DECISION REGARDING MOTION FOR SUMMARY JUDGMENT DECLARING DEBT TO THE UNITED STATES OF AMERICA NONDIS-CHARGEABLE
In this decision, the court holds nondis-chargeable 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
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 debt- or’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 “contend[s] ... 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. 1Ó, 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.... ”
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,
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,
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 mis-perceives 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 exam
In this case all of the settlement debt was based on the debtor’s knowingly making false claims to obtain government mortgage insurance: it related only to claims for that fraud. Having satisfied itself that the settlement debt was intended to compromise only fraudulent conduct, the court’s inquiry is at an end. For the settlement debt attributable to the debtor’s fraud falls within the language of § 523(a)(2)(A). First, it is a “debt” as defined in the Code. 11 U.S.C. § 101(12) (debt means “liability on a claim”). Second, the settlement debt is “for money, property, [or] services, ... to the extent obtained by [fraudulent conduct]” in that it resulted from the debtor’s fraudulent conduct in obtaining mortgage insurance from the government.
See Hartford Accident & Indem. Co.,
The debtor urges that the evidence does not support liability under the FCA for the amount of the debt, citing, for example,
United States v. Hibbs,
The parties settled the underlying claim for fraud for an agreed upon amount. The parties arrived at a mutually acceptable resolution of the underlying claim, and the court ought not step in now and nullify their efforts unless giving effect to the settlement agreement is somehow inconsistent with § 523. Having agreed to the settlement and having benefitted accordingly, the debtor should be bound by the settlement amount — at least to the extent it represents a compromise of the claims arising from his fraudulent conduct.
With this analysis in mind, those cases going behind the settlement agreement to determine how much of the settlement debt is nondischargeable can be squared with other cases where no such inquiry was made. Thus,
In re Carnahan,
Similarly,
In re Church,
In another case cited by the debtor,
In re Arterburn,
However, no inquiry behind the settlement agreement was made in
In re Guerrerio,
Moreover, in those cases discussed above where the courts did seek to apportion the settlement debt between nondischargeable and dischargeable amounts, the courts did not examine whether the debtor’s conduct in fact caused the plaintiff creditor to suffer losses in the amount of the settlement debt. Instead, the courts — without visiting the issue of causation — sought only to determine what part of the debt was intended to compromise the claims for fraud or the like and what part was intended to settle other claims against the debtor.
The whole tenor of Spicer’s settlement negotiations with the government was to fix losses to be repaid by Spicer in order that he might secure a vacating of the restitution award against him. There is no suggestion that punitive damages specifically came into consideration. Nevertheless, this case may be distinguishable from such eases as
Guerrerio,
Can the $339,000 settlement amount be viewed as simply fixing the amount of losses HUD suffered? Certainly it could as to the $100,000 component that the debtor himself urged — before the settlement was increased to $393,000 — was compensation for losses. The court assumes, without deciding, that the remaining $239,000 could be viewed as for punitive damages as well as for compensatory damages.
Although
Church,
The settlement agreement states on its face that it compromised the government’s claims stemming from the debtor’s submission of false information to the government. The debtor’s conduct gave rise to claims against the debtor under the FCA and for fraud at common law. Neither party has alleged that the government had any other basis for claims against the debt- or. The debtor has pointed to no component of the settlement agreement that could be for other than compensatory damages caused by the false statements or punitive damages. The settlement debt is wholly attributable to the common law claims for fraud and FCA claims founded on knowingly false statements.
Ill
There remains for determination whether the underlying conduct complained of by the government amounted to fraud within the meaning of § 523(a)(2)(A). The elements of a § 523(a)(2)(A) exception to discharge have been stated to be:
1. The obtaining of money, property, [or] services ...,
2. Using a false representation pertaining to a past or present fact,
3. With knowledge of the representation’s falsity, or its assertion as fact with reckless disregard for its truth or falsity,
4. And an intention to deceive the other party or to induce the other party to act upon the representation,
5. Reasonable reliance by the creditor upon the misrepresentation, and
6. Resultant detriment to the creditor.
In re Hames,
Proof of the elements of § 523(a)(2)(A) would suffice to establish liability under the FCA.
