Sethna v. Brown

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF PENNSYLVANIA

In re: :

: Civil Action No. 24-4088

RICHARD S. BROWN, :

Debtor. :

: Bankruptcy No. 21-13400

____________________________________________ :

JONATHAN SETHNA, et al., :

Plaintiff/Appellee : Adversary No. 22-00034

:

v. :

:

RICHARD S. BROWN :

:

Defendant/Appellant :

MEMORANDUM

Perez, J. July 25, 2025

This is an appeal from a final judgment of the United States Bankruptcy Court for the

Eastern District of Pennsylvania. The Bankruptcy Court held that Richard Brown’s debt to

Jonathan and Christine Sethna is nondischargeable under 11 U.S.C. § 523(a)(2)(A) based on

Brown’s admissions of fraud in a written settlement agreement. For the reasons that follow, the

Bankruptcy Court’s judgment will be affirmed.

I. BACKGROUND AND PROCEDURAL HISTORY

This appeal arises from a long-running dispute between Jonathan and Christine Sethna

(“the Sethnas”) and debtor Richard Brown (“Brown”). In 2004, the Sethnas contracted to purchase

and have a home built by Brown’s company, Oxford Consulting, at 1305 South Street in

Philadelphia.1 After construction was completed, the Sethnas alleged the home was defective, and

1 Amended Complaint at ¶ 4, Adv. Pro. No. 22-00034.

in 2007 they sued Brown and Oxford in state court, asserting claims for breach of contract and

fraud.2

The parties settled in 2008. Under the Settlement Agreement, Brown agreed to pay the

Sethnas $5,000 and stipulated to a $120,000 judgment in their favor.3 Brown also admitted that he

made “materially false representations to Mr. Sethna and Ms. Sethna in connection with the

Agreement of Sale and the building of the Property . . . with the intent to deceive and fraudulently

obtain money and property. . . .”.4 The Settlement Agreement explicitly stated that the debt was

nondischargeable under § 523(a)(2)(A) and that if Brown later argued it was dischargeable in

bankruptcy, the mutual release would become void and the original litigation could be reinstated.5

Brown also agreed to perform repairs, and failure to complete them would permit the

Sethnas to revive the stipulated $120,000 judgment.6 Brown never completed the repairs, and in

2009 the Sethnas revived the judgment in state court (the “Revived Judgment”).7 With interest

accruing at the statutory rate, the judgment now totals $234,704.96.8

In 2021, Brown filed for Chapter 13 Bankruptcy. The Sethnas moved for summary

judgment in January 2023, arguing the debt was nondischargeable under § 523(a)(2)(A), and

alternatively under § 523(a)(6).9 On March 3, 2023, the Bankruptcy Court granted partial summary

judgment on the § 523(a)(2)(A) claim based on Brown’s admissions of fraudulent representations

in the Settlement Agreement.10

2 Id. at ¶¶ 6-7.

3 Settlement Agreement ¶¶ 1-2, ECF No. 5-4 at 66.

4 Id. at ¶ 11.

5 Id.

6 Id. at ¶ 4

7 Amended Complaint at ¶¶ 14-15

8 ECF No. 1-1 at 11.

9 Id.

10 ECF No. 1-1 at 16.

Following further proceedings, the Bankruptcy Court entered a final order in July 2024,

concluding that: (1) Brown’s breach of contract claim was a counterclaim barred by the statute of

limitations; and (2) the entire $234,704.96 debt, including post-judgment interest, was

nondischargeable. Brown timely appealed that judgment to the district court.11

II. LEGAL STANDARD

This Court has appellate jurisdiction over final judgments and orders of bankruptcy courts

under 28 U.S.C. § 158(a). On appeal, legal conclusions are reviewed de novo, factual findings are

reviewed for clear error, and exercise of discretion is reviewed for abuse thereof. In re Trans World

Airlines, Inc., 145 F.3d 124, 131 (3d Cir. 1998). Summary judgment is properly granted if the

movant shows that there is no genuine dispute of material fact and they are entitled to judgment as

a matter of law. Fed. R. Civ. P. 56(c).

III. ANALYSIS

The issues presented on appeal concern the Bankruptcy Court’s treatment of the adversary

proceeding between Brown and the Sethnas. Brown challenges the court’s decision to grant

summary judgment, arguing that genuine disputes of material fact existed and that he was

improperly denied a trial. He further contends that the Bankruptcy Court erred in finding that all

elements of 11 U.S.C. § 523(a)(2)(A) were satisfied, rendering his debt nondischargeable.

Additionally, Brown argues that the court wrongly treated his breach of contract theory as a

counterclaim rather than an affirmative defense, and improperly accepted the revived state court

judgment amount of $125,000 as the basis for the nondischargeable debt. Finally, Brown disputes

the court’s rulings that post-judgment, pre-petition interest is nondischargeable and that the interest

on the judgment was properly calculated using something other than simple annual interest.

