Family Surety May Not Discharge Bail Forfeiture Section 523(a)(7)s Non-dischargeability Provision Held Applicable to Bail Sureties

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Feb 2002

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Implicitly splitting the circuits and overruling its bankruptcy and district courts, the
Third Circuit in In re Gi Nam<a href="#1" name="1a">1</a> has recently held that bankruptcy does not discharge
forfeited bail surety obligations in a chapter 7 case, at least in cases where a
family member acted as bail surety. Last month's column addressed the dischargeability
of bail bond forfeitures under Bankruptcy Code §523(a)(7), which provides that
"fines, penalties or forfeitures" payable to a governmental unit are non-dischargeable.
The column discussed the law crystallizing around the issue of non-dischargeability of
bail forfeitures, as two circuits had held that §523(a)(7) discharges bail
sureties from forfeiture obligations. However, as often occurs in bankruptcy, the
legal landscape has changed.

Bail bond dischargability is extremely important to law enforcement authorities. If
bail sureties may be absolved of their obligation to produce criminal defendants for
trial, law enforcement authorities have reason to be concerned about the efficacy of
the entire bail bond system. Without strictly enforced bail forfeiture judgments, the
accused's friends or family members have little incentive to ensure his/her appearance.
Additionally, the accused knows that he could become a fugitive without forcing his
friends or family to face the financial consequences of his absconding. Law
enforcement's interest in bringing accused criminals to trial is thereby undermined, and
the entire bail system is jeopardized. Despite these obviously important policy
concerns, the Fourth and Fifth Circuits held bail surety obligations to be
dischargeable. In Gi Nam, however, the Third Circuit has interpreted
§523(a)(7) differently.

<h3>Case Facts</h3>

Gi Nam concerned a father who acted as a bail surety for bail for his son,
David Nam, who was charged with robbery and murder in Philadelphia. The city set
bail for David at $1 million, conditioned on (1) immediately paying 10 percent
and (2) assuming responsibility for full payment by both David and his father,
Gi, in the event of David Nam's skipping bail.

Following his son's release, Gi Nam gave David a place to live and other
necessities. In March 1998, David failed to appear at a pre-trial hearing. In
April 1998, Philadelphia criminal court entered forfeiture judgment for the remaining
bail amount. In the meantime, David fled to South Korea to live with his paternal
grandmother. Gi Nam then went to South Korea to visit his son. Gi Nam also paid
a criminal defense lawyer $10,000 for criminal court representation for his son.
David remains a fugitive in South Korea.

Subsequently, Gi Nam filed a chapter 7 petition listing the forfeiture judgment
as an unsecured non-priority claim. The city filed an adversary proceeding, claiming
that §523(a)(7) disallowed discharge of the remaining $900,000 debt. Nam
filed a motion to dismiss under Federal Civil Procedure Rule 12(b)(6).

The bankruptcy and district courts held for Nam, holding that only penal sanctions
arising from the debtor's own wrongdoing are non-dischargeable under §523(a)(7).
The bankruptcy and district courts held that the section applied only to debts incurred
by the debtor, such as restitution for the illegal receipt of welfare benefits, not
to civil debts undertaken by non-debtors.

Both courts rejected the city's policy arguments as well. The city argued that were
Nam allowed to discharge his surety obligation, his son would have no incentive to
return to face the charges against him. The city also argued that discharging a bail
bond interfered with the state criminal proceedings. The bankruptcy and district courts
recognized the city's policy concerns, but held that since bail surety was a civil
matter, not criminal, there was no interference with criminal proceedings. Further,
regarding the disincentive for the accused to return to face justice, the courts noted
that Nam had already lost the original $100,000 put up at the execution of the
bail bond.

<h3>Circuit Reversal</h3>

On appeal, the Third Circuit reversed the lower courts, taking into consideration
the plain language of §523(a)(7), as well as social policy. Regarding
§523(a)(7), the court rejected the argument that only forfeitures resulting from
the debtor's own wrongdoing are non-dischargeable. The court said that "forfeiture" is
defined as the "deprivation or destruction of a right in consequence of the
non-performance of some obligation or condition," which, it noted, occurred in the
breach of the bail bond agreement. The court also found that §523 was not specific
as to the individual who fails to perform the obligation or who breaches the
agreement. As such, the court found the debtor/non-debtor breach distinction
unconvincing and inconsequential.

<h3>Policy Analysis</h3>

Regarding policy implications, the court found that allowing the discharge of bail
bond obligations, particularly in a situation where the surety is a family member or
acquaintance, would give the surety "perverse incentives." Given the fact that the
family member/surety would not have to face a large debt if the defendant fled, the
surety would have no financial reason not to help the defendant to abscond. The
defendant, secure in his knowledge that the surety would not be saddled with the
forfeiture obligation, would have less incentive to appear at trial. (While filing
a bankruptcy petition may hurt a family in a variety of ways, e.g., community
reputation or perhaps in credit reporting, few families would wish to see their members
incarcerated.)

