In Re: Gi Nam v. ( 2001 )

Opinions of the United
2001 Decisions States Court of Appeals
for the Third Circuit
11-20-2001
In Re: Gi Nam v.
Precedential or Non-Precedential:
Docket 00-4141
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"In Re: Gi Nam v." (2001). 2001 Decisions. Paper 270.
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Filed November 20, 2001
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 00-4141
IN RE: GI NAM
CITY OF PHILADELPHIA
v.
GI NAM
MARVIN KRASNY, CHAPTER 7 TRUSTEE; FREDERIC
BAKER, ASSISTANT U. S. TRUSTEE,
Trustees
CITY OF PHILADELPHIA,
Appellant
Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. Civil Action No. 00-cv-00347)
District Judge: Honorable Stewart Dalzell
Argued: July 27, 2001
Before: ROTH, BARRY and FUENTES,
Circuit Judges
(Filed: November 20, 2001)
Steven M. Schain, Esquire
2401 Pennsylvania Avenue
Philadelphia, PA 19130
Kenneth I. Trujillo, Esquire
City Solicitor
Marcia Berman, Esquire (Argued)
Deputy City Solicitor, Appeals Unit
City of Philadelphia
Law Department
One Parkway Building
1515 Arch Street, 17th Floor
Philadelphia, PA 19102-1595
Attorneys for Appellant-City of
Philadelphia
Eric L. Frank, Esquire (Argued)
Miller, Frank & Miller
21 South 12th Street
640 PSFS Building
Philadelphia, PA 19103
Attorney for Appellee-Gi Nam
Marvin Krasny, Esquire
Wolf, Block, Schorr & Solis-Cohen
1650 Arch Street, 22nd Floor
Philadelphia, PA 19103
Attorney/Chapter 7 Trustee
Frederic J. Baker, Esquire
U.S. Department of Justice
Office of the Trustee
601 Walnut Street
The Curtis Center,
Suite 950 West
Philadelphia, PA 19106
Attorney/Assistant U.S. Trustee
2
Karen A. Brancheau, Esquire
1421 Arch Street
Philadelphia, PA 19102
Attorney for Amicus-Appellant
PA District Attorneys Association
OPINION OF THE COURT
ROTH, Circuit Judge:
This bankruptcy appeal presents a question with
potentially far-reaching implications for the States'
administration of their criminal justice systems. It is also
one of first impression in this Circuit. The issue is whether
the debt to a State of a bond surety for a defendant who
fails to appear is dischargeable in the surety's Chapter 7
bankruptcy. We decide the question here only in the
context of the case before us: The bond surety is a relative
of the non-appearing defendant.
We conclude that the decision of the District Court,
holding such a debt dischargeable, contradicts the plain
meaning of the applicable statute. In light of the problems
that such a holding might inflict upon the functioning of
the bail release system, we will reverse the District Court's
decision.
I. FACTS
David Nam (David), the son of the debtor, Gi Nam (Nam),
was charged in Philadelphia, Pennsylvania, on September
22, 1997, with a number of offenses, including murder,
robbery and burglary in connection with the shooting death
of Anthony Schroeder during a March 1997 robbery. Bail
was set at $1 million, conditioned on a 10% cash payment
by the surety and an agreement by the defendant and the
surety to assume legal responsibility for paying the full
amount of the bail to the Commonwealth of Pennsylvania.
By a Certification of Bail and Discharge, dated January 12,
1998, executed by both Nam and David, Nam agreed to
serve as surety for the bail. The operative portion of the
Certification reads as follows:
3
WE THE UNDERSIGNED, defendant and surety, our
successors, heirs and assigns, are jointly and severally
bound to pay the Commonwealth of Pennsylvania in
the sum of ONE MILLION dollars ($1,000,000). WE are
bound by the CONDITIONS of this bond as shown on
both sides of this form.
Pursuant to the terms of the bond, both Nam and David
agreed that the latter would appear in court at all required
times and that Nam, as surety, would notify the court in
writing of any change in David's address. The Certification
also states, "If defendant performs the conditions as set
forth herein, then this bond is to be void, otherwise the
same shall remain in full force and this bond in the full
sum thereof shall be forfeited." Additionally, both Nam and
David authorized the entry of a judgment by confession
against them in the amount of the bond, regardless of
whether a default of the bond conditions occurred.
On March 12, 1998, David Nam failed to appear in court
for a pre-trial status listing in his criminal case.
Consequently, on April 6, 1998, the Court of Common Pleas
of Philadelphia, Criminal Section, ordered the bail bond
forfeited pursuant to the terms of the bond agreement, the
Pennsylvania Rules of Criminal Procedure, and local court
rules.1 The criminal court entered a judgment against Nam
as surety on the forfeited bond in the amount of the bail,
plus court costs: $1,000,018.50.2 The notice of entry of
judgment against Nam, which bears the caption of David's
criminal case, reads in pertinent part:
Bail in the amount of $1000000.00 has been sued out
and judgment entered in the amount of $1000018.50
including cost of $18.50 due to failure of the above
named defendant to appear for trial on 3/12/98 in
Room 604 CJC 1301 Filbert St.
