FINANCIAL CASUALTY & SURETY CO INC. et al v. THAYER et al
Filing
6
OPINION FILED. Signed by Judge Noel L. Hillman on 9/30/16. (js)
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
FINANCIAL CASUALTY & SURETY
CO INC.,
Appellant,
Civil No. 15-6644(NLH)
OPINION
v.
STEPHEN C. THAYER,
Appellee.
APPEARANCES:
SAMUEL M. SILVER
2050 ROUTE 27
SUITE 106
BRUNSWICK PLAZA
NORTH BRUNSWICK, NJ 08902
On behalf of appellant
STEPHEN C. THAYER
1074 BUCKINGHAM DR.
WEST DEPTFORD, NJ 08086
Appellee appearing pro se
HILLMAN, District Judge
Presently before the Court is the appeal by Financial
Casualty & Surety Company, Inc. (FCS) of the bankruptcy court’s
August 24, 2015 Opinion and Order granting summary judgment in
favor of the debtor, Stephen C. Thayer.
FCS’s adversary complaint
contested the dischargeability of a judgment it obtained against
Thayer arising from bail bond forfeitures.
For the reasons
expressed below, the bankruptcy court’s decision will be reversed
and remanded for further proceedings consistent with this Opinion.
BACKGROUND
A.
Jurisdiction and Standard
This Court has jurisdiction over the appeal from the
bankruptcy court’s August 24, 2015 Opinion and Order pursuant to
28 U.S.C. § 158(a), which provides in relevant part: “The district
courts of the United States shall have jurisdiction to hear
appeals from final judgments, orders and decrees
. . . of
bankruptcy judges entered in cases and proceedings referred to the
bankruptcy judges under section 157 of this title.
An appeal
under this subsection shall be taken only to the district court
for the judicial district in which the bankruptcy judge is
serving.”
In reviewing a determination of the bankruptcy court, the
district court assesses the bankruptcy court’s legal
determinations de novo, its factual findings for clear error, and
its exercise of discretion for abuse. In re Trans World Airlines,
Inc., 145 F.3d 124, 131 (3d Cir. 1998).
B.
Procedural History
In 2011, FCS filed an amended complaint that added Thayer and
other bail bond agents to a civil action in this district.
Action No. 1:11-04316.)
(Civil
FCS sought to recover from Thayer and
other commercial bail bond agents unpaid premium, expenses, and
for bail bond forfeiture liability.
FCS served Thayer with a
summons and copy of FCS’s complaint on February 13, 2012.
2
Because Thayer did answer or otherwise appear in the suit, in May
2012, the district court clerk entered a default against Thayer.
On January 11, 2013, the district court executed a Final Default
Judgment against Thayer for $192,985.41 ($17,698.30 in unpaid
premium bail bond powers entrusted to Nicole Thayer, Stephen C.
Thayer, and Shamrock Bail Bonds Limited Liability Company;
$165,500.00 in bond forfeiture judgments; $3,172.70 in costs and
fees associated with bond judgments; and $6,614.41 in reasonable
and necessary attorney’s fees and expenses).
On May 4, 2013, Thayer filed for protection under Chapter 7
of the Bankruptcy Code.
In his Petition, Thayer identified 18
creditors, including those holding secured and unsecured claims,
along with their respective claims against Thayer’s bankruptcy
estate.
Thayer failed to list FCS as a creditor.
When Thayer
filed an Amendment to his Schedules on May 22, 2013 and identified
additional unsecured creditors, Thayer did not identify FCS as a
judgment creditor.
In August 2013, BGM Financial, LLC (“BGM”) (an unsecured
creditor identified in Thayer’s Schedule F) successfully
challenged the dischargeability of its claims for fraud and breach
of fiduciary duty against Thayer.
BGM sought to recover money
damages from Thayer based on Thayer’s role as BGM’s sub-producer.
BGM served as FCS’s general agent for issuing bail bonds, and, in
turn, Thayer served as FCS’s sub-agent.
3
On August 23, 2013, the bankruptcy court closed Thayer’s
bankruptcy.
In April 2014, Thayer moved to re-open his bankruptcy
to amend Schedules A and C with the intent to discharge FCS’s
judicial lien.
The bankruptcy court granted Thayer’s request to
re-open the proceedings and invited FCS to file an Adversary
Complaint.
On June 24, 2014, FCS filed its Adversary Complaint in
which it alleged that $165,000.00 of its total claim and
attributable to bail bond forfeitures was nondischargeable
pursuant to § 523(a)(7) as a debt “for fine, penalty, or
forfeiture payable to and for the benefit of a governmental unit,
and is not compensation for actual pecuniary loss, other than a
tax penalty.”
FCS also alleged $11,299.30 of unremitted premium
for reported bail bond powers, and $6,399.00 in premium for
unreported bail bond powers of attorney, were nondischargeable
pursuant to § 523(a)(4) because the debt was based on “fraud or
defalcation while acting in a fiduciary capacity, embezzlement, or
larceny.”
FCS later argued § 523(a)(4) as an additional ground to
deny discharge of the forfeiture debt as well.
Thayer timely
filed an answer.
FCS sought summary judgment to avoid discharge of the bail
bond forfeitures and unpaid bail bond premium Thayer owed FCS.
After a hearing and the filing of supplemental memoranda, the
bankruptcy court denied FCS’s Motion for Summary Judgment, granted
summary judgment in favor of Thayer, and discharged Thayer’s debt
4
to FCS.
C.
FCS filed the instant appeal.
Background Facts
This Court restates the background facts from the bankruptcy
court’s Opinion, as most of these facts are not in dispute on
appeal. 1
(See Docket No. 3-5 at 3-8, internal citations omitted.)
As noted above, FCS's claims stem from a pre-petition
judgment obtained by default against Debtors in the United States
District Court for the District of New Jersey in the amount of
$192,985.414 (the "Judgment").
The judgment arose from breach of
a sub-producer bail bond agreement (the "Contract").
The parties
to the contract were:
• FCS as "Company";
• James V. Mascola, Genevieve A. Steward and Bail Group
Management, LLC as General Agent (collectively, "BGM");
• Mr. Thayer and/or Shamrock Bail Bonds as Sub-Producer; and
• Mrs. Thayer as Sub-Producer Indemnitor.
The Contract, dated June 7, 2008, provided that the General
Agent would supply bail bond powers of attorney to the Debtor.
FCS acted as surety.
The Contract further provided that the
Debtor "occupies a fiduciary relationship with Company and General
Agent in relation to the conduct of its business."
As is the
nature of the business, the Contract contemplated the possibility
of bail bond forfeitures.
Bail bonds are forfeited when a
defendant, for whose benefit the bond is issued, fails to appear
for a court date.
1
Regarding bail bond forfeitures, the Contract
Where relevant, disputed facts will be noted.
5
provided that the Debtor:
shall be solely responsible for satisfying bail bond
forfeitures; for investigation of bail bond principals and
prospective bail bond principals; for negotiation,
settlement, and/or satisfaction of claims against Company
and/or General Agent/Sub-Producer by bail bond principals,
courts, and/or others; and/or for any and all other matters
of bail bond administration hereunder. Sub-Producer will make
or cause to be made any and all necessary and warranted legal
motions to preserve, reinstate, and exonerate bonds at SubProducer's sole expense.
Thus, after a forfeiture, the Debtor could mitigate a loss by
ensuring that a defendant later appears or is delivered to the
court.
entered.
If a defendant is not delivered, a bail bond judgment is
The Debtor and FCS are equally obligated to pay the
state for the bond forfeiture judgments. 2
If the Debtor does not
pay the debt, FCS must pay the debt if it wants to continue to do
business in New Jersey.
Thereafter, its remedy is to seek
indemnification from the Debtor.
As security for indemnification under paragraphs 17 and 18,
the Contract provided for contribution by the Debtor to an
indemnity fund.
The use of the indemnity fund was in FCS's
discretion, and the balance of the fund would be returned to the
Debtor upon termination of the Contract, subject to all other
expenses being paid.
2
The indemnity fund could be used by FCS to
Despite the Bankruptcy Court’s characterization that this
arrangement was undisputed, FCS disputes that it and Thayer are
equally obligated to pay the state for the bond forfeiture
judgments, relying upon the language in the parties’ contract.
