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Online CLE Bench Banter on Timely Topics 1.5 General CLE credits From the Oregon State Bar CLE seminar 31st Annual Northwest Bankruptcy Institute, presented on April 13 and 14, 2018 © 2018 The Honorable Marc Barreca, The Honorable David Hercher, The Honorable Mary Jo Heston, The Honorable Frank Kurtz, The Honorable Thomas Renn. All rights reserved.
Transcript
1.5 General CLE credits
From the Oregon State Bar CLE seminar 31st Annual Northwest Bankruptcy Institute, presented on April 13 and 14, 2018
© 2018 The Honorable Marc Barreca, The Honorable David Hercher, The Honorable Mary Jo Heston, The Honorable Frank Kurtz, The Honorable Thomas Renn. All rights reserved.
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The honorable DaviD hercher
The honorable Mary Jo hesTon
U.S. Bankruptcy Court, Western District of Washington Tacoma, Washington
The honorable Frank kurTz
The honorable ThoMas renn
Contents
Presentation Slides—Criminal Fines and Restitution in Bankruptcy (The Honorable Marc Barreca) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10–1
In re: Tukhi, 568 B.R. 107 (B.A.P. 9th Cir. 2017) (The Honorable Frank Kurtz) . . . . . . . . . . . . . 10–7
In re: Maust Transport, Inc., Memorandum Decision (The Honorable Mary Jo Heston) . . . . . . .10–11
Chapter 10—Bench Banter on Timely Topics
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Criminal Fines and Restitution  in Bankruptcy
Honorable Marc Barreca
General Overview
•Recent focus on Penal Debt Systemic Problem – Ferguson, Mo. •Discharge of CrimeRelated Debt in Chapter 7 •Discharge of CrimeRelated Debt in Chapter 13 •Automatic Stay and Contempt proceedings,  criminal fine collection efforts •Fair Credit Collection Practices Act and Consumer  Protection Act Claims
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10–231st Annual Northwest Bankruptcy Institute
Discharge Exception for Civil and Criminal Fines,  Penalties and Forfeitures; §523(a)(7)
§ 523(a)(7) excepts from discharge certain fines,  penalties, or forfeitures that are payable to and for  the benefit of a governmental unit, a term defined  in § 101 of the Code. § 523(a)(13) expressly excepts from discharge  debts for payment of an order of restitution issued  in a prosecution under title 18 of the United States  Code.  The Supreme Court interpreted the scope of  § 523(a)(7) broadly to include restitution.  Kelly v.  Robinson, 479 U.S. 36 (1986).
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Elements of Nondischargeable Debts  under § 523(a)(7)
(1) arise as a punishment or sanction for some type  of wrongdoing by the debtor and not merely an  enhanced monetary remedy for what is essentially  a breach of contract;  (2) not compensation for actual pecuniary loss; (3) payable to a governmental unit, and  (4) for the benefit of a governmental unit.
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Discharge Exception §523(a)(7)
Fines – financial obligations ostensibly established  to serve a punitive function – are not dischargeable  in a Chapter 7 bankruptcy. This includes traffic and  parking fines. 
In re Stevens, 184 B.R. 584 (Bankr. W.D. Wash.  1995)
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Discharge Exception for Debts for Restitution or  Fine in Chapter 13; §1328(a)(3)
§ 1328(a)(3) excludes from discharge in Chapter 13  cases debts “for restitution or a criminal fine, included  in a sentence on the debtor’s conviction of a crime.” An examination of applicable criminal law will often be  necessary. Assessments that are neither restitution nor fines, such  as costs, may be dischargeable in Chapter 13. See In re  Ryan, 389 B.R. 710 (B.A.P. 9th Cir. 2008) (costs imposed  in criminal case dischargeable); But see In re Bravo  (partially punitive mandatory costs excepted from  discharge) (W.D.Wa. 1743092 at docket 39).
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Discharge of Civil Fines in Chapter 13
Fines and restitution must be included in a  criminal sentence in order to be excepted from  discharge in Chapter 13.  Municipal court fines and traffic fines are  frequently found to be dischargeable in Chapter 13  if the underlying nature of the action is determined  to be civil rather than criminal.
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Civil Contempt Proceedings Exempt from  Automatic Stay
Two tests: Pecuniary interest and Public Policy.  If the court determines that the government’s  action is intended either to protect the  government’s pecuniary interest in the debtor’s  property or to be adjudicate private rights, the       § 362(b)(4) government regulatory exemption will  not apply and the automatic stay will be imposed. Conversely, if the government actions are intended  to effectuate public policy interest, the matter is  not stayed. 
