In re McGovern

• Decision Date: 20 August 2003
• Docket Number: No. 02-80965-CIV.,02-80965-CIV.
• Citation: 297 B.R. 650
• Court: U.S. District Court — Southern District of Florida
• Parties: In re John Thomas MCGOVERN, Debtor.

297 B.R. 650

In re John Thomas MCGOVERN, Debtor.

No. 02-80965-CIV.

United States District Court, S.D. Florida.

August 20, 2003.

COPYRIGHT MATERIAL OMITTED

Robert Cyril Widman, Morris, Widman & Keim, Venice, FL, Joseph W. Little, Gainesville, FL, for appellant.

James Earl Copeland, Cohen, Conway, Copeland, Klett, et al., Palm Beach Gardens, FL, for appellee.

MEMORANDUM OPINION

HURLEY, District Judge.

Charles Grapski ("Grapski" or the "Creditor") appeals from a bankruptcy court order denying his motion to dismiss the Debtor's Chapter 13 case for lack of good faith, and approving the Debtor's third amended reorganization plan. For reasons which follow, this court vacates the bankruptcy court order and remands this case for further findings on the issues of whether the Debtor filed his Chapter 13 petition and plan in good faith.

Background

John Thomas McGovern ("McGovern" or the "Debtor") filed his Chapter 13 petition on September 5, 2001, and his Chapter 13 plan on October 14, 2001, listing $7,701.19 in assets and $226,337.16 in liabilities. The bulk of the liabilities are associated with a state court judgment in favor of Grapski, and legal expenses relating to the defense of that claim and appeal of judgment. The Debtor himself testified that approximately eighty to ninety percent of his debt relates to the Grapski litigation. The percentage of potentially dischargeable debt related to the state court judgment may fall closer to the high end or exceed this range: Excluding the non-dischargeable student loan owed to the U.S. Department of Education in the amount of $ 42,502.70,¹ the remaining scheduled potentially dischargeable debt of $183,834.46 breaks down into $7,748.00 of credit card debt unrelated to the Grapski litigation² and approximately $176,084.00 of Grapski-related debt³ — roughly 96 % of the Debtor's total scheduled potentially dischargeable debt.

The petition lists no unsecured priority claims, and only one creditor holding a secured claim, Audi Financial Services, stemming from a lease on a luxury automobile, a 2001 Audi A6, which the Debtor assumed approximately two months before filing his petition.

Grapski filed a $97,053.00 proof of claim based on a $80,880.00 judgment entered in his favor in December 1999, the same month the Debtor graduated from law school at the University of Florida. In the state court suit, Grapski sued McGovern for defamation, alleging that McGovern falsely accused him of being a convicted child molester as part of a political smear campaign designed to destroy Grapski's candidacy for student president at the University of Florida in the mid-1990's when both were undergraduate students at that institution.

The defamation suit culminated with a jury verdict in Grapski's favor in the amount of $250,000.00 in June, 1998. Upon defense motion, the verdict was remitted to $150,000.00. Following a later $85,000 settlement paid by a codefendant, Florida Blue Key, judgment in the amount of $80,880.00, representing the remaining principal liability on the judgment, inclusive of prejudgment interest and costs, entered against McGovern on December 14, 1999. That judgment was affirmed on appeal, McGovern v. Grapski, 793 So.2d 935 (Fla. 1st DCA 2001), and post judgment proceedings in aid of execution ensued.

On the day before his scheduled deposition in aid of execution, the Debtor filed his Chapter 13 petition. Grapski moved to dismiss the Chapter 13 petition on the ground that the Debtor's petition and plan were not filed in good faith. Following hearing held April 8, 2002, at which the Debtor testified as sole witness, the bankruptcy court entered its order dated May 24, 2002, denying the motion to dismiss, but sustaining the Creditor's objections to confirmation of the plan, with leave for the Debtor to file an amended Chapter 13 plan. In re McGovern, 278 B.R. 888 (Bankr.S.D.Fla.2002). The Debtor thereafter filed an amended plan, and Grapski renewed his motion to dismiss and objections to confirmation of the plan.

