Sanburg Financial Corporation v. American Rice, Inc.

Filing

REVISED UNPUBLISHED OPINION FILED. [6910154-2] [11-40301]

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REVISED FEBRUARY 14, 2012
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit

FILED
No. 11-40301
Summary Calendar

September 22, 2011
Lyle W. Cayce
Clerk

In the Matter of: AMERICAN RICE, INC.,
Debtor.
------------------------------------SANDBURG FINANCIAL CORP.,
Appellant,
versus
AMERICAN RICE, INC.,
Appellee.

Appeal from the United States District Court
for the Southern District of Texas
USDC Case No. 2:10-CV-280

Before KING, SMITH, and GRAVES, Circuit Judges.
PER CURIAM:*

*

Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.

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Appellant Sandburg Financial Corporation ("Sandburg Financial") appeals
from an order of the United States District Court for the Southern District of
Texas (Case No. 2:10-cv-00280), affirming1 the bankruptcy court's final judgment
(Bankr. Adv. Proc. 98-21254-C-11). Both the bankruptcy court and the district
court issued detailed opinions. See In re American Rice, Inc., No. 98-21254-C-11,
Dkt. No. 1494 (Bankr. S.D. Tex. April 27, 2010), aff'd sub nom. In re Sandburg
Financial Corp., No. 2:10-cv-00280, Dkt. No. 7 (S.D. Tex. Feb. 11, 2011).
Specifically, Sandburg Financial challenges the district court's order as to the
enforceability of certain contracts between

Sandburg Financial and

debtor-appellee American Rice, Inc. ("American Rice"). For the reasons stated
herein, the district court's judgment is AFFIRMED.
I. Essential Facts and Procedural History
The underlying matter involves a 1988 commercial real estate transaction
in California. Sandburg Financial's predecessor-in-interest, Barrington Capital
Corp. ("Barrington Capital"), contracted with Hansen foods for Barrington
Capital to purchase Hansen's facility in Los Angeles County and lease it back to
Hansen. At the time, ERLY Industries, Inc. ("ERLY"), a very large foods
company, was interested in purchasing Hansen and had loaned Hansen over $20
million. In connection with and as a prerequisite to the real estate transaction,
Barrington Capital and its lender, GMAC, required ERLY, several of its
affiliates, as well as its chairman and Chief Executive Officer, Gerald Murphy,
personally, to guarantee to pay Barrington Capital any damages incurred or
judgments obtained in connection with the real estate transaction. Sandburg
Financial obtained a judgment against ERLY and entities related to American
Rice, entered in State of California Superior Court on April 24, 1998 (Sandburg

1

A district court has jurisdiction over a bankruptcy appeal under 28 U.S.C. § 158(a)(1),
and in reviewing the findings of a bankruptcy court, a district court acts in an appellate
capacity. See Perry v. Dearing, 345 F.3d 303, 308–09 (5th Cir. 2003).

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Financial Corp. et al v. ERLY Industries, et al.) (the "Judgment"). American
Rice commenced its Chapter 11 bankruptcy on August 11, 1998 (the "Petition
Date") in the United States Bankruptcy Court for the Southern District of Texas.
On July 7, 1999, the bankruptcy court issued its order confirming American
Rice's plan of reorganization pursuant to Chapter 11 ("Confirmation Order").
A.

Contracts
Sandburg Financial seeks to collect approximately $19 million from

American Rice, which it claims to be due based upon contracts entered into over
the course of several years, both before and after American Rice filed for Chapter
11 bankruptcy. These contracts fall into three categories: (1) pre-petition
contracts (prior to the Petition Date), (2) post-petition contracts (between the
Petition Date and the Confirmation Order), and (3) post-confirmation contracts
(after the Confirmation Order) – the only contracts relevant to the issue here.
1. Post-Confirmation Order Covenant Not to Sue Contract
American Rice and related entities entered into a covenant not to sue
contract with Sandburg Financial on August 9, 1999, after confirmation of the
bankruptcy plan. Under this contract, American Rice stated that it was a new
contract to pay any new claims Sandburg Financial may have against American
Rice. In exchange, Sandburg Financial agreed not to sue or assert any new
claims against American Rice and related entities prior to June 30, 2008, nor to
do any discovery prior to that time.
2. Post-Confirmation Order Indemnity and Release Contract
On November 22, 1999, American Rice and related entities entered into
an indemnity and release contract with Sandburg Financial. This contract
similarly provided that American Rice and related entities agreed and
guaranteed to pay after June 30, 2008, any damages Sandburg Financial incurs
and any judgment Sandburg Financial obtains. American Rice also "reaffirmed"
its guaranty to pay after June 30, 2008 all of the obligations of any of its related
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entities to Sandburg Financial. In exchange, Sandburg Financial again agreed
not to execute upon or enforce any judgment, not to enforce any guaranty
contracts, and not to sue or assert any claims against American Rice prior to
June 30, 2008.
B.