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Civil Contempt Proceedings and  the Automatic Stay
Bankruptcy courts have held that civil contempt  proceedings, which allow the debtor to purge the  contempt by paying the amount due to the creditor,  are stayed. In re Daniels, 316 B.R. 342 (Bankr. D.  Idaho 2004) But see, In re Dingley, 2017 852 F3d.  1143 (9th Cir. 2017). Pursuant to § 362(d)(4), no  sanctions against creditor under § 362(k) for  seeking enforcement of civil contempt order.
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•Declaratory judgment actions for determination of  dischargeability.  Bankruptcy jurisdiction for  §523(a)(7) determination is concurrent with state  courts.  See In re Rein, 270 F3d. 895 (9th Cir. 2001) •Automatic stay violation motions •Discharge injunction violation motions •Fair Debt Collection Practices Act, Consumer  Protection Act and Collection Agency Act actions •Classification issues in Chapter 13 plans
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Chapter 10—Bench Banter on Timely Topics
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In re: Tukhi, 568 B.R. 107 (B.A.P. 9th Cir. 2017) Dismissal sanction based on local rule violation or failure to prosecute.
RULING
The BAP vacated a judgement of dismissal issued by the bankruptcy court and the matter was remanded for completion of pretrial proceedings and the setting of a trial date.
FACTS
Tukhi commenced his bankruptcy case and Olomi timely filed a nondischargeability complaint against Tukhi. Olomi stated a single claim for relief under § 523(a)(6) for a debt allegedly arising from a willful and malicious injury. According to Olomi, Tukhi intentionally struck him with an automobile.
The nondischargeability action proceeded without incident—even smoothly—up until the time the parties' joint pretrial stipulation was due. In the bankruptcy court's scheduling order, the court set a pretrial conference date and entered a scheduling order that contained the following warning:
The parties are placed on notice that it is the Court's policy to strictly enforce the Local Bankruptcy Rules relating to pre-trial conferences and this Court's procedures supplement to those rules, which are published on the court's website. Failure to comply with the provisions of this order may subject the responsible party to sanctions, including judgment of dismissal or the entry of a default and a striking of the answer.
The bankruptcy court obviously considered it extremely important to obtain the litigants' compliance with its pretrial procedures. For example, at the initial status conference the bankruptcy court warned the litigants that failure to comply with pretrial procedures likely would result in terminating sanctions.
Notwithstanding these warnings, and the unequivocal requirement set forth in the local rule for the preparation, service and filing of a joint pretrial stipulation in advance of the pretrial conference, Olomi attended the pretrial conference without having first served or filed the requisite pretrial stipulation. When the court asked Olomi's counsel where his pretrial stipulation was, counsel explained that he had mistakenly prepared a joint status report because he was inexperienced in practicing before this court, which explanation the court seemed to accept but nonetheless concluded that dismissal was the appropriate remedy. The court reasoned that dismissal was justified because: (1) the pretrial conference and the pretrial procedures were very important; (2) Olomi had been warned of that importance and of the consequences for failure to comply; and (3) lesser sanctions in the form of monetary sanctions would amount to nothing more than a “toll charge” for violating the very important pretrial procedures. The bankruptcy court reiterated the same reasoning in its written order of dismissal.
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Olomi filed a motion for reconsideration, supported by a declaration from his counsel that purported to explain counsel’s failure to comply with the pretrial procedures established by local court rule. The bankruptcy court took the matter under submission and ultimately issued a nine page memorandum decision denying the reconsideration motion. Interestingly, in making this ruling, the court analyzed the dismissal as if it were based on a failure to prosecute under Rule 7041 and Civil Rule 41(b); in contrast, at the time of the pretrial conference, the court had based the dismissal on violation of Local Rule 7016.
DISCUSSION
A. Dismissal Based on Local Rule Violation
In its original dismissal ruling, the bankruptcy court relied on one of the sanction provisions in its local rules. On its face, the applicable rule authorized the bankruptcy court to dismiss Olomi's action based upon his violation of the provision in the rule that imposed a duty on him as plaintiff to prepare, sign and serve a draft pretrial stipulation.
