U.S. v. Spicer

• Citation: 57 F.3d 1152
• Decision Date: 30 June 1995
• Docket Number: No. 94-5145,94-5145
• Parties: , 64 USLW 2034, 27 Bankr.Ct.Dec. 561, Bankr. L. Rep. P 76,560 UNITED STATES of America, Appellee, v. John R. SPICER, Appellant.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 1152

57 F.3d 1152

313 U.S.App.D.C. 67, 64 USLW 2034, 27

Bankr.Ct.Dec. 561,

Bankr. L. Rep. P 76,560

UNITED STATES of America, Appellee, v. John R. SPICER, Appellant.

No. 94-5145.

United States Court of Appeals, District of Columbia Circuit.

Argued May 11, 1995.

Decided June 30, 1995.

Appeal from the United States District Court for the District of Columbia (No. 93cv01722).

Ronald L. Schwartz, Riverdale, MD, argued the cause and filed the brief for appellant.

David W. Long, Attorney, U.S. Dept. of Justice, Washington, DC, argued the cause for appellee. With him on the brief were Frank W. Hunger, Asst. Atty. Gen., Eric H Holder, Jr., U.S. Atty., and Michael F. Hertz, Washington, DC, Atty.

Before: EDWARDS, Chief Judge; WALD and BUCKLEY, Circuit Judges.

Opinion for the Court filed by Circuit Judge WALD.

WALD, Circuit Judge:

John R. Spicer appeals from a judgment of the district court holding that bankruptcy does not discharge his $339,000 debt to the United States. Spicer promised to pay this amount in settlement of the government's civil claims against him for fraud. The district court held the debt nondischargeable under 11 U.S.C. Sec. 523(a)(2)(A), which provides that bankruptcy "does not discharge an individual debtor from any debt ... for money [or] property ... to the extent obtained by ... false pretenses, a false representation, or actual fraud." We affirm.

I. BACKGROUND

On October 3, 1989, real estate broker and investor John R. Spicer entered a guilty plea in the United States District Court for the District of Columbia on a single count of interstate transportation of money obtained by fraud. Spicer admitted that in documents submitted to the Department of Housing and Urban Development ("HUD"), he had intentionally overstated the down payment made by a home buyer in order to help the buyer qualify for an FHA-insured mortgage.

Spicer was sentenced to incarceration for four months. Although the fraud conviction was predicated upon a single transaction involving a property at 764 Howard Road, S.E., in the District of Columbia, Spicer admitted in factual stipulations that he had made similar misrepresentations on a total of 81 applications for FHA-insured mortgages in 1983 and 1984. The district court included in his sentence an order to pay restitution to the government in the amount of $340,000, equal to the profits he earned as a result of these misrepresentations. In each case, Spicer overstated the down payment made by the buyer, who used that false information to obtain an FHA-insured mortgage. In each case, Spicer's misrepresentation was germane to HUD's determination that the buyer qualified for an FHA-insured mortgage. ¹ And in each case, Spicer profited from the transaction either as the seller of the property or as the seller's broker, earning a commission on the sale. Buyers of 43 of the 81 parcels subsequently defaulted, resulting in losses of $1.8 million to HUD.

After being convicted on the criminal fraud count, Spicer reached a settlement agreement with the government on all its pending civil claims against him under the False Claims Act, 31 U.S.C. Secs. 3729 et seq., and for common law fraud. Under the terms of the agreement, Spicer did not admit liability, but did promise to pay the government $339,000, plus interest at 8.5%, over a 10-year period. On October 26, 1990, Spicer executed two promissory notes to that effect. In return, the government explicitly released all its civil claims (except tax claims) against him. Once this settlement agreement was reached on the civil claims, the district court deleted the restitution order from Spicer's criminal sentence.

On July 29, 1992, Spicer filed a voluntary Chapter 7 bankruptcy petition, seeking, inter alia, to discharge his obligations on his promissory notes to the government. On October 29, 1992, the government filed an adversary complaint in bankruptcy court seeking a determination that the $339,000 Spicer owed to the government is not dischargeable in bankruptcy, under a provision of the Bankruptcy Code stating that bankruptcy "does not discharge an individual debtor from any debt ... for money [or] property ... to the extent obtained by ... false pretenses, a false representation, or actual fraud," 11 U.S.C. Sec. 523(a)(2)(A). The bankruptcy court granted the government's motion for summary judgment. In re Spicer, 155 B.R. 795 (Bankr.D.D.C.1993). The district court affirmed in an unreported memorandum opinion. Spicer now appeals from that judgment.

II. ANALYSIS

A. Nondischargeability Under 11 U.S.C. Sec. 523(a)(2)(A)

If Spicer's debt to the government is "debt for money [or] property ... obtained by ... fraud," it is not dischargeable in bankruptcy under the plain terms of 11 U.S.C. Sec. 523(a)(2)(A). Both the bankruptcy court and the district court held that Spicer's debt fell under that statutory provision.