_________________________________________________________________
1. See Pa.R.Crim.P. 4016(A)(2)(a); Rule 510A of the Philadelphia Court
Rules for the Criminal Division of the Court of Common Pleas.
2. Given that Nam had initially posted $100,000, or 10% of the total bail,
in cash, it is not clear why the court did not enter a judgment in the
amount of $900,018.50. That question, however, is not before this Court
and we do not address it.
4
You may reduce your financial responsibility by
producing the defendant forthwith and filing a petition
with the Clerk of Quarter Sessions to vacate, in total or
in part, the judgment against you.
When David was released on bond, Nam provided him
with living quarters and the necessities of life. Some time
before his pre-trial status hearing, David fled to South
Korea where his paternal grandmother resides. It appears
that, once David had fled to Korea, Nam followed him there
and paid a lawyer $10,000 to represent David. See Krasny
v. Gi and Yeoung Nam, 245 B.R. 216, 220, 225-26 (Bankr.
E.D. Pa. 2000). Indeed, Nam testified at a S 341 creditors
hearing before the trustee on August 9, 1999, that he had
provided David with such assistance. See id. at 220.3 David
remains a fugitive.
On May 19, 1999, Nam petitioned for bankruptcy under
Chapter 7 of the Bankruptcy Code. Nam listed the City of
Philadelphia as the creditor on a claim in the amount of
$1,045,000, arising from the bail bond security. On August
27, 1999, the City of Philadelphia filed a Complaint in
Adversary, alleging that, although Nam had listed the bail
bond judgment as an "unsecured non-priority claim" in the
schedule he had filed in the bankruptcy case, such debt
was not in fact dischargeable pursuant to 11 U.S.C.
S 523(a)(7). On September 2, 1999, Nam filed a motion to
dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(6),
arguing that the bail bond debt was dischargeable.
_________________________________________________________________
3. Because these facts concerning Nam's possible collusion with his son
are not part of the record in the instant case, we do not rely upon them
in deciding this appeal. Indeed, it follows as a matter of law from our
holding here that we need not reach the question whether Nam has
aided his son and thereby engaged in `wrongdoing' sufficient to forfeit
his
right to seek dischargeability under the District Court's rule.
Nevertheless, we include this information here to illustrate the
difficulty
of administering a rule such as the one formulated by the District Court
that would make the wrongdoing of the debtor dispositive of the question
of dischargeability. See Sections II and IV.A, infra. Indeed, given Nam's
colorable misconduct, it would seem that the District Court misapplied
the rule in the very case in which it announced it.
5
II. PROCEDURAL HISTORY
The Bankruptcy Judge granted Nam's motion to dismiss
on December 8, 1999. The Bankruptcy Court rejected the
City's arguments that the judgment against Nam satisfied
the elements of S 523(a)(7) and that forfeited bail bonds
must be exempted from discharge in order to safeguard the
integrity of the bail and criminal justice systems. The court
construed S 523(a)(7) narrowly, holding that it only exempts
from discharge "obligations imposed upon the debtor as
punishment for his wrongdoing" and that the judgment
against Nam arose "because a condition of the bond was
breached and not because the surety is being punished."
The District Court affirmed the Bankruptcy Court's
judgment, holding that S 523(a)(7) excepts from discharge
only sanctions that are penal, as opposed to civil, in nature
and that result from the debtor's own wrongdoing. The
District Court further found that Nam never assumed any
independent obligation to produce David in court and,
thus, that Nam committed no wrongdoing. Consequently,
the court held the debt dischargeable. Moreover, the
District Court enunciated a more general proposition
concerning the application of S 523(a)(7): A judgment
against a surety, arising from a forfeited bail bond, will be
exempted from discharge under S 523(a)(7) only if the
surety played some affirmative role in the defendant's
failure to appear. This appeal followed.
III. JURISDICTION
The Bankruptcy Court had jurisdiction under Title 11 of
the United States Code, 28 U.S.C. S 1334(b), as a complaint
to determine the dischargeability of a debt. The District
Court had jurisdiction pursuant to 28 U.S.C. S 158(a) and
we have jurisdiction of this appeal pursuant to 28 U.S.C.
S 158(c) and 28 U.S.C. S 1291. We exercise plenary review
over a district court's bankruptcy decision. Commonwealth
of Pa. Dept. of Environmental Resources v. Tri-State Clinical
Laboratories, Inc., 187 F.3d 685, 687 n.2 (3d Cir. 1999).
6
IV. DISCUSSION
A. SECTION 523(a)(7)
The sole statutory provision at issue in this appeal is the
exception to discharge provided by 11 U.S.C. S 523(a)(7),
which 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] fine, penalty, or
forfeiture [2] payable to and for the benefit of a
governmental unit, and [3] is not compensation for
actual pecuniary loss, other than a tax penalty. . ..