This key issue to FCS’s appeal is discussed in depth below.
6
reimburse itself (offset) for any forfeitures and unpaid
bail bond premiums.
the Contract.
FCS has invoked this right of setoff under
The parties sometimes refer to this indemnity fund
as a Build-Up Fund, or BUF.
The Debtor submitted a document
titled "Trust Account Details" for Thayer/Shamrock Bail Bonds.
This document reflects a continued build-up of the Debtor's BUF
account with FCS during the tenure of the parties' relationship.
The Contract had a specific provision regarding bail bond
forfeitures, as follows:
As a courtesy, Company and/or General Agent shall make an
effort to notify SubProducer of receipt of any bail bond
forfeitures, whether threatened or declared, that Company
receives from the Courts in relation to Sub-Producer's
forfeitures. However, in all instances it shall be SubProducer's sole responsibility and duty to monitor properly
the status and forfeitures of all bonds posted with bail bond
Powers of Attorney entrusted to Sub-Producer by Company
and/or General Agent . . . Sub-Producer shall take any and
all necessary and lawful steps to terminate forfeiture
liability within the applicable statutory time frame. When or
if it is deemed necessary that such forfeiture or resulting
judgment be paid, then, in addition to any other rights and
remedies it may have under this Agreement, at law and/or
equity, Company shall have the right to do any one or more of
the following:
(a) Direct any party hereto indemnifying Company from
forfeiture to pay any part or all thereof;
(b) Pay part or all of the forfeiture judgment from the
indemnity Fund(s);
(c) Pay and/or direct payment of part of all of the
forfeiture judgment from any forfeiture collateral held
for such bond;
(d) Direct the bond principal and/or anyone
guaranteeing, assuring, or indemnifying Company and/or
any other party hereto against loss by reason of the
bond principal's noncompliance to pay part or all of the
forfeiture judgment; and/or
(e) Company may pay part or all of the forfeiture
7
judgment and reimburse itself in accordance with (a),
(b), (c) and/or (d) of paragraph 20. All such rights of
Company to reimbursement shall be primary to any such
rights of any other party hereto, any holder of interest
in and to collateral described in (c), and/or anyone
described in (d).
Paragraph 20, referenced in paragraph 24(e), essentially repeats
subparagraphs (a)-(c), and in addition provides in 20(d) that the
Company retains discretion to direct the Debtor to defend and
protect, or to refrain from defending, the Company and/or General
Agent in any legal action.
The Forfeiture Debt
As to the Forfeiture Debt, FCS alleges that the Debtor wrote
seventeen FCS bail bonds which were ultimately forfeited,
resulting in judgments in the total amount of $165,500.
FCS
alleges that the Debtor failed to mitigate the forfeited bond
judgments, either by locating the defendants and surrendering them
to the New Jersey courts, or otherwise negotiating the bond
obligations.
FCS stated that as a result of the forfeited bail
bonds the Superior Court of New Jersey precluded FCS from writing
bail bonds in New Jersey.
To regain its right to do business in
New Jersey, FCS was obligated to pay the bond forfeiture
liability.
Thereafter, FCS withdrew $15,500 from the BUF account
to offset the $165,500 liability.
In support of the Forfeiture
Debt, FCS submitted documentation concerning only one defendant
bonded by the Debtor, Weston Smith.
FCS supplied no documentation
for the remaining sixteen bail bond forfeitures and in fact, has
8
waived its claim of nondischargeability for these sixteen claims.
Consequently, FCS's demands for recovery on the remaining sixteen
bail bond forfeitures are denied.
As to the Weston Smith bond, in the amount of $150,000, there
can be no dispute it was forfeited and FCS initially satisfied the
judgment in full.
FCS has submitted sufficient evidence to
establish this fact.
In support of its claim, FCS avers that the
Debtor consciously disregarded his duties regarding the Weston
Smith forfeiture by failing to properly monitor the case and
mitigate the loss.
It is interesting to note that the Notice of
Bail Forfeiture for Surety dated June 16, 2011 in the amount
of $150,000, on its face reveals that it was sent to FCS at its
office in Texas and not to the Debtor. 3
The Debtor points this
fact out during his deposition and points out that "I
know it's my responsibility, however if I don't know the bond
forfeited, how am I supposed to produce a defendant if I don't
have a valid forfeiture notice or arrest warrant?"
The Contract
provides that FCS, as a courtesy, shall make an effort to notify
the Debtor of receipt of any bail bond forfeitures.
The Debtor
testified that he never received notice from FCS and that he had
an incentive to recover Weston Smith through a $50,000 return to
him personally.
Finally, the Debtor testified that FCS's failure
to notify him hampered his ability to mitigate FCS's damages and
3
This fact is disputed by FCS.
9
his history reflects that, except for Weston Smith, he captured
all defendants on behalf of FCS.
The Debtor's testimony reflects a pattern of recovering
forfeitures, and he provided documents to support his position
that allegations made by FCS concerning the forfeitures are
incorrect.
As to the Weston Smith forfeiture, the Debtor
testified that once FCS took him of the bail registry, he could
not recapture the defendant because it would be illegal.
More
importantly, the Debtor did not know Weston Smith missed his court
appearance, had no ability to confirm a court date other than
through the defendant's own word, and during the three year period
between the issuance of the bond and the forfeiture, took steps to
mitigate damages and was monitoring the defendant through GPS and
eventually phone calls and personal visits.
The Debtor also
testified that he was told by Michael Padilla of FCS that his
contract was cancelled and he could no longer post any bonds
around the same time of the Weston Smith forfeiture.
The Premium Debt
Under the Contract the Debtor was to remit premiums or ensure
remittance for each bail bond power of attorney issued.
Debtor failed to remit some premiums to FCS.
The
In addition, once
FCS terminated the Contract, the Debtor was to return all unused
bail bond powers to FCS and remit premiums based on the amount of
those bonds.
The Debtor failed to deliver any unused bail bond
10
powers and remit premiums to FCS in the amount of $6,399.00.
The
Debtor's failure to comply with the Contract resulted in the
Judgment (by default), a portion of which included the Premium
Debt.
For his part, the Debtor admits that he was required to
collect premiums.
The Debtor admits to owing premiums in the
approximate amount of $11,000.00 to FCS because he cannot prove
that he paid the premiums.
He also stated that at the end of the
Contract, he stopped paying premiums because the Contract
terminated and he was using the funds to pay forfeitures and
business expenses - in effect, playing "catch up".
The Debtor
testified that he believed that there was sufficient funds
contained in the BUF account to satisfy any outstanding premiums
and that the premiums would be paid from the BUF account.
As of
December 30, 2011, there was $40,566.86 in the BUF account.
did not offset the BUF account to pay the Premium Debt.
FCS
Finally,
the Debtor consistently testified that he believed he returned the
unused bond powers to BGM. 4
DISCUSSION
A.
Whether a debt arising from a bail bond forfeiture
judgment is dischargeable under 11 U.S.C. § 523(a)(7)
The primary issue presented by this bankruptcy appeal is
whether a bail bond forfeiture judgment jointly entered against a
4
FCS contests that Thayer returned all unused powers of attorney.
11
bail bondsman, who signed the bond, and the surety, which
underwrote the bond, is dischargeable debt in the bondsman’s
bankruptcy under 11 U.S.C. § 523(a)(7) 5 when the surety has paid
the judgment to the state and subsequently obtained a default
judgment against the bondsman in the amount of the bail bond
forfeiture judgment.
This precise issue has not been answered by any court in the
Third Circuit. 6
The Third Circuit has, however, determined that an
5
11 U.S.C. § 523(a)(7) provides, “(a) A discharge under section
727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not
discharge an individual debtor from any debt-- . . .(7) to the
extent such debt is for a fine, penalty, or forfeiture payable to
and for the benefit of a governmental unit, and is not
compensation for actual pecuniary loss, other than a tax penalty .
. . .”
