The unearned portion of a military reenlistment bonus is nondischargeable under obscure provisions of the U.S. Code despite Sections 727 and 523 of the Bankruptcy Code, which appear to say the opposite.
Bankruptcy Judge Christopher M. Klein of Sacramento, Calif., proposed a theory that sometimes might result in the discharge of reenlistment bonuses. In addition, the last half of his Nov. 14 opinion reconciles a circuit split regarding the procedure and court to employ in enforcing a discharge injunction under Section 524.
The case involved a sailor who was involuntarily discharged 15 months into a five-year reenlistment. He had received a $7,500 reenlistment bonus. Soon after leaving the Navy, he filed a chapter 7 petition and promptly received a discharge.
After discharge, the Navy began sending him dunning letters demanding he repay some $6,000, representing the unearned portion of his reenlistment bonus. After the Navy threatened to seize tax refunds and other governmental benefits, he filed a motion in bankruptcy court alleging contempt of the discharge injunction.
The debtor relied on the plain language of Section 727, which appears to say that Section 523 contains an exclusive list of the grounds for barring discharge of a debt, including obligations owing to the government such as tax claims. Judge Klein informed the debtor that title 37, governing military pay and allowances, contains several provisions dealing with the dischargeability of reenlistment bonuses.
In 2006 and 2008, Congress added 37 U.S.C. Sections 303a(e)(4) and 373(c), which say that a “discharge in bankruptcy under title 11 does not discharge a person from” a debt to repay an unearned reenlistment bonus. Since there is an irreconcilable conflict between two federal statutes, “the more recent statute governs,” Judge Klein said.
Therefore, he ruled that the two provisions in title 37 “must be construed as creating exceptions to bankruptcy discharge regardless of the seemingly-comprehensive language of Bankruptcy Code Section 727(b).”
Judge Klein speculated that the nondischarge provisions ended up in title 37 to “circumvent the congressional committees responsible for bankruptcy legislation.”
Judge Klein went beyond the facts of the case before him to explore circumstances when the bonuses might be dischargeable. He focused on two provisions in title 37 saying that the obligation is not erased in bankruptcy “if the discharge order is entered less than five years after” separation from the military.
Since discharges in chapter 13 are ordinarily granted on completion of a five-year plan, Judge Klein said that a former member of the military might try using chapter 13 rather than chapter 7.
Judge Klein also noted that dischargeability is not hopeless even in chapter 7, because Sections 303a(e)(1) and 373(b)(1) both give the secretary discretion to waive collection if it “would be against equity and good conscience” or “contrary to the best interest of the United States.” He wondered if a bankruptcy court, after exhaustion of administrative remedies, could determine whether collecting the debt would be an abuse of the secretary’s discretion.
The last half of Judge Klein’s decision is a discussion of the split between the Ninth and First Circuits about the court with power to enforce the discharge injunction by contempt. The First Circuit does not agree with the Ninth Circuit’s holding that the contempt-enforcement power resides only in the bankruptcy court that entered the discharge order. The courts are also split on whether violation of the discharge injunction can be alleged in an adversary proceeding or only in a contested matter.
Judge Klein explained where some courts went wrong in ruling that contempt of the discharge order cannot be folded into a complaint or adversary proceeding. He also discussed situations where, even in the Ninth Circuit, a court might not go wrong adjudicating a discharge violation in litigation stemming from a complaint, rather than a motion.
Click here for ABI’s discussion of a nonprecedential Nov. 9 decision by the Eleventh Circuit holding that the district court lacked power to rule on a complaint alleging violation of the discharge injunction.