11 U.S.C. S 523(a)(7) (emendations added). In order to
"determine whether [a debt] is dischargeable under
S 523(a)(7), we must determine whether [such] debt meets
the three requirements of the section." In re Rashid, 210
F.3d 201, 206 (3d Cir. 2000). Here, the parties do not
dispute that Nam's debt is payable to and for the benefit of
a governmental unit (either or both the Commonwealth of
Pennsylvania and the City of Philadelphia) or that the $1
million bail bond debt is not compensation for any
pecuniary loss by such governmental entities or any other
party.4 Consequently, we need only concern ourselves with
the construction of the first prong of S 523(a)(7): the "fine,
penalty or forfeiture" provision. The City argues that Nam's
debt is a "forfeiture" of the bond amount arising from
David's failure to appear and, therefore, falls within the
plain language of the statute. Nam on the other hand
contends that the statute only creates an exception for
"penal" debts, a category into which Nam's debt assertedly
does not fall.
_________________________________________________________________
4. As the District Court correctly noted, the $18.50 in costs might be
regarded as compensation for a pecuniary loss on the part of the court
system. In what follows, we assume that is so, and confine our
discussion to the remaining $1 million (arguably as reduced by the
$100,000 that Nam has already paid). See District Court opinion at note
10; note 2, supra.
7
Following the teaching of the Supreme Court, we have
held that the "starting point of any statutory analysis is the
language of the statute itself." Commonwealth of Pa. Dept.
of Environmental Resources v. Tri-State Clinical Laboratories,
Inc., 178 F.3d 685, 688 (3d Cir. 1999), citing Pa. Dept. of
Pub. Welfare v. Davenport, 495 U.S. 552, 557-58 (1990);
Kelly v. Robinson, 479 U.S. 36, 43 (1986). Consequently,
our analysis of the "fine, penalty or forfeiture" prong of
S 523(a)(7) must begin with the plain language of the
statute.
On its face, the judgment against Nam seems to come
within the plain meaning of the term "forfeiture." For
example, "forfeiture" is defined in Black's Law Dictionary as
"a divestiture of specific property without compensation;
. . . [a] deprivation or destruction of a right in consequence
of the nonperformance of some obligation or condition."
BLACK'S LAW DICTIONARY 650 (6th Ed. 1990). "Forfeiture" is
defined by Webster's Dictionary as "the divesting of the
ownership of particular property of a person on account of
the breach of a legal duty and without any compensation to
him: the loss of property or money on account of one's
breach of the terms of an agreement, bond, or other legal
obligation." WEBSTER'S THIRD NEW INTERNATIONAL DICTIONARY
(1971). Clearly, the judgment against Nam arose from
David's nonperformance of his obligation to appear in court
and Nam's breach of his duty to produce David for trial.
Moreover, the judgment5 does not compensate the City for
any pecuniary loss suffered but instead serves as an
incentive to the surety to prevent the defendant's flight and
to produce him insofar as the surety is capable.
The District Court, however, attempted to construe
S 523(a)(7) using traditional canons of construction. We find
that this attempt at construction results in fact in writing
the term "forfeiture" out of the statute.
As a preliminary matter, we note that the District Court's
conclusion that a forfeiture must be "penal" in order to
come within the exception conflicts with the plain language
of the statute. Nothing in that language equates a forfeiture
with a penalty. Quite the contrary, "penalty" and
_________________________________________________________________
5. Excluding the $18.50 in court fees. See notes 2 and 4, supra.
8
"forfeiture" are two distinct terms within the phrase "fine,
penalty, or forfeiture." Citing Kelly v. Robinson, 479 U.S. 36
(1986) and In re Collins, 173 F.3d 924 (4th Cir. 1999), the
District Court reasoned that S 523(a)(7) excepts from
dischargeability only those forfeitures which are"penal
sanctions that result from the debtor's wrongdoing."
Finding no such qualification in S 523(a)(7), we disagree
with the District Court's reasoning. We do not interpret
Kelly to imply that the "fine, penalty or forfeiture" prong of
S 523(a)(7) is restricted in scope to except from
dischargeability only obligations of a penal nature.
Furthermore, to the extent the Fourth Circuit so interpreted
Kelly in In re Collins, we decline to adopt a similar rule
here.
The Kelly court addressed the question whether
"restitution obligations, imposed as conditions of probation
in state criminal proceedings, are dischargeable in
proceedings under Chapter 7 of the Bankruptcy Code."
Kelly, 479 U.S. at 38. The Supreme Court held that such
restitution obligations, although not excepted expressly by
S 523(a)(7), fall within the S 523(a)(7) exception and,
therefore, are not dischargable. See id. at 53. The Supreme
Court based this holding on findings that (1) S 523(a)(7)
"creates a broad exception for all penal sanctions" and (2)
restitution obligations such as the one at issue in Kelly
constitute "penal sanctions." Id. at 51-53. Kelly, therefore,
stands for the proposition that S 523(a)(7) excepts from
dischargeability some penal sanctions that technically are
neither fines nor penalties nor forfeitures. However, it does
not follow logically from this proposition thatS 523(a)(7)
excepts only sanctions of a penal nature.
