In re Spicer

• Decision Date: 02 July 1993
• Docket Number: Adv. No. 92-0250.,Bankruptcy No. 92-00848
• Citation: 155 BR 795
• Parties: In re John R. SPICER, Debtor. UNITED STATES of America, Plaintiff, v. John R. SPICER, Defendant.
• Court: United States Bankruptcy Courts – District of Columbia Circuit

155 B.R. 795 (1993)

In re John R. SPICER, Debtor UNITED STATES of America, Plaintiff, v. John R. SPICER, Defendant.

Bankruptcy No. 92-00848, Adv. No. 92-0250.

United States Bankruptcy Court, District of Columbia.

June 29, 1993.

As Corrected July 2, 1993.

COPYRIGHT MATERIAL OMITTED

Michael F. Hertz, Stephen D. Altman, David W. Long, Washington, DC, for plaintiff.

Ronald L. Schwartz, Silver Spring, MD, for defendant.

DECISION REGARDING MOTION FOR SUMMARY JUDGMENT DECLARING DEBT TO THE UNITED STATES OF AMERICA NONDISCHARGEABLE

S. MARTIN TEEL, Jr., Bankruptcy Judge.

In this decision, the court holds nondischargeable under 11 U.S.C. § 523(a)(2)(A) the debtor's debt to the government under a settlement agreement which compromised government claims arising from the debtor's submitting false statements to obtain government mortgage insurance. In determining to grant summary judgment in favor of the government, the court rejects the debtor's contention (1) that the settlement was a novation, leaving only a contract debt which was discharged, (2) that the government may not rely on the settlement figure but must show the amount of damages caused by the debtor's admittedly false statements, and (3) that the debtor, who knowingly submitted the false statements for the purpose of obtaining the guarantees, lacked a specific intent to defraud.

FACTS

At the outset it should be emphasized that the debtor does not contest that the settlement was based on his false statements to the government. In the record presented that would be the only reasonable inference.

From 1983 through 1984, the debtor made numerous false statements to the government in order to obtain mortgage insurance from the government for the buyers of various real properties the debtor was trying to sell. These statements falsely represented that the buyers had made the downpayments required by law to participate in a federal mortgage insurance program. In reliance on the false statements, the Department of Housing and Urban Development ("HUD") approved mortgage insurance for the loans: the insurance would be authorized only if a review of the closing documents showed that the statutory requirement of at least a 3% down payment had been met. The debtor either owned the relevant properties by himself or in partnership, or he acted as broker for the owners of the properties receiving a commission for their sale. Of the 81 properties where the debtor made false statements to obtain mortgage insurance, the government has provided evidence that it had to settle claims on 41 of them. As a result, the government alleges, it sustained losses of over $1.8 million.

Because of his conduct, the debtor pled guilty in United States District Court for the District of Columbia to one count of interstate transportation of money obtained by fraud in violation of 18 U.S.C. § 2314. In a factual proffer and again orally at both the entry of the plea agreement and the sentencing hearing, the debtor admitted to making false statements and acknowledged that he did so to obtain mortgage insurance from the government. The false statements the debtor admitted making included not only those statements forming the substance of the one count of fraud to which he pled guilty but also false statements made in applying for mortgage insurance for 80 other properties. The district court accepted the debtor's guilty plea and sentenced him to 4 months in a community correctional center and ordered restitution of $340,000.00, the amount of the debtor's profits from the real property sales. The district court stated that it would be amenable to reducing the amount of restitution if Spicer subsequently reached a civil settlement with the government.

The debtor and the government entered into a settlement agreement compromising all the government's civil claims against the debtor under the False Claims Act ("FCA"), 31 U.S.C. §§ 3729-33, and at common law. These claims were grounded in the debtor's role in submitting applications for federal mortgage insurance from 1980 through 1984. Specifically, the settlement agreement recited that the government "contends . . . that Spicer . . . caused the submission to HUD of at least nine false applications for HUD mortgage insurance, and is liable for losses sustained in connection with claims for HUD mortgage insurance benefits submitted by the mortgage holders. . . ." Govt. exh. 10, par. 3. Without admitting liability under the FCA or at common law, the debtor agreed to pay the government over a 10-year period $339,000.00 in principal plus interest 8.5% per annum on $100,000.00 of the $339,000.00 debt. The settlement agreement included a release whereby the government agreed it would have no further civil claim, other than tax claims, against Spicer arising out of the claims recited in paragraph 3 of the settlement agreement "or arising out of any other real estate sales transactions in the District of Columbia from 1980 through 1984 in which buyers financed their purchases with mortgages insured by HUD. . . ." Govt. exh. 10, par. 6. Based on the settlement agreement, the district court vacated the restitution order.

