Debtor’s Challenge to Dischargeability Barred by Laches

Posted by NCBRC - March 12, 2021

The debtor was barred by the doctrines of laches and equitable estoppel from asserting that a debt was nondischargeable where he had stipulated to its nondischargeability in an earlier bankruptcy and had not raised the issue of nondischargeability during several subsequent years of litigation concerning that debt. Storick v. CFG LLC, No. 20-80126 (S.D. Fla. Jan. 21, 2021).

When the debtor, a Florida resident, filed for chapter 7 bankruptcy in September, 2009, he and one of his creditors, CFG, a Delaware limited liability company, entered into a settlement agreement which provided that the debtor’s debt to the company was nondischargeable. The court-approved settlement agreement contained a Confession of Judgment provision as follows:

CONFESSION OF JUDGMENT: Debtor hereby irrevocably appoints and constitutes CFG as Debtor’s duly appointed attorney-at-law to appear in open court in the Superior Court for the City of Wilmington, Delaware, or in any other court of competent jurisdiction, and to confess judgment pursuant to the provisions of Title 10 Section 4732 of the Delaware Code, as amended, against Debtor for all principal and interest and any other amounts due and payable under this Agreement. This power of attorney is coupled with an interest and may not be revoked and/or terminated by the Debtor. This power of attorney shall not be revoked and/or terminated by virtue of the death or disability of the Debtor. No single exercise of the power to confess judgment shall be deemed to exhaust this power of attorney.

The debtor received his discharge in August, 2010. Pursuant to the settlement agreement, CFG then obtained a judgment in Delaware state court against the debtor in the amount of $540,000. The debtor later sought to vacate the judgment, arguing that Florida law was controlling and prohibits confessed judgments. After some interim litigation, including motions and appeals in the bankruptcy court, the Delaware Superior Court denied the debtor’s motion to vacate the judgment. The Delaware Supreme Court affirmed. At no point during the litigation over the confessed judgment did the debtor argue that the debt was or should have been discharged in his bankruptcy.

In May, 2018, the debtor filed another chapter 7 bankruptcy in which he listed the debt to CFG as disputed and of an unknown amount. He then initiated an adversary proceeding seeking declaratory judgment that the debt to CFG was dischargeable and alleging that CFG’s post-discharge conduct violated the discharge injunction. The parties filed competing motions for summary judgment.

Finding that the claims made in the adversary complaint were barred by laches and estoppel, and that the Delaware Judgment was valid, the bankruptcy court found in favor of CFG.

On appeal to the district court, the debtor raised two general arguments: 1. The bankruptcy erred in applying laches and equitable estoppel to his claims, and 2. The court erred in finding the settlement agreement was valid under bankruptcy law. The district court stated the doctrine of laches as “(1) a delay in asserting a right or a claim, (2) that the delay was not excusable, and (3) that there was undue prejudice to the party against whom the claim is asserted.

The court was convinced that the case provided a clear laches situation because the debtor failed to raise the issue of dischargeability at any time after the settlement agreement in June, 2010, even though there was extensive litigation surrounding the agreement between that date and the time the debtor filed the current adversary proceeding. The district court found “it undoubtedly the case that Appellee ‘has been (and continues to be) unduly prejudiced by [the debtor’s] ten-year delay in seeking declaratory relief that directly contradicts the explicit terms of the Amended Settlement.’”

Turning to equitable estoppel, the court stated the elements as: “(1) a representation by the party estopped to the party claiming the estoppel as to some material fact, which representation is contrary to the condition of affairs later asserted by the estopped party; (2) a reliance upon this representation by the party claiming the estoppel; and (3) a change in the position of the party claiming the estoppel to his detriment, caused by the representation and his reliance thereon.”

Here the court pointed to representations the debtor made to the bankruptcy court during the settlement hearing in 2010 when he stipulated, through counsel, that the debt was nondischargeable. The court found CFG reasonably relied on that representation and that the present adversary proceeding constituted the detriment caused by that reliance.

Having found that the bankruptcy court did not err in holding that the adversary proceeding was barred by laches and equitable estoppel, the court declined to address the debtor’s procedural claims relating to the enforceability of the settlement agreement. The court affirmed.

Storick SD Fla Jan 2021

On de novo appeal, the Eleventh Circuit affirmed, Storick v. CFG, LLC., No 21-10563 (Aug. 16, 2021). The circuit court held that equitable defenses were appropriately raised in a summary judgment motion in an action for declaratory judgment. The court did not address the debtor’s argument that the district court erred in its application of laches, finding that it need not reach that issue as the case was affirmable on the equitable estoppel issue.

Storick 11th Cir Aug 2021

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