Opinion
Case No. 03-50819-JS, Adv. No. 03-5360-JS.
December 3, 2004
David Barsh, Hebron, Maryland, Pro Se.
Michael Scott Friedman, Assistant Attorney General, Hilary A. Siderius, Staff Attorney, Baltimore, Maryland, Attorneys for State of Maryland Central Collection Unit. Bud Stephen Tayman, Trustee, Greenbelt, Maryland. Office of the U.S. Trustee, Baltimore, Maryland.
MEMORANDUM OPINION AND ORDER DENYING DEFENDANT'S MOTION TO DISMISS COMPLAINT AND RULING ON DISCHARGEABILITY OF DEBT
Issue
The issue presented is whether Plaintiff is entitled to discharge a debt arising out of a judgment for collection fees and costs awarded pursuant to Md Code Ann. State Fin. Proc. § 3-304(a)(2)(I), or whether this constitutes a debt excepted from discharge under 11 U.S.C. § 523(a)(7).
Facts and Procedural History
Debtor, pro se, filed a voluntary petition for relief under Chapter 7 on January 17, 2003. On May 26, 2003 Debtor received a discharge in accordance with 11 U.S.C. § 727. In August, 2003, Defendant, the State of Maryland Central Collection Unit, initiated garnishment procedures to garnish Debtor's wages based on a prepetition judgment obtained in March, 2002. Shortly thereafter, on September 12, 2003, Debtor filed a Complaint to Determine Dischargeability of a Debt under 11 U.S.C. § 523(a)(7). Debtor also filed a Suggestion of Bankruptcy in the District Court of Maryland for Wicomico County on August 12, 2003, claiming that the judgment had been discharged, and seeking to stay the garnishment proceedings. The District Court entered an order on September 24, 2003, allowing the garnishment to proceed, stating that "on the face of the U.S. Bankruptcy Code, 11 U.S.C. Section 523(a)(7), the debt is for a judgement for penalties due a governmental unit plus statutory collection fees therefore, which penalty does not appear to be a tax penalty excepted in
Section 523(a)(7)(A) or (B)." See State of Maryland v. Barsh, Civil Case No.: 0203-0005814-2001 (D. Ct. of Md. for Wicomico Cty.).
Debtor alleges in his Complaint that collection of the debt by Plaintiff is in violation of state and federal law, is not in the nature of a fine or penalty, and was discharged with his other debts in May 2003. The debt at issue is the judgment obtained by Plaintiff for $7,795.78, plus attorneys fees of $1,307.96 and costs of $54.00. The principal amount of the judgment is for uncollected fines assessed by the Maryland Motor Vehicle Administration for Debtor's failure to maintain insurance on his vehicle during the period from May, 1995 through April,1999. The attorney's fees are actually a calculation of the statutorily allowed assessment of collection fees at 17% interest on the total amount of debt due (17% x $8,293.35), less payments made to CCU by Debtor ($101.91). Defendant obtained the judgment inState of Maryland v. Barsh, on March 19, 2002. It was appealed and affirmed.
In response to the Complaint, Defendant filed a motion to dismiss the adversary proceeding in which it claimed immunity from suit, failure to state a claim, and de facto nondischargeability under federal law. On December 16, 2003, a hearing was held on the motion, which was granted on the ground that Debtor failed to state a claim upon which relief could be granted because the debt was in the nature of a fine or penalty and was thus nondischargeable under § 523(a)(7). The remaining issues raised in the motion were not addressed. Debtor then filed this Motion to Reconsider based on newly discovered evidence, to which there were several responses and amended motions filed. Another hearing was held in July, 2004, in which the court determined that there was no new evidence with regard to the issue of whether the principal amount owing on the judgment was in the nature of a fine or penalty. However, the court allowed both parties to submit additional memoranda on the issue of whether the costs and collection fees, apart from the fine itself, were dischargeable under this section of the Code. Both parties submitted additional memoranda for the court's consideration of the issue.
I. Defendant's Motion to Dismiss Discussion
Defendant's Motion to Dismiss originally raised three arguments. First, Defendant stated that this Court does not have jurisdiction to hear the matter; second, that it is immune from suit; and finally, that Debtor has failed to state a claim upon which relief can be granted because the debt is nondischargeable as a matter of law. Initially, Defendant's Motion to Dismiss was granted for failure to state a claim. However, based on the additional exhibits and pleadings filed, the Court has determined that collection fees and costs may be considered as a separate component of the judgment rendered against Debtor, sufficient to establish that these costs may be a dischargeable debt. Therefore, Debtor has met his burden to state a claim for which relief may be granted, and the Court must now consider the other bases for dismissal alleged by Defendant in its original Motion to Dismiss.
