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Bail Bond Guarantees Are Dischargeable

This practice includes the prosecution of contempt as to those that violate the discharge injunction.  However, when considering whether you can or should proceed with a discharge injunction violation you have to look carefully at the exceptions to discharge as stated in 11 U.S.C. § 523.  If there is an exception is it one that requires an actual adversary by the opposing party while the bankruptcy is pending, or is the debt simply immune from any discharge entered due to the type of debt it represents.  It is always a question.

In this regard, the 10th Circuit Court of Appeals has now stated that 11 U.S.C. § 523(a)(7) does     not render nondischargeable a debt incurred by a debtor who has     guaranteed a bail bondsman to make the bondsman whole in the event a     criminal defendant jumps bail.

In a case of first impression for the Court, it ruled in  Affordable Bail Bonds, Inc. v. Sandoval (In re Sandoval) that a judgment obtained before the filing of a case for the guarantee of payment to a bail bond company on an appearance bond was dischargeable because § 523(a)(7) did not apply.

In this case the Debtor, Sandoval, entered into a "plain talk" contract with the Bondsman, Affordable, as an indemnitor in the even the person being bailed did not appear as required.  The Debtor paid the Bondsman $1,600.00 for the bond and agreed to reimburse the Bondsman for actual expenses in case of forfeiture, including the "full amount of the bail forfeited".

The 10th Circuit stated a few caveats:  "It is important at the outset to understand what this case is not. It is not a case where the debtor was the defendant in the underlying criminal action who had previously jumped bail and is now attempting to get his debt to a governmental unit discharged in bankruptcy. Nor is it a case involving a bail-bondsman debtor or other type of surety debtor who is attempting to discharge a debt owing directly to a governmental unit incurred as a result of the
nonappearance of a defendant. We are not concerned here with the nature, scope, or operation of the bond agreement between the Bondsman and the State of Oklahoma".

In light of these caveats, the Bankruptcy Court had gone into some discussion that the Debtor was not a party to the bonds that were forfeited, and the debt was therefore not a fine or a penalty.  The 10th Circuit cut through this by stating it does not matter because this type of "debt is not payable to and for the benefit of a governmental unit, and thus the statute does not bar discharge".  All that mattered was that the "Bondsman is a nongovernmental corporate entity ... and the fact that [the Bondsman] ultimately paid money to the State of Oklahoma after [the one bonded out] failed to appear does not change [the Bondsman's] status from that of a private corporate entity".  The Bondsman had attempted to bootstrap the government entity prong of The Bondsman attempts to satisfy the government-entity prong of § 523(a)(7) by arguing that [the Bondsman] should be subrogated to the rights of the State of Oklahoma.  The 10th Circuit, as the Bankruptcy Court before it, was unpersuaded, stating:  "the State had no rights on the bail bond or otherwise against the [the Debtor]. Thus, 'stepping into the shoes' of the State as a subrogee avails the Bondsman nothing in regard to the dischargeability of the debt and fails to afford the Bondsman status as a governmental unit.

The Bondsman relied on a public policy argument, which would seem to contravene the Bankruptcy Code.  The 10th Circuit concluded that “'[E]xceptions to discharge are to be narrowly construed, and because of the fresh start objectives of bankruptcy, doubt is to be resolved in the debtor’s favor.”' (Internal cite omitted).

10th Circuits Adopts Objective-Coercion Principle In Discharge Injunction Violations

The United States Court of Appeals, Tenth Circuit opened the door to the Objective-Coercion Principle in discharge injunction violations.  In doing so, however, it distinguished the facts of the case at hand and ruled against the debtors because neither the Bankruptcy Court findings, nor the Debtor's testimony met the guidelines set out by the 10th Circuit.

