ARTHUR I. HARRIS, Bankruptcy Judge.
In this appeal, Russell Looney ("debtor") appeals the bankruptcy court's determination that the debt he owed to Old Republic Title Company of Tennessee ("Old Republic"), in the amount of $286,940, is nondischargeable. For the reasons that follow, we AFFIRM.
The issue on appeal is whether the bankruptcy court erred when it found the debt debtor owed to Old Republic, which had been reduced to judgment by a state court settlement agreement, nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A).
The Bankruptcy Appellate Panel of the Sixth Circuit ("BAP") has jurisdiction to decide this appeal. The United States District Court for the Middle District of Tennessee has authorized appeals to the BAP. A final order of a bankruptcy court may be appealed by right under 28 U.S.C. § 158(a)(1). For purposes of appeal, an
Conclusions of law are reviewed de novo. Mitan v. Duval (In re Mitan), 573 F.3d 237 (6th Cir.2009). "Under a de novo standard of review, the reviewing court decides an issue independently of, and without deference to, the trial court's determination." Palmer v. Washington Mut. Bank (In re Ritchie), 416 B.R. 638, 641 (6th Cir. BAP 2009) (emphasis in original) (citing Gen. Elec. Credit Equities, Inc. v. Brice Rd. Devs., LLC (In re Brice Rd. Devs., LLC), 392 B.R. 274, 278 (6th Cir. BAP 2008)).
Factual findings underlying the bankruptcy court's ruling are reviewed for clear error. In re Mitan, 573 F.3d 237. "A finding of fact is clearly erroneous `when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.'" Riverview Trenton R.R. Co. v. DSC, Ltd. (In re DSC, Ltd.), 486 F.3d 940, 944 (6th Cir.2007) (quoting Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 573, 105 S.Ct. 1504, 1507, 84 L.Ed.2d 518 (1985)). Additionally, the trial court's "[f]indings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses." Fed. R. Bank. P. 8013; see also Peveler v. United States, 269 F.3d 693, 702 (6th Cir.2001) (refusal to set aside credibility determination of magistrate judge "who has had opportunity to view the witness on the stand and assess his demeanor.") (quoting Ramsey v. United Mine Workers of America, 481 F.2d 742, 747 (6th Cir. 1973)) ("Thus, however we might individually view the evidence if we were the triers of fact, it is clear that we are required to give great weight to the findings of the trial court which had the opportunity to see the witnesses, to hear their evidence as it was presented, to view the demeanor of the persons who testified in court, and to determine all issues of credibility.").
The debtor was a member of Green Investors, LLC, ("Green Investors") a two-member LLC with the debtor and Michael Dolan as its sole members. In October of 2005, Green Investors purchased the property located at 4529 Wayland Drive, Nashville, Tennessee. Green Investors then contracted with Carpenter Construction to serve as general contractor for the construction of a house on the property. Paul Robert Carpenter ("Mr. Carpenter") is the sole shareholder and President of Carpenter Construction. Pursuant to agreement, Carpenter Construction would receive $50,000 in overhead in monthly installments during the project and Green Investors would pay all associated construction expenses. In addition to overhead, Carpenter Construction was to receive $100,000 for its contracting services. However, that agreement was never put in writing.
On January 26, 2006, Green Investors refinanced the property by borrowing $332,000 from Branch Banking and Trust Company ("BB & T"). In May of 2006, Green Investors borrowed an additional $1,000,000 from BB & T to fund the construction project. At that time, the debtor executed a personal guaranty of the obligations of Green Investors to BB & T. In April of 2007, Green Investors borrowed additional funds from BB & T, bringing the total amount of indebtedness to $1,600,000. Of those funds, the debtor
In February of 2007, the Greenbergs (the buyers), Green Investors (the owner), and Carpenter Construction (the contractor) executed a contract in which Carpenter Construction agreed to finish the construction project and the Greenbergs agreed to purchase the improved property from Green Investors at the price of $1,905,000. Paragraph 10 of the contract provided:
(Trial Ex. 2) (emphasis added).