The parties viewed the settlement agreement as fixing compensation for HUD's losses. In reaching the settlement agreement the parties focused on Spicer's financial circumstances. At first, subject to Department of Justice approval, HUD agreed that Spicer was to pay only $100,000, payable over a 10-year period in recognition of Spicer's "currently bleak financial situation" (Govt. exh. 8 at 3). In moving to vacate the restitution award, Spicer characterized the settlement agreement as "a global settlement of his civil liability for damages to HUD and the debarment/suspension proceeding initiated by HUD. . . ." Id. at 2. Further, Spicer stated that "HUD . . . has agreed to accept the $100,000 . . . as appropriate restitution." Id. at 4. Spicer viewed the $100,000 as a recovery of "compensatory damages." Id. at 4 n. 4 (quoting 18 U.S.C. § 3663(e)(2) (1985 and 1990 Supp.)). In response to a "concern that the settlement agreement did not adequately consider potential improvements in Mr. Spicer's financial situation in the future," Spicer then agreed to a Justice Department proposal to supplement the original proposal by $239,000. Govt. exh. 9 at 2. Spicer reported in the district court that he and the government "now believe that the sizeable civil settlement agreement that Mr. Spicer has agreed to pay satisfies the Court's interest in compensating HUD under the Restitution Order. . . ." Id. at 3. Spicer explicitly believed that the district court had stated that it would be amenable to reducing the amount of restitution if Spicer reached a civil settlement with the government "with respect to any losses sustained by HUD in connection with its FHA guaranteed mortgages." Id. at 1.

On July 29, 1992, the debtor filed a petition for bankruptcy under chapter 7 of the Bankruptcy Code. On October 29, 1992, the government filed a complaint for a determination that under 11 U.S.C. § 523(a)(2)(A) the debt for $339,000.00 cannot be discharged in bankruptcy. Summary judgment motions were filed, first by the government on February 26, 1993, and then by the debtor on April 15, 1993.

DISCUSSION

Section 523(a)(2)(A) provides:

(a) A discharge under section 727 . . . does not discharge an individual debtor from any debt—

(2) for money, property, or services, . . . to the extent obtained by—

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor\'s or an insider\'s financial condition.

I

At the outset, the court must reject the debtor's argument that its debt to the government is only a contract debt that can be discharged. Thus, the court rejects the holdings of Maryland Casualty Co. v. Cushing, 171 F.2d 257 (7th Cir.1948), and Gonder v. Kelley, 372 F.2d 94 (9th Cir. 1967) (affirming on the basis of the district court opinion), and their progeny in favor of the analysis set forth in Greenberg v. Schools, 711 F.2d 152 (11th Cir.1983) (affirming on the basis of the district court opinion), for the reasons articulated by the dissent in Gonder v. Kelley, 372 F.2d at 94-95 (Koelsch, J., dissenting). See also Arnold v. Employers Ins. Co. of Wassau, 465 F.2d 354 (10th Cir.1972); Hartford Accident & Indem. Co. v. Flanagan, 28 F.Supp. 415 (S.D.Ohio 1939).

Accordingly—

The fact that the plaintiff\'s claim never matured into a final judgment but was terminated by a settlement agreement should not be controlling. The Bankruptcy Court should inquire into the factual circumstances behind the settlement agreement to ascertain whether or not the debt incurred by the debtor was derived from the alleged fraudulent conduct complained of. If the court is satisfied that the debtor\'s conduct was fraudulent and did result in the debt that the plaintiff claims against him, the debt should not be discharged by the bankruptcy proceeding.

Greenberg v. Schools, 711 F.2d at 156.

II

In opposing the government's motion (on the assumption that Greenberg v. Schools is controlling), the debtor argues that to establish nondischargeability the government must demonstrate that the debtor's fraudulent conduct caused it to suffer damages in the amount of the settlement debt, $339,000.00.

In making this argument, the debtor misperceives the nature of the court's inquiry. In examining the underlying conduct, the court must satisfy itself that the conduct complained of in fact amounted to fraud by the debtor within the meaning of § 523(a)(2)(A). Having satisfied itself that this is the case, the court must then examine the debt established by the settlement agreement ("the settlement debt") to determine to what extent it was intended to be a substitute for any underlying claim for fraud against the debtor. To the extent the settlement debt was attributable to the debtor's fraudulent conduct, it cannot be discharged in bankruptcy,...