On appeal, Spicer contends that the district court erred in characterizing his debt as one "for money or property obtained by fraud." Relying principally on two Seventh Circuit cases, Maryland Casualty Co. v. Cushing, 171 F.2d 257 (7th Cir.1948), and more recently Matter of West, 22 F.3d 775 (7th Cir.1994), Spicer argues that because under the settlement agreement the government expressly released its underlying tort claims for fraud, a "novation" occurred in which the parties' original rights and obligations ceased to exist and were replaced by new contractual obligations. Consequently, Spicer reasons, even if his original obligation to the government had been for money or property obtained by fraud, his post-settlement debt does not fit that description. Instead, he contends, it is just an ordinary contractual obligation--a promise to pay, made in exchange for the government's promise to forego certain legal claims. And ordinary contractual obligations, unlike debts for money or property obtained by fraud, are dischargeable in bankruptcy.

Maryland Casualty and West do indeed lend support to Spicer's theory. In West, an embezzler executed a promissory note to her defrauded employer in exchange for an express release of the employer's civil claims against her, then a short time later petitioned for bankruptcy. Applying the rule established in Maryland Casualty, the West court held the note dischargeable, explaining that "[e]ven if the obligation arising from ... [the] embezzlement would have been nondischargeable due to its fraudulent nature, no allegations of fraud surrounded the note, and the note substituted a contractual obligation for a tortious one." 22 F.3d at 777. See also Gonder v. Kelley, 372 F.2d 94 (9th Cir.1967) (per curiam).

We decline to follow the Maryland Casualty approach, however, because in our view it improperly elevates legal form over substance. We cannot agree with a rule under which, through the alchemy of a settlement agreement, a fraudulent debtor may transform himself into a nonfraudulent one, and thereby immunize himself from the strictures of Sec. 523(a)(2)(A). The weight of recent authority rejects the Maryland Casualty approach because it is contrary to the public policy embodied in Sec. 523(a)(2)(A) of preventing fraudulent debtors from escaping their obligations at the expense of innocent defrauded creditors. The leading case is Greenberg v. Schools, 711 F.2d 152 (11th Cir.1983), where the Eleventh Circuit concluded that "a debt which originates from the debtor's fraud should not be discharged simply because the debtor entered into a settlement agreement." Id. at 156 (emphasis added). Rather than looking to the current legal form of the debt, the court "should inquire into the factual circumstances behind the settlement agreement to ascertain whether ... the debt ... was derived from the alleged fraudulent conduct...." Id. (emphasis added).

The Greenberg approach has been followed in most recent decisions in the bankruptcy courts. See, e.g., In re Marceca, 129 B.R. 371 (Bankr.S.D.N.Y.1991); In re Carnahan, 115 B.R. 697 (Bankr.D.Colo.1990); In re Bobofchak, 101 B.R. 465 (Bankr.E.D.Va.1989); In re Peters, 90 B.R. 588 (Bankr.N.D.N.Y.1988); In re Pavelka, 79 B.R. 228 (Bankr.E.D.Pa.1987); In re Kovacs, 42 B.R. 1 (Bankr.D.Mass.1982); In re Rush, 33 B.R. 97 (Bankr.D.Maine 1983). But cf., e.g., In re Anderson, 64 B.R. 331 (Bankr.N.D.Ill.1986). As the Peters court cogently explained, "[d]ischargeability is determined by the substance of the liability, not the form." 90 B.R. at 604.

We think the Greenberg approach sound because, as numerous courts have noted, it effectuates the policy Congress sought to implement when it enacted Sec. 523(a)(2)(A). "A debtor's 'fresh start' is not absolute; the [Bankruptcy] Code embodies a delicate balance between the rights of debtors and the rights of defrauded creditors." In re Pavelka, 79 B.R. at 232. "Although debtors are entitled under the [Bankruptcy] Code to an unencumbered fresh start, Congress has unmistakably mandated in section 523(a)(2)(A) that they may not get a fresh start at the expense of defrauded third parties." In re Rush, 33 B.R. at 98 (citation omitted).

In contrast, under the Maryland Casualty approach "[t]he intent of Congress to except from discharge debts incurred by fraud could effectively be shortcircuited by a simple execution of settlement. To disregard the settlement agreement and look at the underlying nature of the claim would not hinder the overall scheme of the Bankruptcy Code of giving the honest debtor a fresh start." In re Bobofchak, 101 B.R. at 468 (emphasis added). The purpose of the fraud exception to the general principle of dischargeability is "to discourage fraudulent conduct and to ensure that relief intended for honest debtors does not inure to the benefit of the dishonest." In re Wilson, 12 B.R. 363, 370 (Bankr.M.D.Tenn.1981). Settlement makes the dishonest debtor no more honest, and no more entitled to the relief Congress intended to reserve for the honest debtor.

In Matter of West, the Seventh...