In the case In re Paul, Circuit Judge Stephen H. Anderson issued the opinion that states that the Objective-Coercion Principle "operates as an overarching exception" to the rule that actions that do not directly violate the 11 U.S.C. §524 discharge injunction may still be a violation of §524(a)(2) if it can be shown that a "creditor acted in such a way as to 'coerce' or "harass' the debtor improperly so as to theoretically force them to pay a discharged debt.

The 10th Circuit, therefore, adopts the theory first established by the 1st Circuit Court of Appeals in its decision In re Pratt in 2006, except that the 10th Circuit did not find that the facts before it in In re Paul met the standard set.

Undisclosed Fees Charged By A Mortgage Company Both Before And After Confirmation Can Constitute Compensable Violations

The scenario is that debtors file bankruptcy, typically a Chapter 13 bankruptcy.  They might pay an arrearage on the home through the plan.  They pay their mortgage payment direct through the plan, meaning the ongoing mortgage payment is included in the plan, but either by the debtors or through the trustee in some jurisdictions the current house payment is being made directly.  The mortgage company continues to add charges while the bankruptcy is pending for drive by inspections, attorneys' fees, certain late penalties, and the like.  However, the company does little to disclose these to the court.  The result is the mortgage company is laying in wait -- hiding -- while these fees build (sometimes called "escrow arrearages") until the bankruptcy is discharged.  Then the mortgage servicing company (which is often not the same one as when the bankruptcy was originally filed) makes a demand for these fees, and the accrued interest from the fees.  Sometimes the mortgage company makes a demand for back house payments when the past mortgage payments were first applied to paying these fees, costs and expenses.  In any event, if not paid after discharge the mortgage company threatens foreclosure.

For years bankruptcy attorneys have been trying to figure out how to effectively deal with this matter, because the situation exists to some extent in nearly every Chapter 13 bankruptcy in which a mortgage is involved.  What complicates the matter for both the attorney and the client is deciphering the long -- often erratic -- payment history since the filing of the bankruptcy.  It takes an untold number of attorney time to get this accomplished, and there is a question of how to get paid, and how to get the matter resolved.  In this, there might now be hope.

Two Houston bankruptcy courts have tackled this issue with different opinions of which laws are violated, but essentially reaching the same conclusion -- these fees must be disclosed by the filing of a 2016(a) fee application with the court or they are likely (1) per se unreasonable, and (2) constitute violations of the Bankruptcy Code, the orders of the Court, and possibly the injunctions of the Court.

FDCPA May Not Be A Substitute For A Good Old Injunction Violation Case

Suing creditors and debt buyers under the FDCPA when they also violate a discharge injunction issued by a bankruptcy court may not be the panacea most newly minted consumer lawyers think.  (The same thing is true when considering automatic stay litigation).

Lawyers tend to like the FDCPA because they believe they can recover statutory damages for the debtor on top of actual damages and possible punitive damages.  The problem is that the FDCPA and litigating a typical discharge injunction violation have different defenses, with the FDCPA being more liberal.  Also, the extra money that can be recovered is limited to $1,000.00.

You Must Distinquish Between What Is A Fine And What Is Compensation For A Pecuniary Loss

In what is yet an unpublished decision, Bankruptcy Judge Letitia Clark of the Southern District of Texas has issued a decision, which indicates that when suing the state agency for failing to issue a driver's license you have to distinguish between the failure to do so in an effort to collect a pecuniary loss and the State exercising it's police powers.

THE FIRST CIRCUIT STATES THAT A SECURED CREDITOR'S HOBSON'S CHOICE BETWEEN REPOSSESSION AND MONEY CAN CONSTITUTE A DISCHARGE INJUNCTION VIOLATION

On September 1, 2006 the First Circuit Court of Appeals handed down In re Pratt, No. 05-2453, which helps define whether a secured lender can just sit on its lien and do nothing with regard to taking possession of its property after a Chapter 7 discharge is entered without violating the discharge injunction.