11 ECF No. 1.

A. The Bankruptcy Court Properly Held the Debt Was Nondischargeable Under §

523(a)(2)(A)

The Bankruptcy Court properly held that Brown’s debt is nondischargeable. In the

Settlement Agreement, Brown expressly admitted that he made materially false representations

with the intent to defraud the Sethnas. Under 11 U.S.C. § 523(a)(2)(A), a debt is nondischargeable

if it was incurred through “false pretenses, a false representation, or actual fraud, other than a

statement respecting the debtor’s or an insider’s financial condition.” To prevail under this

provision, a plaintiff must prove by a preponderance of the evidence that: (1) the debtor knowingly

made false representations; (2) the debtor intended to deceive the creditor; (3) the creditor

justifiably relied on those representations; and (4) the creditor suffered a loss as a proximate result.

See Grogan v. Garner, 498 U.S. 279, 291 (1991); Field v. Mans, 516 U.S. 59, 61 (1995).

There is no genuine dispute of material fact that Brown’s debt was incurred through actual

fraud. In the Settlement Agreement, Brown admitted that “he personally and through the actions

of Oxford, did make materially false representations to Mr. Sethna and Ms. Sethna in connection

with the Agreement of Sale and the building of the Property … with the intent to deceive and

fraudulently obtain money and property.” This admission alone satisfies each element of

§ 523(a)(2)(A): (1) knowingly false representations; (2) intent to deceive; (3) justifiable reliance;

and (4) resulting loss.

Brown’s conclusory assertions that he did not mean what he signed, or that the Sethnas

also breached the agreement, are legally insufficient to create a genuine dispute of material fact.

He offers no evidence contradicting the unambiguous language of his written admissions and does

not dispute that he entered into the Settlement Agreement voluntarily and with the advice of

counsel. Summary judgment was therefore appropriate. See Celotex Corp. v. Catrett, 477 U.S.

317, 324 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247–48 (1986) (“[T]he mere

existence of some alleged factual dispute between the parties will not defeat an otherwise properly

supported motion for summary judgment … the requirement is that there be no genuine issue of

material fact.”).

Brown’s claim that the Bankruptcy Court improperly relied on collateral estoppel

mischaracterizes the record. The Bankruptcy Court did not rely on preclusive effect from prior

litigation; rather, it relied on Brown’s own admissions in the Settlement Agreement.12 His attempt

to repudiate those admissions is unavailing. Once executed, settlement agreements are binding and

enforceable contracts that courts will not disturb merely because a party later regrets the outcome.

See Ehrheart v. Verizon Wireless, 609 F.3d 590, 593–94 (3d Cir. 2010).

The record confirms that Brown was represented by counsel during settlement

negotiations, had ample opportunity to consult with his attorney, and chose to settle as a strategic

decision. In his deposition, Brown acknowledged that counsel negotiated the terms on his behalf

and that he opted to settle rather than face the uncertainties of trial.13 He testified: “I think that this

was the only option that I had. This was the only real option that I had where there was … some

kind of definitive amount,” explaining that the agreement allowed him the opportunity to reduce

or avoid a judgment by completing repairs.14 Given that the agreement was negotiated at arm’s

length, in good faith, and executed voluntarily, it is fully enforceable. Brown cannot now disavow

its terms.

B. The Bankruptcy Court Correctly Treated Brown’s Breach of Contract Theory as a

Time-Barred Counterclaim

12 ECF No. 5-1 at 2.

13 Brown Dep. 20:4-13, Dec. 6, 2022, ECF No. 26-1.

14 Id. at 22:11-20.

The Bankruptcy Court properly rejected Brown’s breach of contract theory as a time-

barred counterclaim. Although Brown alleged that the Sethnas breached the Settlement

Agreement by reviving the judgment, he raised this allegation not to defeat liability under

§ 523(a)(2)(A), but to offset or reduce the amount of the debt he owed. The Bankruptcy Court

correctly concluded that this constitutes a counterclaim and not an affirmative defense, because it

seeks affirmative relief rather than negating an element of the Sethnas’ nondischargeability

claim.

Under Pennsylvania law, an affirmative defense is “matter asserted by defendant which,

assuming the complaint to be true, constitutes a defense to it,” whereas a counterclaim is “a claim

presented by a defendant in opposition to or deduction from the claim of the plaintiff.” Nat’l Union

Fire Ins. Co. v. City Sav., F.S.B., 28 F.3d 376, 393–94 (3d Cir. 1994). Brown’s theory does not

undermine the Sethnas’ showing of fraud or address the legal sufficiency of their claim under

§ 523(a)(2)(A); rather, it seeks to diminish the debt by asserting a breach by the Sethnas. As such,

the Bankruptcy Court properly treated it as a counterclaim.15

As a counterclaim, Brown’s breach of contract theory is time-barred. Under Pennsylvania

law, actions based on a contract for the sale, construction, or furnishing of tangible property or

fixtures must be commenced within four years. 42 Pa. C.S.A. § 5525(a). The Settlement

Agreement was executed in 2008, and any alleged breach would have occurred shortly thereafter.

