BAP Enforced Agreement Against Debtor Who Stipulated to Forgo Discharge Upon Default

By Karl Johnson posted 07-07-2018 15:47

Karl Johnson, Hellmuth & Johnson, PLLC
Jeffrey Klobucar, Bassford Remele, P.A.

 Contributing Editor: Kesha Tanabe, Tanabe Law

In Charles Gabus Motors, Inc. v. Martin J. Tirrell, No. 17-6009, (B.A.P. 8th Cir. Sept. 6, 2017), the BAP upheld a decision of the bankruptcy court denying the debtor a discharge of his debts in accordance with a default provision set forth in a court-approved stipulation. 

Debtor entered into the stipulation with a creditor who had previously commenced an adversary proceeding seeking denial of the debtor’s discharge under § 727. Under the stipulation, debtor agreed to pay $45,000 in five installments in exchange for dismissal of the adversary proceeding. If debtor failed to pay the installments on time, the creditor could file an affidavit of default and ask the court to enter an order denying debtor a discharge. Notably, the stipulation did not include a grace period nor did it require creditor to deliver a notice to cure.

When the debtor failed to make the first payment, the creditor promptly sought to enforce the stipulation. The debtor objected, making several arguments that the stipulation was unenforceable under state law. Debtor argued, for example, inclement weather kept him from making the payment on time, and therefore, the doctrine of impracticability excused his performance. Debtor also argued that the default provision was akin to an excessive liquidated damages clause and therefore void as a penalty under state law. The BAP reviewed the debtor’s theories de novo and held that all of the debtor’s contract-based defenses were inapplicable to the stipulation. Moreover, the BAP unequivocally declined debtor’s invitation to soften the default provisions of his stipulation. Notwithstanding any suggestion that the outcome was harsh to the debtor, the BAP made clear that the stipulation could be enforced against him in accordance with its original terms.