State Court Lawsuit
The agreed-upon tolling period for the enforcement of the Judgment ended

on June 30, 2008. Thereafter, on October 23, 2009, Sandburg Financial filed suit
in Texas state court against American Rice (the "Post Confirmation Complaint"),
seeking to collect amounts allegedly due from American Rice, Rice Corporation
of Haiti, Comet Rice of Puerto Rico, Inc., and Comet Ventures, Inc. under the
Pre-Petition Contracts only, including amounts due under the Judgment.
C.

Reopening of Chapter 11 Case and District Court Procedures
After Sandburg Financial filed the Post Confirmation Complaint,

American Rice filed a motion on November 24, 2009 to reopen the Chapter 11
case and filed a "Motion for Order that Sandburg Financial Corporation Appear
and Show Cause as to Why Sandburg Financial Should Not be Found in
Contempt and Sanctioned for Violations of the Discharge Injunction." The
district court granted the motions on November 24, 2009. Appellee later moved
for summary judgment on the motion (on January 27, 2010), arguing that the
Post Confirmation Complaint violated the district court's discharge injunction
and Confirmation Order.
The bankruptcy court heard the motion on March 8, 2010, and issued an
opinion on April 27, 2010, finding that Sandburg Financial's Post Confirmation
Complaint violated the discharge injunction and Confirmation Order.
Specifically, the district court found: (a) Sandburg Financial's claim based on
the pre-petition contracts and post-petition contracts was discharged by the
Confirmation Order, (b) the post-petition contracts and post-confirmation

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contracts are unenforceable, and (c) the Post-Confirmation Complaint violates
the court's discharge injunction.
The bankruptcy court entered final judgment on August 10, 2010, finding
that Sandburg Financial's claims were discharged during the bankruptcy, and
that Sandburg Financial was permanently barred from pursuing the claims
against American Rice. The claims were dismissed with prejudice.
II. Issue on Appeal
Sandburg Financial argues that the two post-confirmation contracts were
not discharged by the Confirmation Order of American Rice's reorganization
plan, and are thus valid and enforceable, because the contracts represent new
contracts supported by new and independent consideration. Sandburg Financial
does not appeal any findings with respect to the pre- or post-petition contracts.
Therefore, the sole issue on appeal is whether the district court erred in finding
the two post-confirmation contracts between Sandburg Financial and American
Rice void and unenforceable, because each of the contracts failed to comply with
11 U.S.C. § 524(c) of the United States Bankruptcy Code.
III. Standard of Review
This court has jurisdiction over appeals of “all final decisions of the district
courts", including final judgments in bankruptcy appeals. 28 U.S.C. § 1291;
Conn. Nat'l Bank v. Germain, 503 U.S. 249, 253 (1992). Fact findings of the
district court and the bankruptcy court are reviewed under a clearly erroneous
standard, and issues of law are reviewed de novo. U.S. ex rel. FCC v. GWI PCS
1, Inc., 230 F.3d 788, 799-800 (5th Cir. 2000) (citing In re Berryman Products,
Inc., 159 F.3d 941, 943 (5th Cir. 1998)).
IV. Analysis

