In re Rose

101 B.R. 934 (1989)

In re Thomas J. (Jerry) ROSE, Debtor.

Bankruptcy No. 2-89-01015.

United States Bankruptcy Court, S.D. Ohio, E.D.

June 29, 1989.

Stephen E. Schafer, Columbus, Ohio, for debtor.

Michael J. Barren, Porter, Wright, Morris & Arthur, Columbus, Ohio, for The Huntington Nat. Bank.

Frank M. Pees, Worthington, Ohio, Chapter 13 Trustee.

Charles M. Caldwell, Columbus, Ohio, Asst. U.S. Trustee.

OPINION AND ORDER ON OBJECTION TO CONFIRMATION

R. GUY COLE, Jr., Bankruptcy Judge.

I. Preliminary Statement

This matter is before the Court upon an objection, filed by the Huntington National Bank ("HNB"), to confirmation of the Chapter 13 plan proposed by Thomas J. Rose ("Debtor"). The Court has jurisdiction over this contested matter pursuant to 28 U.S.C. § 1334(b) and the General Order of Reference entered in this judicial district. The matter at bar is a core proceeding which the Court may hear and determine in accordance with 28 U.S.C. § 157(b)(1) and (2)(L). The following opinion and order shall constitute the Court's findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.

Debtor's proposed plan provides for quarterly payments of $2,700 over a 57-month time period; full payment of allowed, priority, unsecured claims; and a dividend of 70% to holders of allowed, general, unsecured claims. HNB, one of two creditors set forth in the schedules accompanying Debtor's petition, is listed as the holder of a claim arising from a criminal restitution obligation of the Debtor (the "Criminal Restitution Obligation"). HNB has filed a proof of claim in the amount of $68,285.61. The other creditor, the Internal Revenue Service, is scheduled as the holder of a $962.79 priority tax claim.

II. Factual Background

Between 1974 and August of 1981 Debtor was the owner and operator of Rose Title Agency ("RTA") and Federated Mortgage, and was also a partner in Gibralter Land Title. Each of these entities¹ maintained banking accounts with HNB. During this time period, Debtor served as title agent for M/I Homes, a sizable Columbus-based real estate developer. In the course of Debtor's business, large sums of money routinely were deposited in the aforementioned HNB accounts.

While the record is unclear as to many of the facts preceding the Criminal Restitution Obligation, it appears that Debtor, in July of 1981, drew on an unspecified bank account a check payable to RTA in the amount of $47,000 and presented the check to HNB. The proceeds of this check were credited to an account maintained by RTA with HNB. Thereafter, Debtor drew, and HNB honored, numerous checks against this account. Subsequently, the $47,000 check was returned to HNB unpaid because the account upon which the check was drawn contained insufficient funds. Debtor apparently admitted that he knew, when he drew the $47,000 check, that the check would be dishonored upon presentment by HNB. Because the check was returned to HNB unpaid, Debtor's account with HNB became substantially overdrawn.

At or about this same time, Debtor obtained $3,850 from Society Bank "by false pretenses, false representations and/or actual fraud." HNB Ex. 1 (identified below as the "Restitution Agreement") at 1. Debtor obtained an additional $67,236.27 from Berks Title Agency, Inc. ("Berks") "by fraud or defalcation while acting in a fiduciary capacity, by embezzlement and/or larceny." Id. The particular circumstances surrounding Debtor's criminal conduct involving Society Bank and Berks is not revealed by the record.

As a result of the transactions described above, Debtor was criminally charged in state court with theft, and subsequently pleaded guilty to one count of that charge. Debtor attributes his criminal conduct to an addiction to alcohol and cocaine from 1979 to August of 1980. In August of 1980 Debtor entered, and apparently successfully completed, a substance-abuse rehabilitation program at Riverside Methodist Hospital. Debtor presently attends programs sponsored by a nationally-recognized alcohol abuse organization and maintains his sobriety.

Following entry of a guilty plea to the theft charge, the state court placed Debtor on probation. Debtor either was required as a condition of his probation, or consented, to enter into an agreement (the "Restitution Agreement") with Society Bank, Berks and HNB, pursuant to which Debtor would repay in installments his obligations to these creditors. Pursuant to the terms of the Restitution Agreement, HNB and Berks would receive payments only after the debt to Society Bank had been satisfied in full. Thereafter, payments made by the Debtor were to be applied equally to the debts owed Berks and HNB until the respective obligations were fully satisfied.