6
The bankruptcy court addressed whether Fifth Circuit law would
apply to the issue because the contract between FCS and Thayer
contains a choice of law provision that references the application
of Texas law. The Court finds that only Third Circuit law and New
Jersey state law apply to this issue, and a discussion of Fifth
Circuit law is unnecessary, for several reasons. First, the
choice of law provision in the contract provides that the
agreement is to be interpreted under the law of Texas, FCS’s state
of incorporation, or the law of the Thayer’s home state, which is
New Jersey. The choice of which law to apply is at FCS’s
discretion. (Docket No. 3-3 at 21.) As discussed herein, even if
the Fifth Circuit’s analysis of the dischargeability of a bail
bond forfeiture judgment under 11 U.S.C. § 523(a)(7) could be
considered “Texas law,” it is evident that FCS does not wish that
law to apply in this context. Second, whether Thayer’s debt is
dischargeable under 11 U.S.C. § 523(a)(7) requires the
interpretation of federal bankruptcy law, and not the
interpretation of the contract, which would implicate the choice
of law provision. See In re Gonzalez, No. BR 15-10628 ELF, --B.R. ---, 2016 WL 2944281, at *3 (Bankr. E.D. Pa. May 19, 2016)
(citing Butner v. United States, 440 U.S. 48, 54–55 (1979); In re
Brannon, 476 F.3d 170, 176 (3d Cir. 2007); United States v. Energy
Res. Co., 495 U.S. 545, 549 (1990)) (“When a debtor enters the
12
unsatisfied bail bond forfeiture judgment entered against a
commercial bail bondsman cannot be discharged in bankruptcy under
11 U.S.C. § 523(a)(7).
In Dobrek v. Phelan, 419 F.3d 259, 262 (3d
Cir. 2005), the plaintiff filed suit against the Clerk of the New
Jersey Superior Court, claiming that he was wrongfully removed
from the bail registry because his bail bond debts were discharged
in bankruptcy pursuant to 11 U.S.C. § 727.
The district court
dismissed plaintiff’s claims, finding that bail bond forfeiture
judgments are not dischargeable debt under 11 U.S.C. § 523(a)(7).
On appeal, the Third Circuit affirmed.
In its decision, the Third Circuit first briefly explained
the bail bond system in New Jersey:
New Jersey courts permit individuals and companies to
post bail bonds for criminal defendants in return for a fee.
Once the bondsman posts bail for an accused, it becomes the
bankruptcy system, state or non-bankruptcy federal law usually
determines the scope and nature of a debtor's property interests
and the debts subject to adjustment. The next part of the
bankruptcy process involves the application of federal bankruptcy
law to those pre-existing relationships, i.e., the extent to which
the provisions of the Bankruptcy Code permit the Debtor to modify
those preexisting relationships.”). Third, the debt that Thayer
seeks to discharge arises from a New Jersey district court default
judgment entered because of Thayer’s New Jersey state bail bond
recognizance agreement and resulting New Jersey state bail bond
forfeiture judgment. Finally, the binding federal bankruptcy law
to be applied here is that of the Third Circuit, which has
expressly rejected the Fifth Circuit’s position on this issue.
See Dobrek v. Phelan, 419 F.3d 259, 267 (3d Cir. 2005)
(disagreeing with In re Hickman, 260 F.3d 400, 405 (5th Cir.
2001), which held that commercial bondsman’s bail forfeiture debts
are dischargeable in bankruptcy).
13
bondsman's responsibility to produce the defendant for
required court proceedings. If the defendant fails to
appear, then the bail posted is “forfeited,” and the bondsman
becomes responsible for the amount of bail or for ensuring
that the fugitive defendant is captured and brought to court.
The bondsman's obligation to satisfy bail in this
circumstance may be underwritten by insurance companies
licensed to do business in New Jersey. . . .
Dobrek was, at different times, an authorized agent of
various commercial surety companies. In connection with this
work, Dobrek was listed on the New Jersey Bail Registry
(“Bail Registry”), a list of insurance producers and limited
insurance representatives licensed to write bail bonds in New
Jersey. Individuals who are not listed on the Bail Registry
cannot engage in the business of writing bonds in that state.
As an agent who executed bail bonds on behalf of surety
companies, Dobrek, like all other such agents in New Jersey,
was responsible for the contractual default of these
companies in the event that a defendant failed to appear in
court, at least to the extent of being precluded from writing
additional bonds until the bail forfeiture judgments were
satisfied. In other words, in instances where defendants
failed to appear, judgment was entered against both the
commercial sureties and Dobrek, as the signer of the bail
bond. As a result, Dobrek was jointly bound to pay to the
court any amount of money specified in a court order setting
bail where a defendant failed to appear at any required court
proceedings.
Dobrek, 419 F.3d at 261 (citing Capital Bonding Corp. v. N.J.
Supreme Court, 127 F. Supp. 2d 582, 584 (D.N.J. 2001); In re
Preclusion of Brice, 366 N.J. Super. 519, 841 A.2d 927, 929 (App.
Div. 2004)).
The Third Circuit then discussed In re Gi Nam, 273 F.3d 281
(3d Cir. 2001), where it considered the related issue of whether
the bail bond debts of an individual family member acting as a
surety are excepted from discharge under § 523(a)(7).
Relying on
the plain meaning of the statute, the purpose and context of
14
Pennsylvania's bail forfeiture laws, and public policy
considerations, the Third Circuit determined in Gi Nam that such
bail bond debts are nondischargeable.
Cir. 2005).
Dobrek, 419 F.3d at 260 (3d
The Dobrek court extended the reasoning in Gi Nam to
bail bond forfeiture judgments entered against commercial bail
bondsmen in New Jersey.
In addition to following the plain language of § 523(a)(7),
the Third Circuit in Dobrek reviewed New Jersey’s statutory
treatment of bail bond judgments, which suggested that these debts
were considered “forfeitures” under state law, and that the state
law context of Dobrek's debts reinforced the conclusion that they
were “forfeitures” within the meaning of § 523(a)(7).
Id. at 266
(citing N.J. Ct. R. 3:26-6; Gi Nam, 273 F.3d at 288 (“Indeed,
“‘[a]lthough 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 dischargeability provisions, such statelaw designations are at least helpful to courts in determining the
generic nature of such debts....’”)).
The Third Circuit noted that it had previously limited its
holding in Gi Nam to a family surety, but it extended the holding
of Gi Nam to the commercial context.
Id. at 265 (“[I]n spite of
our earlier disavowal of the applicability of Gi Nam's reasoning
to commercial bondsmen, upon further reflection, we conclude that
many of the policy concerns of Gi Nam apply with equal force to
15
commercial bondsmen.”).
It presented two policy reasons for why
bail bond forfeiture judgments should not be dischargeable in
bankruptcy:
(1) “[A]llowing commercial bondsmen to discharge bail bond
debts in bankruptcy could encourage the use of federal bankruptcy
laws to evade the financial consequences of noncompliance with a
bail bond agreement.
Indeed, while bail forfeitures are an
anticipated cost of doing business, a bail bondsman would
certainly prefer to avoid these debts.
Should a commercial
bondsman be allowed to discharge these debts in bankruptcy,
bankruptcy could become an attractive option over satisfying one's
financial obligations to the state”; and
(2) “[S]hould the bail bond debts of a commercial bondsman be
dischargeable in bankruptcy, the state's criminal proceedings may
effectively be invalidated, triggering comity and federalism
concerns.
The non-appearing or fugitive defendant would be out of
the state's custody and the professional bondsman would no longer
have any incentive to produce him in court.”
Dobrek, 419 F.3d at
265 (internal citations omitted).
The Third Circuit succinctly concluded, “Because we read the
text of § 523(a)(7) to encompass the type of bail bond debts at
issue here, and because we are persuaded by the reasoning in Gi
Nam, we hold that § 523(a)(7) excepts from discharge bail bond
forfeitures entered against a commercial bail bondsman.”
16
Id. at
267.
In its decision allowing Thayer to discharge his debts
arising from the bail bond forfeiture judgment, the bankruptcy
court did not find Dobrek controlling.
The bankruptcy court
discussed Fifth Circuit law, the Third Circuit Gi Nam case, and
cases from the Southern District of New York, upon which it relied
heavily.
