District Court Allows Discharge Of Bail Bond In Chapter 7 Proceeding
A forfeiture is a forfeiture, is a forfeiture!
NOT SO! In a recent decision by the District Court, Judge Dalzell addressed this issue on which the Third Circuit has not as yet ruled.
In the case In Re Gi Nam, 254 BR 834, 2000 WL 1661488, the issue was presented as to whether a bail bond surety debt arising from the criminal defendant’s failure to appear is discharged in a chapter 7 proceeding filed by the surety. In a thorough opinion, U.S. District Court Judge Dalzell sustained Bankruptcy Judge Diane Weiss Sigmund’s decision to discharge the debt.
The facts of the case are relatively simple. The debtor’s son was charged with numerous serious criminal offenses, including murder, robbery and burglary. Bail was set at $1,000,000. The debtor agreed to serve as surety and signed the customary surety agreement, agreeing to the payment to the Commonwealth of Pennsylvania of the sum of $1,000,000 if the defendant (son) failed to appear in Court. The document contained the confession of judgment provision. It appears that ten percent of the bail was posted ($100,000).
The defendant failed to appear for pretrial status and to this day remains a fugitive. Judgment was entered on the bond in the amount of $1,000,018.15 ($18.15 costs).
Approximately one year later the father (surety) filed a petition under chapter 7 of the Bankruptcy Code and sought to discharge the debt owing to the City of Philadelphia under the judgment referred to above. The City of Philadelphia (alleging that it was the real party in interest, even though the judgment was entered in favor of the Commonwealth of Pennsylvania), filed an adversary complaint attempting to declare the debt non-dischargeable under 11 U.S. §523(a)(7). A Motion to Dismiss was filed by the Debtor and granted by the Bankruptcy Court. The City appealed to the District Court. The appropriate section of the Code which the Court was asked to rule upon is:
11 U.S.C. § 523 states, in pertinent part:
(a) A discharge under section 727. . . of this title does not discharge an individual debtor from any debt – . . . .
(7) to the extent such debt is for a [1] find, penalty, or forfeiture [2] payable to and for the benefit of a governmental unit, and [3] is not compensation for actual pecuniary loss . . . .
The Bankruptcy Court’s conclusion that, despite the City’s argument “…that the integrity of the bail bond system might suffer…”, nevertheless held that §523(a)(7) deals with obligations which were penal in nature…that was imposed on the debtor as punishment for the debtor’s wrongdoing. Therefore, the Bankruptcy Court determined that this debt was, in fact, dischargeable.
The District Court concluded that on appeal it need concern itself with the issue of the scope of the Bankruptcy Court’s legal determination dealing with what is meant by the language in §523(a)(7) regarding “fine, penalty or forfeiture.”
The city argued that, since the debt was a forfeiture of the bond, the plain language falls within the statutory exception. The District Court, in relying upon United States Supreme Court caption Kelly v. Robinson, 479 U.S. 36, 107 S.C. 353 (1986), and a Fourth Circuit case In re Collins, 173 Fed. 3rd 924, 931 (4th Cir. 1999) disagreed with the City and concluded that the mere use of the word “forfeiture” does not make the claim penal in nature and thus non-dischargeable.
Judge Dalzell presented the thorough analysis of the statute defining the basis of his conclusion that the forfeiture must be penal in order to discharge the debt under §523(a)(7) of the Bankruptcy Code. In his opinion the Judge applied a detailed analysis of canons of statutory constructions such as ejusdem generis, (when a general term follows a specific one, the general term should be understood as a reference to subjects akin to the one with specific enumeration), and noscitur a sociis (a provision that should not be viewed in isolation but in light of the words that accompany it and give it meaning).
The Court concluded that the words “penalty” and “fine” set forth in the statute were clearly penal in nature. Thus applying the rules of statutory construction, Congress meant that the “forfeiture” set forth in the statute was also penal in nature.
The Court’s conclusion was buttressed by the fact that the debt owed to the city was not created by debtor’s own wrongdoing. Since this was a Motion to Dismiss, the allegations set forth in the complaint were deemed true. The Court pointed out that the city made no allegations that the debtor’s (father’s) action triggered the judgment. Furthermore, the bond failed to explicitly set forth the surety (debtor’s) obligation to produce the criminal defendant. The District Court and the Bankruptcy Court, while acknowledging the concern of the city’s position that to allow the debt to be discharged would impede the state’s ability to successfully prosecute criminal offenders. The Court held that the policy concerns of the City do not overcome the basic policy of Congress and decisions under the Bankruptcy Code, to wit, “a fresh start and opportunity for a complete unencumbered new beginning to the honest but unfortunate debtor.” Grogan v. Garner 498 US 279, 286-87, 111 Supreme Ct. 654 at 659 (1991). An open issue is whether the Court’s conclusion would have been different if there was any allegation that the Debtor’s own wrongdoing had created the debt.
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