Family Surety May Not Discharge Bail Forfeiture Section 523(a)(7)s Non-dischargeability Provision Held Applicable to Bail Sureties
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.
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.
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.
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.
Gi Nam Differs with the Fourth and Fifth Circuits
The Gi Nam holding decided the §523 issue differently than the Fourth and Fifth Circuits, albeit on different facts, in In re Collins2 and In re Hickman,3 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. Robinson4 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.
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."