The history of the case, as stated by the 1st Circuit, is this:

"In 1994, Carlton Pratt bought a new Chevrolet Cavalier and financed the purchase through GMAC, which acquired a lien on the vehicle. Four years later, the Pratts filed a Chapter 13 petition, and estimated the current value of the vehicle at $4900. The bankruptcy court allowed the GMAC proof of secured claim for the outstanding loan balance (including interest) at $3,291.35, and GMAC subsequently received $1,083.62 in distributions during the course of the chapter 13 proceeding.

In 1999, the Pratts converted their Chapter 13 case to Chapter 7, by which time the balance due on the GMAC secured claim approximated $2620. Pursuant to Bankruptcy Code § 521(a)(2)(A), the Pratts gave notice that they intended to "surrender" the vehicle, viz., by ceding possession in lieu of reaffirming their prepetition loan obligation to GMAC. The bankruptcy court granted the GMAC motion for relief from the automatic stay in order to allow GMAC to realize on its lien. GMAC notified the Pratts in writing of their right to cure the default. After concluding that the expense of repossession would outstrip the value of its secured claim, GMAC followed its customary practice of writing off the remaining loan balance. The Pratts retained possession of the vehicle. The bankruptcy court granted the Pratts a Chapter 7 discharge, which released them from their outstanding personal indebtedness for the balance due on the GMAC car loan.

By September 1999, the Pratts realized that the Cavalier was inoperable, hence essentially worthless, and that they would have to dispose of it. Before they could "junk" the car, however, salvage dealers were required by Maine law to obtain a release of the GMAC lien. During the next few months, the Pratts repeatedly contacted GMAC and requested that it either repossess the car or release the lien. GMAC refused to release its lien unless and until the outstanding loan balance was paid in full".

Essentially, GMAC refused to remove its property from the Pratts' yard or to give them the title so that the Pratts could do it themselves.  As a result the Pratts reopened their Chapter 7 bankruptcy and filed an adversary proceeding against GMAC for violating their discharge injunction for its failure to do one or the other.

Both the Bankruptcy Court and the District Court ruled in favor of GMAC and found that (1) GMAC's in rem right to enforce its lien against the vehicle survived intact the Chapter 7 discharge of the Pratts' unsecured personal liability on the loan; (2) A secured creditor has an unqualified right to refuse to release its lien until the loan balance is paid in full; (3) GMAC's refusal to release its lien did not coerce the Pratts to repay their discharged personal liability on the car loan, but simply invoked its legitimate in rem remedies; and, (4) the situation was no more coercive than had GMAC offered the Pratts a reaffirmation agreement whereby they could consent to repay both the secured and unsecured portions of the loan indebtedness.

A nice decision for GMAC, but the Pratts did not agree that GMAC could not refuse to release their lien without the payment of money and refuse to remove the automobile from the Pratt's yard without payment of the money owed.  The Pratts believed that given GMAC's position they were coerced to pay off the remaining money owed in order to get the junk car off their property, and that this created a "putative violation" of their Chapter 7 discharge injunction.  So they appealed to the 1st Circuit.

The 1st Circuit reversed both the Bankruptcy Court and the District Court, finding among other things, that debtors have only three options as to secured property:  (1) reaffirmation, (2) redemption and (3) surrender.  If debtors do not choose either redemption or reaffirmation, then their only other option is surrender.  Surrender means only that debtors make the property available to the secured party (or to "cede their possessory rights").  However, nothing in the Bankruptcy Code suggests that GMAC was required to take possession of its secured property.  The more difficult question for the 1st Circuit was whether or not the surrender of the property required GMAC to release its lien in lieu of taking possession so the Pratt's could have the automobile removed from their property.

The question for the 1st Circuit was whether the Hopson's choice created by GMAC constituted a discharge injuntion violation.

