STEVEN M. HICKMAN; GINA L. HICKMAN versus STATE OF TEXAS

New Orleans, LA - Bail Bond lawyer represented Appellees with arguing that a bail bond forfeitures is not dischargeable.

For nearly ten years, Gina Lynn Hickman ("Hickman”) owned and

operated a bail bonding business in Tarrant County, Texas. She

served as a surety on criminal bail bonds; when a criminal

defendant failed to appear in court, a judgment for the amount of

the bond was entered against her. The Tarrant County Bail Bond

Board issued and renewed Hickman's bail bond license for two year

terms from June 1989 to August 1997 based on a sworn financial

statement attesting that her net worth satisfied statutory

requirements. Under Tx. Occ. § 1704.203, a bail bond license

holder can execute bail bonds in an aggregate amount up to ten

times the value of the property held as security. Because Hickman

pledged property valued at $116,800 as collateral, she was entitled

to write in excess of $1 million in criminal bail bonds.

On June 24, 1999, Gina Hickman and her husband filed for

bankruptcy, seeking to discharge all debt from the bail bond

business. At the time, Texas' bond forfeiture judgments against

her totaled more than $50,000. The State of Texas filed a

complaint to determine dischargeability of the Hickmans' bond

forfeiture debt. Without a hearing, the bankruptcy court ruled the

bond forfeiture debts were nondischargeable under § 523(a)(7). The

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district court reversed, finding that the Hickmans' bail bond

forfeitures were not the type of penal forfeiture contemplated by

§ 523(a)(7). The State filed a timely appeal with this Court.

In reviewing the bankruptcy court's order, we apply the same

standards of review as did the district court: the bankruptcy

court's findings of fact are analyzed for clear error, and its

conclusions of law are reviewed de novo. In re Mercer, 246 F.3d

391, 402 (5th Cir. 2001) (en banc). As a question of law, we

review de novo the bankruptcy court's interpretation of the term

"forfeiture” as used in § 523(a)(7). Construing forfeiture in

light of the accompanying terms in § 523(a)(7), § 523(a) as a

whole, and the basic policy and object of the Bankruptcy Code, we

hold that § 523(a)(7) excludes from discharge only those

forfeitures imposed because of misconduct or wrongdoing by the

debtor. Hickman's debt arising from her failure to fulfill her

contractual obligation to the State as a surety on a criminal bail

bond is not the sort of punitive or penal forfeiture rendered

nondischargeable by § 523(a)(7).

Discussion

Section 523(a)(7) of the Bankruptcy Code excepts from

discharge any debt

to the extent that 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.

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11 U.S.C. § 523(a)(7). Hickman's bail bond judgment is payable to

the State of Texas, for the benefit of the State of Texas, and is

not compensation for actual pecuniary loss. The statute's

applicability to Hickman's bond forfeiture debt thus turns on the

meaning of the phrase "fine, penalty or forfeiture” within the

context of § 523(a)(7).

In answering any statutory question, we begin with the

language of the statute itself. United States v. Ron Pair

Enterprises, 489 U.S. 235, 241, 109 S.Ct. 1026, 1030 (1989);

Kellogg v. United States, 54 F.3d 1194, 1200 (5th Cir. 1995). The

term forfeiture is:

A comprehensive term which means a divestiture of specific

property without compensation; it imposes a loss by taking

away of some preexisting valid right without compensation. A

deprivation or destruction of some obligation or condition.

Loss of some right or property as a penalty for some illegal

act. Loss of property or money because of breach of a legal

obligation (e.g. default in payment).

BLACK'S LAW DICTIONARY 650 (6th ed. 1990) (citations omitted) (emphasis

added). A forfeiture of a bond occurs upon the "failure to perform

the condition upon which obligor was to be excused from the penalty

in the bond. With respect to a bail bond, occurs when the accused

fails to appear for trial.” Id. (citation omitted). Relying on

this definition, at least one court has concluded that "Debtor's

obligation on the forfeited bail bond appears to fall squarely

within the parameters of § 523(a)(7).” United States v. Zamora,

238 B.R. 842, 843-44 (D. Ariz. 1999).

1 See Tx. Occ. § 1704.204(a) ("A license holder shall pay a

final judgment on a forfeiture of a bail bond . . . .”); Federal

Rule of Criminal Procedure 46(e)(1) ("If there is breach of

condition of bond, the district court shall declare a forfeiture of

the bail.”).

