People v. Hemingway (In Re Hemingway)

Sep 12, 1983
83-CV-574
Versions:

MEMORANDUM-DECISION AND ORDER

MUNSON, Chief Judge.

This is an appeal from a decision of the Bankruptcy Court, Leon J. Marketos, Bankruptcy Judge, dismissing with prejudice the appellant’s complaint to determine the dischargeability of certain debts incurred by appellee Gary W. Hemingway. Judge Marketos held that the State of New York lacked standing to sue and refused to allow the substitution of parties whom it was alleged did not have such standing. The Attorney General, representing the State, argues that these rulings constituted reversible error and has brought the instant appeal.

FACTS

Appellee Hemingway was a general contraсtor who received certain sums of money from individuals who contracted with him to perform construction services. As a result of various complaints about the way Hemingway was conducting his business, the Attorney General instituted consumer fraud proceedings against him in the New York State Courts. In 1978, Hemingway defaulted in these proceedings which alleged that he had made numerous false representations to consumers in the course of his business.

As part of the relief obtained in the state court proceeding, Hemingway was enjoined from violating New York State consumer protectiоn laws, and was ordered to pay restitution to the State of New York on behalf of six named consumers injured by his fraudulent conduct. The Attorney General, as plaintiff in the action, was granted a $2,000.00 additional allowance pursuant to Section 8303 of the New York Civil Practice Law and Rules. N.Y.Civ. Prac.Law § 8303 (McKinney 1981 & Supp. 1982-83) (hereinafter CPLR). Upon further default, contempt proceedings were cоmmenced against Hemingway and some payments of restitution were made to the Attorney General pursuant to the court order.

On August 9, 1982, Hemingway filed his petition in bankruptcy, and the Attorney General filеd his complaint on September 30, 1982. According to the complaint filed in the Bankruptcy Court below, the Attorney General alleges that the monies ordered to be paid to him for distribution to the named consumers are a debt incurred through false pretenses in contravention of 11 U.S.C. § 523(a)(2)(A) (Supp. V 1981). Moreover, the Attorney General further al leges that the $2,000.00 additional allowance is a “finе, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss_” 11 U.S.C. § 523(a)(7). If this were the case, then the debt would bе nondischargeable under the Code.

ADDITIONAL ALLOWANCE

The purpose of an additional award of costs under the CPLR is “to indemnify a successful party for expenses beyond those usually incurred....” Metropolitan Sav. Bank v. Tuttle, 183 Misc. 879, 880, 52 N.Y.S.2d 472, 473 (Sup.Ct., Bronx Co.1944) (citing Town of Brighton v. Rochester Vulcanite Pavement Co., 149 Misc. 592, 268 N.Y.S. 795). See also CPLR § 8303 practicе commentary C8303:1 at 223. The payment is made to the ‍​​​‌​​‌​‌‌​‌‌‌‌​‌‌​​​‌​‌‌‌‌‌​​‌‌‌‌​​​‌‌​​​‌​‌‌​​‍party bearing the burden of prosecuting a particularly difficult case.

In the instant case, the Attorney General was the plaintiff in the consumеr fraud proceedings and the additional allowance was granted to him rather than to any particular consumer fraud victim. See State of New York by Lefkowitz v. Daro Chartours, Inc., 72 A.D.2d 872, 422 N.Y. S.2d 146 (3d Dep’t 1979). Thus, this Court disagrees with the ruling of the Bankruptcy Court below that the additional allowance was to be paid to the State for distribution to the listed creditors. See Memorandum-Decision and Order at 2. The question still remains, however, as to the dischargeability of this debt.

Under 11 U.S.C. § 523(а)(7), debts incurred as a result of a “fine, penalty or forfeiture payable to and for the benefit of a governmental unit” are nondischargeable in bankruptcy. Here, as noted above, thе $2,000.00 additional allowance is payable to and for the benefit of a governmental unit. Therefore, the issue that arises is whether this amount is a “fine, penalty or forfeiture” within the meaning of the statute.

In this Court’s view, the $2,000.00 additional allowance is not a “fine, penalty or forfeiture.” Rather, it is simply a recognition by the state court that the prosecution was an unusual one and that some additional compensation was required to make the prosecuting party whole again. A review of the case law interpreting 11 U.S.C. § 523(a)(7) supports this Court’s opinion that the additional allowance is a dischargeable debt under the Bankruptcy Code. The cases decided under this section all deal with criminal or tax related penalties and not anything analogous to the awаrd of costs in a civil proceeding. See, e.g., In re Osborn, 4 B.R. 431 (W.D.Mo.1979) (declaring debt for withholding and ‍​​​‌​​‌​‌‌​‌‌‌‌​‌‌​​​‌​‌‌‌‌‌​​‌‌‌‌​​​‌‌​​​‌​‌‌​​‍social security taxes nondischargeable); In re Daugherty, 25 B.R. 158 (Bkrtcy.E.D.Tenn.1982) (declaring civil penalty for violation of mine safety laws non-dischargeable); In re Newton, 15 B.R. 708 (Bkrtcy.N.D.Ga.1981) (declaring criminal restitution penalty nondischargeable); In re Tauscher, 7 B.R. 918 (Bkrtcy.E.D.Wis.1981) (declaring civil fines for violation of child labor laws nondischargeable); In re Young, 10 B.R. 17 (Bkrtcy.S.D.Cal.1980) (declaring traffic fines nondisсhargeable). Accordingly, the Bankruptcy Court’s dismissal of this part of appellant’s complaint is hereby affirmed.

