Protecting the people from debtors charged with criminal offenses has long convinced courts of the need to except debts imposed in criminal cases from discharge despite the ambiguous wording of the law. As the judge stated in In re Moore, 111 F. 145, 148-149 (W.D. Ky. 1901):

It may suffice to say that nothing but a ruling from a higher court would convince me that Congress, by any provision of the bankrupt act, intended to permit the discharge...of any judgment rendered by a state or federal court imposing a fine in the enforcement of criminal laws... The provisions of the bankrupt act [do not deal with] punishment inflicted pro bono publico for crimes committed."

The Supreme Court echoed that view in Kelly v. Robinson, 479 U.S. 36, 47 (1986):

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 the sovereignty retained by the states. This court has emphasized repeatedly "the fundamental policy against federal interference with state criminal prosecutions." Younger v. Harris, 401 U.S. 37, 46, 91 S.Ct. 746, 751, 27 L.Ed.2d 669 (1971).

Not only was the mere possibility that a state might be forced to defend its criminal judgments offensive to a proper federal-state relationship, but the court also emphasized that the Code must protect criminal monetary judgments that would not otherwise fall under §523. (Negligent homicide, for instance, would not involve the conscious wrongdoing needed to trigger §523(a)(6), but a criminal fine would still be non-dischargeable.) In short, it held, "fine, penalty and forfeiture...preserves from discharge any condition a state criminal court imposes as part of a criminal sentence." 479 U.S. at 50.

Yet, in spite of the court's strongly expressed concerns, a new problem has arisen. Two circuit courts and a district court have held that forfeitures of bonds posted by third parties are not "forfeitures" under §523(a)(7). In re Collins, 173 F.3d 924 (4th Cir. 1999); In re Hickman, 260 F.3d 400 (5th Cir. 2001); In re Gi Nam, 254 B.R. 834 (E.D. Pa. 2000).²

Those courts concede that "in common parlance, and consistently throughout history, the label 'forfeiture' has been affixed to a bail bond debt" and that meaning of the term is "evidenced by the dictionary definition of forfeiture as well as the term's use in state and federal statutes." Hickman, 260 F.3d at 402. They have refused to stop there, however. They note that decisions have limited the breadth of §523(a)(7) by reading the language in Kelly (which held that the section as applied to all "penal sanctions") to mean that only penal sanctions are covered.

The problem with that approach, though, is that Kelly was describing why §523(a)(7) should be expanded beyond its literal meaning. Nothing therein suggests that the court meant to limit the section to less than a literal meaning in criminal cases. The Fifth Circuit conceded that the statement from Kelly could not be relied on to read bail bond forfeitures out of §523(a)(7). Instead, the court seized on Kelly's description of §523(a)(7) as "ambiguous" to justify employing tools of statutory construction to discover what it really means. However, unlike the Supreme Court, which looked to the concerns of the criminal system in analyzing its impact, the Fifth Circuit only looked to the Code for the relevant policy goals.

Initially, it cited the canon noscitur a sociis ("a word is known by the company it keeps") to show that it must limit the meaning of "forfeitures" to be consistent with the meaning of "fines" and "penalties." This, however, proved to be less than helpful in its quest. A "penalty" is, to be sure, defined as a punishment for a wrong but it is also defined as "money which the obligor of a bond undertakes to pay in the event of his omitting to perform or carry out the terms imposed on him by the...bond" and "excessive liquidated damages that a contract...imposes on a [breaching] party." 260 F.2d at 403. Those latter aspects could, or course, easily fit a bail bond forfeiture. The definition of a "fine," though, was limited solely to amounts imposed as punishment, and the court triumphantly concluded that since the definitions of fines and penalties were based at least in part on debtor misconduct, this "implies that Congress intended to limit the section's application to forfeitures imposed upon a wrongdoing debtor." 260 F.3d at 404. (That implication is less than clear though, since at best, the decisions on this topic appear to be evenly split.)

Even if the definitions did support the court's position, the problem with its analysis is that there are other equally applicable canons, such as the one that states that every word in a statute should be given its own meaning and that redundancy should not be presumed. Since only "penal" forfeitures qualify, who needs that term at all? How is a penal forfeiture any different than a simple penalty? And if it isn't, then why use a third term at all? The inclusion of that added language can equally imply that Congress meant to include more debts than covered by fines and penalties.

The Fifth Circuit further argued that since "the majority" of discharge exceptions relate to wrongdoing by the debtor, it should be assumed that this section must be so limited as well and cited the Supreme Court as holding that "the basic purpose" of bankruptcy was to give the debtor a fresh start. If so, this too dictated that exceptions should be construed as narrowly as possible.

There are several problems with those arguments as well. First, many discharge exceptions, such as those for taxes, student loans and domestic support, do not involve any wrongdoing in the incurral of the debts. Second, the Supreme Court quotation is not from a case dealing with forfeiture issues (or even the criminal justice system); it is discussing the far less policy-laden topic of what should be deemed to be property of the estate. And, finally, the citation is somewhat suspect in that it is in a case that did not even receive full argument and misquotes the prior Supreme Court case that it purports to cite to. (That earlier case had said the fresh start was merely "one" of the primary goals of the Code. Another, surely, is ensuring that other societal goals are not undermined by an overly broad fresh start. See Grogan v. Garner, 498 U.S. 279, 286-287 (1991).)

The Fifth Circuit then reviewed the Texas law. It held first that the state law label for the debt was irrelevant, but that so too was the fact that the debt was based on a contract (a fact that the Fourth Circuit, on the other hand, had found quite significant in Collins). The court noted that this debt differed from a typical contract debt in that the amount at issue bore no relation to any actual loss suffered by the states, so that under contract law it would be an "impermissible penalty or forfeiture clause (emphasis added)." In addition, unlike other contracts, bail "is an integral and essential tool in the administration of the states' criminal justice system." 260 F.3d at 406.