Several BAP cases have held that dismissal sanctions based on local rule violations must be supported by a finding of a degree of culpability higher than mere negligence or fault, such as “willfulness, bad faith, recklessness, or gross negligence” or a “repeated disregard of court rules.” In re Roessler–Lobert, 567 B.R. 560, 573 (9th Cir. BAP 2017); see also Kostecki v. Sutton (In re Sutton), 2015 WL 7776658, at *8 (Mem. Dec.) (9th Cir. BAP Dec. 3, 2015); Taylor v. Singh (In re Singh), 2016 WL 770195, at *4–5 (Mem. Dec.) (9th Cir. BAP Feb. 26, 2016).
In its holding, the BAP relied upon its prior decision in Roessler–Lobert and Zambrano v. City of Tustin, 885 F.2d 1473, 1480 (9th Cir. 1989). In addition to requiring the above-referenced finding assessing the culpability and/or state of mind of the rule violator, Zambrano indicated that any sanctions order based on a local rule violation needed to be “proportionate to the offense and commensurate with principles of restraint and dignity inherent in judicial power.” Zambrano, 885 F.2d at 1480. The bankruptcy court also needed to consider: “(1) the public's interest in expeditious resolution of litigation; (2) the court's need to manage its docket; (3) the risk of prejudice to the defendants; (4) the public policy favoring disposition of cases on their merits[;] and (5) the availability of less drastic sanctions.” In re Roessler–Lobert, 567 B.R. at 568, 573–74, (citing Henderson v. Duncan, 779 F.2d 1421, 1423 (9th Cir. 1986)).
The bankruptcy court, here, did not consider the three-part Zambrano test. Prejudgment, the court did not consider the culpability or state of mind of Olomi or his counsel, nor did the court apply the traditional five-factor dismissal sanctions standard originating from Henderson. In addition, nothing in the court's comments indicated that it ever considered, pre- or postjudgment, whether the dismissal sanction was proportionate to the offense.
B. Dismissal Based On Delay In Prosecution
As previously stated, the bankruptcy court offered a different legal basis for its dismissal sanction when it ruled on Olomi's reconsideration motion. According to the court's ruling denying the reconsideration motion, dismissal was appropriate under Civil Rule 41(b) as made
Chapter 10—Bench Banter on Timely Topics
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applicable in adversary proceedings by Rule 7041. The elements for a Civil Rule 41(b) dismissal for failure to prosecute are different than those set forth above for a dismissal for violation of local court rules. See In re Roessler–Lobert, 567 B.R. at 568, 573–74. Dismissal for failure to prosecute must be supported by a showing of unreasonable delay and by consideration of the five Henderson factors. Id. While no showing of heightened culpability is required, the delaying party's mental state typically is relevant, and the bankruptcy court should consider any excuse offered by the delaying party in the process of determining whether the delay was unreasonable and whether there is a risk of prejudice to the adverse party. Id. at 568.
The court examined the bankruptcy court's postjudgment findings on each of the five Henderson factors, which are: 1) The public’s interest in expeditious resolution of litigation, 2) the court’s need to manage its docket, 3) the risk of prejudice to the defendants, 4) the public policy favoring disposition of cases on their merits and, 5) availability of less drastic sanctions. From its analysis, the court concluded that only two of the five Henderson factors militated in favor of dismissal. There was no demonstration of a genuine risk of prejudice to the defendant, nor were effective alternative lesser sanctions shown to be unavailable. Furthermore, the policy favoring decisions on the merits strongly militated against dismissal.
At bottom, the bankruptcy court appeared to have given inordinate weight to its concern over its overcrowded docket and the systemic effect a more lenient sanctions policy might have had on its ability quickly and efficiently to move cases on its docket towards resolution. The court expressed its sympathy for the bankruptcy court's frustration with litigants who do not pay adequate attention to court procedures and the very real impact their inattention has on the court's ability expeditiously to administer justice. Even so, the court concluded that this sympathy could not permit it to gloss over the established legal standards for imposing terminating sanctions on litigants.
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Below is a Memorandum Decision of the Court.
_____________________ Mary Jo Heston U.S. Bankruptcy Judge
__________________________________________________________________
Entered on Docket April 3, 2018
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Presentation Slides—Criminal Fines and Restitution in Bankruptcy (The Honorable Marc Barreca)
In re: Tukhi, 568 B.R. 107 (B.A.P. 9th Cir. 2017) (The Honorable Frank Kurtz)

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