The bankruptcy court acknowledged that Dobrek held that
§ 523(a)(7) excepts from discharge bail bond forfeitures entered
against a commercial bail bondsman, but it appears to have
distinguished Dobrek from the instant matter because the bail bond
forfeiture judgment remained unsatisfied in Dobrek.
In other
words, whereas the bail bond forfeiture judgment in Dobrek was
unpaid by the parties against whom the judgment was entered – the
criminal defendant, the bail bondsman, and the surety – in this
case the bail bond forfeiture judgment, which was also entered
against the criminal defendant, the bail bondsman, and the surety,
was paid by the surety. 7
7
Because of this difference, the
Dobrek’s arrangement with several sureties was essentially
identical to Thayer’s arrangement with FCS. (See Civil Action 04313 JBS-JBR, Docket No. 7-1 at 6.) It appears that several bail
bond forfeiture judgments were entered against Dobrek and
different sureties. One of those sureties was removed from the
bail bond registry, but two others were not. It is not clear from
the record whether the two sureties that were not removed from the
bail bond registry paid the forfeiture judgments so that they
could continue underwriting bonds in New Jersey. If they did, and
if Dobrek sought to have those surety-satisfied forfeiture
judgments discharged in bankruptcy, the holding of the Third
Circuit in Dobrek’s case would be directly on-point with this
case.
17
bankruptcy court focused on whether “private corporations such as
FCS, which are engaged in the business of insuring bail bonds and
other suretyship obligations for profit, can step into the shoes
of a governmental entity to recovery on an otherwise contractual
liability for damages to that private corporation as if it were a
forfeiture to a governmental entity.”
(Docket No. 3-5 at 10.)
In determining that FCS could not “step into the shoes” of
the state, by way of equitable subrogation, and meet the
requirement that the forfeiture judgment was “payable to and for
the benefit of a governmental unit,” the bankruptcy court
ostensibly determined that the dispositive difference between
Dobrek and this case is that FCS is clearly not a governmental
unit, and Thayer’s debt to FCS arose by way of a contractual
indemnification provision.
That is, even though Thayer and FCS
were both liable for the forfeiture judgment to the state, because
FCS paid the debt to the state, Thayer, by filing bankruptcy, is
now absolved from all liability for that debt.
We are unpersuaded that the timing difference identified by
the bankruptcy court renders Dobrek inapplicable in this matter.
To the contrary, we find it controlling.
The purpose of the bail
bond system, along with the public policy considerations expressed
in Dobrek, all demand that the dischargeability of a bail bond
forfeiture judgment against a bail bondsman cannot hinge on
whether or not a surety, which underwrites all commercial bonds to
18
the state, pays the forfeiture judgment.
The right to bail is guaranteed by the New Jersey
Constitution.
“All persons shall, before conviction, be bailable
by sufficient sureties, except for capital offenses when the proof
is evident or presumption great,” and “[e]xcessive bail shall not
be required.”
N.J. Const. art. I, ¶¶ 11, 12.
These provisions
have been incorporated into N.J. Court Rules 3:26-1 and 7:4-1. 8
The State of New Jersey, Commission of Investigation,
recently issued a report on New Jersey’s bail bond industry and
noted,
Bail is a central element of the criminal justice system.
Enshrined as a constitutional right, it is intended to strike
a balance between shielding criminal defendants from
excessive pretrial detention while simultaneously holding
them accountable to attend required court proceedings. The
accused may gain release by posting cash and/or property
directly with the court or by paying a percentage of the
total bail for a surety bond through a licensed commercial
bail-bond agency. Much is at stake in maintaining the
integrity of a properly functioning bail process, including
public safety, the credibility of law enforcement and
judicial institutions and the appropriate administration of
justice.
INSIDE OUT, Questionable and Abusive Practices in New Jersey’s
8
N.J. Const. art. I, ¶ 1, effective January 1, 2017, has been
revised to state: "All persons shall, before conviction, be
eligible for pretrial release. Pretrial release may be denied to
a person if the court finds that no amount of monetary bail, nonmonetary conditions of pretrial release, or combination of
monetary bail and non-monetary conditions would reasonably assure
the person's appearance in court when required, or protect the
safety of any other person or the community, or prevent the person
from obstructing or attempting to obstruct the criminal justice
process."
19
Bail-Bond industry, State of New Jersey, Commission of
Investigation, May 2014, at 1. 9
Because the State Commission of Investigation found the bailbond system in New Jersey to be “highly prone to subversion by
unscrupulous and improper practices that make a mockery of the
public trust,” the Commission recommended “a series of statutory
and regulatory measures to provide stronger oversight of the bail
industry, particularly related to the licensure of bail agents and
agencies and the operation of those businesses.” 10
Id. at 1, 5.
The New Jersey courts have similarly recognized the critical
role bail bond sureties and their agents have in the bail bond
system.
The purpose of bail is to secure the release of the accused
from imprisonment pending disposition of the charge and to
assure his presence in court when lawfully required in
connection with that charge. A recognizance of bail . . .
executed by a surety amounts to a contract between that
surety and the State. Under such a contract, when a criminal
9
Available at http://www.nj.gov/sci/pdf/BailReportSmall.pdf.
10
As a result of the New Jersey Commission of Investigation
report, the Supreme Court created a Bail Judge Subcommittee to
identify issues and concerns with the bail forfeiture recovery
process and the bail bond system. The Subcommittee issued a
report in February 2016. The Supreme Court invited written
comments from the Bar of New Jersey, which were due by June 9,
2017. See http://www.judiciary.state.nj.us/notices/2016/
n160510a.pdf.
The Court notes that by relating the serious issues with the bail
bond system in New Jersey, it does not intend to suggest that
Thayer was a participant in any of the unscrupulous activities
described by the New Jersey Commission of Investigation. Indeed,
the bankruptcy court viewed Thayer to be credible, and this Court
has no reason to question that assessment.
20
defendant, as the principal under the bail bond, defaults on
his obligation to appear in court when lawfully required, the
surety is obligated to locate, apprehend and return the
defendant to custody. Therefore, if a surety seeks a partial
or total remission of a forfeiture of bail, it bears a heavy
burden to show that it has satisfied its essential obligation
under the recognizance to secure the defendant's return to
custody, and in the absence of this showing, the trial court
may determine that the forfeiture should stand.
State v. Mercado, 747 A.2d 785, 789 (N.J. Super. Ct. App. Div.
2000) (internal citations omitted).
Because commercial sureties contract with agents and bail
bondsmen to perform the actual duties of assuring the criminal
defendant’s obligation to appear in court when lawfully required,
the agent and bail bondsman, as well as the criminal defendant,
sign a bail recognizance agreement.
That agreement provides,
The insurer, bail agency and bail agent agree to be
responsible for:
(a) Producing the defendant for all court proceedings,
unless otherwise authorized by the court;
(b) Supervising the defendant while he or she is
released on bail under the terms of this Recognizance;
(c) Taking immediate steps to recapture the defendant
should the defendant fail to appear for any court appearance;
(d) Notifying the court immediately in writing of any
change in the defendant’s address;
(e) Notifying the court immediately in writing if the
defendant is detained in jail or prison or otherwise cannot
appear at a court proceeding.
. . . Any notice of forfeiture will be served on the
corporate surety (insurer), bail agency and bail agent at the
address listed in the Bail Registry . . . .
New Jersey Bail Recognizance, available at
21
http://www.judiciary.state.nj.us/directive/criminal/dir_13_04.pdf.
In the event a criminal defendant fails to appear and the
recognizance is breached, a forfeiture judgment is entered against
the fugitive, the surety, and the bail agent/bondsman.
See In re
Preclusion of Brice, 841 A.2d 927, 929-30 (N.J. Super. App. Div.
2004) (noting that a bail bond is a “written undertaking, by and
between the State, defendant and surety, that the defendant will
appear at any required court proceedings, comply with the
conditions of bail, and that if the defendant fails to do so, the
signers of the bond will pay to the court the amount of money
specified in the court order setting bail,” recognizing that “an
agent may make himself individually responsible by engaging
expressly to perform his principal's obligation,” and finding that
“in view of the bond conditions and the . . . instructions, that
the agent's signature on the bond constitutes such an
engagement”).