The court found that allowing discharge of bail forfeiture obligations would (1)
hamper the states' ability to prosecute criminal defendants, thereby increasing the danger
such persons pose to the public, (2) impose increased costs on states for locating
and capturing fugitives, (3) increase the costs on states for pre-trial detention
of defendants who would otherwise be released on bail, and (4) exacerbate the
already serious problem of overcrowding in detention facilities.

The Third Circuit also suggested that socioeconomic fairness justified its holding.
The defendant's father paid $100,000 in cash to provide assurance that the
additional $900,000 would be paid in the event the defendant absconded, while
most criminal defendants must remain in custody awaiting trial because they have no
access to large amounts of bail funds. Thus, the lower courts' decision would afford
freedom to the wealthy defendants who have someone willing to pay large amounts of cash
up front for them, while the economically disadvantaged would have to remain in jail.
Thus, the court held, the lower courts' decision discriminates between rich and poor.
Under the Third Circuit's decision, an affluent family could not score a "double win"
from the criminal justice system by (1) having the funds to put up for a large
bail amount in the first place, and (2) putting up a large amount of bail money
in anticipation of discharge of the default amount.

<h3>Gi Nam Differs with the Fourth and Fifth Circuits</h3>

The Gi Nam holding decided the §523 issue differently than the Fourth and Fifth
Circuits, albeit on different facts, in In re Collins<a href="#2" name="2a">2</a> and In re Hickman,<a href="#3" name="3a">3</a>

respectively. Those courts both found for the debtor/surety. In Collins, the Fourth
Circuit held that judgments entered against a bail bondsman resulting from forfeited
bail bonds are dischargeable under §523(a)(7). That court found that
non-dischargeable fines, penalties or forfeitures are obligations that are essentially
penal in nature and distinguishable from bail surety bonds, which are contractual
obligations and therefore subject to the general rules of contract law. The court held
that losses on bail bonds when criminal defendants fail to appear in court are an
inevitable cost of doing business for the professional bondsman. As the bond debt
arose from a contractual obligation, it was not a "fine, penalty or forfeiture" within
the meaning of §523(a)(7).

The Fourth Circuit addressed the policy concerns inherent in giving individuals the
ability to discharge bail bond defaults by stating that bail bondsmen are strictly
regulated and scrutinized by state law, that sufficient safeguards exist for states to
ensure that bail bondsmen are financially sound, and that states have the ability to
ensure that sureties provide adequate security against bail bond defaults.

In Hickman, the Fifth Circuit similarly held that bail bond forfeitures are based
in civil contractual law, not state criminal law, and are dischargeable. The Fifth
Circuit distinguished bail surety obligations owed by a third party from obligations
that are directly generated by wrongdoing by the debtor, which are non-dischargeable
under §523.

The Fifth Circuit's analysis began with the fact that the term "forfeiture" could be
used in either a criminal or a civil context. The court then considered the question of
whether the presence of the term "forfeiture" in §523(a)(7) demonstrated an intent
by the Bankruptcy Code drafters to include both the criminal and civil contexts of the
term. In its determination, the Fifth Circuit invoked the constructor canon noscutir
a sociis (a term is defined by its accompanying statutory terms). Performing its
analysis, the Fifth Circuit found that "penalty" is generally confined to pecuniary
punishment, and that "fine" implicates only "pecuniary fine or civil penalty." The court
concluded, despite the fact that "forfeiture and penalty" have civil and punitive
connotations, that "fine" does not have a civil connotation; as such, the entire section
relates only to "punitive or penal sanctions imposed by some form of wrongdoing."
Accordingly, the court held that §523(a)(7) implies that Congress intended to limit
the application of §523(a)(7) to forfeitures imposed on a wrongdoing debtor, not
to someone in a contractual relationship with the state.

In contrast, in Gi Nam, the Third Circuit rejected the application of noscitur
a sociis to §523(a)(7) because the applicable terms are separated by the
disjunctive "or," thus allowing each individual term its separate meaning. The Third
Circuit also found that the bail bond judgment represented a "forfeiture" under both
the legal and dictionary definitions of the term, and rejected the argument that the
forfeiture had to come from the wrongdoing party.

While Collins and Hickman may be factually distinguished from Gi Nam on the basis
that the former cases addressed professional bail bondsmen rather than a family surety,
Gi Nam also conflicts with the earlier cases interpreting Kelly v. Robinson, a
Supreme Court case addressing dischargeability under §523(a)(7).

