's Employment Discrimination Claim

The Eleventh Circuit has ruled that a Chapter 7 trustee may pursue a debtor's employment discrimination claims despite the fact that the debtor failed to disclose those claims in her petition. Parker v. Wendy's Int'l, No. 02-16185 (March 31).

After the debtor received a Chapter 7 discharge, the trustee was advised of the existence of certain employment discrimination claims. The trustee then moved to reopen the case to allow for the further administration of the bankruptcy assets. The bankruptcy court granted his motion to reopen, and the district court granted his motion to intervene. The defendant moved to dismiss the discrimination claims arguing that the claims for monetary damages were barred by judicial estoppel because the debtor failed to disclose the existence of her discrimination suit to the bankruptcy court. The defendant contended that the fact that the bankruptcy court reopened the bankruptcy case was relevant only as an acknowledgment that the debtor failed to disclose an asset. The district court agreed and the trustee appealed.

Reversing, the Eleventh Circuit held that because the party pursuing this case was not the debtor but the trustee, who did not make any inconsistent statements to the courts, that judicial estoppel did not apply. Here, the debtor's discrimination claim became an asset of the bankruptcy estate when she filed her petition, and at that time the trustee became the real party in interest in the discrimination suit. He has never abandoned the discrimination claim and never took an inconsistent position under oath with regard to this claim. Therefore, the trustee cannot be judicially estopped from pursuing the claim.

' 523(a)(6) Does Not Apply to Debt from Oral Misrepresentations

The Seventh Circuit has ruled that a judgment creditor cannot rely on ' 523(a)(6) to except from discharge a debt that had not been reduced to writing, but which was allegedly induced by a debtor's oral misrepresentations regarding his financial condition. Berkson v. Gulevsky (In re Gulevsky), No. 03-3299 (March 31).

A judgment creditor filed an adversary complaint against the debtor to have a debt declared nondischargeable under ' 523(a)(2)(A) and ' 523(a)(6). The bankruptcy court found that because the debtor's misrepresentations were of his financial condition, and were oral, they were not actionable under any part of ' 523(a)(2). In addition, the creditor could not support a claim under ' 523(a)(6) because allowing a creditor to proceed under that section would render the writing requirement of ' 523(a)(2)(B) superfluous. The creditor argued that under the Supreme Court's interpretation of ' 523(a)(6) as adopted in Kawaauhau v. Geiger, 523 U.S. 57, (1998), the standard required to bring a claim under ' 523(a)(6) is more exacting than that required under ' 523(a)(2)(B), and thereby does not render the writing requirement superfluous. Rather, the creditor interpreted the two provisions as making it easier for a creditor to prove a written fraud than an oral fraud. The appeals court disagreed with this interpretation.

The court stated that the distinction the creditor sought to draw between ' 523(a)(2)(B) and '523(a)(6) was “vanishingly thin.” The court observed that “although ' 523(a)(6) does require proof that the injury was intended, ' 523(a)(2)(B) requires proof that the debtor had the intent to deceive. We do not believe that any rational distinction can be drawn between these two different intent formulations, at least on the facts of this case.” Where a debtor obtains money through false statements, this defines the intent to deceive as it intends the financial injury that it causes. The court further stated that “[t]he few other courts that have been confronted with the dischargeability of false oral statements of financial condition are unanimous that ' 523(a)(6) cannot be used to circumvent ' 523(a)(2)(B)'s writing requirement. We agree that creditors should not be able to use ' 523(a)(6) in that way, in no small part because of the Pandora's Box that would be opened in the absence of '523(a)(2)(B)'s writing requirement.”

First Circuit Rejects holding in Claremont

Becoming the first circuit court to address the issue since the Ninth Circuit's controversial ruling in In re Claremont Acquisition Corp., 113 F.3d 1029 (9th Cir. 1997), the First Circuit rejected the Ninth Circuit's rationale and has held that non-monetary defaults of unexpired leases are not required to be cured before assumption. Eagle Insurance Company and Newark Insurance Company v. BankVest Capital Corp. (In re BankVest Capital Corp.), No. 03-9006 (March 15, 2004).

The debtor was the lessor of computer equipment. Following the filing of an involuntary bankruptcy petition, the lessees continuing using the debtor's equipment without making the lease payments and arrears of approximately $1 million accumulated. The confirmed plan provided that all leases where the debtor was the lessor would be deemed assumed under ' 365 unless specifically rejected. The lessees here sought cure costs for some undelivered loaner equipment, but the bankruptcy court dismissed the cure claims, holding that under ' 365(b)(2)(D) a debtor in possession may assume an unexpired lease without curing nonmonetary defaults. The Bankruptcy Appellate Panel affirmed and the lessee appealed.