Moreover, in addition to a bail bondsman’s liability for a
bail bond forfeiture judgment based on the recognizance agreement,
a bail bondsman’s agreement with the surety imparts liability as
well.
For example, in In re Preclusion of Brice, the bondsman’s
agreement with the surety imposed “upon the agent/bondsman the
duty to ‘see to it the persons bonded appear in court when
required,’” and provided “that if the agent/bondsman violates the
agreement or ‘any other obligation’ he has undertaken and owes to
22
the principal, he is obliged to indemnify the principal for its
losses resulting therefrom.” Id. at 930.
“[E]ven more
specifically, by paragraph 15, captioned ‘Forfeitures’ the
agent/bondsman agrees that upon breach of any obligation imposed
upon him by the agreement, he ‘shall be financially responsible
for the payment of any and all summary judgments of same.’”
Id.
The court held, “We think it plain, therefore, that even if the
form of recognizance bond, together with its conditions and
instructions, did not impose individual liability on the agent,
his own agreement with his principal did.”
Id.
Public policy considerations also mandate that the bondsman
must be personally liable for a non-appearing criminal defendant.
[T]he imposition of this obligation and the consequence of
non-compliance on the agent accords with the demands of
public policy. It is the agent, not the surety, who
determines which risks he will accept and those defendants
for whom he will write bonds. By writing the bond, he
undertakes to assure the defendant's appearance, and the
corollaries of that obligation are his duty to monitor and
supervise the defendant after his release on bail and to
recapture him should he fail to appear. Were we to accept
[the bail bondsman’s] argument that no personal liability can
attach despite his non-compliance with these duties, despite
his individual undertaking to the court, and despite his
unilateral decision to accept poor risks, there would be no
penalty for his non-compliance and no incentive to his
performance of his ultimate obligation of producing the
defendant in court and recapturing him if he fails to appear.
Those consequences are unacceptable if we are to maintain the
integrity and function of the bail-bond system.
In re Preclusion of Brice, 841 A.2d at 930-31.
To summarize the foregoing, the bail bond system is a central
element of the criminal justice system, and a properly functioning
23
bail process is imperative.
To maintain the integrity of the
system, both the surety and the bondsman are held financially
accountable 11 for a non-appearing criminal defendant.
With regard
to the bondsman, who performs the actual duties of producing,
supervising, and recapturing the criminal defendant, his liability
for any forfeiture judgment arises from both the bail recognizance
agreement with the state and his contract with the surety.
Without this personal liability, the bail bondsman would not face
any penalty for failing to assure the appearance of a criminal
defendant, and the public safety and administration of justice
would be threatened.
In this case, if FCS had not paid the bond forfeiture
judgment, Thayer would still be responsible to the state for the
judgment.
In that posture, just like in Dobrek, Thayer would not
be permitted to have his obligation for payment of the judgment to
the state discharged under § 523(a)(7).
The bankruptcy court
determined that because FCS paid that judgment, however, Thayer’s
obligation is extinguished.
The discharge of Thayer’s obligation
is equivalent to erasing the penalty for Thayer’s failure to
11
Unlike several other states, violations of the bail bond
regulations amounts only to administrative penalties. The New
Jersey Commission of Investigation has recommended that the state
criminal code be amended to include criminal penalties against
bail bondsmen for certain violations. INSIDE OUT, Questionable
and Abusive Practices in New Jersey’s Bail-Bond industry, State of
New Jersey, Commission of Investigation, May 2014, at 60-61,
available at http://www.nj.gov/sci/pdf/BailReportSmall.pdf.
24
secure the fugitive criminal defendant’s appearance that gave rise
to the forfeiture judgment. 12
This result cannot stand in light of
all the considerations set forth above.
It is a constitutional right in New Jersey that “[a]ll
persons shall, before conviction, be bailable by sufficient
sureties.”
N.J. Const. art. I, ¶¶ 11.
In order for FCS to
provide “sufficient sureties” in New Jersey, it was compelled to
pay the bail bond forfeiture judgment for which Thayer was liable
based on the recognizance agreement with the state and the
agreement between FCS and Thayer. 13
If it did not pay the bail
12
The bankruptcy court considered Thayer’s testimony regarding the
circumstances of the non-appearing fugitive, Weston Smith. The
bankruptcy court found that because Thayer had been vigilant in
capturing other defendants in the past, it was improbable that he
intentionally ignored the notice of forfeiture regarding Smith.
The bankruptcy court’s factual determinations on this issue are
discussed in the next section of this Opinion concerning whether
the fees and costs associated with the forfeiture judgment that
Thayer contractually owed to FCS are dischargeable under 11 U.S.C.
§ 523(a)(4) “for fraud or defalcation while acting in a fiduciary
capacity.”
13
The agreement between FCS and Thayer provided, “[I]n all
instances it shall be Sub-Producer's sole responsibility and duty
to monitor properly the status and forfeitures of all bonds posted
with bail bond Powers of Attorney entrusted to Sub-Producer by
Company and/or General Agent, including all transfer bonds caused
to be posted by Company, either at Sub-Producer's request or at
General Agent's request for Sub-Producer, regardless of who posts
said bonds. Sub-Producer shall take any and all necessary and
lawful steps to terminate forfeiture liability within the
applicable statutory time frame.” (Docket No. 3-3 at 21.)
It also provided, “Sub-Producer shall be solely responsible for
negotiating, underwriting, securing, and posting bail bonds issued
to secure the release from custody of bail bond
principals/defendants. Sub-Producer shall be responsible for all
25
bond forfeiture judgment on Thayer’s behalf, it would have been
removed from the bail bond registry and not permitted to
underwrite bail bonds in New Jersey.
According to the bankruptcy
court’s decision, Thayer’s obligation to pay the bail bond
forfeiture judgment to the state would not be dischargeable in
bankruptcy so long as FCS was removed from the bail bond registry
due to an unpaid bond.
Thayer’s debt would be dischargeable,
however, if FCS took action to remain on the bail bond registry by
paying the bond.
This presents a Hobson’s choice for FCS and
other sureties in a similar situation: pay the forfeiture judgment
and continue its business in New Jersey even though it cannot
recover the payment from the bail bondsman if he files bankruptcy,
or do nothing and cease to do business in New Jersey so that the
bail bondsman remains liable for the judgment even if he files
bankruptcy.
The doctrine of equitable subrogation is the cure for
this Hobson’s choice.
dealings with bail bond principals/defendants, including but not
limited to their court appearances, apprehension, holding,
movement, arrest, extradition, and/or surrender (hereinafter
"dealings with bond principals/defendants"). Sub-Producer's
dealings with bail bond principals/defendants will be conducted in
compliance with all applicable laws, statutes, regulations, and
prudent business practices utilized in the bail bond business.
Sub-Producer shall be solely responsible for any damages arising
from or occasioned by dealings with bail bond
principals/defendants. . . . Sub-Producer shall exercise extreme
care in its dealings with bail bond principals/defendants, and
shall exercise the utmost care and caution in the selection of
persons assisting Sub-Producer in dealings with bail bond
principals/defendants.” (Docket No. 3-3 at 17.)
26
New Jersey courts widely recognize the doctrine of equitable
subrogation, see In re Bridge, 18 F.3d 195, 201 (3d Cir. 1994),
which is implicated “‘when an obligation is discharged by one not
primarily liable for it, but who believes himself to be acting
either in the performance of a legal duty, or for the protection
of a legal right, or at the request of the party ultimately bound,
and even in certain other cases, favored by public policy,
. . .
the party thus discharging the obligation is entitled in equity to
demand, for his reimbursement,
. . . the performance of the
original obligation, and the application thereto of all securities
and collateral rights held by the creditor,’” Burke v. Izmirlian,
No. A-3762-09T3, 2011 WL 1661022, at *3 (N.J. Super. Ct. App. Div.
May 4, 2011) (quoting Schmid v. First Camden Nat. Bank & Trust
Co., 130 N.J. Eq. 254, 255, 22 A.2d 246 (Ch. 1941)); see also
Feigenbaum v. Guaracini, 952 A.2d 511, 519 (N.J. Super. App. Div.