All three appeals courts cite Kelly v. Robinson<a href="#4" name="4a">4</a> in attempting to determine whether
§523(a)(7) excepts from dischargeability only those fines, penalties or
forfeitures that are criminal sanctions resulting from the debtor's own wrongdoing. The
Third Circuit's interpretation directly conflicts with the other two courts.

In Kelly, the debtor was found guilty of wrongfully receiving welfare benefits.
The criminal court placed the defendant on probation for five years, with a condition
that she make restitution payments throughout the period of her probation. One month
into probation, the debtor filed for bankruptcy, listing her restitution obligation as
a debt.

Addressing the dischargeability issue, the Supreme Court held that "Congress enacted
the 1978 Bankruptcy Code against the background of an established judicial exception
to discharge for criminal sentences, including restitution ordered, an exception created
in the face of a statute drafted with considerable care and specificity." The court
in Kelly was concerned that if a debt arising out of criminal proceedings were declared
dischargeable, it would damage the states' ability to administer their criminal justice
systems. The Supreme Court stated, "Our interpretation of the 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. The right to formulate
and enforce penal sanctions is an important aspect of sovereignty retained by the
states."

The court in Kelly held that §523(a)(7) creates a broad exception for all
penal sanctions, as sanctions both punish and rehabilitate. The Kelly decision held the
sanction non-dischargeable "in light of the strong interests of the states, the uniform
construction of the previous bankruptcy statutes, and the absence of any significant
evidence that Congress intended to change the law in this area."

Collins interpreted Kelly's language by stating that "the decision to impose
restitution does not turn on the victim's injury, but on the penal goals of the state
and the situation of the defendant," and "unlike an obligation which arises out of
contractual, statutory or common law duty, here the obligation is rooted in the
traditional responsibility of a state to protect its citizens by enforcing its criminal
statutes and to rehabilitate an offender by imposing a criminal sanction intended for
that purpose" as a limitation of §523 to penal sanctions. In holding that bail
forfeiture essentially represents a cost of doing business, the court in Collins

essentially equated a bail bondsman with an investor, making a judgment about whether
a criminal defendant will appear at court proceedings. As such, the bail bondsman
is removed from the penal sanctioning that the Collins court believes the Supreme
Court in Kelly intended to protect.

In Hickman, the court followed Collins's narrow interpretation of Kelly. The
Hickman court stated that Kelly's purpose was to eliminate restrictions on a state's
ability to advance the penal, rehabilitative and deterrent goals of its criminal justice
system, but that such concerns do not exist with respect to a surety's debt for bond
forfeiture, which it found history has rendered a civil matter.

Conversely, the Third Circuit interpreted Kelly more expansively. While agreeing
that Kelly held penal sanctions non-dischargeable, it did not agree that it logically
follows that §523(a)(7) exempts only penal sanctions. The Third Circuit looked
to the plain language of the statute and held that "forfeitures," whether civil or
penal, were excepted from discharge. The interpretation of Kelly (i.e., whether to
read Kelly expansively or narrowly), will probably underlie future bail dischargeability
decisions.

<h3>Case Significance</h3>

The significance of the Gi Nam decision is threefold. First, the decision
eliminates the possibility that relatives (as well as friends, or anyone with a
personal stake in seeing a defendant escape criminal punishment) may put up bail
without regard for the financial consequences of bail forfeiture. Second, the decision
encourages tightening standards of individual sureties to the level of professional bail
bondsmen. While under Collins, Hickman and possibly Gi Nam professional bail bondsmen
may discharge bail surety obligations, states are free to place strict financial
requirements on professional bondsmen (e.g., that bondsmen themselves be bonded for
payment in the event of default). State law enforcement agencies, aware of the risks
of flight when family or friends put up bail money, may require more strict safeguards
on non-professional bail sureties. Third, the decision reinforces the principle, stated
in legislative history to the Bankruptcy Reform Act of 1978, that "the bankruptcy
laws are not a haven for criminal offenders, but are designed to give relief from
financial overextension."

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…, 2001 WL 1472666</a>. <a href="#1a">Return to article</a>

<a name="2">2</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… F. 3d 400 (5th Cir. 2001)</a>. <a href="#2a">Return to article</a>

<a name="3">3</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… F.3d 924 ( 4th Cir. 1999)</a>. <a href="#3a">Return to article</a>

<a name="4">4</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S. 36 (1986)</a>. <a href="#4a">Return to article</a>

Journal Authors

Joseph DiGiuseppe

Journal Date

Friday, February 1, 2002 - 12:00

Bankruptcy Rule

2002