Can A Pre-Bankruptcy Agreement Waive A Bankruptcy Discharge? (Arsenis v. Blue Cross)

Ignoring the issue? (photo by Marilyn Swanson)

By: Donald L Swanson

A Petition for certiorari is before the U.S. Supreme Court in Speech & Language Center, LLC, and Chryssoula Marinos-Arsenis v. Horizon Blue Cross Blue Shield of New Jersey (Case No. 21-1154, filed 2/16/2022).

Petition’s Question

The Question presented in the Petition is this:

  • “Can parties to a civil settlement agree that the payments required under the agreement are not dischargeable in bankruptcy?”

[Editorial Comment

  • For starters, the answer to the Petition’s Question has to be this:  “No, a pre-bankruptcy agreement cannot waive a bankruptcy discharge!”
  • Here’s why: Otherwise, every promissory note and every guaranty and every other contact document will contain boilerplate language like, “This obligation is not dischargeable in bankruptcy”—and that will be the end of bankruptcy relief.]

Agreement for No-Discharge

The Petition involves a state court proceeding in New Jersey.  The parties inform the court of a settlement, the provisions of which are memorialized in a term sheet. 

While on the record and under oath, the parties verbally confirm their agreement to the term sheet provisions, which are to be incorporated into a formal settlement agreement they will all sign.

One term sheet item says, each Defendant “agrees and intends that the judgment debt will be a non-dischargeable debt, pursuant to 11 U.S.C. § 523(a)(2) in the event of a bankruptcy.”

Thereafter, Defendants refuse to sign the settlement agreement, contending that the no-discharge provision is contrary to public policy and unenforceable.

State Court Ruling–Ignoring the Issue

Plaintiff seeks an order compelling Defendants to “sign what they agreed to sign,” and the state court grants that relief.

However, as to the question of whether the no-discharge provision is enforceable in a subsequent bankruptcy, the state court ignores it:

  • “We do not reach” the issue “because our courts do not render advisory opinions or function in the abstract”;
  • The individual Defendant’s agreement about no-discharge “has no significance until she files a bankruptcy petition”; and
  • If she ever files bankruptcy, enforceability of the no-discharge provision will need to be addressed by the bankruptcy court at that time.

Such ruling ultimately finds its way to the U.S. Supreme Court.

Petition—Legal Authorities Cited

The Petition for a Writ of Certiorari cites 28 legal opinions.  What follows is a summary of how the Petition describes some of those authorities.

–Provisions are Void

Some courts say that a prepetition agreement to waive discharge is void, as violating bankruptcy policy:

  • In re Huang, 275 F.3d 1173 (9th Cir. 2002) (Debtor “is not collaterally estopped by her settlement with the Bank from denying the Bank’s allegations of fraud”);
  • Matter of Ethridge, 80 B.R. 581, 586 (Bankr. M.D. Ga. 1987) (“the provisions of the consent judgment which pertain to the waiver of Defendant’s right to a discharge are void”);
  • In re Kriger, 2 B.R. 19, 23 (Bankr. D. Or. 1979) (“It is a well settled principle that an advance agreement to waive the benefit of a discharge in bankruptcy is wholly void, as against public policy”);
  • In re Minor, 115 B.R. 690, 694–96 (D. Colo. 1990) (holding prepetition waiver of discharge of individual debt invalid);
  • Matter of Bisbach, 36 B.R. 350, 352 (Bankr. W.D. Wis. 1984) (holding unenforceable prepetition waiver in divorce agreement describing debt as nondischargeable maintenance or support);
  • In re Cole, 226 B.R. 647, 652–53 (B.A.P. 9th Cir. 1998) (“state court stipulated judgment where the debtor waives his right to discharge is unenforceable as against public policy”); and
  • In re Weitzen, 3 F. Supp. 698 (S.D.N.Y. 1933) (“The agreement to waive the benefit of bankruptcy is unenforceable. To sustain a contractual obligation of this character would frustrate the object of the Bankruptcy Act”).

Similarly, the following cases declare that an agreement prohibiting a subsequent bankruptcy filing is unenforceable:

  • In re Shady Grove Tech Ctr. Assocs. Ltd. P’ship, 216 B.R. 386, 390 (Bankr. D. Md.), supplemented, 227 B.R. 422 (Bankr. D. Md. 1998) (“[P]rohibitions against the filing of a bankruptcy case are unenforceable”);
  • Matter of Gulf Beach Dev. Corp., 48 B.R. 40, 43 (Bankr. M.D. Fla. 1985) (“Debtor cannot be precluded from exercising its right to file Bankruptcy and any contractual provision to the contrary is unenforceable as a matter of law”);
  • In re Tru Block Concrete Prod., Inc., 27 B.R. 486, 492 (Bankr. S.D. Cal. 1983) (“It is a well settled principal that an advance agreement to waive the benefits conferred by the bankruptcy laws is wholly void as against public policy”);
  • Matter of Schnakenberg, 195 B.R. 435 (Bankr. D. Neb. 1996) (“any attempt by a creditor in a private pre-bankruptcy agreement to opt out of the collective consequences of a debtor’s future bankruptcy filing is generally unenforceable. The Bankruptcy Code pre-empts the private right to contract around its essential provisions”);
  • In re Madison, 184 B.R. 686, 690 (Bankr. E.D. Pa. 1995) (a prepetition agreement to waive debtor’s right to file further bankruptcies within 180 days from filing of the debtor’s last bankruptcy petition is unenforceable under public policy);
  • In re Daniel, 290 B.R. 914, 919 (Bankr. M.D. Ga. 2003) (“Defendant’s agreement to not list her obligations is not enforceable”);
  • Klingman v. Levinson, 831 F.2d 1292, 1296 n.3 (7th Cir. 1987) (“[f]or public policy reasons, a debtor may not contract away the right to a discharge in bankruptcy”); and
  • Fallick v. Kehr, 369 F.2d 899, 904 (2d Cir. 1966) (“[T]he Bankruptcy Act expresses a strong legislative desire that deserving debtors be allowed to get a fresh start….[A]n advance agreement to waive the benefits of the Act would be void”).

–Provisions May Be Enforceable

Other courts have not voided similar types of agreements. For example:

  • U.S. Bank, Nat. Ass’n v. Kobernick, 454 F. App’x 307, 313 (5th Cir. 2011) (contract provision that a non-recourse loan would become a fully recourse loan upon a bankruptcy filing—is enforceable);
  • F.D.I.C. v. Prince George Corp., 58 F.3d 1041, 1046 (4th Cir. 1995) (the contract provision is enforceable because it did not waive the right to file bankruptcy, it only provided the contracting party “would forfeit its exemption from liability for any deficiency” by filing bankruptcy); and
  • In re Halpern, 810 F.2d 1061, 1064 (11th Cir. 1987) (a state court consent judgment and “issue preclusion” prevent debtor from contesting dischargeability because the consent judgment’s findings closely parallel non-discharge language of the Bankruptcy Act).

Conclusion

It will be interesting to see what the Supreme Court does with this Petition.

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