Pay-to-Stay Debt Dischargeable

Posted by NCBRC - April 12, 2016

A debt owed to the county under a pay-to-stay incarceration cost recoupment program was held to be dischargeable under section 523(a)(7). County of Dakota v. Milan, No. 15-3034 (Bankr. D. Minn. March 1, 2016).

Jacob Jerome and Ashley Kaye Milan filed chapter 7 bankruptcy in which they listed, as an unsecured, non-priority debt, $3,600.00 owed to Dakota County incurred by Mr. Milan under the state pay-to-stay program for prison inmates. The program, Minn. Stat. § 641.12, subd.3, charges $25.00/day for incarceration expenses including room and board, medical expenses, and other miscellaneous costs. The stated purpose of the program is to permit the County to recoup some of the over $100.00/day cost of incarceration. Unlike court costs and fees which are administered by the district court collector, the pay-to-stay program is administered by the Dakota County Sheriff’s Office (DCSO). In the event the inmate fails to pay the fee the state authorizes “recapture” through garnishment of tax refunds, rent credits and lottery winnings.

The county filed an adversary complaint seeking declaratory judgment that the debt was not dischargeable and the parties filed cross-motions for summary judgment.

Section 523(a)(7) renders nondischargeable a debt that is: 1) a “fine, penalty, or forfeiture,” 2) payable to a governmental unit, and 3) “not compensation for actual pecuniary loss.” The controversy in this case revolved around the first and third prongs of this test. The court reviewed cases examining what types of costs are rendered nondischargeable under this section beginning with Kelly v. Robinson, 479 U.S. 36 (1986), which held that court-ordered victim restitution was not dischargeable. Likewise, other courts have found court-ordered restitution, court costs, and disgorgements all to be nondischargeable. The Milan court concluded: “The direction of these cases is clear: when a court imposes an obligation as part of a judicial order in a criminal case, the obligation is nondischargeable pursuant to § 523(a)(7).”

In this case the debt did not arise out of a court order, however, but out of a program established by the state and administered by the DCSO. The court, therefore, turned to the three-part test to determine whether the debt was nonetheless nondischargeable.

The first part of the test looks at the nature of the debt. The court rejected DCSO’s argument that the costs are “penal” because they are a result of Mr. Milan’s criminal conviction and incarceration. The court found no connection by statute or otherwise between the cost recoupment program and the criminal justice system that would justify calling the costs a “penalty.”  Nor could it be deemed penal as having been included in a court order or as part of the criminal process. As such, it did not meet the first requirement of the exception to discharge test set forth in section 523(a)(7).

The court went on to determine whether the third prong of the test applied and found that it did not. Addressing whether the costs imposed under the pay-to-stay program were compensation, the court again turned to the decision in Kelly where that Court found victim restitution was penal rather than compensatory. The Kelly Court was persuaded by the facts that the victim had no say in whether or how much restitution would be awarded, and that the government’s intention in providing for restitution was primarily penal.

The Milan court found no similar penal purpose behind the pay-to-stay program. The program was codified in the state’s civil administrative code rather than its criminal code. Its stated purpose was to help the county recoup some of the costs of incarceration and it was directly related to the county’s actual costs. The county’s control over the collection amount further distinguished it from Kelly where the victim had no similar input with respect to restitution. Moreover, in the event that a pay-to-stay debtor fails to pay the costs, the statute provides for ordinary civil collection methods to be used rather than recourse to the criminal justice system.

The court dismissed the adversary complaint as against Ashley Milan, and granted summary judgment in favor of Jacob Milan.

This case is currently on appeal to the BAP for the Eighth Circuit, No. 16-6012.

Milan Bankr. D Minn. March 2016 opinion

Tags:

2 Comments

  • Posted April 15, 2016 at 8:05 pm | Permalink

    Another policing for profit example, otherwise known as debtor’s prison. Maybe if the good citizens would actually fund an appropriate level of government service without complaint, the practice of leaching more for people who cannot afford it would stop.

  • Noah
    Posted June 12, 2016 at 12:56 pm | Permalink

    Very interesting. What a terrible system pay to stay is. Debt is the scurge of America. Jacob Milan no longer owed his pay to stay debt after delcaring bankruptsy?

Post a Comment

Your email is never shared. Required fields are marked *

*
*