Defendant first argues that this Court does not have jurisdiction to render judgment in the instant adversary proceeding because the District Court of Maryland for Wicomico County has already made a determination as to dischargeability. Consequently, the Court is estopped from rendering further judgment. This contention is incorrect. While there is a general prohibition against federal courts reviewing state court judgments, see District of Columbia Court of Appeals v. Feldman, 460 U.S. 462 (1983) and Rooker v. Fidelity Trust Co., 263 U.S. 413 (1923), this is not the case with respect to determining dischargeability of a debt. See Brown v. Felsen, 442 U.S. 127, 136, 99 S. Ct. 2205, 2211 (1979) ("If a state court should expressly rule on § 17 [predecessor to § 523] questions, then giving finality to those rulings would undercut Congress' intention to commit § 17 issues to the jurisdiction of the bankruptcy court . . . While Congress did not expressly confront the problem created by prebankruptcy state-court adjudications, it would be inconsistent with the philosophy of the 1970 amendments to adopt a policy of res judicata which takes these § 17 questions away from bankruptcy courts and forces them back into state courts."); Combs v. Richardson 838 F.2d 112, 115 (4th Cir. 1988) ("`The determination whether or not a certain debt is dischargeable is a legal conclusion based upon the facts in the case. The bankruptcy court has the exclusive jurisdiction to make that legal conclusion. It must apply the statute to the facts and decide to discharge or not.'" citing Spilman v. Harley, 656 F.2d 224, 226 (6th Cir. 1981)). This limitation is explicitly recognized by the District Court's order, in which it states that "in the event the Defendant [Mr. Barsh] is successful in his adversary proceeding against the Plaintiff in the U.S. Bankruptcy court, the Defendant should then file herein another Suggestion of Bankruptcy. . . ." The district court made no findings of fact, and limited itself to a conclusory statement that the judgment appeared to be nondischargeable on its face.See supra note 1 and accompanying text. Therefore, this court is fully within its jurisdictional limits to make a determination as to the dischargeability of the debt.
Defendant next asserts that the State is immune from prosecution. However, in Tennessee Student Assistant Corp. v. Hood, 124 S.Ct. 1905, 1912-13 (2004), the Supreme Court held that in determining the dischargeability of a debt owed to a governmental unit that was presumptively excepted from discharge, the bankruptcy court was exercising its in rem jurisdiction not in contravention to the state's sovereign immunity. The Court summed its position in the following manner:
No matter how difficult Congress has decided to make the discharge of student loan debt, the bankruptcy court's jurisdiction is premised on the res, not on the persona; that States were granted the presumptive benefit of nondischargeability does not alter the court's underlying authority. A debtor does not seek monetary damages or any affirmative relief from a State by seeking to discharge a debt; nor does he subject an unwilling State to a coercive judicial process. He seeks only a discharge of his debts. . . .
We find no authority, in fine, that suggests a bankruptcy court's exercise of its in rem jurisdiction to discharge a student loan debt would infringe state sovereignty in the manner suggested by TSAC. We thus hold that the undue hardship determination sought by Hood in this case is not a suit against a State for purposes of the Eleventh Amendment.
Id. As in the case of Hood, this Court must determine whether a debt owed to a governmental unit is nondischargeable under § 523. Given the reasoning in Hood, there is no impediment to exercising in rem jurisdiction in determining whether the judgment against Debtor is a dischargeable debt.
For the reasons state above, Defendant's Motion to Dismiss is denied. Defendant and Debtor submitted additional documents for the court's consideration beyond the pleadings. Therefore, this Court will now treat the issue of dischargeability of the debt as a matter for summary judgment. Fed.R.Civ.Pro. 12(b), made applicable by Fed.R.Bankr.P. 7012.
II. Determination of Dischargeability of Debt Pursuant to 11 U.S.C. § 523(a)(7) Summary Judgment Standard
Pursuant to Fed.R.Civ.P. 56(c), made applicable by Fed.R.Bankr.P. 7056, summary judgment is proper where "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c).See also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S. Ct. 2505, 2511, 91 L. Ed.2d 202 (1986). It is appropriate to decide this case as a matter of summary judgment because there are no material factual disputes to resolve. All that is left for resolution is whether the Debtor is entitled to judgment as a matter of law.
Debtor has asserted various reasons why the underlying state court judgment and its appeals are not valid. However, because this Court is forbidden by the Rooker Feldman doctrine from sitting as a court of appeals for State court decisions, the issues raised by Debtor are beyond the authority of this Court. Debtor really seeks to re-litigate many of the various defenses that were available to him at trial, e.g. fraud and illegality, but these are not relevant to the determination at hand, i.e. whether the state court judgment represents a debt for a fine, penalty or forfeiture.