The Kelly court addressed the penal nature of restitution
obligations and the history, object and policy ofS 523(a)(7)
because the plain language of that statute fails to address
"restitution obligations" expressly. The instant appeal is
distinguishable from Kelly insofar as "forfeitures" -- the
type of obligation alleged to be at issue -- are excepted
expressly from discharge by S 523(a)(7). Because S 523(a)(7)
expressly excepts forfeitures without regard to penal
nature, we need not address this characteristic in assessing
the applicability of S 523(a)(7) to Nam's alleged forfeiture.
9
Returning to the District Court's use of the canons of
statutory construction, we find its reliance on the canon
ejusdem generis to lead to an erroneous interpretation of
the statute. According to that canon, "where general words
follow specific words in a statutory enumeration, the
general words are construed to embrace only objects
similar in nature to those objects enumerated by the
preceding specific words." United States v. Weadon, 145
F.3d 158, 160 (3d Cir. 1998). Nevertheless, the District
Court's attempt to render "forfeiture" a more general term
than "penalty" is strained and unconvincing. The
alternative dictionary definitions of "forfeiture" which the
District Court cites span varying degrees of generality.
Although Black's Dictionary characterizes"forfeiture" as a
"comprehensive term," it also defines it as a"divestiture of
specific property" -- language which resembles that
dictionary's alternative definitions of "penalty" in both its
broadness and its specificity; "penalty" is an"elastic term
with many different shades of meaning" but is nevertheless
"generally confined to pecuniary punishment." BLACK'S LAW
DICTIONARY 650, 1133 (6th ed. 1990).
It is not necessary to make here the numerous similar
observations possible with respect to the dictionary
definition of "fine"; it suffices merely to note that the
generality of the terms in question cannot be ascertained
with any reliability on the basis of their dictionary
definitions and that it is difficult to discern any lexical
justification for the assertion that "forfeiture" is a more
general term than "penalty." It follows that the canon
ejusdem generis is inapplicable to this case. Moreover, even
were it applicable, it could not be used to reach the result
of the District Court -- the transformation of the term
"forfeiture" into surplusage -- because ejusdem generis
"cannot be employed to render general words meaningless."
Ferrara & DeMercurio, Inc. v. St. Paul Mercury Ins. Co., 169
F.3d 43, 52 (1st Cir. 1999), quoting United States v. Alpers,
338 U.S. 680, 682 (1950).
Similarly flawed is the District Court's application of the
maxim noscitur a sociis to subsume the term"forfeiture"
within the earlier term "penalty." The Supreme Court has
stated that "[t]he maxim noscitur a sociis, that a word is
10
known by the company it keeps, while not an inescapable
rule, is often wisely applied where a word is capable of
many meanings in order to avoid the giving of unintended
breadth to Acts of Congress." Folger Adam Sec., Inc. v.
DeMatteis/MacGregor JV, 209 F.3d 252, 258 (3d Cir. 2000),
quoting Jarecki v. G.D. Searle & Co., 367 U.S. 303, 307
(1961). Put differently, the maxim provides that the
meaning of an ambiguous statutory term may be derived
from the meaning of the accompanying terms. In re
Continental Airlines, Inc., 932 F.2d 282, 288 (3d Cir. 1991).
Were the maxim applicable here, it would indeed be
possible to hold that the term "forfeiture" should be read as
"penal forfeiture" in light of the term's proximity to the word
"penalty." S 523(a)(7). However, noscitur a sociis can have
no application in this context because "[w]hen Congress
has separated terms with the conjunction `or,' it is
presumed that Congress intended to give the terms`their
separate, normal meanings.' " In re Continental Airlines, 932
F.2d at 288, quoting Garcia v. United States, 469 U.S. 70,
72 (1984). Consequently, we are again referred to the plain
meaning of the term "forfeiture" which, as we have
indicated supra, encompasses debts such as Nam's.
B. STATE LAW CONTEXT AND HISTORY
As is often the case, such an analysis of the "plain
meaning" of the statutory language in a vacuum, while
helpful, cannot of itself provide an adequate guide to the
proper construction of the statute. To buttress the
preceding discussion, we now turn to the state-law context
of S 523(a)(7) and its history. As Nam points out in his
appellate brief, absent explicit Congressional intent to
incorporate state law, the meaning of a term in a federal
statute is a question of federal law. See In re Wilson, 252
B.R. 739, 742-43 (B.A.P. 8th Cir. 2000); accord In re
Gianakas, 917 F.2d 759 (3d Cir. 1900) (federal law
determines dischargeability under 11 U.S.C. S 523(a)(5)).
Nevertheless, this fact does not render the characterization
of debts such as Nam's under applicable state law wholly
without meaning. Although the label that state law affixes
to a certain type of debt cannot of itself be determinative of
the debt's character for purposes of the federal
11
dischargeability provisions, such state-law designations are
at least helpful to courts in determining the generic nature
of such debts under the law that most directly governs their
creation, e.g., whether they are penal or civil, fines or
forfeitures.
