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In re Smith

April 11, 2002


Appeal from the United States District Court for the Southern District of Indiana, New Albany Division. No. 00 C 44--Sarah Evans Barker, Judge.

Before Bauer, Posner and Ripple, Circuit Judges.

The opinion of the court was delivered by: Ripple, Circuit Judge.


Jerry D. Watson appeals from the decision of the district court affirming the bankruptcy court's confirmation of Edwin R. Smith's Chapter 13 plan. Ms. Watson contends that Mr. Smith filed his Chapter 13 reorganization plan in bad faith and, therefore, that he should have been denied discharge. For the reasons set forth in this opinion, we affirm the judgment of the district court.


A. Facts

Edwin R. Smith is a Certified Public Accountant who, in the late 1980s, fraudulently induced Jerry D. Watson to loan $75,000 to William Compton. Mr. Smith claimed, falsely, that Ms. Watson's investment was secured by real property owned by Compton. Mr. Smith, using the power of attorney conferred on him by Ms. Watson, also used her credit cards to their limit, took out a mortgage against her home and put her in debt to her life insurance company. Mr. Smith also borrowed $6,000 from Ms. Watson to buy his daughter a car; he has not repaid the loan.

Ms. Watson brought an action in a state court in Kentucky to recover the loan proceeds that had been fraudulently taken. The jury awarded her a judgment of $197,247.88, including punitive damages; that judgment was later affirmed on appeal. With interest, the judgment is now worth about $267,000. Ms. Watson domesticated the judgment in the Circuit Court of Harrison County, Indiana, where Mr. Smith resides.

B. Bankruptcy Court Proceedings

In March 1999, Mr. Smith filed for Chapter 7 bankruptcy in the United States Bankruptcy Court for the Southern District of Indiana. Ms. Watson filed an adversary proceeding challenging the dischargeability of Mr. Smith's debt to her. On July 22, 1999, the bankruptcy court granted Ms. Watson's motion for summary judgment and declared that Mr. Smith's debt was non-dischargeable because of Mr. Smith's fraudulent representations and his fraud while serving as Ms. Watson's fiduciary. See 11 U.S.C. sec. 523(a)(2) & (4).

Mr. Smith then filed this Chapter 13 proceeding and a reorganization plan ("the Plan"). Ms. Watson is Mr. Smith's only remaining creditor. Under the more liberal rules of Chapter 13, Mr. Smith's debt to Watson is dischargeable, subject to certain limitations, which will be discussed below. Ms. Watson again filed an adversary proceeding, arguing that "the plan is not proposed in good faith, that the income has been underreported, that the expenses have been overstated, and that there is more money available to pay on this plan than the debtor is indicating." Bankruptcy Tr. at 5.

The bankruptcy court held an evidentiary hearing regarding Ms. Watson's objection to confirmation of the Plan. The focus of the hearing was Ms. Watson's charge that Mr. Smith had padded his expenses in the Plan and underreported his income. Ms. Watson's counsel cross-examined Mr. Smith, suggesting that he claimed household expenses that were not characterized properly as such, that he failed to estimate properly his income over the course of the five-year Plan and that his wife's income was not properly documented. The court also examined Mr. Smith. Ms. Watson presented documentary evidence in support of her claims.

Ms. Watson also testified, describing Mr. Smith's fraudulent conduct while he was serving as her fiduciary. Ms. Watson described her precarious financial condition, made more difficult by Mr. Smith's fraud, which had deprived her of much of her savings. She also testified that Mr. Smith "remarked to me after I found out what he had been doing, that he knew how to make it that I would never be able to collect a dime from him. . . . I don't think he's done it in good faith." Bankr. Tr. at 67-68. Ms. Watson's counsel argued that "with the fraud that was involved in this particular debt, I think you ought to hold the debtor to a very high standard of proof that he really does spend each month what he claims to spend each month. . . . [T]here comes a point where you're padding your expenses so bad that your Chapter 13 plan just isn't a good faith plan." Bankr. Tr. at 72-73.

After hearing the evidence, the court, ruling from the bench, adjusted, and then confirmed, Mr. Smith's Chapter 13 plan. The court stated, "I just have to make sure that this debtor puts all [his] disposable income into the plan." Bankr. Tr. at 76. The original Plan called for payments of $200 per month; the court accepted this number for the first five months of the Plan. After that period, however, Mr. Smith would pay $250 per month for the next seven months, then $300 per month for a year, and then $350 per month for the final three years of the Plan. As adjusted, the Plan would increase Mr. Smith's payments to account for any pay raises he receives. After describing these adjustments, the court concluded that "[b]ased upon payment of that [adjusted] level, the Court would find that the ...

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