Sandburg Financial Corp. v. American Rice, Inc. (In re American Rice, Inc.)

Case No. 11-40301 (5th. Cir. September 22, 2011
Under 11 U.S.C. § 524(c), an agreement based “in whole or in part” on a dischargeable obligation is unenforceable unless the parties comply with the requirements set forth in § 524(c)(1)-(6). Some Courts create an exception to § 524(c)’s “in whole or in part” language for contracts that contain dischargeable obligations that also contain new and independent consideration. Under this “new and independent consideration exception,” these Courts allow enforcement of such contracts without requiring compliance with the elements of 524(c)(1)-(6). Noting that the exception (i) is widely criticized as contrary to the clear language of the statute, (ii) is an example of an exception that swallows its rule and (iii) lacks support in prior Fifth Circuit Court jurisprudence, the Court rejects the exception. Because the contract at bar reaffirms the Debtor’s discharged obligations, the Court rules that the agreements are unenforceable as the parties did not comply with § 524(c)(1)-(6).
Procedural context:
After its postpetition obligee filed suit against it in Texas State Court, Debtor American Rice moved to re-open its Chapter 11 case and asked the Bankruptcy Court to find that the state court lawsuit violated the discharge injunction and confirmation order. Both the Bankruptcy and District Courts agreed with the Debtor and obligee Sandburg Financial appealed.
Debtor American Rice entered into a post-confirmation covenant not to sue with Sandburg Financial. The contract purported to be a new contract to pay any new claims Sandburg Financial may have against American Rice. In exchange, Sandburg agreed not to assert new claims or commence discovery against Debtor until June 30, 2008. Debtor and related entities subsequently agreed to pay, after June 30, 2008, any damages Sandburg might incur and any judgment Sandburg might obtain. Debtor also “reaffirmed” its guaranty to pay, after June 30, 2008, all of the obligations of any of its related entities. In October 2009, Sandburg filed suit in Texas seeking to collect sums allegedly owed by Debtor and its related entities, including sums due under its prepetition judgment.
Judges King, Smith and Graves

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