2008) (citations omitted) (“Subrogation rights may be created in
three different ways: (1) by agreement; (2) by statute; or (3)
judicially as an equitable device to compel the ultimate discharge
of an obligation by the one who should in good conscience pay it.
The doctrine of equitable subrogation should not be imposed where
its enforcement would be inconsistent with the terms of a contract
or when the contract, either expressly or by implication, forbids
its application.
Equitable subrogation may only be imposed if the
27
cause is just and enforcement is consonant with right and
justice.”).
Thayer was obligated to the state of New Jersey to pay the
forfeited bail bond.
FCS paid the debt on Thayer’s behalf, only
so it could continue to underwrite bail bonds in New Jersey.
Based on the principles of the equitable subrogation doctrine, FCS
is entitled to the same protections as the state would have if FCS
did not pay the forfeiture judgment.
See Schmid, 130 N.J. Eq. 254
at 255 (“Where subrogation is claimed on the ground that the
payment was necessary to protect the interests of the subrogee,
the extent or quantity of interest which is in jeopardy is not
material.
If he has any palpable interest, which will be
protected by the extinguishment of the debt, he may pay the debt
and be entitled to hold and enforce it just as the creditor
could.”).
Applying the equitable subrogation doctrine under these
circumstances also addresses the public policy concerns that would
arise from a bondsman’s ability to discharge in bankruptcy his
liability for bail bond forfeiture judgments.
The discharge of
bail bond forfeiture judgments, even ones that were paid by the
surety and transformed into civil litigation default judgments,
would (1) encourage the use of federal bankruptcy laws to evade
the financial consequences of noncompliance with a bail bond
agreement, (2) become an attractive option over the bondsman
28
satisfying his financial obligations to the state, (3) effectively
invalidate the state's criminal proceedings, triggering comity and
federalism concerns, and (4) cause the fugitive defendant to be
out of the state's custody and the professional bondsman would no
longer have any incentive to produce him in court.
In short, bail bond forfeiture judgments entered against a
bail bondsman cannot, in any fashion, be discharged in bankruptcy.
The Court will therefore reverse the bankruptcy court’s
determination of this issue.
B.
Whether the premium debt is dischargeable under 11
U.S.C. § 523(a)(4)
Section 523(a)(4) of the Federal Bankruptcy Code provides
that an individual cannot obtain a bankruptcy discharge from a
debt “for fraud or defalcation while acting in a fiduciary
capacity, embezzlement, or larceny.”
11 U.S.C. § 523(a)(4).
FCS
argues that Thayer’s obligation to pay the premiums owed 14 to FCS
cannot be discharged in bankruptcy because Thayer breached his
fiduciary duties to FCS by way of defalcation of those duties. 15
14
FCS also argues that Thayer breached his fiduciary duties by
failing to return unused bail bond powers of attorney. The unpaid
premiums and the unreturned powers of attorney constitute the
“premium debt” that FCS contends is exempt from discharge under §
523(a)(4). The Court’s analysis of the unpaid premiums also
applies to the unreturned powers of attorney.
15
In addition to its argument under § 523(a)(7), FCS argues that
the forfeiture judgment also cannot be discharged under §
523(a)(4). In determining that Thayer’s actions concerning the
forfeiture judgment did not fall under § 523(a)(4), the bankruptcy
court accepted Thayer’s testimony that he did not receive notice
29
The Supreme Court has described the parameters of what
constitutes “defalcation.”
[W]here the conduct at issue does not involve bad faith,
moral turpitude, or other immoral conduct, the term requires
an intentional wrong. We include as intentional not only
conduct that the fiduciary knows is improper but also
reckless conduct of the kind that the criminal law often
treats as the equivalent. Thus, we include reckless conduct
of the kind set forth in the Model Penal Code. Where actual
knowledge of wrongdoing is lacking, we consider conduct as
equivalent if the fiduciary “consciously disregards” (or is
willfully blind to) “a substantial and unjustifiable risk”
that his conduct will turn out to violate a fiduciary duty.
That risk “must be of such a nature and degree that,
considering the nature and purpose of the actor's conduct and
the circumstances known to him, its disregard involves a
gross deviation from the standard of conduct that a lawabiding person would observe in the actor's situation.” . . .
[T]this interpretation does not make the word identical to
its statutory neighbors. As commonly used, “embezzlement”
requires conversion, and “larceny” requires taking and
carrying away another's property. “Fraud” typically requires
a false statement or omission.
that the criminal defendant, Weston Smith, failed to appear, or
that a resulting forfeiture judgment had been entered. The
bankruptcy court noted that there was no evidence in the record
that FCS informed Thayer about Weston’s non-appearance or the
forfeiture judgment. Without this notice, the bankruptcy court
concluded that Thayer could not have mitigated the situation, and
therefore Thayer’s actions did not constitute fraud or defalcation
as to the forfeiture debt. FCS argues that these findings do not
consider that the failure-to-appear and forfeiture judgment
notices were mailed to Thayer’s address, and that Thayer was still
a registered bail bondsman with the state at the time of the nonappearance and entry of forfeiture judgment who was obligated,
both through his agreement with the state and FCS, to track
criminal defendants or pay forfeitures. Because the Court has
found that Thayer cannot discharge the debt that resulted from a
bail bond forfeiture judgment under § 523(a)(7), the Court does not
need to determine whether the bankruptcy erred in determining that
the forfeiture judgment did not meet the elements of
nondischargeability under § 523(a)(4).
30
Bullock v. BankChampaign, N.A., 133 S. Ct. 1754, 1759-60, 185 L.
Ed. 2d 922 (2013) (internal citations omitted).
In the bail bond business in New Jersey, the purchaser of a
bond – often a family member of a criminal defendant - usually
pays a premium of ten percent of the amount of the bond to the
bondsman.
Lexington Nat. Ins. Corp. v. Ranger Ins. Co., 326 F.3d
416, 417 (3d Cir. 2003).
The bondsman then divides the premium
with the insurance company.
Id. at 418.
The percentage of the
premium the bondsman retains varies, but typically a bondsman
remits 20% of the premium to the company for its share of the
premium, and 10% of the premium to the company for payment into a
reserve fund – “build-up fund” - to secure the company against
loss in the event of a forfeiture. 16
Id.
With regard to the premium Thayer owed to FCS, the bankruptcy
court determined that because Thayer used the money to pay other
forfeitures and his business expenses, including legal fees, and
because Thayer believed that his build-up fund contained
sufficient funds to cover the costs of the outstanding premiums,
Thayer’s failure to pay the premiums to FCS did not amount to
16
The parties’ agreement in this case provides, “Unless otherwise
authorized and/or directed by Company, and without regard to
premium credit extended to customers, Sub-Producer shall remit to
Company and/or General Agent within 14 days of execution of each
bond hereunder such cash sums for premiums as will equal to 2.0 %
($20.00 per $1,000.00) of the total amount of Bond Liability for
each bond written by Sub-Producer. Company shall charge a minimum
of $10.00 per bond issued.” (Docket No. 3-3 at 26.)
31
fraud or defalcation.
The bankruptcy court referred to the
parties’ contract, which the bankruptcy court found to have
“contemplated” such an occurrence.
In its appeal, FCS argues that Thayer’s admission that he
purposefully failed to pay FCS the premiums and instead used them
to pay for other expenses demonstrates a breach of fiduciary
duties to FCS that amounts to defalcation.
FCS argues that Thayer
held the premiums in trust for FCS, and that Thayer admittedly
knew that the premiums were not his to use.
FCS contends that
regardless of the value of the build-up fund or how he used the
money, Thayer intentionally and recklessly breached his fiduciary
obligations to FCS by converting FCS’s premium payments for his
own use.
As a primary matter, it is clear that Thayer, as the agent
for FCS, held a fiduciary duty to FCS. 17
The scope of the term “fiduciary” under § 523(a)(4) is a
question of federal law. Analysis of state law, however, is
necessary to determine when the requisite trust relationship
exists. The traditional definition of “fiduciary,” involving
a relationship of confidence, trust and good faith, is too
broad for the purposes of bankruptcy law. Rather, the
meaning of “fiduciary” for purposes of Bankruptcy Code
section 523(a)(4) is limited to instances involving express
or technical trusts. Moreover, the trustee's duties must be
independent of any contractual obligation between the parties
and must be imposed prior to, rather than by virtue of, any
claim of misappropriation. Accordingly, implied or
constructive trusts and trusts ex maleficio are not deemed to
17
The bankruptcy court did not decide whether a fiduciary duty
existed between FCS and Thayer because it found that Thayer’s
conduct and state of mind did not rise to the level of fraud or
defalcation.