Then, even though it initially rejected the significance of the contractual nature of the debt, the court made an about-face and held that the contractual nature of a surety's debt was a basis for discharging it. Unlike restitution, which was meant to protect citizens by punishing or rehabilitating the debtor, this contractual debt, the court held, was just another form of damages that are normally dischargeable. The court dismissed the state's policy concerns about the effect of its holding on administration of its criminal justice system in a single paragraph. While the state's position was "not wholly unpersuasive" and the court had agreed that bail bonds were an "integral and essential tool," the court held that the state was reading Kelly too broadly. While bankruptcy should be allowed to disrupt the states' penal, rehabilitative and deterrent goals by releasing a criminal from his debts,"such a concern does not exist with respect to a surety's debt for forfeiture of a bond."

That dismissive view of the state's concerns seems inadequate.³ It is difficult to see how a state can achieve any "penal, rehabilitative and deterrent goals" if it cannot ensure the presence of a criminal suspect to whom those goals will be applied upon conviction. Bail is designed to allow suspects freedom pending trial, in light of their presumed innocence, while ensuring that they will appear at trial. Considering the dire results of a conviction, many criminals would undoubtedly disappear if they could while on bail. The reasons why they do not are presumably two-fold; if the bond is posted by a relative as in the Gi Nam case, the criminal is presumed to want to avoid inflicting a crushing financial burden on his family. On the other hand, if the bond is put up by an agency, as in Collins and Hickman, that agency is expected to keep track of the suspect and to bring him back, by force if necessary, if he does not appear voluntarily. The agency's knowledge that it will be responsible for the full amount of the bond if it fails to ensure the suspect's presence is an incentive for it to perform its monitoring and retrieval duties zealously (cf. the '80s television show, "The Fall Guy").

Under either scenario, all parties know that a severe financial penalty will be visited upon the debtor if the suspect does not appear. If the certainty of that result vanishes, the efficacy of the system must suffer. The district court in Gi Nam viewed it as significant that the bond did not literally require the debtor to produce his son so he had not actually violated its terms or been proven to have done anything wrong when the son absconded. But the system does not rely on having relatives force the suspect into court; rather, it is intended to make the suspect face the financial consequences his family will face, regardless of their own culpability. That coercive effect is greatly diminished if 90 percent of the debt can be discharged. The district court in Gi Nam thought the loss of the original $100,000, and the adverse effects on the father's credit in the future,⁴ were sufficient incentives to keep the son from fleeing and the father from helping him do so. Yet, the fact is that the state court (correctly, it seems) thought $1 million was needed to make the debtor appear, not just $100,000. Discharging 90 percent of that amount makes bankruptcy courts, not criminal courts, the arbiters of what is needed to ensure defendant's presence.

These decisions pose a myriad of other practical problems. For instance, if states cannot fully enforce bail bonds, they will need to either greatly increase the face value of the bonds or force debtors to post the full amount up front. Either reaction will result in more people being held in jail awaiting trial, a situation that benefits neither the state nor defendants. In addition, limiting §523(a)(7) only to debts that have some flavor of moral wrongdoing causes other problems as well. What of laws that forfeit assets even where one owner has done no wrong? In Bennis v. Michigan, 516 U.S. 442 (1996), the Supreme Court upheld the forfeiture of the family car—which was used by the husband to cruise a red-light district, even though the wife was innocent. Does bankruptcy override that law? And how does the insistence on moral guilt square with the statement in Kelly that criminal fines for negligent homicide are excepted, even though the debtor did not act willfully or maliciously? Is every state penalty now up for review to see if there has been enough "wrongdoing" to qualify? (The Fifth Circuit explicitly said its reasoning applied to penalties and forfeitures.) If a nursing home owner is penalized because staff skipped work on inspection day, is the penalty dischargeable if a bankruptcy court thinks the operator wasn't to blame because staffing ratios were violated? If the corporate veil is pierced and a penalty imposed on an individual for corporate wrongdoing, is that debt now dischargeable? U.S. v. WRW Corp., 936 F.2d 138, 144 (6th Cir. 1993), says it is not, but is that still true? Where is the line?

Judge Learned Hand said it best in In re Caponigri, 193 F.291 (S.D.N.Y. 1912):

The recovery on a recognizance for bail is essentially the recovery of a penalty, and is a forfeiture... [The bond] had...no relationship to a loss suffered by the United States or anything given by it; for it is perverted to regard the failure to try the defendant as being valued by the United States at so much money, or his temporary freedom from arrest as being exchanged for the sum of his recognizance...

The states agree, so why not let the statute just mean what it says?

Footnotes

¹ The quote is by Humpty Dumpty as reported in Through the Looking Glass. The remainder of the views herein are those of the author, and should not be taken as those of the National Association of Attorneys General, any individual attorney general or staff. Return to article

² Two cases involved a bail bond agency; the last involved the suspect's father. Return to article

³ Perhaps the most telling proof of the court's lack of real concern over these issues is its final footnote, which conceded that those goals would only "arguably" be undermined if the suspect was the party posting the bond. That a court could find it debatable that bail owed by an absconding criminal defendant should be non-dischargeable speaks volumes. The district court was not much more impressed by the city's policy in Gi Nam. It held that the city could not rely on policy arguments to alter the meaning of the Code—even though the city was asking for only a literal reading of the Code—yet the court had earlier relied on policy concerns to justify narrowing the Code to exclude matters that it explicitly covered. The contrast in approach is startling. Return to article

⁴ It is difficult to imagine many fathers struggling to decide between a bad credit report and the possibility that a son will be imprisoned for life or executed, but perhaps some do exist. Return to article