Bankruptcy Judge Wallace of the Central District of California (Riverside Division), recently entered a Memorandum Decision which declined to approve the settlement of a dischargeability action filed 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 bring flimsy dischargeability actions against penniless pro per debtors, counting on the fact that the cases “can always be settled for something.” The case should also be disconcerting to lawyers on both sides of the fence whose clients need to settle legitimate dischargeability disputes.
First Mutual’s dischargeability action was based on an allegedly false credit application which was filled out by a sales rep for a window company on a visit to the Debtor’s home, then signed by the Debtor. First Mutual alleged that the Debtor had intentionally overstated her income by signing the form.
The Debtor, who had a lawyer in her no-asset chapter 7 bankruptcy, was not represented by counsel at any point in the adversary proceeding. She filed an obviously homemade answer, and later signed a joint pretrial order which relieved First Mutual from the burden of proving much of its case. Shortly after the trial commenced, counsel for First Mutual asked for a short recess to discuss settlement with the Debtor. They returned to the courtroom and announced that a settlement had been reached. The Debtor would stipulate to entry of a judgment for $32,853.87 [for windows?] with the proviso that the judgment would not be executed so long as Debtor paid First Mutual$100.00 per month until the 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 record that one of the reasons the Debtor was willing to settle the matter on these terms was that “she did not want a judgment of fraud entered against her.”
Judge Wallace refused to enter the requested stipulated judgment, and the trial proceeded. First Mutual did not produce as a witness the sales rep who took the application, and the Debtor testified about everything the sales rep “explained” to her in taking the information to fill out the form. The Court found that First Mutual did not sustain its burden of proof and entered judgment for the Debtor.
The opinion states in part:
The Court refused to accept such proposed settlement stipulation for two separate and independent reasons. First, there was no reasonable basis for such a settlement based upon a review of the pleadings and the Court’s record. . . . A court is authorized to satisfy itself that there is a reasonable basis for the entry of a consent judgment. [citations] Here, there was no reasonable basis for such entry.
Second, the Court cannot and should not approve a settlement stipulation in a section 523(a)(2) matter that does not stipulate that fraud has been committed. [citations]. [The Debtor’s] adamant (and, in the Court’s view, totally justified) refusal to admit to fraud precluded the Court from accepting 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 crossed my path. But it looks like once the 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 and stipulate to judgment. Certainly, the filing of dischargeability cases against debtors without the means to hire an attorney to defend themselves can be a strategy for oppression.
It is the second reason which should give pause: Should a debtor without the means to pay a cash settlement be required to admit to wrongdoing as a condition to being allowed to stipulate to payment of a compromise amount in installments? Should a debtor’s choice be to either admit in writing to having committed fraud or go to trial and incur both the attorney fees and the risk of an adverse result? Such a rulepenalizes a debtor for having the combination of prudence and integrity.