The appeals court affirmed. The court found that ' 365(b)(2)(D) “can plausibly be interpreted in at least two ways and that the legislative history is not helpful. Therefore, the court relied on one of the Bankruptcy Code's basic premises to conclude that permitting debtors to shed disadvantageous contracts but keep beneficial ones under ' 365 “advances one of the core purposes of the Bankruptcy Code: 'to give worthy debtors a fresh start.'” As written, ' 365(b)(1) (D) provides that one of the exceptions to the requirement that a debtor cure lease defaults prior to assumption is “the satisfaction of any penalty rate or provision relating to a default arising from any failure by the debtor to perform nonmonetary obligations under the executory contract or unexpired lease.” The lessees here argued that the word “penalty” describes both “rate” and “provision.” This interpretation, and the one endorsed by the Ninth Circuit in Claremont, interprets the statute to read: “the satisfaction of any penalty rate[, or any penalty provision] relating to a default arising from any failure by the debtor to perform nonmonetary obligations under the executory contract or unexpired lease.” The court rejected this interpretation, choosing to adopt the reading favored by the debtor that “the word 'penalty' describes only the term 'rate,' and that the second half of subparagraph (2)(D) creates a distinct exception for non-monetary defaults.” This interpretation would, therefore, have the statute read: “the satisfaction of any penalty rate [or any] provision relating to a default arising from any failure by the debtor to perform nonmonetary obligations under the executory contract or unexpired lease.”

Noting that “the Claremont decision has drawn sharp criticism from bankruptcy commentators, who nearly unanimously regard that case as an obstacle to the successful reorganization of many debtors in bankruptcy,” the court observed that “many non-monetary defaults are 'historical facts' that are impossible to cure after the fact.” The court concluded that “to prevent a debtor from assuming a contract based on historical events that it cannot remedy undermines Congress's basic purpose in ' 365: to promote 'the successful rehabilitation of the business for the benefit of both the debtor and all its creditors.'” To require a debtor to cure an incurable event the court stated, “is plainly inconsistent with Congress's purpose in the Bankruptcy Code to maximize the value of the estate for all creditors.”

Editor's Note: The creditors in this case, Newark Insurance Company and Eagle Insurance Company, have filed a writ of certiorari with the U.S. Supreme Court.

Chapter 7 Trustee May Pursue a Debtor's Employment Discrimination Claim

The Eleventh Circuit has ruled that a Chapter 7 trustee may pursue a debtor's employment discrimination claims despite the fact that the debtor failed to disclose those claims in her petition. Parker v. Wendy's Int'l, No. 02-16185 (March 31).

After the debtor received a Chapter 7 discharge, the trustee was advised of the existence of certain employment discrimination claims. The trustee then moved to reopen the case to allow for the further administration of the bankruptcy assets. The bankruptcy court granted his motion to reopen, and the district court granted his motion to intervene. The defendant moved to dismiss the discrimination claims arguing that the claims for monetary damages were barred by judicial estoppel because the debtor failed to disclose the existence of her discrimination suit to the bankruptcy court. The defendant contended that the fact that the bankruptcy court reopened the bankruptcy case was relevant only as an acknowledgment that the debtor failed to disclose an asset. The district court agreed and the trustee appealed.

Reversing, the Eleventh Circuit held that because the party pursuing this case was not the debtor but the trustee, who did not make any inconsistent statements to the courts, that judicial estoppel did not apply. Here, the debtor's discrimination claim became an asset of the bankruptcy estate when she filed her petition, and at that time the trustee became the real party in interest in the discrimination suit. He has never abandoned the discrimination claim and never took an inconsistent position under oath with regard to this claim. Therefore, the trustee cannot be judicially estopped from pursuing the claim.

' 523(a)(6) Does Not Apply to Debt from Oral Misrepresentations

The Seventh Circuit has ruled that a judgment creditor cannot rely on ' 523(a)(6) to except from discharge a debt that had not been reduced to writing, but which was allegedly induced by a debtor's oral misrepresentations regarding his financial condition. Berkson v. Gulevsky (In re Gulevsky), No. 03-3299 (March 31).

A judgment creditor filed an adversary complaint against the debtor to have a debt declared nondischargeable under ' 523(a)(2)(A) and ' 523(a)(6). The bankruptcy court found that because the debtor's misrepresentations were of his financial condition, and were oral, they were not actionable under any part of ' 523(a)(2). In addition, the creditor could not support a claim under ' 523(a)(6) because allowing a creditor to proceed under that section would render the writing requirement of ' 523(a)(2)(B) superfluous. The creditor argued that under the Supreme Court's interpretation of ' 523(a)(6) as adopted in Kawaauhau v. Geiger , 523 U.S. 57, (1998), the standard required to bring a claim under ' 523(a)(6) is more exacting than that required under ' 523(a)(2)(B), and thereby does not render the writing requirement superfluous. Rather, the creditor interpreted the two provisions as making it easier for a creditor to prove a written fraud than an oral fraud. The appeals court disagreed with this interpretation.

The court stated that the distinction the creditor sought to draw between ' 523(a)(2)(B) and '523(a)(6) was “vanishingly thin.” The court observed that “although ' 523(a)(6) does require proof that the injury was intended, ' 523(a)(2)(B) requires proof that the debtor had the intent to deceive. We do not believe that any rational distinction can be drawn between these two different intent formulations, at least on the facts of this case.” Where a debtor obtains money through false statements, this defines the intent to deceive as it intends the financial injury that it causes. The court further stated that “[t]he few other courts that have been confronted with the dischargeability of false oral statements of financial condition are unanimous that ' 523(a)(6) cannot be used to circumvent ' 523(a)(2)(B)'s writing requirement. We agree that creditors should not be able to use ' 523(a)(6) in that way, in no small part because of the Pandora's Box that would be opened in the absence of '523(a)(2)(B)'s writing requirement.”