In re: Douglas R. Cottle and Kyla Cottle
AZ-16-1078-JuFL
| 9th Cir. BAP | Oct 17, 2016Background
- Douglas and Kyla Cottle filed Chapter 7 in 2009 and received a discharge on April 6, 2010; two days later they signed a consent order with the Arizona Corporation Commission (ACC) providing for $2,637,880 restitution and a $150,000 administrative penalty, each bearing 10% interest.
- The ACC obtained a state-court judgment approving the Consent Order in May 2010 and later pursued collection; Debtors reopened their bankruptcy case and sued the ACC for stay violations and to bar collection as discharged.
- The bankruptcy court held the restitution obligation discharged and awarded Debtors $33,105.79 in attorneys’ fees and costs under §523(a)(19); that judgment was entered May 13, 2015.
- The bankruptcy court separately found the $150,000 administrative penalty nondischargeable under §523(a)(7) by order entered April 29, 2015 (reconsideration denied Sept. 1, 2015).
- The parties disputed prejudgment interest rate and period on the penalty and whether the ACC could offset amounts it owed Debtors (attorneys’ fees, wrongfully garnished funds) against the penalty; the court awarded prejudgment interest at 10% from April 8, 2010 to May 13, 2015, reduced by garnished sums and the $33,105.79 fee award, with postjudgment interest under 28 U.S.C. §1961.
- The BAP affirmed the bankruptcy court’s rulings on prejudgment interest rate and period and upheld application of a unitary-creditor/setoff theory treating the ACC and State as one entity for mutuality of offset.
Issues
| Issue | Plaintiff's Argument (Cottle) | Defendant's Argument (ACC) | Held |
|---|---|---|---|
| Appropriate prejudgment interest rate on nondischargeable administrative penalty | Contract rate should not govern; challenge to applying Consent Order rate | Consent Order expressly set 10% and governs prejudgment interest under Arizona law | Court: No abuse of discretion — 10% rate applies per written Consent Order and A.R.S. §44-1201(A) |
| When prejudgment interest period ran (start and end dates) | Interest should run only from Consent Order to state-court judgment (Apr 8–May 11, 2010) | Interest runs from Consent Order date through entry of federal nondischargeability judgment | Court: No abuse — interest starts Apr 8, 2010 and ran through the date the federal judgment became final (court used May 13, 2015; any ambiguity favored Debtors) |
| Whether ACC may offset amounts it owes (attorneys’ fees, wrongfully garnished funds) against penalty owed to State | No mutuality: penalty owed to State, not ACC; State and ACC are distinct, so setoff invalid | ACC and State should be treated as a single governmental unit (unitary-creditor) allowing setoff | Court: No abuse — treated ACC and State as unitary creditor; mutuality satisfied; offset permitted |
Key Cases Cited
- Cohen v. de la Cruz, 523 U.S. 213 (prejudgment interest and other monetary relief可be included in nondischargeability determinations under §523)
- Cherry Cotton Mills v. United States, 327 U.S. 536 (government agencies may be treated as a single governmental unit for interagency setoff)
- Hinkson v. United States, 585 F.3d 1247 (en banc) (two-step abuse-of-discretion review: correct legal standard, then factual application)
- Neary v. Padilla (In re Padilla), 222 F.3d 1184 (a pending appeal divests lower courts of jurisdiction over the same issues)
- HAL, Inc. v. United States (In re HAL, Inc.), 122 F.3d 851 (federal unitary setoff principles applied in bankruptcy)