In the case of Nam's debt, Pennsylvania law defines a
judgment entered against a surety as a result of his failure
to produce the defendant in court as a "forfeiture." Rule
4016 (A)(2)(a) of the Pennsylvania Rules of Criminal
Procedure, entitled "forfeiture," authorizes the bail authority
to "order the case or other security forfeited" as a sanction
for the defendant's violation of a condition of the bail bond.
Local court rules also use the term "forfeiture"; Rule 510A
of the Philadelphia Court Rules for the Criminal Division of
the Court of Common Pleas authorizes the court to order
bail to be "forfeited" when the defendant fails to appear for
court and states that the surety is obligated to produce the
defendant at all required court appearances "under penalty
of forfeiture of his bail bond." Consequently, the District
Court correctly conceded that the $1 million judgment
against Nam is characterized as a forfeiture under state
law.
The history of S 523(a)(7) strongly suggests that Congress
intended the sort of forfeiture entered against Nam to come
within the exemption from dischargeability set forth in that
section. Section 523(a)(7) came into being in 1978, when
Congress enacted the present Bankruptcy Code. The
parties to this litigation do not dispute that, in enacting the
Code, Congress codified case law exempting certain
penalties and forfeitures from discharge under the former
Bankruptcy Act of 1898. Moreover, such codified case law
included a line of authority holding that obligations against
sureties arising from forfeited bail bonds were
nondischargeable. In what follows, we will review the
fundamental historical rationale for and the development of
S 523(a)(7) against the background of the prior 1898 Act
case law from which that statute emerged.
In general, a discharge granted to a debtor in a Chapter
7 bankruptcy proceeding voids all judgments previously
applicable to the debtor, except for debts that are exempt
from discharge under 11 U.S.C. S 523, which"expresses
12
Congressional policy that certain debts should be excluded
from discharge because of overriding public policy relating
to the type of the debt, the manner in which liability for it
was incurred, or the underlying social responsibility that
it represents." Bankruptcy Service, Lawyers Edition,
Ch. 27: Code 523, S 27:4 at 27-90 (West 1999). Such
"[d]ischargeability exceptions reflect a decision by Congress
to allow certain competing public interests to override the
`fresh start' purpose of bankruptcy." Id . As the Supreme
Court has stated, "Congress evidently concluded that the
creditors' interest in recovering full payment of debts in
[the] categories [encompassed by S 523(a)] outweighed the
debtors' interest in a complete fresh start." Grogan v.
Garner, 498 U.S. 279, 287 (1991).
Although the 1898 Act contained no provision specifically
forbidding the discharge of fines, penalties, or forfeitures
due the government, it did provide that certain types of
debts were nondischargeable. See Bankruptcy Act of 1898,
SS 17, 63 (repealed 1978). Pursuant to S 57j of the 1898
Act, penalties or forfeitures owed to the government were
only allowed as a claim in bankruptcy to the limited extent
that such penalties or forfeitures compensated the
government for a pecuniary loss. Section 57j provided:
Debts owing to the United States, a State, a county, a
district, or a municipality as a penalty or forfeiture
shall not be allowed, except for the amount of the
pecuniary loss sustained by the act, transaction, or
proceeding out of which the penalty or forfeiture arose.
30 Stat. 561, 11 U.S.C. S 93 (repealed 1978).
It is evident then that in enacting this provision,
Congress intended to protect general creditors against the
reduction of debts owed them by limiting the debts
allowable to the government to its actual pecuniary losses.
A leading treatise on bankruptcy explained the policy
considerations underlying S 57j in the following terms:
It is perfectly conceivable that a bankruptcy law is
anxious not to curtail this sovereign power to mete out
punishment and therefore treats claims for penalties
on a footing of equality with, if not of precedence over,
other claims. Yet there is on the other hand the natural
13
tendency and task of the bankruptcy law to mitigate as
far as possible the losses to be sustained by creditors,
and under this aspect there is an undeniable equity in
the postulate that participation in the estate should be
denied to a creditor who has neither in some degree
contributed to the distributable funds (e.g., by the
governmental protection on which taxation is supposed
to be based), nor has suffered a pecuniary loss by
parting with something in money's worth. It is this
consideration for the bankrupt's creditors that
pervades S 57j.
3 Collier on Bankruptcy, P 57.22[1], at p. 382 (14th ed.
1977).
The notion that the conflicting interests of protecting the
government's power to punish and defending the rights of
general creditors should be thus balanced is a recurring
theme of the case law under the 1898 Act. See, e.g.,
Simonson v. Granquist, 369 U.S. 38, 40 (1962) (stating that
S 57j "plainly manifests a congressional purpose to bar all
claims of any kind against a bankrupt except those based
on a `pecuniary' loss. So understood, this section, which
has been a part of the Bankruptcy Act since its enactment
in 1898, is in keeping with the broad aim of the Act to
provide for the conservation of the estates of insolvents
. . . ."); Goggin v. United States, 140 F. Supp. 557, 560 (Ct.
of Claims 1956) ("[w]hen Congress, in [S57j], drew a
distinction between a penalty of forfeiture, on the one hand,
and the pecuniary loss sustained, on the other, we think it
meant that an arbitrarily set amount . . . should not be put
in competition with the claims of the ordinary creditors of
the bankrupt."), vacated on other grounds, 152 F. Supp. 78
(Ct. of Claims 1957).