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The United States Bankruptcy Code, 11 U.S.C. § 524(c), governs the
enforcement of a contract between a creditor and a debtor involving
dischargeable debt (also known as a "reaffirmation contract"), 2 and states:
(c) An agreement between a holder of a claim and the debtor, the
consideration for which, in whole or in part, is based on a debt that
is dischargeable in a case under this title is enforceable only to any
extent enforceable under applicable nonbankruptcy law, whether or
not discharge of such debt is waived, only if(1) such agreement was made before the granting of the
discharge under section 727, 1141, 1228, or 1328 of this title [11
USCS § 727, 1141, 1228, or 1328];
(2) the debtor received the disclosures described in subsection
(k) at or before the time at which the debtor signed the agreement;
(3) such agreement has been filed with the court and, if
applicable, accompanied by a declaration or an affidavit of the
attorney that represented the debtor during the course of
negotiating an agreement under this subsection, which states that-(A) such agreement represents a fully informed and
voluntary agreement by the debtor;
(B) such agreement does not impose an undue hardship
on the debtor or a dependent of the debtor; and
(C) the attorney fully advised the debtor of the legal
effect and consequences of-(i) an agreement of the kind specified in this
subsection; and
(ii) any default under such an agreement;
(4) the debtor has not rescinded such agreement at any time
prior to discharge or within sixty days after such agreement is filed
with the court, whichever occurs later, by giving notice of rescission
to the holder of such claim;
(5) the provisions of subsection (d) of this section have been
complied with; and
(6)
(A) in a case concerning an individual who was not
represented by an attorney during the course of negotiating an
agreement under this subsection, the court approves such
agreement as-2

The district court concluded that the debt at issue here (American Rice's guarantee
of payment of the Judgment under the Pre- and Post-Petition Agreements) was dischargeable
and was in fact discharged.

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(i) not imposing an undue hardship on the debtor
or a dependent of the debtor; and
(ii) in the best interest of the debtor.
(B) Subparagraph (A) shall not apply to the extent that
such debt is a consumer debt secured by real property.
"The reaffirmation rules are intended to protect debtors from
compromising their fresh start by making unwise contracts to repay
dischargeable debts. Because of the danger that creditors may coerce debtors
into undesirable reaffirmation contracts, they are not favored under the
Bankruptcy Code and strict compliance with the specific terms in Section 524 is
mandatory. A reaffirmation contract which does not comply fully with Section
524 is void and unenforceable." Republic Bank, N.A. v. Getzoff (In re Getzoff),
180 B.R. 572, 180 B.R. 572, 574 (B.A.P. 9th Cir. 1995) (citations omitted); Chase
Auto. Fin., Inc. v. Kinion (In re Kinion), 207 F.3d 751, 756 (5th Cir. 2000)
(reaffirmation contract "flawed" under 11 U.S.C. § 524(c) is "unenforceable").
Here, Sandburg Financial argues that the district court erred in finding
the post-confirmation contracts to be unenforceable. This court holds that the
district court did not err in finding that the post-confirmation contracts failed to
comply with the requirements of 11 U.S.C. § 524(c).