15 Even if Brown’s breach of contract theory were properly characterized as an affirmative defense, it is nonetheless

without merit. Brown contends that the Sethnas themselves breached the Settlement Agreement by reviving the full

judgment rather than allowing him additional time or credit for repairs. But under Pennsylvania law, an alleged breach

by the non-moving party does not automatically excuse the moving party’s own material breach or failure to perform.

See Widmer Engineering, Inc. v. Dufalla, 837 A.2d 459, 468 (Pa. Super. Ct. 2003) (“[A] party who has materially

breached a contract may not complain if the other party refuses to perform his obligations under the contract.”). Here,

it is undisputed that Brown failed to complete the agreed-upon repairs. Having materially breached his own obligations

under the Settlement Agreement, Brown cannot now assert the Sethnas’ purported breach as a defense to avoid the

agreed-upon judgment.

Brown did not raise this claim until more than a decade later, well beyond the applicable limitations

period. The Bankruptcy Court therefore properly dismissed the counterclaim as untimely.

C. The Bankruptcy Court Properly Declined to Revisit the State Court Judgment

Amount

The Bankruptcy Court properly declined to reduce the judgment amount from $125,000 to

$120,000. The judgment, originally stipulated in the Settlement Agreement, was revived in 2009

by the state court at $125,000. Under the Rooker-Feldman doctrine, federal courts (including

bankruptcy courts) are barred from reviewing or modifying final state court judgments. See

Baldino v. Wilson (In re Wilson), 116 F.3d 87, 90 (3d Cir. 1997) (“The Rooker-Feldman doctrine

prohibits lower federal courts from sitting as effective courts of appeal for state court judgments.”).

Any challenge to the validity or amount of the revived judgment should have been brought through

the state appellate process. Brown failed to do so. The Bankruptcy Court correctly recognized that

it lacked authority to alter the state court’s judgment and appropriately treated the $125,000 figure

as final and fixed.

D. The Bankruptcy Court Correctly Included Post-Judgment, Pre-Petition Interest in

the Nondischargeable Debt

The Bankruptcy Court correctly included post-judgment, pre-petition interest in the

nondischargeable debt. Brown argues that even if the principal debt is nondischargeable under

§ 523(a)(2)(A), the interest accruing from the 2009 revival of the judgment to his 2021 bankruptcy

filing should be excluded. That argument fails.

Once a debt is deemed nondischargeable under § 523, all components of the debt—

including pre-petition interest—are likewise nondischargeable. Interest is not a separate obligation

but an integral part of the continuing debt. As the Supreme Court recognized in Bruning v. United

States, 376 U.S. 358, 360 (1964), interest reflects the cost of the creditor’s lost use of funds and is

inseparable from the principal. Courts have consistently held that pre-petition interest carries the

same nondischargeable status as the underlying debt. See In re Larson, 862 F.2d 112, 119 (7th Cir.

1988).

Here, Pennsylvania law provides for post-judgment interest at a simple annual rate of 6%.

See 42 Pa. C.S.A. § 8101; 41 P.S. § 202. The Sethnas’ 2009 judgment has lawfully accrued interest

at this statutory rate. The Bankruptcy Court properly included that accrued interest in the total

nondischargeable amount as of the petition date.

E. Brown Waived Any Challenge to the Interest Calculation

The Bankruptcy Court did not err in accepting the total judgment amount, including

interest, as claimed by the Sethnas. Brown’s argument that the interest was improperly

compounded rather than calculated using simple interest was raised for the first time on appeal and

is therefore waived.16

Courts routinely decline to consider issues not presented to the bankruptcy court in the first

instance, as doing so would undermine the efficiency and finality of bankruptcy proceedings. As

the Eleventh Circuit has explained, permitting a party to withhold objections until appeal would

enable litigants “to say nothing to the bankruptcy court, await its ruling, bypass that judgment, and

for the first time take that objection to the district court.” Valdez v. Feltman (In re Worldwide Web

Sys.), 328 F.3d 1291, 1300 (11th Cir. 2003) (quoting In re Daikin Miami Overseas, Inc., 868 F.2d

1201, 1208 (11th Cir. 1989)).

16 Even if the Court were to reach the merits of the issue, Brown’s argument lacks evidentiary support. A simple

calculation shows that $125,000 accruing 6% simple interest per year for 15 years (since the judgment was revived in

2009) yields approximately $237,500. The $234,705 figure claimed by the Sethnas is consistent with that calculation,

and Brown has provided no evidence beyond his speculation to suggest that compound interest was improperly

applied.

Because Brown failed to raise any objection to the interest calculation in the Bankruptcy

Court, that issue is not properly before this Court. Accordingly, there is no basis to disturb the

Bankruptcy Court’s acceptance of the Sethnas’ claimed judgment amount.

IV. CONCLUSION

Therefore, upon review of the record in this matter, as well as the parties’ briefs, the

Bankruptcy Court did not err in determining that Brown’s debt to the Sethnas is nondischargeable

under § 523(a)(2)(A). The Bankruptcy Court also properly rejected Brown’s breach of contract

counterclaim, correctly declined to alter the revived judgment, and appropriately included interest

in the total debt. The judgment of the Bankruptcy Court is affirmed.