Thus, under pre-1978 bankruptcy statutes and judicial
decisions, penalties and forfeitures owed to the government
were, for the most part, not allowed as claims. The
correlative question whether such debts should be
dischargeable was firmly settled by the judiciary long before
the enactment of the Code in 1978. Because penalties and
forfeitures owed to the government were essentially not
allowable, courts generally exempted them from discharge
as a way of holding debtors responsible for such penalties
14
and forfeitures while avoiding interference with the results
of state criminal proceedings. See United States v. Ron Pair
Enters., Inc., 489 U.S. 235, 245 (1989); Kelly, 479 U.S. at
44-47; Tri-State Clinical Laboratories, 178 F.3d at 695. As
the Kelly Court stated, "[d]espite the clear statutory
language, most courts refused to allow a discharge in
bankruptcy to affect the judgment of a state criminal
court." Kelly, 479 U.S. at 45. This principle of
nondischargeability of penalties and forfeitures payable to
the government and not in remuneration of a pecuniary
loss was so "uniformly accepted" by 1978 that Congress
incorporated it into the Code as an explicit statutory
exception to dischargeability in S 523(a)(7). Ron Pair, 489
U.S. at 245 n.8; Kelly, 479 U.S. at 44-46, quoting 1A Collier
on Bankruptcy P 17.13, at 1609-10 & n.10 (14th ed. 1978);
id. at 51 (recognizing that S 523(a)(7)"codified the judicially
created exception to discharge for fines [, penalties and
forfeitures]").
C. CASE LAW
The line of authority underlying this judicially-created
exception is an old and venerable one, stretching back to
the turn of the twentieth century. In In re Caponigri, 193 F.
291, 292 (S.D.N.Y. 1912), Judge Learned Hand addressed
the issue whether a claim of the United States on a forfeited
recognizance for bail in a criminal case, asserted against a
debtor who had acted as surety for a defendant who fled,
was allowable, given that it constituted a penalty or
forfeiture under former S 57j. Significantly, in Caponigri, as
in the instant case, the debtor was a surety for the criminal
defendant and not the defendant himself. Judge Hand held
that "the recovery on a recognizance for bail is essentially
the recovery of a penalty, and is a forfeiture." 193 F. at 292.
Judge Hand adhered to the concept of a penalty being by
definition unrelated to any pecuniary loss; the amount of a
penal obligation, he wrote, "is measured neither by the
obligee's loss nor by the valuation placed by him upon what
he has given in exchange." Id.
In the years that followed, Caponigri came to be viewed as
controlling authority on the question of the allowability of
forfeited bail bonds. See, e.g., In re Lake, 22 Am. Bankr.
15
N.S. 168 (F. Ref. Minn. 1932). More significantly, however,
the Caponigri decision provided an analytical framework for
defining debts. This framework was applied to determine
the allowability of types of penalties and forfeitures other
than bail bonds. Many cases applied Judge Hand's penalty
test to find obligations to be disallowed where the
obligations were imposed for coercive or regulatory
purposes and were not proportionate to any actual
pecuniary loss. See, e.g., In re James Butler Grocery Co., 22
F. Supp. 993, 994-95 (E.D.N.Y. 1938); In re Erlin Manor
Nursing Home, Inc., 36 B.R. 672, 678-79 (Bankr. D. Mass.
1984); In re Idak Corp., 19 B.R. 765, 772-75 (Bankr. D.
Mass. 1982).
Moreover, the reasoning of Caponigri was applied to
dischargeability as well as to allowability. As early as 1914,
a court in New York held that claims by governments
against sureties for judgments on forfeited bail bonds were
nondischargeable under the 1898 Act. See In re Weber, 212
N.Y. 290, 106 N.E. 58 (1914). See also Commonwealth v.
McMillen, 1 Ky. Rptr. 270 (Ct. of Appeals of Ky. 1880)
(accord). In Weber, the debtor sought the discharge of a
judgment entered against him on a forfeited bail bond.
Following Judge Hand's decision in Caponigri, the court
found the obligation not to be allowable. See Weber, 212
N.Y. at 291-92, 106 N.E. at 59. The court went further,
however, ruling that because the obligation was not
allowable, it was also not dischargeable: "It could not have
been intended by the Bankruptcy Act that a bankrupt
should be discharged of the payment of a debt which was
not allowable." Id.