32
impose fiduciary relationships under the Bankruptcy Code.
The reason for this narrow interpretation is to promote the
Bankruptcy Code's “fresh start” policy.
There are different requirements that must be met to
establish the existence of either an express or technical
trust. To establish an express trust three elements must be
met: (1) a declaration of trust; (2) a clearly defined trust
res; and (3) an intent to create a trust relationship. The
definition and scope of a technical trust, however, is
difficult to determine. Some courts have determined that
technical trusts for purposes of § 523(a)(4) can be created
by state statutes. Other courts have found that state common
law can create the requisite fiduciary relationship.
Notwithstanding the differences in the means of establishing
these two types of trusts, the scope of technical and express
trusts is “not limited to trusts that arise by virtue of a
formal trust agreement, but includes relationships in which
trust-type obligations are imposed pursuant to statute or
common law.”
In re Kaczynski, 188 B.R. 770, 773-74 (Bankr. D.N.J. 1995) (citing
Matter of Angelle, 610 F.2d 1335, 1339 (5th Cir. 1980)) (other
internal citations omitted); see also Matter of Tran, 151 F.3d
339, 342-43 (5th Cir. 1998). 18
In this case, a fiduciary relationship and an express trust
existed between FCS and Thayer.
The contract between FCS and
Thayer provides:
18
FCS cites to Texas law to support its position that Thayer acted
in a fiduciary capacity to FCS. As noted above, supra note 6, the
agreement between FCS and Thayer contains a choice of law
provision that allows FCS to choose either Texas or New Jersey law
to apply. Even though the Fifth Circuit case law does not support
FCS’s position with regard to the dischargeability of bail bond
forfeiture judgments under § 523(a)(7), FCS relies upon Texas
state court cases to support its non-dischargeability argument
under § 523(a)(4). Even though FCS should be limited to one
choice of law to apply based on a contractual choice of law
provision, choosing which law to apply is inconsequential on this
issue because New Jersey and Texas law is essentially identical.
33
3.
STATUS. . . . [I]t is expressly understood and
agreed that Sub-Producer occupies a fiduciary relationship
with Company and General Agent in relation to the conduct of
its business. However, Company is not the fiduciary of
either General Agent or Sub-Producer.
. . .
5.
POWERS OF ATTORNEY. . . . Said bail bond Powers of
Attorney shall be delivered to Sub-Producer in trust, and
Sub-Producer shall act as trustee with regard to same, with
Company being the beneficiary thereof.
. . .
7.
BOND COLLATERAL. . . . Company shall be named
trustee on any build up fund/reserve account, indemnity
account, client trust fund, or collateral account, and is the
intended beneficiary thereof. . . . Company and/or General
Agent may, at their discretion, direct Sub-Producer to
deliver immediately any and all collateral of any sort taken
by Sub-Producer at any time as bond security to Company
and/or General Agent; the collateral shall be identified by
bond number, indemnitor, and principal, to be held in trust
by Company until released to Sub-Producer or directly to the
party who gave such collateral, and Company shall be the
beneficiary of same. Sub-Producer shall hold such collateral
as a fiduciary in a manner, which complies with all laws and
administrative regulations of the State . . . . In the event
that Sub-Producer fails or refuses to provide the Company
and/or General Agent with receipts and collateral for
executed bonds, it shall be conclusively presumed in any
litigation, lawsuit, or other proceeding between the Company
and/or General Agent and Sub-Producer, or in which the
Company has a beneficial interest in the claim, that: 1) SubProducer received collateral for the bond in the full face
amount of the bond as trustee for Company; 2] such collateral
is in the possession, custody, and control of Sub-Producer;
and 3) Sub-Producer, as Company's fiduciary trustee, has
failed to account for such collateral, and is fully liable
for the taking, supplying, maintenance, and return thereof.
8.
BOND PREMIUM RATES, COLLECTION AND REMITTANCES. . .
. (b) All bond premiums chargeable, charged, receivable,
collected, and/or held by Sub-Producer shall belong solely to
Company until actual receipt by Company of the amount to
which Company/General Agent is entitled as described herein.
Once Company and General Agent have been paid any amount due
34
to them in respect to bond premium, Sub-Producer shall retain
all remaining premiums collected or outstanding.
. . .
14. RECORDS AND REPORTS OF SUB-PRODUCER. Sub-Producer
acknowledges and agrees that it is its fiduciary duty to the
Company to maintain all files and records concerning each and
every Company bond that has been executed by Sub-Producer
and/or its employees/independent contractors for a period of
five (5) years from the execution date of each bond.
(Docket No. 3-3 at 14-26.)
Based on the parties’ agreement, Thayer agreed to act in a
fiduciary capacity to FCS in two ways.
First, he accepted the
powers of attorney granted to him by FCS that imposed a fiduciary
duty on Thayer to act for the FCS’s benefit.
See In re Parks, No.
05-37154/JHW, 2007 WL 2033380, at *14 (Bankr. D.N.J. July 10,
2007) (citing D'Amato v. D'Amato, 701 A.2d 970, 973 (N.J. Super.
Ct. App. Div. 1997); Manna v. Pirozzi, 131 A.2d 55, 57 (N.J.
Super. Ct. App. Div. 1957) (“[W]hen a person undertakes to act as
an agent, he assures the obligations of a fiduciary.”)); N.J.S.A.
46:2B–19 (under a power of attorney, agent serves as a fiduciary);
Jordan v. Lyles, 455 S.W.3d 785, 792 (Tex. App. 2015) (“A power of
attorney creates an agency relationship, which is a fiduciary
relationship as a matter of law.”).
Second, Thayer agreed to
create an express trust for FCS’s premiums, as defined in the
various provisions in the parties’ agreement.
Thus, because Thayer “acted in a fiduciary capacity” in his
relationship with FCS, it must be determined whether the premium
35
debt is excepted from discharge under § 523(a)(4) “for fraud or
defalcation.”
As noted above, the bankruptcy court determined
that Thayer’s failure to provide FCS with its premium funds did
not constitute defalcation because Thayer used the funds for his
business expenses, and not for personal use. 19
Even accepting the
bankruptcy’s assessment of Thayer’s good intentions to keep his
business afloat, Thayer’s intentional decision to convert for his
own use premium payments that he held in trust for FCS meets the
definition of defalcation.
Additionally, even though the parties’ agreement permitted
19
The bankruptcy court interpreted Bullock v. BankChampaign, N.A.,
133 S. Ct. 1754 (2013) to require that FCS must show that Thayer
committed a gross deviation from the legal standards of conduct,
and that Thayer’s breach of his obligations to FCS – namely, his
failure to pay FCS its premiums as required by the contract – did
not constitute per se defalcation. (Docket No. 3-5 at 16.) This
Court disagrees with the bankruptcy court’s application of Bullock
to the facts of this case. Bullock decided for the first time
whether § 523(a)(4) had a scienter requirement, and if so, what
standard applied. In doing so, Bullock held that the definition
of defalcation extends beyond intentional conduct to include
conduct constituting a conscious disregard of a “substantial and
unjustifiable risk” a duty would be breached. The gross deviation
analysis was simply designed to insure that the conduct was
sufficiently reckless and not approaching mere negligence, a lower
mens rea the Supreme Court implicitly rejected when it also
rejected the “objectively reckless” standard in the Eleventh
Circuit. However, the Court’s adoption of a willful blindness
test, something short of intentional conduct, did not change the
long standing law that the intentional breach of an express trust
constitutes defalcation. Where a fiduciary, acting pursuant to an
express trust, intentionally breaches a known duty, as Thayer did,
that “per se” conduct constitutes defalcation at its highest
level, even if such conduct does not also constitute fraud, theft,
or other acts evidencing moral turpitude. The Supreme Court’s
decision in Bullock did not change that.