See
31 U.S.C. § 3729;
see, e.g., United States v. Veneziale,
The elements for actual fraud are met here as indicated by the following undisputed facts. The debtor has admitted he knowingly submitted false statements to the government for the purpose of inducing the government to insure mortgages. The false information submitted formed the basis for the government agreeing to insure the mortgages, and the government acted reasonably in relying on the false representations contained in the insurance applications: the certification was necessary before an application could be granted and there is no evidence the government was on warning that the certification was false. 1 The debtor benefitted from the government insuring the mortgages as such insurance facilitated the sale of the real properties, which, in turn, resulted in the debtor obtaining money through sales proceeds or commissions. Finally, because the government agreed to insure the mortgages, it was required to settle numerous claims to its detriment when the various mortgagors defaulted.
With respect to the specific intent element, the debtor maintains that he did not intend to cause the government losses. However, the government does not need to establish such an intent, but only that the debtor submitted false statements to induce the government to insure the mortgages.
Hames,
The debtor further maintains that he obtained no benefit, but that the lenders were the only ones to benefit. Some courts appear not to require a benefit by holding that it is of no consequence that third parties
{e.g.,
the purchasers of the HUD-insured properties) arguably were the primary beneficiaries of the fraud; a debt- or need not actually procure money or property for himself for the debt to be nondischargeable.
In re Mann,
The debtor also renews his contention that the government cannot show that the false statements caused it to suffer detriment because any injury resulted from defaults by the mortgagors. For reasons discussed in part II of this decision, the settlement agreement fixed the amount of damages and bars the debtor from requiring the government to put on proof of causation. The amount of liability the parties agreed to under non-bankruptcy law standards of causation is plainly nondis-chargeable under whatever standards of causation are imposed by Federal bankruptcy nondischargeability law: the latter standards are at least as unfavorable to the debtor as the former.
In an analogous situation this court has held that the entire loss suffered by a creditor is the proper measure of the non-dischargeable debt where the creditor ad^ vanced monies wholly in reliance on the debtor’s misrepresentations.
In re Hecker,
In arguing that the defaulting mortgagors caused the government’s losses, the debtor seeks to avoid responsibility for his actions much as the debtor in
Hecker
did. The government program at issue here required by law that the mortgagor make a downpayment as a pre-condition to obtaining federal mortgage insurance. Thus, absent the debtor’s false statements, the government would never have been called upon to pay off the mortgages. The debtor is not entitled to escape or limit liability by laying the blame for the government’s losses on the defaulting mortgagors where his false statements resulted in the government agreeing to insure the mortgages in the first place.
Cf. Hecker,
IV
Few cases tiirn purely upon the binding effect of a settlement. But an analogy readily demonstrates that the settlement agreement should have binding effect here. This case is similar to cases in which the debtor and a creditor enter into a consent judgment in state court and the issue then is whether the consent judgment should be given binding effect.
See Kling-
The collateral estoppel question presented, when only the settlement agreement or consent judgment is relied upon, is whether by their agreement the parties not only intended to terminate the litigation of claims but also intended to determine finally the issues eventually presented in the dischargeability litigation.
Pearson,
However, when the settlement agreement does not establish an intent to fix the character of the debt, other evidence may be received to determine the character of the debt. A conviction or guilty plea can form the basis for collateral estoppel.
In re Jardula,
CONCLUSION
In short, the court finds, on undisputed material facts, fraud on the part of the debtor and the compromise of claims grounded in that fraud resulting in the settlement debt of $339,000.00 in principal plus interest in accordance with the settlement agreement. Accordingly, the court holds, as a matter of law, that the debt for $339,000.00 is nondischargeable under § 523(a)(2)(A) of the Code. Summary judgment to this effect will be entered in favor of the government.
Notes
. Moreover, to the extent that the Federal non-dischargeability reliance element is but a reflection of non-bankruptcy law requirements of reliance to impose liability,
see Kirsh,