Specifically, (1) the

post-confirmation contracts were not made before the granting of discharge, (2)
the post-confirmation contracts do not contain the disclosures required by 11
U.S.C. § 524(c), and (3) the post-confirmation contracts were not filed with the
court thus precluding enforcement pursuant to 11 U.S.C. § 524(c). See Kinion,
207 F.3d at 756.
Sandburg Financial further argues that the post-confirmation contracts
are new contracts, supported by new and independent consideration, rather than
reaffirmation contracts. Sandburg Financial cites to a few decisions to have
found an exception to 11 U.S.C. § 524(c) for post-confirmation contracts
supported by new and independent consideration, and thus considered such
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contracts to be enforceable. Watson v. Shandell (In re Watson), 192 B.R. 739
(B.A.P. 9th Cir. 1996); In re Petersen, 110 B.R. 946 (Bankr. D. Colo. 1990); In re
Button, 18 B.R. 171 (Bankr. W.D.N.Y. 1982); Minster State Bank v. Heirholzer
(In re Heirholzer), 170 B.R. 938 (Bank. N.D. Oh. 1994); Antonino v. Kenny (In re
Antonino), 241 B.R. 883 (Bankr. N.D. Ill. 1999).
However, the cases upon which Sandburg Financial relies have been
widely and seriously questioned since their issuance. See, e.g., Liptz & Roberts,
Chtd. Pension Plan Trust v. Stevens (In re Stevens), 217 B.R. 757, 761 (Bankr.
D. Md. 1998) ("[T]he Heirholzer court take[s] the opposite approach to § 524(c)
than that which is intended by Congress"); In re Zarro, 268 B.R. 715, 722
(Bankr. S.D.N.Y. 2001) ("To the extent [creditor's] authorities suggest that a
post-petition contract to pay a discharged debt is valid simply because the
creditor offers something extra, I join the growing chorus that questions their
correctness."); In re Arnold, 206 B.R. 560, 566 (Bankr. N.D. Ala. 1997) ("The
Court believes [Heirholzer] and [Button] are wrong.").
Many courts have in fact considered and rejected the "new and
independent consideration" exception. One court has stated, "[i]f the
consideration for the [contract] is based, in whole or in part, on a dischargeable
debt, then the contract must comply with § 524. Therefore, even if it could be
argued that the [contract] was based upon new consideration, this Court finds
that the [contract] was at least based in part upon the discharge debt and
therefore must comply with § 524 to be valid." In re Cruz, 254 B.R. 801, 815
(Bankr. S.D.N.Y. 2000); see also TD BankNorth, N.A. v. Ewing (In re Ewing), 365
B.R. 347, 350 (Bankr. D. Mass. 2007) ("[T]he forbearance contract . . . was a form
of ‘reaffirmation contract.' Such contracts, though they arise post-petition, are
not enforceable unless statutorily prescribed procedures are followed with respect
to those contracts.") (emphasis added). Another court has explained: "Section
524(c) is not concerned with the consideration that the debtor received; instead,
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it invalidates non-complying contracts where any part of the consideration given
by the debtor involves his promise to pay a discharged debt. Every reaffirmation
contract involves some element of new consideration. Otherwise, the debtor
would not agree to pay the discharged debt. If new consideration saved a
non-complying reaffirmation contract, little would remain of the protection
afforded by § 524(c)." Zarro, 268 B.R. at 720-21 (emphasis added) (citations
omitted). The one Texas court to have discussed the exception and considered
the cases upon which Sandburg Financial relies in fact declined to follow those
cases. Lindale Nat'l Bank v. Artzt, 145 B.R. 866 (Bankr. E.D. Tex. 1992). That
court reasoned, "[a]s enacted, § 524(c) is purposefully rigorous in application.
This Court agrees . . . that supporting [creditor's] position would be counter to
the policy goals of § 524(c), in protecting debtors from creditors and in many
instances from their own improvident actions." Id. at 870.
Here, given the lack of authority in this court permitting enforcement of
the post-confirmation contracts at issue under a new and independent
consideration exception and the significant authority to the contrary, this court
concludes that the post-confirmation contracts would be enforceable only upon
compliance with 11 U.S.C. §524(c). The district court did not err when it
required that the Post-Confirmation Contracts comply with 11 U.S.C. § 524(c).
The district court properly noted that the Post-Confirmation Contracts
purported to reaffirm American Rice's pre-confirmation debt, which was
discharged, to Sandburg Financial. The district court correctly found that the
post-confirmation contracts did not satisfy the requirements of 11 U.S.C. §
524(c).
Notwithstanding the lack of authority to support a "new and independent
consideration" exception to 11 U.S.C. § 524(c), the district court also considered
whether the post-confirmation contracts could be enforceable in light of such an
exception, were it viable. Sandburg Financial argues that its new consideration
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was its contract to forbear on executing the Judgment against American Rice's
subsidiary, Rice Haiti, since it was unclear whether Rice Haiti was an intended
beneficiary of a pre-petition contract. As the district court correctly recognized,
Sandburg Financial's consideration in the post-confirmation contracts included
the same promise to forbear on enforcement of the Judgment as contained in the
previous contracts.
The district court did not err in concluding that the post-confirmation
contracts were not supported by new and independent consideration. Sandburg
Financial's argument relying upon the unenforceability of the pre-confirmation
contracts must also be rejected, as it would essentially allow any
post-confirmation contract to be enforceable under the proposed new and
independent consideration exception, whenever pre-discharge contracts were
declared unenforceable. These contracts would essentially be written on a clean
slate, and would always be supported by new and independent consideration. In
effect, Sandburg Financial's position, if this court accepted it, would greatly
expand the scope of a new consideration exception, and greatly diminish the
import of 11 U.S.C. § 524(c), which governs such reaffirmation contracts.
V. Conclusion
The district court did not err in finding the post-confirmation contracts
void and unenforceable. AFFIRMED.

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