Can't We All Just Even Give Up?

02/24/12

Bankruptcy Judge Wallace of theCentral District of California (Riverside Division), recently entered a MemorandumDecision which declined to approve the settlement of a dischargeability actionfiled by a finance company against a pro se debtor.  The Memorandum Decision in First Mutual Sales Finance v. Cacciatori,2012 WL 539783, (C.D. Cal. 2/15/2012) should give pause to creditors who bringflimsy dischargeability actions against penniless pro per debtors, counting onthe fact that the cases "can always be settled for something."  The case should also be disconcerting tolawyers on both sides of the fence whose clients need to settle legitimatedischargeability disputes. 

First Mutual's dischargeabilityaction was based on an allegedly false credit application which was filled outby a sales rep for a window company on a visit to the Debtor's home, thensigned by the Debtor.  First Mutualalleged that the Debtor had intentionally overstated her income by signing theform. 

The Debtor, who had a lawyer in herno-asset chapter 7 bankruptcy, was not represented by counsel at any point inthe adversary proceeding.  She filed anobviously homemade answer, and later signed a joint pretrial order whichrelieved First Mutual from the burden of proving much of its case.  Shortly after the trial commenced, counselfor First Mutual asked for a short recess to discuss settlement with theDebtor.  They returned to the courtroomand announced that a settlement had been reached.  The Debtor would stipulate to entry of ajudgment for $32,853.87 [for windows?] with the proviso that the judgment wouldnot be executed so long as Debtor paid First Mutual $100.00 per month untilthe full amount was paid (without postjudgment interest).  At that rate, the Debtor would have made$100.00 payments to the finance company for the next 27 years.  Counsel for First Mutual stated on the recordthat one of the reasons the Debtor was willing to settle the matter on theseterms was that "she did not want a judgment of fraud entered against her." 

Judge Wallace refused to enter therequested stipulated judgment, and the trial proceeded.  First Mutual did not produce as a witness thesales rep who took the application, and the Debtor testified about everythingthe sales rep "explained" to her in taking the information to fill outthe form.  The Court found that FirstMutual did not sustain its burden of proof and entered judgment for theDebtor. 

The opinion states in part: 

The Court refused to accept such proposedsettlement stipulation for two separate and independent reasons. First, therewas no reasonable basis for such a settlement based upon a review of thepleadings and the Court's record. . . . A court is authorized to satisfy itselfthat there is a reasonable basis for the entry of a consent judgment.[citations]  Here, there was noreasonable basis for such entry. 

Second, the Court cannot and should notapprove a settlement stipulation in a section 523(a)(2) matter that does notstipulate that fraud has been committed. [citations].  [The Debtor's] adamant (and, in the Court'sview, totally justified) refusal to admit to fraud precluded the Court fromaccepting the proposed stipulated settlement.

As to the first "separate and independent" reason for refusing to implement the settlement:  This appeared to be by no means the weakest dischargeabilty case that ever crossedmy path.  But it looks like oncethe trial started and Judge Wallace got a sniff of just how weak the case was,he simply wasn't going to let the pro per Debtor just give up andstipulate to judgment.  Certainly, thefiling of dischargeability cases against debtors without the means to hire an attorneyto defend themselves can be a strategy for oppression. 

It is the second reason which should give pause:  Should adebtor without the means to pay a cash settlement be required to admit to wrongdoing as a condition to being allowed to stipulateto payment of a compromise amount in installments?   Should a debtor'schoice be to either admit in writing to having committed fraud or go totrial and incur both the attorney fees and the risk of an adverse result?  Such a rule penalizes a debtor for having thecombination of prudence and integrity. 
Copyright Dean T. Kirby 2007. All rights reserved.

[more]