Opinion ID: 3011511
Heading Depth: 2
Heading Rank: 2

Heading: state law context and history

Text: 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, whichexpresses 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]).