Discussion
For a debt to be nondischargeable under § 523(a)(7), three elements must be present: (1) the debt must be payable to and for the benefit of a governmental unit; (2) it must be in the nature of a fine, penalty, or forfeiture; and (3) it must not be compensation for actual pecuniary loss. See In re Hollis, 810 F.2d 106, 108 (6th Cir. 1987) (citing Kelly v. Robinson, 107 S.Ct. 353, 361-62 (1986)). Section 523(a)(7) provides, in pertinent part:
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt — . . .
(7) to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss, other than a tax penalty. . . .
11 U.S.C. § 523(a)(7). Neither party has raised arguments with regard to the first element, and in any event, the Court finds that the State of Maryland Central Collection Unit is a governmental unit as that term is used. See § 107(27). This court has previously found that at least part of the underlying debt was for a fine or penalty, in that the judgment arose out of collection efforts by Defendant with respect to fines owed by Debtor to the Maryland Motor Vehicle Administration for failure to maintain insurance on his vehicle. See Adv. No. 03-5360 Proc. Memo Dkt. 29. Thus, the only remaining issue is whether that part of the judgment assessed pursuant to Md. Code Ann. Fin. Procurement § 3-304 constitutes compensation for actual pecuniary loss or is part of the penalty.
A number of cases have found that the entry of a judgment for costs as part of a criminal proceeding is nondischargeable under § 523(a)(7) because the award of costs is intended to be part of the penal sanction by the state. See Kelly v. Robinson, 479 U.S. 36 (1986); In re Thompson, 16 F.3d 576, 581 (4th Cir. 1994); In re Hollis, 810 F.2d 106 (6th Cir. 1987). In Kelly v. Robinson, the Supreme Court found that a restitution order entered as a condition of the defendant's probation was part of the penalty imposed by the state in criminal proceedings and thus was a fine or penalty that should not be disturbed by federal court. Cf. In re Wilson, 299 B.R. 380 (Bankr. E.D. Va. 2003) (holding that a criminal proceeding resulting in entry of order for restitution payable directly to the victim in an amount to be determined at a later civil trial was dischargeable because it was not payable to a governmental unit).
The reasoning in Kelly v. Robinson has been extended to civil proceedings as well. U.S. Dept. of Housing Urban Development v. Cost Control Marketing Sales Management of Virginia, Inc., 64 F.3d 920 (4th Cir. 1995). Cf. In re Taggart, 249 F.3d 987 (9th Cir. 2001). In Taggart the Court of Appeals for the Ninth Circuit held that the part of a monetary judgment that could be conditioned as part of the sanction entered against an attorney was nondischargeable, while the portion of the monetary award that was not a condition was simply compensation for actual pecuniary loss, was not penal in nature, and was thus dischargeable. Id. at 994. In extending the logic of Kelly v. Robinson to certain civil judgments, courts have concluded that where proceedings are penal in nature, whether criminal or civil, a monetary judgment flowing directly from a punitive sanction is also nondischargeable. This is true even if the monetary award is calculated with respect to actual pecuniary loss by the state.In re Zarzynski, 771 F.2d 304, 303 (7th Cir. 1985) ("There is no county pecuniary loss when the county functions as it should in the furtherance of its public responsibilities. . . . Nor does the fact that the costs are based on what the county expended in the criminal trial convert the costs into `compensation for actual pecuniary loss.'") See In re Thompson, 16 F.3d 576. InThompson the court explained:
All those terms and conditions suggest that the assessment of costs is understood by the Commonwealth as operating hand-in-hand with the penal and sentencing goals of the criminal justice system. The practical operating of the cost-assessment can only be understood in the penal context. Consequently, while for state law purposes these costs may be considered other than penal, for the purposes of the Bankruptcy Code the costs appear as a "condition a state criminal court imposes as part of a criminal sentence." Kelly, 479 U.S. at 50, 107 S.Ct. at 361.
Id., 16 F.3d at 580.
The preceding cases establish that even if a penal sanction is calculated by determining actual costs, it will not change the nature of the debt owed as being one for a penalty or fine. However, this is only true where the underlying action is penal in nature, such as criminal proceedings, attorney disbarment proceedings, or proceedings arising out of violation of environmental laws. The action in which Plaintiff's debt for collection fees and costs was adjudged was a collection action.
The specific statutory provisions that allow for an award of fees by the Central Collection Unit states as follows:
§ 3-304. Rights of Unit.