Both factually6 and legally, Weber is on all fours with the
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6. The opinion does not make clear whether the debtor was the criminal
defendant or a surety for another. Nevertheless, the Weber Court's
wholesale adoption of Judge Hand's analysis in Caponigri suggests that
the cases were factually identical. Additionally, at least one bankruptcy
treatise suggests that the debtor in Weber was in fact a surety. See
Harold Remington, A Treatise on the Bankruptcy Law of the United
States, vol. 8, S 3304 at 156 (6th ed. 1956) (citing Weber as authority
for
the proposition that "[j]udgment against the bondsman on an appearance
bond in a criminal case, forfeiting the bond, is . .. not dischargeable")
16
instant case. Moreover, the parties to this appeal agree, and
the Supreme Court instructed in Kelly, that cases under
the 1898 Act, relating to the dischargeability of certain
fines, forfeitures and penalties, comprise part of the
judicially-created body of exceptions that Congress codified
in S 523(a)(7), and therefore guide courts' dispositions of
such cases. As the District Court stated, "courts
interpreting the present Bankruptcy Code have referred to
the practices under the Act of 1898 that preceded it, and in
construing provisions of the Code that were codifications of
earlier judge-made law, as S 523(a)(7) evidently was, courts
interpret the codification to match the prior judge-made law
absent evidence of specific intent that it be interpreted
otherwise, see Kelly, 479 U.S. at 44, 47." District Court
Opinion at 18 n.19. Nevertheless, the District Court failed
to follow this teaching insofar as it entirely ignored Weber,
notwithstanding the City's heavy reliance on that case in its
reply brief.
The District Court sought to explain its refusal to rely
upon pre-Code jurisprudence with the assertion that
practice relating to the dischargeability question at issue
was "mixed" during that period.This view is b ased upon a
single case, United States v. Hawkins, 20 F.2d 539 (S.D.
Cal. 1927). Hawkins, however, conflicts with all other
judicial and scholarly authority which recognizes the
exception to dischargeability for penalties and forfeitures --
an exception which the District Court itself acknowledged
as axiomatic in its opinion.7 Given that Hawkins is a
summary opinion of only two paragraphs, bereft of analysis
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(emphasis added). Regardless of identity of the debtor in Weber, however,
that decision still governs the instant case because of the broad scope of
its underlying rationale: "It could not have been intended by the
Bankruptcy Act that a bankrupt should be discharged of the payment of
a debt which was not allowable." Weber, 212 N.Y. at 291-92, 106 N.E.
at 59.
7. See In Re: Gi Nam, 254 B.R. 834, 846 n.25 (E.D. Pa 2000) (noting
"pre-Code judicial practices by which courts found that judgments of
state criminal courts were not discharged in bankruptcy despite that the
strict application of the letter of the Act of 1898 would have discharged
them" (citing Kelly, 479 U.S. at 44-48)).
17
and lacking any references to Caponigri, Weber, McMillen,
or the judicially-created exception to dischargeability for
penalties and forfeitures, it is virtually worthless as a
precedent.8 Even if we could properly rely on Hawkins, the
decision by its terms stands only for a very narrow
proposition not directly applicable here: S 17 of the 1898
Act provides no exception whatever to dischargeability for
penalties and forfeitures. We conclude that the District
Court erred in relying on Hawkins for the proposition that
pre Code practice concerning the dischargeability of
penalties and forfeitures was "mixed."
D. PUBLIC POLICY CONSIDERATIONS
The clarity and weight of the judicial authority discussed
supra are great enough that such authority provides a
sufficient basis for deciding this appeal. Nevertheless, the
implications of this case for the administration of justice
are potentially of such a magnitude that it is necessary to
devote more than passing attention to the public policy
considerations underlying the dischargeability question.
These issues range from socioeconomic equity to the ability
of the several States to administer their justice systems.
First and foremost among these policy concerns is the
issue of socioeconomic fairness. Let us return to some
critical facts presented by this case -- facts emphasized by
neither party to this litigation. Here, Nam, the father of the
fugitive defendant, had sufficient means to pay $100,000 in
cash and to assure payment of the remaining $900,000 in
the event of forfeiture. As the Pennsylvania District
Attorneys Association points out in its amicus brief, the
parents and relatives of the typical accused felon in
Philadelphia, who is more likely than not economically
disadvantaged, do not have such resources at their
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8. The Bankruptcy Court here recognized the limited usefulness of
Hawkins, noting that the "court's decision in United States v. Hawkins
. . . consists of only two paragraphs. The court simply held that none of
the four exceptions to discharge listed in S 17 of the Act covered the
debt
of a surety on a bail bond. It did not analyze whether the words `fine,
penalty or forfeiture' cover a surety's obligation on a bail bond." In Re:
Gi
Nam, 255 B.R. at 155 n.7.
18
command. The average defendant is forced to remain in jail
while awaiting trial, all but certainly experiencing far poorer
living conditions than the defendant free on bail. At least
one bankruptcy court has discussed this danger:
Eventually, freedom on bail would be restricted to
those defendants who could pay cash up front, i.e.,
wealthy defendants only. Poor and middle class
defendants would be forced to languish in overcrowded
jails. [Among t]he end results would be . . . inequitable
discrimination against those defendants not fortunate
enough to possess thousands of dollars in ready cash.