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As a product of history, the term "forfeiture” in the bail

bond context has become associated with the contractual damages

owed to the State by an obligor – the defendant or his surety – on

a bond. Historically, a defendant or his surety was required to

post the full amount of the bond in order to secure release.

However, the bonding system has evolved to allow the defendant or

a professional bondsmen to enter into a contractual agreement with

the State to guarantee the defendant's presence in court. Under

this agreement, the State does not require payment of the entire

amount of the bond in order to secure release. Rather, the State

requires a contractual promise to pay the amount of the bond by the

defendant or his surety if the defendant fails to comply with the

conditions of the bond. Upon default, the State merely seeks a

money judgment as damages for breach of contract against the

obligor under the bond. We cannot ignore that in common parlance,

and consistently throughout history, the label "forfeiture” has

been affixed to a bail bond debt. This common usage is evidenced

by the dictionary definition of forfeiture as well as the term's

use in state and federal statutes1 and caselaw. We, therefore,

consider whether Congress intended § 523(a)(7) to apply to bail

bond forfeiture debts by a surety.

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A majority of courts have read forfeiture within § 523(a)(7)

not to include the contractual damages incurred by a professional

bondsmen as a result of the defendant's failure to appear. In re

Collins, 173 F.3d 924, 931 (4th Cir. 1999); In re Damore, 195 B.R.

40 (Bankr. E.D. Pa. 1996); In re Midkiff, 86 B.R. 239 (Bankr. D.

Colo. 1988); In re Paige, 1988 WL 62500 (Bankr. D. Colo. 1988).

These courts principally rely on the Supreme Court's analysis of §

523(a)(7) in Kelly v. Robinson, 479 U.S. 36, 107 S.Ct. 353 (1986).

In Kelly, the Supreme Court held that restitution paid as a

condition of probation was nondischargeable under § 523(a)(7). Id.

at 52. Although not specifically listed in § 523(a)(7), the Court

held that because § 523(a)(7) "creates a broad exception for all

penal sanctions, whether they be denominated fines, penalties, or

forfeitures,” restitution payments were included within its scope.

Kelly, 479 U.S. at 51. Relying on Kelly and its own precedent, the

Fourth Circuit concluded that "[t]he nondischargeable 'fine,

penalty or forfeiture' under § 523(a)(7) is an obligation that is

essentially penal in nature.” In re Collins, 173 F.3d at 931.

To the extent that "[t]he word 'penal' is inherently a much

broader term than 'criminal' since it pertains to any punishment or

penalty and relates to acts which are not necessarily delineated as

criminal,” we ultimately agree with the Fourth Circuit's

conclusion. BLACK'S LAW DICTIONARY 1132 (6th ed. 1990). However, in

light of the question presented in Kelly – whether, although not

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listed, restitution was excepted from discharge under § 523(a)(7)

– the Supreme Court's construction of § 523(a)(7) does not itself

prevent the section's application to bail bond judgments against a

surety. In focusing on whether § 523(a)(7) created a broad

exception for all penal sanctions, thus including restitution, the

Court did not decide § 523(a)(7)'s applicability to civil, nonpenal debts. Thus, while the Court's analysis and approach in

Kelly are instructive, its holding does not compel the result that

debts incurred in the capacity of a surety on a bail bond are

dischargeable.

In Kelly, the Court found the language of § 523(a)(7)

ambiguous. Kelly, 479 U.S. at 48 n.9; see also id. at 50 (finding

the language of § 523(a)(7) "is subject to interpretation”). The

Court then admonished that "[i]n expounding a statute, we must not

be guided by a single sentence or member of a sentence, but look to

the provisions of the whole law, and to its object and policy.”

Kelly v. Robinson, 479 U.S. 36, 43, 107 S.Ct. 353, 357-58 (1986)

(citations omitted). Thus, in discerning Congress' intent we must

consider (1) the terms accompanying forfeiture in § 523(a)(7); (2)

§ 523(a) as a whole; and (3) the policies underlying the Bankruptcy

Code and its exceptions to discharge.

Under the familiar canon of statutory construction noscitur a

sociis, "a word is known by the company it keeps.” Gustafson v.

Alloyd Co., Inc., 513 U.S. 561, 575, 115 S.Ct. 1061, 1069 (1995).

2 To the extent that the State argues alternatively that the

Hickmans' debt is a penalty, our analysis limiting the potentially

broad scope of forfeitures excluded from discharge under §

523(a)(7) applies with equal force to their penalty argument.

