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Cannot Use 727 Claim to Uphold a 532 Claim Against Bankruptcy Estate

June 9, 2014 by  
Filed under Blog

Several bankruptcy courts have held that a creditor cannot settle a § 727 claim with a bankruptcy estate in order to obtain a § 523 claim against the bankruptcy estate. As explained by one court:

“a discharge in bankruptcy is not an appropriate element of a quid pro quo. Tying withdrawal of objections to discharge to settlement of other actions is contrary to public policy. Under no circumstances, not even where the intent is innocent, may a debtor purchase a repose from objections to discharge. A discharge in bankruptcy depends on the debtor’s conduct; it is not an object of a bargain.”

In re Moore, 50 B.R. 661, 664 (Bankr.E.D.Tenn.1985). Bankruptcy courts recognize that settlement of a § 727 claim can be improperly used in order for a creditor to obtain an advantage in the creditor’s § 523 claim. However, such a tactic is against public policy and attacks the bankruptcy process and its integrity. In re Vickers, 176 B.R. 287, 290 (Bankr. N.D. Ga. 1994). A creditor also violates its fiduciary duty when it settles a § 727 claim in favor of the creditor’s § 523 claim. In re de Armond, 240 B.R. 51, 56-57 (Bankr. C.D. Cal. 1999) (explaining a “creditor who joins a § 727 claim with a § 523 claim wears two hats:  a fiduciary hat for the § 727 claim, which is brought on behalf of all creditors, and an individual hat for the § 523 claim. In settling the litigation, the creditor may not disregard the fiduciary hat.”); see also In re Joseph, 121 B.R. 679, 682 (Bankr. N.D.N.Y. 1990) (“[T]he plaintiff who commences an adversary proceeding pursuant to Code § 727 . . . becomes the trustee of that action as it ‘inures to the benefit of all creditors’ . . . A creditor commencing an adversary proceeding based upon Code § 523 . . .  seeks to ‘vindicate only its own debt’ . . . A creditor’s withdrawal of an objection to discharge, therefore, is a unilateral act which affects all creditors.”).

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