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Note: As part of a purported financing opportunity, Stephen Cheikes (Creditor) was introduced to Richard Wlodarczyk (Debtor) by a non-party. Attempting to secure financing for a film production, Creditor agreed to deposit €300,000 into an escrow account which would be used to obtain a €50,000,000 standby letter of credit issued by HSBC, Singapore with Debtor functioning as intermediary between Creditor and other non-parties. Debtor subsequently informed Creditor that the standby would soon be issued and requested that Creditor release the escrow funds to another non-party. Creditor refused to do so until Debtor agreed to execute a “personal and corporate guarantee” promising Creditor that it would not lose any of its €300,000 “investment.” Debtor agreed and Creditor eventually released the escrow funds. Ultimately, Creditor neither obtained a standby letter of credit nor was returned the €300,000. Moreover, when Creditor demanded that Debtor honor the guarantee, Debtor refused.

Creditor initially sued Debtor in California state court for breach of contract, conversion, fraud and negligence which resulted in a settlement. Later alleging that Debtor breached the settlement agreement, Creditor pursued anex parte summary procedure for a judgment ordering Debtor to comply with the settlement agreement. Creditor obtained a judgment in its favor (the Stipulated Judgment). Subsequently, Creditor brought an involuntary bankruptcy petition against Debtor which was dismissed on the basis that Debtor “represented to the bankruptcy court that he was paying his debts in the normal course”. Thereafter, Debtor filed for bankruptcy and Creditor pursued an adversary complaint alleging the nondischargeability of Debtor’s guarantee obligations. Following a bench trial, the bankruptcy court granted judgment in favor of Debtor. Creditor appealed. The United States District Court for the Southern District of California, Huff, J., affirmed.

Creditor argued that pursuant to the Stipulated Judgment, the issue of “whether the guarantee debt was procured by fraud” was precluded and Debtor could not argue otherwise in bankruptcy. The Judge disagreed, however, noting that the Stipulated Judgment merely stated that Debtor owed Creditor a debt and ultimately “lack[ed] any substantive reference to the fraud claim or facts supporting a fraud claim.” Moreover, while settlement judgments rendered pursuant to the applicable summary procedure may carry preclusive effect, the Judge noted that such an effect is not automatic and that the Stipulated Judgment terms would have to meet the elements of preclusion under California law. The fraud issue was not necessarily decided or litigated as the Stipulated Judgment recognized the settlement as a “compromise” regarding the state claims brought by Creditor. Thus, the judgment on its own did not satisfy the elements of preclusion.

Creditor also argued that the bankruptcy court erred in finding that Creditor failed to prove its claim that the guarantee obligation was nondischargeable (i.e., obtained by false pretenses or fraud but not merely from statements regarding the debtor’s or an “insider’s financial condition”). The Judge noted that the record before the bankruptcy judge consisted of disputed facts on whether Debtor made false representations regarding the underlying scheme. The bankruptcy judge chose to credit Debtor’s testimony over Creditor’s which the district Judge concluded was not clear error. Ultimately, the Judge affirmed the finding that “[Debtor] had no present intent to deceive [Creditor] when he entered the guarantee and rather, [Debtor] had intent to perform on the guarantee.” Accordingly, the District Judge affirmed the finding of the bankruptcy judge in that Creditor failed to establish that the guarantee obligation was nondischargable.

[MJK]

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