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This canon is "often wisely applied where a word is capable of many

meanings in order to avoid the giving of unintended breadth to the

Acts of Congress.” Jarecki v. G.D. Searle & Co., 367 U.S. 303,

307, 81 S.Ct. 1579, 1582, 6 L.Ed.2d 859 (1961). The intended

breadth of forfeiture within § 523(a)(7) must be interpreted,

therefore, in light of its accompanying terms "penalty” and "fine.”

A penalty is "[a]n elastic term with many different shades of

meaning; it involves idea of punishment, corporeal or pecuniary, or

civil or criminal, although its meaning is generally confined to

pecuniary punishment.” BLACK'S LAW DICTIONARY 1133 (6th ed. 1990).

Central to the definition of penalty is the "idea of punishment” –

"[p]unishment imposed on a wrongdoer, esp. in the form of

imprisonment or fine. Though usu. for crimes, penalties are also

sometimes imposed for civil wrongs.” BLACK'S LAW DICTIONARY 1153 (7th

ed. 1999). The term penalty, however, may also include "[t]he sum

of money which the obligor of a bond undertakes to pay in the event

of his omitting to perform or carry out the terms imposed upon him

by the conditions of the bond,” BLACK'S LAW DICTIONARY 1133 (6th ed.

1990), or "[e]xcessive liquidated damages that a contract purports

to impose on a party that breaches.”2 BLACK'S LAW DICTIONARY 1153 (7th

ed. 1999). Although focusing on punishment for criminal and civil

wrongs, the definition of penalty, like forfeiture, could be read

3 A fine is "[a] pecuniary punishment or penalty imposed by

lawful tribunal upon person convicted of crime or misdemeanor.”

BLACK'S LAW DICTIONARY 632 (6th ed. 1990).

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expansively to include the Hickmans' debt. A fine, on the other

hand, relates solely to "[a] pecuniary punishment or civil penalty

payable to the treasury.”3 BLACK'S LAW DICTIONARY 647 (7th ed. 1999).

The definitions of penalty and fine reflect the traditional

understanding of the these terms as punitive or penal sanctions

imposed for some form of wrongdoing. Their inclusion in §

523(a)(7) implies that Congress intended to limit the section's

application to forfeitures imposed upon a wrongdoing debtor.

This construction of forfeiture also accords with Congress'

statutory scheme in § 523(a) as a whole. The exceptions to

discharge in § 523(a) advance a miscellany of social policies.

Notably, the majority of these exceptions relate to a form of

wrongdoing by the debtor. See In re Cross, 666 F.2d 873, 880 (5th

Cir. 1982) ("The exceptions to discharge found in [§ 523(a)] were

designed to prevent the bankrupt from avoiding through bankruptcy

the consequences of certain wrongful acts . . .”). Interpreting §

523(a)(7) against the backdrop of § 523(a) further suggests

Congress' intent to limit the scope of the phrase "fine, penalty or

forfeiture” to debts imposed as punishment for wrongdoing by the

debtor.

Finally, "[t]he most important consideration limiting the

breadth of the definition of [forfeiture] lies in the basic purpose

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of the Bankruptcy Act to give the debtor a 'new opportunity in life

and a clear field for future effort, unhampered by the pressure and

discouragement of pre-existing debt. The various provisions of the

Bankruptcy Act were adopted in the light of that view and are to be

construed when reasonably possible in harmony with it so as to

effectuate the general purpose and policy of the act.'” Lines v.

Frederick, 400 U.S. 19, 19, 91 S.Ct. 113, 113-14 (1970) (citing

Local Loan Co. v. Hunt, 292 U.S. 234, 244-45, 54 S.Ct. 695, 699

(1934)). Consistent with the Code's basic purpose of "reliev[ing]

the honest debtor from the weight of oppressive indebtedness and

permit[ting] him to start afresh,” Williams v. U.S. Fidelty &

Guar. Co., 236 U.S. 549, 554-55, 35 S.Ct. 289 (1915); Hardie v.

Swafford Bros. Dry Goods Co., 165 F. 588, 590-91 (5th Cir. 1908),

exceptions to discharge are to be construed narrowly. Gleason v.

Thaw, 236 U.S. 558, 562, 35 S.Ct. 287, 289 (1915); In re Case, 937

F.2d 1014, 1024 (5th Cir. 1991). However, such construction should

not permit the bankruptcy courts to become "a haven for

wrongdoers.” In re Davis, 194 F.3d 570, 573 (5th Cir. 1999). Our

precedent has construed the exceptions in § 523(a) and its

predecessor using these competing policies as guideposts.