In 1983, during the term of Debtor's probation and while he was making payments pursuant to the Restitution Agreement, Debtor filed a joint voluntary petition under Chapter 7 of the Bankruptcy Code together with his wife, Polly Rose, from whom he is now divorced. Debtor thereafter entered into a stipulation ("Stipulation") with HNB in his Chapter 7 proceeding, which provided that the full amount of the obligation owed HNB under the Restitution Agreement was a nondischargeable debt in his bankruptcy case. Debtor and HNB further stipulated that the Criminal Restitution Obligation arose from Debtor's willful, malicious and fraudulent conduct. Paragraph 9 of the Stipulation specifies the amount of the obligation and the interest to be charged, as follows:

Rose\'s obligation pursuant to the Restitution Agreement remains wholly unsatisfied, and accordingly Rose, on account of his fraudulent actions, owes Huntington the sum of Forty-Seven Thousand and 00/100 Dollars ($47,000.00), together with interest thereon at the rate of eight percent (8%) per annum from November 16, 1981.

Similar language was incorporated into a judgment entry (the "Judgment Entry") executed by former Bankruptcy Judge Kelleher on February 21, 1984.

Debtor made all payments called for under the Restitution Agreement until his probation terminated in February of 1987. Debtor then contacted HNB and proposed a restructuring of the Restitution Agreement. Specifically, because Berks had ceased doing business, Debtor requested that HNB credit all future payments made under the Restitution Agreement to its claim and none to the claim held by Berks. Because his requests to restructure the Restitution Agreement were unsuccessful, Debtor obtained legal counsel to assist him in his negotiations with HNB. Debtor expended considerable time and expense, including attorney's fees of $6,000 for the month of January, 1989, in attempting to renegotiate the terms of the Restitution Agreement.

Debtor and HNB were unable to reach an agreement for the restructuring of the Restitution Agreement. The primary issue in dispute — which precluded a successful renegotiation — involved whether the amount to be paid HNB should include interest charges from November 16, 1981. HNB, apparently on the strength of the Stipulation and Judgment Entry, took the position that interest from November 16, 1981, was properly includible in the amount it should receive under a restructured restitution agreement. Debtor took the contrary position — i.e., the restructured payment obligation should not include interest charges from November 16, 1981.

Debtor's post-probation employment is germane to the issues before the Court. Upon termination of his probation Debtor accepted a position as an Executive Vice President with Leader Mortgage Company ("Leader") in Cleveland, Ohio, and earned approximately $75,000 in calendar year 1987. In 1988 Debtor, because of the alleged stress incumbent in his executive position, requested and obtained a job as office manager in Leader's Columbus operation. As office manager, Debtor earned approximately $20,000 in 1988, considerably less than he had earned the previous year as a vice-president.

Debtor left Leader and, since October 1, 1988, has been employed by First Mortgage Group, a small mortgage company which commenced doing business in September of 1988. Debtor receives a bi-weekly salary of $2,000 and is entitled to receive commission income on a quarterly basis. According to Debtor's Chapter 13 statement, he anticipates earning quarterly commission payments of approximately $4,500-$5,000. Debtor also receives a monthly automobile allowance of $325 and an "expense" allowance of $100 per month.

Debtor's income to date has not met his expectations. He received aggregate commission payments of $2,200 for the months of October, November and December of 1988. For the period between January 1 through February 21, 1989, Debtor has earned no commission income. The record is silent as to whether Debtor has earned any commission income since February 21. Debtor attributes the absence of commission income to several factors. First, because First Mortgage Company is a fledgling company, much of his time has been spent in "start-up" activities which have yet to provide financial reward. Further, Debtor claims that his attention to the dispute with HNB has distracted him and, thus, resulted in lost productive time. Debtor steadfastly maintains, nonetheless, that quarterly commission earnings of $4,500-$5,000 are a realistic expectation.

Debtor remarried in December of 1987. Because Debtor's criminal record has made it difficult for him to obtain credit, he and his wife have recorded the ownership of their residence and the vehicle which Debtor drives (a 1986 GMC Jimmy Pick-Up Truck) in his wife's name. However, even though Debtor did not sign the promissory notes for the purchase of the residence or automobile, he has made the payments on these obligations, at least in part, from his earned income.

It bears notation that, notwithstanding Debtor's receipt of a substantial salary in 1987, he made no payments to HNB that year. In fact, no voluntary payments under the Restitution Agreement have been made since...