First Circuit Gets Suiza Dairy Decision Wrong PROMESA has been a rollercoaster of disappointments and vindications for those who have asserted
First Circuit Gets Suiza Dairy Decision Wrong PROMESA has been a rollercoaster of disappointments and vindications for those who have asserted
prepetition claims against the Commonwealth
based on the taking of their property for public use. One of the vindications came last year when the First Circuit held that otherwise valid takings claims arising prepetition could not be discharged in the Title III bankruptcy proceedings without payment of just compensation.
Unfortunately, said vindication was recently followed with a disappointment. This week the First Circuit affirmed the District Court’s holding that Suiza Dairy’s settlement-based claim against the Commonwealth could be impaired under the plan of adjustment.
In short, because Suiza settled its dispute before receiving a final judgment on its takings claim, Suiza only a had contract-based claim, which could be impaired in bankruptcy.
The First Circuit declined Suiza’s invitation to “pull the curtain back on the settlement agreement” to see that it was based on a takings claim. It reasoned that Suiza’s invitation “would undermine the settlement's finality, as well as the principle that ‘once a settlement is concluded, the merits of the antecedent claims will not thereafter be examined.’” Such reasoning is contrary to the U.S. Supreme Court’s holding in Archer v.
Warner, 538 U.S. 314 (2003), which was not discussed by the First Circuit or the District Court nor raised by Suiza in its brief.
In that case, the Archers and the Warners entered into a settlement agreement to release the former’s fraud claims in exchange for certain payments. The Warners didn't make the required payments and filed for bankruptcy. The Archers sought a determination that the amounts owed under the settlement were nondischargeable under section 523(a)(2)(A).
The lower courts held that the settlement worked a kind of novation that replaced the original fraud-based debt with a new dischargeable debt. The Supreme Court reversed. It reasoned that the inquiry with respect to the nature of the debt should not end with the settlement (despite the “blanket” release of the claims) since the nondischargeability statute “indicated that "Congress intended the fullest possible inquiry" to ensure that "all debts arising out of" fraud are "excepted from discharge," no matter what their form.” Courts have since applied the Archer holding to other exceptions under section 523(a).
The fact that Suiza’s nondischargeability argument was based on the takings clause and not section 523(a) should not dictate a different result. In fact, there are even more compelling reasons to look beyond a settlement and examine the nature and origin of a potential takings claim because, as explained by the First Circuit, the payment of just compensation “serves also as a structural limitation on the government's very authority to take private property for public use.” #bankruptcy #PROMESA #takings