Section 17a, 11 U.S.C. § 35a, of the Bankruptcy Act was the

predecessor to the modern Code's § 523(a). Section 17a(4) excepted

from discharge debts "created by fraud, embezzlement,

misappropriation, or defalcation while acting . . . in any

4 Section 523(a)(9) makes nondischargeable any debt:

for death or personal injury caused by the debtor's operation

of a motor vehicle if such operation was unlawful because the

debtor was intoxicated from using alcohol, a drug, or another

substance.

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fiduciary capacity.” 11 U.S.C. § 35a(4). This Court, relying on

Supreme Court precedent, construed the term "fiduciary” narrowly in

order to effectuate the Act's purpose of providing a fresh start.

In re Angelle, 610 F.2d 1335, 1339 (5th Cir. 1980) (citing Chapman

v. Forsyth, 2 U.S. (How.) 202, 207 (1844)). Despite the presence

of the word "any” in the statute, we rejected the district court's

reliance on the broad definition of fiduciary quoted from Black's

Law Dictionary. Id. at 1338. Instead, we concluded that

"[c]onsistent with the principle that exceptions to discharge are

to be narrowly construed, the concept of fiduciary under §

523(a)(4) is narrower than it is under the general common law.” In

re Tran, 151 F.3d 339, 342 (5th Cir. 1998) (citing In re Angelle,

610 F.2d at 1339).

More recently this Court was asked to interpret the term

"motor vehicle” in § 523(a)(9) to include motorboats.4 In re

Greenway, 71 F.3d 1177, 1180 (5th Cir. 1996). The creditor argued

that parsing the term "motor vehicle” to its component parts

permitted such a construction. Citing our duty to construe

exceptions narrowly in favor of the debtor, we refused to interpret

the term "motor vehicle” so expansively. In re Greenway, 71 F.3d

5 The little legislative history that exists supports this

construction. See S. Rep. No. 95-989 at 79, reprinted in 1978

U.S.C.C.A.N. 5787, 5865 (stating that § 523(a)(7) is meant to apply

to tax assessments that are "penal in nature”); S. Rep. No. 95-989

at 97, reprinted in 1978 U.S.C.C.A.N. 5787, 5883 (describing

similar language in § 726(a)(4) as relating to "punitive

penalties”).

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at 1180 n.8. Guided by this same principle, we limited the scope

of the term "willful and malicious injury” under § 523(a)(6) to

"conduct designed to cause deliberate or intentional injury” and

not merely intentional conduct that resulted in injury. In re

Quezada, 718 F.2d 121, 123 (5th Cir. 1983); see also In re Walker,

48 F.3d 1161, 1164-65 (11th Cir. 1995) ("Mindful of our obligation

to construe strictly exceptions to discharge to give effect to the

fresh start policy of the Bankruptcy Code, we hold that section

523(a)(6) requires a deliberate or intentional injury.” (citation

omitted)).

Consistent with our precedent, the accompanying terms in §

523(a)(7), Congress' statutory scheme in § 523(a) as a whole, and

the basic object and policy of the Bankruptcy Code, we construe

narrowly the term forfeiture to apply solely to forfeitures imposed

because of misconduct or wrongdoing by the debtor.5 See In re Gi

Nam, 254 B.R. 834, 843 (E.D.Pa. 2000). This construction provides

relief to the honest debtor, while preventing the wrongdoer from

avoiding the imposition of a forfeiture through invocation of

federal bankruptcy law.

Our inquiry thus turns to whether the Hickmans' debt arising

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from a bail bond forfeiture under Texas law falls within Congress'

intended scope. Whether the bail bond debt of a surety is a

forfeiture under § 523(a)(7) is a question of federal law. See

Angelle, 610 F.2d at 1341 (stating that the scope of the concept

"fiduciary” under § 523(a) is a question of federal law). But we

look to state law to determine whether the debt at issue possesses

the attributes of a forfeiture. Id.

Judgements entered in Texas state court against a surety upon

the principal's failure to appear order the bail bond "forfeited.”

Reyes v. State, 31 S.W.3d 343, 345 (Tex. App.–Corpus Christi 2000).

The State relies on this label to argue that the Hickmans' debt is

a forfeiture subject to § 523(a)(7)'s exception to discharge. We

cannot agree that merely because a bail bond judgment is generally

referred to as a forfeiture, it automatically falls within the

bounds of § 523(a)(7). It is important to examine the true nature

of the debt incurred rather than the label attached to it by the

State. See In re Long, 774 F.2d 875, 878-79 (8th Cir. 1985) ("It

is the substance of a transaction, rather than the labels assigned

by the parties, which determines whether there is a fiduciary

relationship for bankruptcy purposes.”) (citing Davis v. Aetna

Acceptance Co., 293 U.S. 328, 333, 55 S.Ct. 151, 153, 79 L.Ed. 393

(1934)). Otherwise, the State could except from discharge all

manner of debts simply by labeling them a fine, penalty or

forfeiture.

