Exception to Discharge for Criminal Fines and Costs

Posted by NCBRC - August 28, 2018

Where state law treats criminal fines, fees and costs as punitive rather than compensatory those debts are excepted from discharge in bankruptcy. Sanders v. AllianceOne Receivables Management Inc., No. 15-15243, Adv. Proc. No. 16-1204 (Bankr. W.D. Wash. July 6, 2018).

When Randy Sanders filed for chapter 13 bankruptcy, AllianceOne Receivables Management, Inc., as collection agency for Bellingham Municipal Court and Whatcom County, filed proofs of claim based on criminal fines, costs and fees. The debts, or “Legal Financial Obligations,” (LFO) arose out of Sentencing Orders following numerous criminal convictions. Mr. Sanders filed an adversary complaint alleging that AllianceOne’s conduct relating to the debts for which it filed proofs of claim and a debt based on a criminal conviction in the Whatcom County District Court, violated state consumer protection statutes as well as the discharge injunction from his prior chapter 7 bankruptcy. Both parties moved for summary judgment.

Resolution of the case involved interpretation of section 523(a)(7) which excepts from discharge a debt where: “(1) the debt [is] for a fine, penalty, or forfeiture; (2) the debt [is] payable to and for the benefit of a governmental unit; and (3) the debt [does not] constitute compensation for actual pecuniary loss.” Unlike most exceptions to discharge which are construed narrowly, section 523(a)(7) is construed broadly such that even costs associated with actual pecuniary loss may be excepted from discharge if the requirement to pay those costs is deemed punitive.

In Washington, LFOs are based on court orders “for payment of restitution to a victim, statutorily imposed crime victims compensation fee, court costs, a county of interlocal drug fund, court-appointed attorneys’ fees and costs of defense, fines, and any other legal financial obligation that is assessed as a result of a felony conviction.” Certain of these financial obligations are mandatory and others are discretionary based on the defendant’s ability to pay.

The court found that, because the LFOs arising out of the Superior Court Sentencing Order were not necessarily tied to the actual amount of any pecuniary loss and the defendant’s failure to pay any of those obligations could result in imprisonment, the debts were punitive rather than compensatory. It found, therefore, that “all financial obligations imposed in the Superior Court Sentencing Orders – including the Victim Assessment, the Criminal Filing Fee, the DNA Collection Fee, Court Appointed Attorney Fees, Collection Costs and Interest – are nondischargeable under § 523(a)(7).”

The “Offender Supervision Intake Fees,” which related to the court clerk’s office’s efforts to collect the LFOs from the defendant and which were imposed by the clerk’s office, were likewise non-dischargeable. The court found that the genesis for collection of those fees came from the Sentencing Order which provided that the “defendant shall pay the costs of services to collect unpaid [LFOs], which include monitoring fees for a monthly time payment plan and/or collection agency fees.”

For the same reasons, the court found the similar LFOs imposed under the Bellingham Municipal Court sentencing order to be non-dischargeable. However, the Bellingham Municipal Court debt included interest which was imposed not by the sentencing court but by separate statute and did not appear to include the risk of imprisonment for non-payment. Notwithstanding these distinctions, the court found that, because state courts had interpreted the imposition of interest under the statute to be penal rather than compensatory in nature, the accumulated interest was also non-dischargeable.

Turning to Whatcom County District Court sentencing orders, AllianceOne argued that because it no longer performed collection activities for the district court and had not filed a proof of claim for any debts related to Mr. Sanders’s conviction in that court, it was entitled to summary judgment. The court disagreed. The record showed that AllianceOne did make collection efforts with respect to that debt after Mr. Sanders obtained his chapter 7 discharge and there was insufficient evidence as to whether the debt was included in the discharge order. Therefore, the court denied summary judgment on that claim.

The court found various other charges, such as the fees associated with employment of the collection agency and other fees and costs from the other sentencing orders, to be insufficiently supported by the record and therefore not amenable to disposition on a motion for summary judgment.

Sanders Bankr WD Wash July 2018

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