(a) In carrying out its responsibilities, the Central Collection Unit may:
(1)(I) institute, in its name, any action that is available under State law for collection of a debt or claim; or
(ii) without suit, settle the debt or claim;
(2) for all debts or claims collected on or after June 1, 1992:
(I) in addition to the outstanding principal and interest, assess and collect from the debtor a fee, which may not exceed 20% of the outstanding principal and interest, sufficient to cover all collection and administrative costs; and
(ii) prior to crediting any amount to any agency which refers a debt for any purpose, withhold a fee sufficient to cover all collection and administrative costs
Md. Code Ann. State Fin. Proc. § 3-304 (Supp. 2004). The Maryland Central Collection Unit is only authorized to collect debts, not to assess them. Its enabling legislation provides that, "[e]xcept as otherwise provided in subsection (b) of this section or in other law, the Central Collection Unit is responsible for the collection of each delinquent account or other debt that is owed to the State or any of its officials or units." Id. at § 3-302(a). Further, the Central Collection Unit is prohibited from collecting debts for fines unless the debt is specifically assigned to it by the agency that holds the debt.Id. at § 3-304(b)(4). Consequently, although the underlying debt consisting of the principal calculated in the judgment is a fine or penalty owed to the government, the remainder of the judgment is merely a collection fee, and it represents actual compensation for pecuniary loss by the government. In re Caggiano, 34 B.R. 449 (Bankr. D. Mass. 1983). The portion of the judgment debt attributed to collection/attorney fees is not a penal sanction flowing from, or arising out of, a penal proceeding; rather, it arose in a civil collection action to collect a fine owed to the government in which collection fees were assessed "sufficient to cover all collection and administrative costs". Md. Code Ann. State Fin. Proc. § 3-304(a)(2)(ii). Therefore, it represents compensation for actual pecuniary loss.
Defendant, relying on a variety of cases under other nondischargeability subsections of 11 U.S.C. § 523, asserts that an award of attorney fees and interest is nondischargeable when the underlying debt is determined to be nondischargeable. In addition, Defendant cites to In re Weinstein, 173 B.R. 258 (Bankr. E.D.N.Y. 1994) for the proposition that there are at least three different doctrines supporting a finding of nondischargeability of attorney's fees and costs: the statutory/contractual basis; the status dependent doctrine; and the support context. However, In re Weinstein, as well as the other cases relied on by Defendant, are inapposite. Jordan v. Southeast Nat'l Bank, 927 F.2d 221 (5th Cir. 1991) (nondischargeability of debt arising under § 523(a)(2)(B)); In re Gosney, 205 B.R. 418 (B.A.P. 9th Cir. 1996), aff'd 161 F.3d 12 (9th Cir. 1998) (nondischargeability of debt under §§ 523(a)(2)(A) and (B)); In re Klause, 181 B.R. 487 (Bankr. C.D. Cal. 1995) (nondischargeability of debt under §§ 523(a)(2) and (6)); In re Weinstein, 173 B.R. 258 (nondischargeability of debt under § 523(a)(4)). Each of these cases deals with nondischargeability based on the fraud or defalcation of the debtor, and not with the specific provision at hand. As discussed above, in order for a debt to be nondischargeable under § 523(a)(7) the debt must be payable to or for the benefit of a governmental entity, must be for a fine, penalty or forfeiture, and may not be compensation for actual pecuniary loss. Because of the specific exception in § 523(a)(7), courts have not considered whether the underlying debt is itself nondischargeable in determining whether attorneys fees and costs are nondischargeable. Rather, courts have looked to the nature of the underlying proceedings and whether the costs assessed are an extension of the punishment and rehabilitation to be imposed by the judgment. The standard suggested by Defendant is thus inapplicable to the nondischargeability of a debt under § 523(a)(7).
It is, therefore, by the United States Bankruptcy Court for the District of Maryland,
ORDERED, that the Motion to Dismiss by the Maryland Central Collection Unit is DENIED; and it is further
ORDERED, that the judgment for collection fees against David V. Barsh in the case of State of Maryland v. Barsh, Civil Case No.: 0203-0005814-2001 (D. Ct. of Md. for Wicomico Cty) in the amount of $1,307.96 is DISCHARGEABLE; and it is further
ORDERED, that the judgment for costs against David V. Barsh in the case of State of Maryland v. Barsh, Civil Case No.: 0203-0005814-2001 (D. Ct. of Md. for Wicomico Cty) in the amount of $54.00 is DISCHARGEABLE; and it is further
ORDERED, that the judgment for fines against David V. Barsh in the case of State of Maryland v. Barsh, Civil Case No.: 0203-0005814-2001 (D. Ct. of Md. for Wicomico Cty) in the amount of $7,795.77 is NOT DISCHARGEABLE.