It appears that in June of 2007, Green Investors began to have trouble satisfying its obligations to Carpenter Construction. In June of 2007, Green Investors exhausted the remaining balance of the BB & T credit line, and from June until the closing date of August 10, 2007, many subcontractors and vendors either went unpaid or were paid by Carpenter Construction. Although the debtor denies receipt of certain invoices reflecting nonpayment, Mr. Carpenter testified that he delivered all invoices dated prior to August 1, 2007, before closing. Specifically, Mr. Carpenter testified:
(Tr. at 38, lines 2-9.)
At closing, Green Investors executed a Mechanics' Lien and Extended Coverage Affidavit and Indemnity Agreement ("owner's affidavit") in which the debtor declared under oath that "title to the property is good and marketable" and that:
(Trial Ex. 8.) The notarized owner's affidavit further provides, "THIS AFFIDAVIT IS MADE FOR THE PURPOSE OF INDUCING Old Republic National Title Ins. Co. to issue a policy or policies insuring the title to the property." (Id.) (emphasis in original). Green Investors then conveyed a warranty deed to the Greenbergs for a final purchase price of $1,934,551. The warranty deed "covenanted" that Green Investors was "lawfully seized and possessed of said land in fee simple" and "[had] a good right to convey" the land and that "the same is unencumbered, unless otherwise herein set out." (Trial Ex. 6.) Green Investors received $151,823.12 in proceeds from the sale of the property. Of those proceeds, the debtor wrote $113,500 in checks payable to himself. Again, the debtor's testimony is, at best, inconsistent regarding the purpose of the personal checks.
On October 3, 2007, Carpenter Construction asserted and recorded a lien against the property in the amount of $316,363.62, which was amended on November 13, 2007, to $349,097.97. On October 25, 2007, Carpenter Construction filed suit in state court. As title insurer to the Greenbergs, Old Republic settled and compromised Carpenter Construction's claims in the state court litigation and secured the release of Carpenter Construction's liens on the property. On or about October 3, 2008, the parties, including Carpenter Construction, Old Republic, the Greenbergs, Green Investors, Mr. Dolan, and the debtor, executed a settlement agreement in the state court litigation. The salient terms of the agreement are summarized as follows:
On February 25, 2010, the bankruptcy court conducted an evidentiary hearing. On August 6, 2010, the bankruptcy court found the debt nondischargeable pursuant to § 523(a)(2)(A). In its memorandum of opinion, the court analyzed the elements of § 523(a)(2)(A) and found that Old Republic had proven its claim of fraudulent representation. Specifically, the bankruptcy court made several factual determinations:
The bankruptcy court also found that Old Republic was not prevented from bringing a § 523 claim as a result of its participation in the underlying state court settlement agreement. On October 25, 2010, the bankruptcy court amended its prior order to include a money judgment in the amount of $286,940. On November 3, 2010, the debtor timely filed a notice of appeal.
The debtor asserts that the settlement and release agreement paired with the debtor's providing of new security, a deed of trust in favor of Old Republic secured by separate real property, renders the underlying debt automatically dischargeable. The debtor's brief provides "[c]learly, this was a complete novation of any obligation owed by [the debtor] arising out of this transaction, and clearly, this Agreement created a new and separate remedy at law in favor of Old Republic Title. This fact clearly renders the subject debt dischargeable in [the debtor's] Bankruptcy Action." The bankruptcy court rejected this argument as contrary to the Supreme Court's holding in Archer v. Warner, 538 U.S. 314, 123 S.Ct. 1462, 155 L.Ed.2d 538 (2003). The memorandum of opinion provides in pertinent part:
(Dkt. 178 at 13.)