On July 25, 2002, the bankruptcy court conducted a hearing on the Debtor's proposed third amended plan and Grapski's renewed motion to dismiss and objections to the plan. Grapski was sworn as a witness, seeking to proffer testimony relating to the circumstances relating to the underlying debt and the Debtor's pre-petition conduct toward this Creditor for the stated purpose of showing that the Debtor's petition and plan were not filed in good faith. The bankruptcy court sustained the Debtor's objections to the relevancy of this testimony, holding that the pre-petition behavior of the Debtor, while "despicable," was ultimately irrelevant to the assessment of good faith in a Chapter 13 proceeding:

I'm going to rule that I'm not going to allow Mr. Grapski to testify as to the prior course of conduct, and I'm going to state my reasons, if I may. I believe that under the present enactment of the Bankruptcy Code, a debt, such as the debt that was incurred by Mr. McGovern to Mr. Grapski, which would be non-dischargeable in a Chapter 7 proceeding, and which fact was stipulated to at the commencement of this first hearing in this case, can be discharged in a Chapter 13 proceeding, a debt incurred as a result of willful and malicious injury, a debt that would otherwise be nondischargeable under Section 523(a)(6) if this was a Chapter 7 proceeding. Thus, I believe that any inquiry into the history of the relationship between Mr. Grapski and Mr. McGovern is largely, if not wholly, superfluous.

....

I don't think it's relevant or admissible to examine the debtor's prior bad conduct or bad acts.

....

I construe Section 1325(a)(3) which reads that in order for a plan to be confirmed, the plan must be proposed in good faith, and not by any means forbidden by law, as referring to the conduct of a debtor during the course of a Chapter 13 case, and his conduct, vis-a-vis the Court, and the papers he files with this court.

On August 14, 2002, the bankruptcy court issued its order confirming the Debtor's third amended Chapter 13 plan, citing In re Lilley, 91 F.3d 491 (3d Cir.1996) and In re March, 83 B.R. 270 (Bankr.E.D.Pa.1988) for the proposition that the exceptions to dischargeable debt enumerated in § 1328(a)(2) are exclusive in a Chapter 13 proceeding. Under the confirmed third amended plan, the Debtor is required to make monthly payments totaling $50,847.84 over a period of 51 months.⁴ This encompasses a total payment of $19,656.00 to Grapski, constituting approximately 20% of the original debt owed to him.

Notably, at the time of confirmation, the Debtor was newly employed as an associate attorney at the prestigious law firm of Montgomery & Larson in West Palm Beach, earning a base salary of $75,000.00 per annum, with an expectation of variable annual bonuses payable at the discretion of his employer. In the year 2001, by way of example, his first full year of employment as an associate attorney, he generated an aggregate of $15,000.00 in bonus payments.

On appeal of the bankruptcy court order denying his motion to dismiss and overruling his objections to confirmation of the Debtor's third amended plan, the Creditor urges that the bankruptcy court erred in formulation of the legal criteria applicable to the determination of good faith in the filing of the Debtor's petition and plan, erred by excluding consideration of the Debtor's pre-filing conduct in making its good faith determinations, and consequently erred in concluding that the petition and plan were filed in good faith.⁵

Standard of Review

A district court reviews a bankruptcy court's fact findings for clear error, while legal conclusions are reviewed de novo. In re Optical Technologies, 246 F.3d 1332 (11th Cir.2001); In re Thomas, 883 F.2d 991 (11th Cir.1989); Fed. R. Bankr.P. 8013. A factual finding is "clearly erroneous" when the reviewing court on the entire record is left with the definite and firm conviction that a mistake has been committed, even though there is some evidence to support it. Anderson v. City of Bessemer, 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985), quoting United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948). Under this standard, the reviewing court may not reverse simply because it takes a different view of the evidence or would have decided the case differently, but this deference is not unlimited: The court may consider documents or objective evidence which contradict a witness' story, or take notice that a story is internally inconsistent or so facially implausible that a reasonable fact finder would not credit it. Id. at 574-575, 105 S.Ct. 1504.

The determination of a debtor's good faith in proposing a Chapter 13 plan is deemed a factual finding reviewable under the clearly erroneous standard. Handeen v. LeMaire, 898 F.2d 1346, 1350 (8th Cir.1990). Questions regarding interpretation of the Bankruptcy Code, like any other question of statutory interpretation, in contrast, are questions of law which are properly reviewed de novo. In re Hart, 328 F.3d 45 (1st Cir.2003); In re Kolich, 328 F.3d 406 (8th Cir.2003); In re BCE West, LP, 319 F.3d 1166 (9th Cir.2003); In re Morgan, 182 F.3d 775 (11th Cir.1999).

Accordingly, in this case, the court reviews de novo the bankruptcy court's threshold legal interpretation of the Chapter 13 "good faith" requirements, and reviews the bankruptcy court's factual findings under the clearly erroneous standard, as developed in Anderson, in order to determine whether McGovern filed and proposed his Chapter 13 plan in good faith.

Having done so, the court concludes that the bankruptcy court erred as a matter of law in formulating a "totality of circumstances" approach which excluded any consideration of the Debtor's pre-petition behavior, particularly as it relates to the Debtor's dealings with Grapski, his primary unsecured creditor, and other circumstantial evidence bearing on the...