In re: Bean, 66 B.R. 454, 457 (Bankr. D.Colo. 1986). The
District Court's decision, therefore, opens the door to
accusations that the Philadelphia justice system treats the
wealthy and the poor differently.
Also of concern are the implications of the District
Court's decision for principles of federalism and comity that
must be respected in order to insure the proper functioning
of the several States' justice systems. In Kelly , the Supreme
Court stated that "we must consider the language of S 523
in light of the history of bankruptcy court deference to
criminal judgments and in light of the interests of the
States in unfettered administration of their criminal justice
systems." Kelly, 479 U.S. at 43-44. Throughout its opinion,
the Supreme Court repeatedly emphasized the significant
deference due to state criminal proceedings in the context
of federal bankruptcy law. Discussing S 523, the Court
wrote, "[o]ur interpretation of the [Bankruptcy] code also
must reflect the basis for this judicial exception, a deep
conviction that federal bankruptcy courts should not
invalidate the results of state criminal proceedings." Id. at
49 (citation omitted). The District Court's opinion fails to
take account of these important considerations, and,
insofar as its decision in favor of Nam sanctions the use of
federal bankruptcy laws to evade the financial
consequences of noncompliance with Pennsylvania's bail
system, it constitutes the very sort of federal interference
with a State's administration of justice which the Supreme
Court condemned in Kelly.
The course that the District Court urges entails not only
19
relatively abstract problems such as these, but also
potentially grave concrete consequences for the States'
administration of their respective criminal justice systems
and the proper functioning of the bail system. In terms of
a basic behavioral incentive analysis, the rule that the
District Court proposes would throw into doubt the viability
of the current bail system by creating perverse incentives
for sureties who are also relatives of the defendant, as well
as for such defendants themselves. Once a criminal
defendant becomes convinced that his relative will be able
to escape financial responsibility (other than the negative,
albeit temporary and comparatively lesser, consequences of
the bankruptcy filing itself) for the bail amount if the
defendant flees, the incentive to appear for trial diminishes
sharply. Similarly, given that the surety would no longer
face a sizable debt should the defendant flee (again, leaving
aside the consequences of a bankruptcy), the surety would
no longer be deterred from assisting the defendant in his
flight. This is a particularly serious risk in cases, such as
the Nams', in which the criminal defendant faces execution.
Many a father might consider the opportunity to purchase
his son's life at the cost of enduring a bankruptcy
proceeding to be an attractive bargain.9
The States' bail systems are "central to our modern
criminal procedure"; any threat to their efficacy and
integrity damages the States' criminal justice systems. In
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9. Of course, these concerns do not come into play when a professional
bail bondsman acts as surety for a criminal defendant. In such cases,
the professional bondsman is not inherently interested in helping the
defendant avoid punishment; nor is the defendant likely troubled by the
impact of his actions on the bondsman's finances. Professional
bondsmen are compensated in advance through fees for the risk that the
defendant will flee; consequently, the forfeiture of a bail bond is, from
the perspective of the bondsman, merely an anticipated cost of doing
business. See In re Collins, 173 F.3d 924, 932 (4th Cir. 1999).
Nevertheless, the instant case does not present, and we therefore do not
address ourselves to, the question of professional sureties. For that
reason, we find both Collins and the recent Fifth Circuit decision in In
re
Hickman, 260 F.3d 400 (5th Cir. 2001) inapplicable to the case at bar in
part because those cases involved commercial bail bondsmen. It should
be noted that many jurisdictions, including Philadelphia, do not provide
for professional bondsmen.
20
re: Bean, 66 B.R. at 456-57; see Commonwealth v.
Truesdale, 449 Pa. 325, 335-36, 296 A.2d 829, 834 35
(1972) (discussing purpose and importance of bail system);
Ruckinger v. Weicht, 356 Pa. Super. 455, 457, 514 A.2d
948, 949 (1986) (same). Were we to permit the rule that the
District Court proposes, the effectiveness of the bail system
would be reduced because the risk of flight by criminal
defendants released on bail under bonds executed by
nonprofessional sureties would increase. The adverse
consequences of the proposed rule are obvious. They
include hampering the States' ability to prosecute criminal
defendants, thereby increasing the danger such persons
pose to the public; imposing increased costs on the States
for locating and capturing fugitives; increasing the costs of
pre-trial detention for defendants who otherwise would be
released on bail; and exacerbating the already serious
problem of overcrowding in detention facilities. Such costs,
however "difficult to quantify," are, contrary to the District
Court's view, hardly "marginal" considerations.
V. CONCLUSION
For the foregoing reasons, we will reverse the decision of
the District Court and remand this case for further
proceedings consistent with this opinion. We hold that, in
light of the statute's plain language, its history, and
applicable case law, 11 U.S.C. S 523(a)(7) does not except
from discharge in a Chapter 7 bankruptcy a bail bond
forfeiture judgment entered against a family surety for
failure to produce the defendant for trial.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
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