Bankruptcy: Prior Bankruptcy Petition - Dismissal "With Prejudice"

     In the case of Colonial Auto Ctr. Inc. v. Tomlin, the United States District Court at Charlottesville, Virginia, reviewed a Bankruptcy Court's decision denying a creditor summary judgment against the debtor in a motion to determine if the creditor's debtor was nondischargeable due to the debtor's prior bankruptcy case being dismissed "with prejudice". 

     In Tomlin the Bankruptcy Court had ruled that the words "dismissed with prejudice" meant only that the debtor could not file another bankruptcy petition for 180 days. The creditor, however, argued that the language meant that the debtor could not discharge pending debts in a later bankruptcy petition; the creditor asserted that dischargeability had a res judicata effect. 

     The District Court ascertained that the question before it was does an order stating only that a case is "dismissed with prejudice," which in the general legal context, the effect of precluding the subsequent litigation based upon the same claim, have, in the bankruptcy context, the effect of precluding the subsequent discharge of pending debts? 

     The District Court ruled that there was no reason to depart from the traditional effect of an order dismissing a case "with prejudice", and that the Bankruptcy Court erred in determining that the prior order as effecting something less than res judicata. The District Court further ruled that the debtor failed to identify any portion of the Bankruptcy Code in which Congress indicated an intention that a dismissal "with prejudice," once ordered, does not effect claim preclusion in relation to a pending debt. Accordingly, the District Court vacated the Bankruptcy Court's order denying the creditor summary judgment. 

Collections: Bank Denied Lawyer Fees Due to Problem in the Guaranty

     In the case of Jefferson National Bank v. Estate of Frogale, a Loudoun County Circuit Court Judge denied the award of attorney's fees to a bank because the guaranty agreement did not have a provision for attorney's fees even though the promissory note clearly provided for 25% attorney's fees. The Loudoun Court found that the guaranty referred only to collection of "charges or costs" upon default. The Court ruled that this language was ambiguous, and as such, construed the ambiguity against the bank because they drafted the documents. 

     In Frogale a corporation defaulted in the payment of a note and the bank sued the note's guarantor. The guarantor filed a motion for summary judgment regarding the question of the guarantor's liability for attorney's fees. The Loudoun Court reviewed the Virginia Supreme Court case of Mahoney v. Nationsbank. In Mahoney the Virginia Supreme Court ruled that a note and guaranty are two separate agreements, but each must be construed in the light of the other. In doing so, the Loudoun Court stated that it was "crucial that the bank chose to distinguish in the Note between 'all other applicable fees, costs and charges' and attorney's fees; and that it chose not to place a specific attorney fee obligation in the guaranty." The Loudoun Court pointed out that the bank could have placed an attorney's fee provision in the guaranty just as it had done in the note. 

     The lesson of Frogale is that you should be careful that when you have guaranties you ensure that the language in the guaranty "mirrors" the language in the promissory note - without mirror language, there can be a problem, with mirror language, ambiguity should not be an issue.