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11.5.3.3 Civil Penalties

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  6. 11.5.3.3 Civil Penalties

11.5.3.3 Civil Penalties

Courts generally find penalties in civil and administrative proceedings to be excepted from the chapter 7 discharge. Nondischargeable civil penalties include remediation fees and penalties arising from violations of environmental protection statutes,279 administrative penalties for illegal access to utilities,280 civil disgorgement orders in Securities and Exchange Commission (SEC) enforcement actions or similar proceedings,281 treble damages and restitution in Medicaid fraud matters,282 Foreign Bank Account Reporting penalties,283 Department of Housing and Urban Development (HUD) penalties,284 National Labor Relations Board (NLRB) penalties,285 penalties assessed in contractor licensing proceedings,286 and civil penalties imposed for fraudulent acquisition of unemployment benefits.287 One court has found civil fees imposed for reestablishing a driver’s license after adjudication of guilt in certain traffic offenses to be nondischargeable.288 Another court has held that civil penalties related to private attorney general actions brought by individuals cannot be discharged.289 The Eleventh Circuit found that civil penalties owed to a municipality for “life-safety issues” in the amount of $5 million was nondischargeable in a chapter 7 bankruptcy.290

Several courts have found penalties, fees, and costs associated with civil consumer fraud actions to be dischargeable because they are payable to but not for the benefit of a governmental unit.291 But other courts find consumer fraud fines nondischargeable, even though they find attorney fees and costs in consumer fraud cases to be dischargeable.292 Civil contempt fees between private parties have been found to be dischargeable.293

Footnotes

  • 279 Whitehouse v. LaRoche, 277 F.3d 568 (1st Cir. 2002); In re Strong, 305 B.R. 292 (B.A.P. 8th Cir. 2004); In re Warfel, 268 B.R. 205, 213 (B.A.P. 9th Cir. 2001); Ky. Nat. Res. & Envtl. Prot. Cabinet v. Seals, 161 B.R. 615 (W.D. Va. 1993); Pa. Dep’t of Envtl. Prot. v. Thebes (In re Thebes), 2011 WL 1239847 (Bankr. M.D. Pa. Mar. 30, 2011); Ohio Envtl. Prot. Agency v. Kirby (In re Kirby), 2007 WL 2492682 (Bankr. N.D. Ohio Aug. 28, 2007); In re Damm, 2001 WL 34065016 (Bankr. C.D. Ill. May 10, 2001).

  • 280 Maldonado v. Autoridad de Acueductos y Alcantarillados (In re Maldonado), 2013 WL 6860807 (Bankr. D. P.R. Dec. 27, 2013).

  • 281 In re Ott, 218 B.R. 118 (Bankr. W.D. Wash. 1998); In re Telsey, 144 B.R. 563 (Bankr. S.D. Fla. 1992).

  • 282 State v. Sokol (In re Sokol), 170 B.R. 556 (Bankr. S.D.N.Y. 1994), aff’d, 108 F.3d 1370 (2d Cir. 1997); In re Kelly, 155 B.R. 75 (Bankr. S.D.N.Y. 1993). See also In re Brown, 2019 WL 1746279 (N.D. Ind. Apr. 17, 2019) (penalty imposed for knowingly failing to disclose income while receiving unemployment compensation is nondischargeable).

  • 283 United States v. Simonelli, 614 F. Supp. 2d 241 (D. Conn. 2008).

  • 284 United States Dep’t of Hous. & Urban Dev. v. Cost Control Mktg. & Sales Mgmt. of Va., Inc., 64 F.3d 920 (4th Cir. 1995).

  • 285 In re Fogerty, 204 B.R. 956 (Bankr. N.D. Ill. 1996).

  • 286 In re Poule, 91 B.R. 83 (B.A.P. 9th Cir. 1988).

  • 287 In re O’Brien, 110 B.R. 27 (Bankr. D. Colo. 1990).

    However, in many cases courts rely on the fraud exception to discharge in section 523(a)(2) to prevent the discharge of debts resulting from fraudulently obtained unemployment benefits.

  • 288 In re Clayton, 199 B.R. 29 (Bankr. W.D. Tenn. 1996).

  • 289 Medina v. Vander Poel, 523 B.R. 820 (E.D. Cal. 2015).

  • 290 Benkovitch v. Village of Key Biscayne, 778 Fed. Appx. 711 (11th Cir. 2019) (debtors let property fall into disrepair causing “life safety issues,” such as a stagnant pool and garbage and debris build-up, for which the Village of Key Biscayne obtained an order imposing civil penalties of $4500 per day for the ongoing issues; finding that such penalties were nondischargeable).

  • 291 In re Towers, 162 F.3d 952 (7th Cir. 1998); In re Styer, 477 B.R. 584 (Bankr. E.D. Pa. 2012).

  • 292 In re Parsons, 505 B.R. 540 (Bankr. D. Haw. 2014); Hessler v. Md. Consumer Prot. Div. (In re Hessler), 2013 WL 5429868 (Bankr. D. Md. Sept. 30, 2013); In re Jensen, 395 B.R. 472 (Bankr. D. Colo. 2008) (attorney general’s assessments for violations of various consumer protections statutes non-dischargeable).

  • 293 In re Strutz, 154 B.R. 508 (Bankr. N.D. Ind. 1993).