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Texas courts have recognized that "[b]ail bonds are contracts

between the surety and the State” and that "[t]he contract consists

of a promise by the surety that the principal will appear before

the court in exchange for a promise by the State that it will

release the principal.” Reyes v. State, 31 S.W.3d at 345; Morin v.

State, 770 S.W.2d 599, 599 (Tex. App.–Houston 1989). The Hickmans

argue that Texas courts' recognition of a bail bond as a contract

renders any damages therefrom dischargeable. This argument suffers

from the same deficiency as the State's argument on the label

"forfeiture.” A bail bond contract is sui generis. While treated

as a contract under state law in many respects, a bail bond is

certainly distinguishable from the typical contract. First, the

forfeiture of the bonded amount bears no relation to the actual

loss suffered by the State – thus, under general rules of contract

the provision would be struck down as an impermissible penalty or

forfeiture clause. See Restatement (Second) of Contracts § 356;

Uniform Commercial Code § 2-718. Second, the bail bond is an

integral and essential tool in the administration of the State's

criminal justice system.

Still, under the present structure of the Texas bail bond

system the role of the surety is essentially contractual. When

considering § 523(a)(7)'s application to restitution payments, the

Supreme Court noted that "[u]nlike an obligation which arises out

of a contractual, statutory or common law duty, here the obligation

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is rooted in the traditional responsibility of a state to protect

its citizens by enforcing its criminal statutes and to rehabilitate

an offender by imposing a criminal sanction intended for that

purpose.” Kelly, 479 U.S. at 52. Contrary to the obligation in

Kelly, Hickman's bail bond judgments are not a penal sanction

rooted in the traditional responsibility of the state to protect

its citizens, but rather arise from a contractual duty. In this

regard, the damages are the type of contract damages typically

discharged in bankruptcy. Thus, Hickman's debt arising from the

forfeiture of the bail bond is not the sort of punitive or penal

forfeiture Congress intended to render nondischargeable.

Finally, we address the State of Texas' contention that our

holding will undermine the effective administration of its criminal

justice system. Along these lines, the State argues that Kelly's

true relevance in this case is its statement that "[t]his Court has

recognized that the States' interest in administering their

criminal justice systems free from federal interference is one of

the most powerful of the considerations that should influence a

court considering equitable types of relief.” Kelly, 479 U.S. at

49. The State's position is not wholly unpersuasive. Indeed,

several courts have been persuaded by this reasoning in

interpreting other sections of the Code. See In re Scott, 106 B.R.

698, 701 (Bankr. S.D. Ala. 1989) (interpreting § 362(b)(4) in light

of concerns over the effect on the functioning of the State's bail

6 Arguably the State's penal, rehabilitative, and deterrent

goals would be undermined if the debtor were the criminal

defendant, but we do not address that question today.

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system); In re Bean, 66 B.R. 454, 456-57 (Bankr. S.D. Colo. 1986)

(same), aff'd Bean v. Colorado, 72 B.R. 503 (D. Colo. 1987). But

the State reads too broadly the Court's admonition in Kelly. The

Court in Kelly held that § 523(a)(7) excepts from discharge any

condition a state criminal court imposes as part of a criminal

sentence. Id. at 50. The Court's statements in Kelly were

directed at restrictions on a State's ability to advance the penal,

rehabilitative, and deterrent goals of its criminal justice system.

Kelly, 479 U.S. at 360. These goals would be defeated if the

bankruptcy court relieved a criminal of a fine, penalty or

forfeiture imposed by a state court. Such a concern does not exist

with respect to a surety's debt for forfeiture of a bond.6

We hold that § 523(a)(7) excludes only those forfeitures

imposed because of misconduct or wrongdoing by the debtor. This

construction balances the equitable concerns underlying the

Bankruptcy Code by providing the honest, but unfortunate debtor

with a fresh start, while not permitting the bankruptcy courts to

serve as a haven for wrongdoers. Hickman’s debt arising from her

contractual obligation on a bail bond does not represent the type

of punitive or penal forfeiture rendered nondischargeable by §17

523(a)(7). Accordingly, we AFFIRM the judgment of the district

court