36
FCS to “withdraw monies from the Indemnity Fund(s) [build-up fund]
as Company deems necessary to reimburse itself for unpaid bail
bond premiums,” that provision did not absolve Thayer of his
obligation to pay the premiums to FCS. 20
19.)
(See Docket No. 3-3 at
A premium payment is money paid from a criminal defendant’s
friend or relative for the bond to be issued.
Even though Thayer
was entitled to a percentage of the premium, the remainder of the
premium belonged to FCS.
Moreover, the entire purpose of the
build-up fund was to serve as security for Thayer’s
indemnifications of FCS, and it was separately funded by Thayer.
(See id. ¶ 19, “As security for any and all indemnifications . . .
Sub-Producer shall deliver to Company a cash sum equal to 1.0% of
the total amount of bond liability for each bond written . . . .
.”)
This build-up fund constituted more than simply a premium
savings account that Thayer could unilaterally tap into when he
wanted to use the premiums held in trust for FCS for other
20
The agreement provides:
21. PRESERVATION OF INDEMNITY FUNDS. Should Company make an
Indemnity Fund(s) withdrawal for indemnification herein
described, Company may, at its sole discretion, require SubProducer to reimburse said Indemnity Fund(s) in the amount
withdrawn, either forthwith or in installments as determined
by Company. Under extraordinary circumstances, Company may,
at its sole discretion, at the request of General Agent or
Sub-Producer, pay a forfeiture from the General Agent's or
Sub-Producer's Indemnity Fund(s) at General Agent's or SubProducer's request, but shall have no obligation to do so.
(Docket No. 3-3 at 19.)
37
purposes. 21
Thayer’s use of premiums held in trust for FCS for other
business expenses may not have been motivated by bad intentions,
but his actions breached his fiduciary duties to FCS.
Because
Thayer committed defalcation while acting in a fiduciary role, his
debt for the unpaid premiums and unreturned powers of attorney
must be exempted from discharge pursuant to § 523(a)(4).
C.
Whether FCS is entitled to attorneys’ fees and other
costs associated with the bail bond forfeiture judgment, the
default judgment, and the bankruptcy proceedings
FCS argues that it is entitled to its attorneys’ fees and
costs associated with Thayer’s nondischargeable debts.
The
bankruptcy court denied FCS’s request for fees and costs because
it found that Thayer’s debts were dischargeable.
Thus, this Court
must determine whether FCS is entitled to its attorneys’ fees and
costs now that Thayer’s debts have been found to be exempted from
discharge.
With regard to the bail bond forfeiture judgment, FCS’s
attorneys’ fees and costs do not amount to a “forfeiture payable
to and for the benefit of a governmental unit.”
523(a)(7).
11 U.S.C. §
Moreover, § 523(a)(7) does not apply to “compensation
for actual pecuniary loss,” which FCS’s expenses relating to the
21
FCS argues that Thayer failed to fully fund the build-up
account, although Thayer believed it was fully funded. Whether
the build-up fund was fully funded or not is immaterial to the
analysis of nondischargeability under § 523(a)(4).
38
default judgment and the payment of the forfeiture judgment can be
considered.
Consequently, FCS is not entitled to attorneys’ fees
and costs relating to Thayer’s debt not exempted from discharge
under § 523(a)(7).
In contrast, however, attorneys’ fees and costs incurred in
connection with a debt deemed to be nondischargeable under 11
U.S.C. § 523(a)(4) are recoverable. 22
In In re Grigg, 619 F. App'x
195, 199 (3d Cir. 2015), the Third Circuit affirmed the bankruptcy
court’s determination that Grigg’s debt was nondischargeable under
§ 523(a)(4) because Grigg acted in violation of his fiduciary
capacity with the state of mind required by Bullock.
The Third
Circuit also affirmed the bankruptcy court’s determination that
that ancillary obligations - court-ordered attorneys’ fees and
costs awarded in conjunction with the contempt proceeding, as well
as sanctions and costs against Grigg - were nondischargeable
because they were incurred in connection with a nondischargeable
debt.
The Third Circuit agreed with the bankruptcy court’s
reasoning: “but for Grigg's conduct, Chaney would not have
incurred attorneys' fees, and the sanctions and costs would not
have been imposed.
The ancillary obligations are therefore, as
22
Because the Court found that the forfeiture judgment was
nondischargeable under § 523(a)(7), the Court did not need to
decide the issue of whether the forfeiture judgment was
nondischargeable under § 523(a)(4). See, infra, note 14. The
Court will not undertake that analysis solely to determine if FCS
would be entitled to attorneys’ fees and costs.
39
the Bankruptcy Court explained, nondischargeable.”
In re Griggs,
619 F. App’x at 199.
In this case, FCS would not have incurred attorneys’ fees and
costs in the bankruptcy proceedings if Thayer had not attempted to
discharge a nondischargeable debt caused by violating § 523(a)(4).
Even though the circumstances in Griggs were more egregious than
the case here, 23 FCS was required to oppose Thayer’s request to
reopen his bankruptcy to include the premium debt, and then file
an adversary proceeding to recover that debt, all of which was
incurred because Thayer’s debt was garnered through defalcation
while acting in a fiduciary capacity.
Accordingly, FCS is
entitled to its attorneys’ fees and costs that are directly
attributable to Thayer’s debt that is exempted from discharge
under § 523(a)(4).
CONCLUSION
A bail bondsman holds a unique position in the criminal
justice system.
Criminal defendants are released from jail
pending further court proceedings under the supervision of the
bail bondsman based on the agreement that the criminal defendant
and the bail bondsman will both suffer financial consequences if
23
Ronald Grigg was a lawyer who represented Blaine Chaney in a
divorce. Grigg paid himself approximately $2.2 million in fees
from his client trust account. Chaney eventually filed suit
against Grigg, disputing his legal fees. Instead of returning the
fees to the client trust account (as he was obligated to under
California law), Grigg continued to spend the disputed funds. In
re Griggs, 619 F. App’x at 199.
40
the criminal defendant fails to appear when he is supposed to.
Permitting a bail bondsman to discharge in bankruptcy the
financial consequences of his failure to assure the criminal
defendant’s appearance would seriously undermine the integrity and
function of the bail bond system and the criminal justice system
as a whole.
Relatedly, similar to the duty a bail bondsman has to the
state to keep tabs on a criminal defendant who is out of custody
on bail, a bail bondsman has a fiduciary duty to the surety that
underwrites the bail bonds secured by the bondsman.
A bail
bondsman cannot discharge in bankruptcy the unpaid premium
payments he is required to hold in trust for the surety when he
has used those funds for other purposes.
Consequently, the debt
for bail bond forfeiture judgments, manifesting in any form, and
the debt for unpaid premiums and other similar obligations to the
surety are nondischargeable in bankruptcy.
Specifically relating to Thayer, a precise accounting must be
performed to determine the total amount of Thayer’s
nondischargeable debt to FCS.
The amount of the nondischargeable
debt is the amount of the bail bond forfeiture judgments
($165,000.00) and the premium debt ($11,299.30 in premium payments
and $6,399.00 in unreported bail bond powers of attorney, totaling
$17,698.30).
According to the bankruptcy court’s calculation,
that debt, however, has been reduced by several events.
41
FCS
applied Thayer’s build-up fund to the outstanding forfeitures with
three disbursements: $15,500, $32,584.14, and $.18.
FCS also
received a fifty-two percent remission of Weston Smith’s
$150,000.00 bond and the New Jersey state court ordered the return
of $78,000.00 to FCS.
Thus, it appears that of the $182,698.30 of
nondischargeable debt, $126,084.32 has been paid to FCS, leaving
$56,613.98 in debt that is exempted from discharge.
A more
thorough accounting must be performed to set the precise
nondischargeable debt Thayer owes to FCS.
The same specific
itemization must be performed for the attorneys’ fees and costs
related to Thayer’s nondischargeable debt under § 523(a)(4).
leave such matters to the bankruptcy court upon remand.
An appropriate Order will be entered.
Date:
September 30, 2016
At Camden, New Jersey
s/ Noel L. Hillman
NOEL L. HILLMAN, U.S.D.J.
42
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