Saturday, February 3, 2007

Judge Hillman Declines to Approve Settlement of Objection to Discharge Case

In the case of In re Streck, In re Streck, Slip Copy, 2007 WL 268552 (Bankr.D.Mass., Jan 25, 2007)(NO. 03-11241-WCH, 03-1103), a creditor objected to the discharge of the debtor under Section 727 of the Bankruptcy Code. The court does not specify which subsections of Section 727 were invoked by the creditor but stated that the case had been "extremely contentious and more than slightly uncivil." An objection under Section 727 aims at the denial of a debtor's entire discharge whereas an objection under Section 523 seeks the more limited remedy of an order declaring a certain debt nondischargeable. The parties had proposed that the 727 action be dismissed in exchange for the debtor paying money to the objecting creditor. The issue in this case is whether the Court would approve the settlement where the whole benefit would go to the objecting creditor instead of the bankruptcy estate. The Court stated: "I will adopt the standards set out in Judge Brown's decision, Wolinsky v. Maynard (In re Maynard ), 273 B.R. 369 (Bankr D. Vt. 20002). In applying those factors, I conclude that the proposed settlement does not satisfy the last factor, 'that principles of equity and fairness would be furthered by approval of the proposed settlement,' Id. at 372. I so hold because all of the consideration being paid by Debtor (and his spouse) goes directly to Plaintiff and not to the estate." One lesson here is that a creditor should think twice before pleading a Section 727 count when their real goal (which is almost always the case) is to obtain a settlement only to their own benefit. Creditors like to plead under both Sections 523 and 727 when filing objections to discharge and dischargeability because they believe it gives them leverage (they can bargain away the 727 count in exchange for a favorable settlement on the 523 count). This decision should give them pause.

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