The term "Hobson's choice" originated from Thomas Hobson, who lived in Cambridge, England from 1544 to 1630. Hobson was a stable manager renting out horses to travelers.  After customers began requesting particular horses again and again, Hobson realized certain horses were being overworked. He decided to begin a rotation system, placing the well-rested horses near the stable door, and refused to let out any horse except in its proper turn. He offered customers the choice of taking the horse in the stall nearest the door or taking none at all.  This is somewhat different from a Catch-22 situation, where both (or all) choices available contradict each other.  "Hobson's choice" is  used not to mean a false illusion of choice, but simply a choice between two undesirable options.  A modern phrases might be"take it or leave it" or "beggars can't be choosers".  The last, in a bankruptcy context, is particularily offensive.  Yet, in this writer's opinion, that was the position that GMAC left the Pratts.  GMAC left the Pratts with the undesirable alternatives of leaving the hunk of junk that belonged to GMAC in their front yard, or paying the remaining portion of the loan to which the Pratts were no longer liable.  The 1st Circuit apparently saw it that way as well.

The 1st Circuit stated that even though "the Pratts (and not GMAC) initiated all the inquiries about releasing the lien might preclude a finding that GMAC "harassed" the Pratts, that does not foreclose the possibility that GMAC's refusal was objectively and improperly "coercive" in the circumstances", finding that "the line between forceful negotiation and improper coercion is not always easy to delineate, and each case must therefore be assessed in the context of its particular facts".

Applying this logic, the 1st Circuit found that "[a]lthough GMAC did not create all these circumstances, and we find no record evidence that it acted in bad faith, in these circumstances its actions were objectively coercive".  In this regard, the Court stated unequivocally that "even legitimate state-law rights exercised in a coercive manner might impinge upon the important federal interest served by the discharge injunction, which is to ensure that debtors receive a 'fresh start' and are not unfairly coerced into repaying discharged prepetition debts".

Ultimately the 1st Circuit found GMAC's actions to be "objectively coercive" because GMAC announced that it did not intend to repossess the "surrendered" vehicle because it was of insufficient value, then expressly conditioned its release of the lien upon the Pratts' agreement to repay the loan balance in full.

In its final analysis the 1st Circuit found that "[w]hatever the bona fides of the state-law basis for the GMAC statement, its pronouncement effectively amounted to a demand for a "reaffirmation," which obviously never purported to comply with the stringent "anti-coercion" requirements of Bankruptcy Code § 542(c)".

The end result would seem to be to not ignore the forest for the trees.  Think not just what your rights are under any law but on the actual options you are offering debtors, and what you are actually attempting to achieve offering a Hobson's choice.

Can A Debtor Sue A State For Damages For Violating The Automatic Stay Or Discharge Injunction?

The answer to the question is decidedly mixed despite the fact that the 11th Circuit Court of Appeals was the last to joined five of six other circuits in ruling that 11 U.S.C. § 106 is unconstitutional and does not abrogate states’ sovereign immunity from a debtor's claim for damages arising from student loan collection actions purportedly taken in violation of the automatic bankruptcy stay. In re Crow, 394 F.3d 918 (11th Cir. 2004).

Although the Supreme Court’s decision in Tennessee Student Assistance Corp. v. Hood, 541 U.S. 440 (2004), established that adversary proceedings against states for discharge of student loan debt do not implicate Eleventh Amendment, a debtor’s claim for damages does. The 11th Circuit relied on Seminole Tribe of Florida v. Florida, 517 U.S. 44 (1996), to find that Congress did not have the power under the Bankruptcy Clause of Article I of the Constitution to abrogate states’ sovereign immunity for such damages.

The question is mixed, however, because although the decision prevents the debtor from seeking damages directly, the 11th Circuit and the other Circuits it followed failed to point out that a similar result might be achieved through the court’s power to impose monetary sanctions for violating a court order, which does not implicate the Eleventh Amendment. Frew ex rel. Frew v. Hawkins, 540 U.S. 431, 439-40 (2004).  It  would appear to be well settled law  across a large territory of cases, such as civil rights litigation, that states can be subject to injunctions issued by federal courts and may be  sanctioned for the violation of those injunctions.