STANDING

The Attorney General of the State of New York filed the instant complaint in the Bаnkruptcy Court as part of his continuing effort to protect the citizens of the State from consumer fraud. Earlier, the Attorney General had pursued state court remedies against appеllee for violation of the State’s consumer protection laws. Nevertheless, the Bankruptcy Court dismissed appellant’s complaint because the order of restitution from the statе court was for the benefit of the named consumers. Thus, according to the court below, the Attorney General was not a “creditor to whom such debt is owed” pursuant to 11 U.S.C. § 523(c), and, therefore, thе Attorney General lacked standing to bring the action. See Memorandum-Decision and Order at 3 (citing In re Pierson, 17 B.R. 822, 823 (Bkrtcy.D.Minn.1982); In re Meredith, 4 Bankr.Ct.Dec. 652 (Bankr.S.D.Ohio 1978)).

While the Bankruptcy Court’s interpretation of section 523(c) was correct, this Court finds that the court below was too rigid in its construction of the law and the general policy behind the Bankruptcy Code. In addition, this Court believes that the Attorney General has standing to maintain this action under the doctrine of parens patriae as a representative of the six named consumers. Therefore, the Bankruptcy Court’s grant of summary judgment on this aspect of appellant’s complaint is hereby reversed and this matter is remanded to the Bankruptcy Court for рroceedings consistent with this opinion.

In Alfred L. Snapp & Sons, Inc. v. Puerto Rico ex rel. Barez, 458 U.S. 592, 102 S.Ct. 3260, 73 L.Ed.2d 995 (1982), the Supreme Court summarized the decisional ‍​​​‌​​‌​‌‌​‌‌‌‌​‌‌​​​‌​‌‌‌‌‌​​‌‌‌‌​​​‌‌​​​‌​‌‌​​‍law with respect to the doctrine of parens patriae and made several observations. To begin with, a state will have standing tо sue under the doctrine when it can “articulate an interest apart from the interests of particular private parties, i.e., the state must be more than a nominal party.” Id. at 607, 102 S.Ct. at 3269. One such interest thаt can be articulated, and it is of particular importance to the case at bar, is the “quasi-sovereign interest.” In its broadest form, the Court noted that states have quasi-sovereign interests in рrotecting the “health and well-being — both physical and economic — of its residents in general.” Id.

The Snapp Court refused to set any rigid guidelines on what types of interests would qualify as quasi-sovereign or what proportion of a state’s population would have to be affected before the doctrine of parens patriae would come into play. Rather, the Court held that such determinations would have to be made on a case-by-case basis. The Court did, however, note the following.

One helpful indicia in determining whether an alleged injury to the health and welfare of its citizens suffices to give the state standing to sue as parens patriae is whether the injury is one that the state, if it could, would likely attempt to address through its sovereign law-making powers.

Id. (footnote omitted). In the present case, the injury which the State of New Yоrk seeks to redress is one that has already been the subject of legislative attention, to wit, New York’s consumer protection laws. Moreover, one would be hard-pressed to argue thаt protection against consumer fraud is no t a subject of vital impdrtance to the economic ‍​​​‌​​‌​‌‌​‌‌‌‌​‌‌​​​‌​‌‌‌‌‌​​‌‌‌‌​​​‌‌​​​‌​‌‌​​‍well-being of the citizens of New York State. See generally People by Abrams v. 11 Cornwell Co., 695 F.2d 34, 38-40 (2d Cir.1982) (granting standing under parens patriae doctrine to allow State of New York to pursue community housing for mentally retarded).

The second consideration for determining whether parens patriae standing is appropriate is that of “numerosity.” In other words, whether the state “has alleged injury to a sufficiently substantial segment of its population.” Alfred L. Snapp & Son, 458 U.S. at 603, 102 S.Ct. at 3267. While the State of New York seeks standing to represent six named consumers in the present case, it must not be overlooked that such representation is part of a much broader scheme of consumer protection. When viewed as a whole, and fully considering the future impact that an adverse decision to the State would have, the Court finds that parens patriae standing is appropriate in the instant case. See People by Abrams v. 11 Cornwell Co., 695 F.2d at 39-40.

The Second Circuit in 11 Cornwell Co. observed that “[pjarens patriae standing also requires a finding that individuals could not obtаin complete relief through a private suit.” 695 F.2d at 40. Here, the Court notes that private individuals could not, as a matter of law, have pressed the consumer fraud claims in the state courts. Such a function was entrusted by the Legislature solely to the Attorney General. Moreover, the order of restitution by the state court specifically ordered appellant to pay the Attorney Gеneral for distribution to the named consumers. Thus, in one sense, the individual consumers would themselves lack formal standing under 11 U.S.C. § 523(c) to argue against the dis-chargeability of the restitution order.

Under the special fаcts of this case, the ‍​​​‌​​‌​‌‌​‌‌‌‌​‌‌​​​‌​‌‌‌‌‌​​‌‌‌‌​​​‌‌​​​‌​‌‌​​‍Court finds that the Attorney General has parens patriae standing to challenge the dischargeability of appellant’s debt. Such a finding in no way implies that appellant will prevail on such a claim. Rather, appellant will now have the opportunity to attempt to prove that the debt is nondis-chargeable pursuant to 11 U.S.C. § 523(a)(2)(A). The actual determination of dischargeability will be up to the Bankruptcy Court following whatever hearings it deems necessary. Therefore, it is hereby

ORDERED that the decision of the Bankruptcy Court entered April 7, 1983 is reversed and remanded for proceedings consistent with this opinion.