While this panel must review conclusions of law de novo, it is apparent that Archer v. Warner is binding precedent on the issue at hand. In Archer v. Warner, the Archers sued the Warners in state court alleging fraud in connection with the sale of the Warners' company to the Archers. Archer, 538 U.S. at 317, 123 S.Ct. 1462. In full settlement of the state court action, the Warners paid the Archers $200,000, and promised to pay an additional $100,000 in exchange for dismissal. Id. When the Warners defaulted on the first payment of the promissory note, the Archers sued to recover the $100,000 consent judgment, which precipitated the Warners' filing of a bankruptcy petition. Id. at 317-18, 123 S.Ct. 1462. The Archers brought an adversary proceeding to determine whether the $100,000 debt was nondischargeable. Id. Mr. Warner agreed to a consent judgment holding his debt nondischargeable, but Mrs. Warner contested nondischargeability. Id. The bankruptcy court ruled in favor of Mrs. Warner and found the promissory note debt dischargeable. Archer, 538 U.S. at 318, 123 S.Ct. 1462. The Fourth Circuit affirmed, and provided that the settlement acted as a novation which replaced the original debt allegedly obtained by fraud with a new debt that was not for money obtained by fraud but instead money for breach of contract. Id.
In deciding Archer, the Supreme Court followed Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979). In Brown, the Court held that all debts arising from fraudulent conduct are nondischargeable and "the mere fact that a conscientious creditor has previously reduced his claim to judgment should not bar further inquiry into the true nature of the debt." Brown, 442 U.S. at 138, 99 S.Ct. 2205. The Archer Court conducted a full analysis of the factual similarities between Brown and Archer. In doing so, it rejected the theory of "novation" and provided "[i]f the Fourth Circuit's view were correct—if reducing a fraud claim to settlement definitively changed the nature of the debt for dischargeability purposes— the nature of the debt in Brown would have changed similarly, thereby rendering the debt dischargeable." Archer, 538 U.S. at 320, 123 S.Ct. 1462.
Id. at 321, 123 S.Ct. 1462. The Court concluded that "the Archers' settlement
In this case, the debtor's argument centers around the theory of "novation" but fails to distinguish the circumstances surrounding the settlement agreement from the circumstances in either Archer or Brown. The only distinction, the debtor's execution of a deed of trust, provides no support for the debtor's argument. The facts of this case are substantially identical to the established Supreme Court precedent set forth in Brown and Archer. See also Giaimo v. DeTrano (In re DeTrano), 326 F.3d 319, 320, 322-23 (2d Cir.2003) (in light of Supreme Court's decision in Archer v. Warner, district court correctly held that courts are to look beyond contractual nature of settlement agreement to determine whether underlying debt is nondischargeable) (Sotomayor, J.). Accordingly, we affirm the bankruptcy court's decision that Old Republic is not barred from bringing an 11 U.S.C. § 523(a)(2)(A) claim.
Section 523 provides in pertinent part:
In order to except a debt from discharge under § 523(a)(2)(A), a creditor must prove the following elements: (1) the debtor obtained money through a material misrepresentation that, at the time, the debtor knew was false or made with gross recklessness as to its truth; (2) the debtor intended to deceive the creditor; (3) the creditor justifiably relied on the false representation; and (4) its reliance was the proximate cause of the loss. Rembert v. AT & T Universal Card Servs. (In re Rembert), 141 F.3d 277, 280-81 (6th Cir. 1998) (footnote omitted). See also Longo v. McLaren (In re McLaren), 3 F.3d 958, 961 (6th Cir.1993). The debtor asserts that Old Republic failed to carry its burden of proof regarding every element of 11 U.S.C. § 523(a)(2)(A). In its memorandum of opinion, the bankruptcy court carefully considered each of the four elements that the Sixth Circuit identified in Rembert for nondischargeability under 11 U.S.C. § 523(a)(2)(A). Having reviewed the entire record, this panel is not left with a definite and firm conviction that a mistake has been made by the trial court with respect to the elements of nondischargeability pursuant to 11 U.S.C. § 523(a)(2)(A).
For the foregoing reasons, the decision of the bankruptcy court, entered on October 25, 2010, determining the debt, in the amount of $286,940, which included attorney's fees, nondischargeable pursuant to § 523(a)(2)(A) is AFFIRMED.
