State v. Dargon (In re Dargon)

638 B.R. 25

IN RE: Drake D. DARGON, Sr., Debtor.

State of New Hampshire, Banking Department, Plaintiff,

v.Drake D. Dargon, Sr., Defendant.

Case No. 20-30300

Adversary Proceeding No. 20-03017

United States Bankruptcy Court, D. Massachusetts, Western Division.

Signed March 11, 2022

Laura D. Devine, Anthony Galdieri, Seth Zoracki, New Hampshire Department of Justice, Office of the Attorney General, Concord, NH, for Plaintiff.

Eric D. Kornblum, Law Office of Eric Kornblum, Westfield, MA, for Defendant.

MEMORANDUM OF DECISION

Elizabeth D. Katz, United States Bankruptcy Judge

In New Hampshire, the duty to supervise nondepository residential mortgage brokers, loan originators, and small loan lenders and to ensure compliance with state and federal laws and regulations is assigned to the State of New Hampshire Banking Department, an executive state governmental agency (the "Department"). In 2010, the Department commenced an administrative proceeding against Drake D. Dargon, Sr., an attorney practicing in the state of New Hampshire and the debtor in the underlying Chapter 7 bankruptcy case (the "Debtor"), alleging that the Debtor engaged in unlicensed loan modifications and violated various provisions of RSA 399-D and RSA 397-A.¹ In an Adjudicative Hearing Decision issued on February 14, 2011, the presiding officer ("Presiding Officer") found that the Debtor acted as a loan originator (while not exempt from licensure requirements), did actual work as an unlicensed loan originator, collected advance fees, and entered into impermissible best efforts contracts. In a June 30, 2011 order (the "2011 Order"), the Presiding Officer assessed fines against the Debtor and awarded restitution to affected consumers in the total amount of $147,196.99. Consistent with the Department's request, the restitution was to be forwarded to the Department within 14 days, paid via certified funds made payable to each individual identified in an attached list (the "Identified Consumers").

The 2011 Order provided an opportunity for reopening the record to adjust an Identified Consumer's restitution award if the consumer could provide evidence of additional payments to the Debtor that were not accounted for in the 2011 Order. In August 2011, the 2011 Order was suspended when the Debtor moved for a rehearing. The administrative proceedings then became inactive when the Debtor asserted his rights under the Servicemembers Civil Relief Act ( 50 U.S.C. app. §§ 501 et seq. (2011)) due to his active military duty.

On May 26, 2020, the Debtor filed a voluntary petition under Chapter 7 of the United States Bankruptcy Code.² The initial Schedule E/F filed in the Debtor's bankruptcy case listed a claim held by the Department for an "administrative fine" in an unknown amount.³ The Department then filed the present adversary proceeding requesting a determination that the restitution award assessed against the Debtor in the 2011 Order is nondischargeable pursuant to §§ 523(a)(2)(A) and (a)(7) of the Bankruptcy Code.⁴ Because the New Hampshire administrative action was not final, the parties were granted leave to proceed with the administrative proceeding and procure a final adjudication. On September 7, 2021, the Presiding Officer issued a final order (the "Final Order") upholding and giving full effect to the 2011 Order, including the restitution award. The Final Order also required the Debtor to list each Identified Consumer in his bankruptcy documents to ensure that the Identified Consumers had the opportunity to file a proof of claim and to otherwise protect their individual rights and interests. On October 25, 2021, the Debtor amended his creditor matrix and filed an amended Schedule E/F to include the names and addresses of over 70 additional creditors holding restitution claims in various amounts. The Final Order was not appealed and the restitution award remains unpaid.⁵

At the request of the Department, the claim under § 523(a)(2)(A) has been dismissed. Presently before the Court is a motion filed by the Department seeking summary judgment with regard to its claim for nondischargeability of the restitution award pursuant to § 523(a)(7), to which the Debtor has objected. After a hearing on the motion, the Court took the matter under advisement.

I. DISCUSSION

Summary judgment as to a particular claim or defense should be granted if "the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a), made applicable by Fed. R. Bankr. P. 7056. Section 523(a)(7) excepts a debt from the bankruptcy discharge "to the extent 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, other than a tax penalty ...." 11 U.S.C. § 523(a)(7). Relying on the Final Order, the Department says that judgment should enter in its favor as a matter of law since the restitution award is a fine or a penalty, payable to and for the benefit of a governmental unit (the Department), and is not compensation for actual pecuniary loss. While the Debtor agrees that no material facts are in dispute, the Debtor argues that summary judgment for the Department is not appropriate since the Final Order requires the Debtor to pay restitution to the Identified Consumers and was intended to compensate them for actual pecuniary loss – therefore, the restitution award is not excepted from discharge under § 523(a)(7).

In Kelly v. Robinson , 479 U.S. 36, 107 S.Ct. 353, 93 L.Ed.2d 216 (1986), the Supreme Court held that the language in § 523(a)(7) is "subject to interpretation" and that "the text is only the starting point" when determining whether a debtor's obligation to pay restitution imposed in a state criminal proceeding as a condition of probation was for the benefit of a governmental unit and whether the restitution constituted compensation for actual pecuniary loss. Kelly, 479 U.S. at 43, 50, 107 S.Ct. 353. In that case, the debtor had been ordered to make monthly restitution payments to the State of Connecticut Office of Adult Probation (the "Probation Office") until the debtor's probation ended. Id. at 39, 107 S.Ct. 353. Soon after those payments commenced, the debtor filed a Chapter 7 bankruptcy case, listed the restitution obligation as a debt in her bankruptcy documents, received a discharge, and made no further restitution payments. Id. Despite being notified of and taking no action during debtor's Chapter 7 bankruptcy case, the Probation Office later asserted its position that the restitution obligation was nondischargeable, prompting the debtor to file an adversary proceeding in the bankruptcy case seeking a determination that the obligation was discharged. Id. at 39-40, 107 S.Ct. 353.⁶

The Supreme Court recognized that its "interpretation of the Code also must reflect the basis for this judicial exception, a deep conviction that ... [t]he right to formulate and enforce penal sanctions is an important aspect of the sovereignty retained by the States." Id. at 47, 107 S.Ct. 353. As a result, the Supreme Court concluded that because the decision to impose restitution involves the state's punitive and rehabilitative interests rather than the victims’ request for compensation, criminal restitution orders are "for the benefit of" a governmental unit, are not assessed "for ... compensation" of the victim, and therefore are excepted from discharge under § 523(a)(7). Id. at 53, 107 S.Ct. 353. Notably, in Kelly , the Supreme Court was not tasked with determining whether the restitution award was "payable to" a governmental unit for purposes of § 523(a)(7).

In Richmond v. N.H. Supreme Court Committee On Prof. Conduct , 542 F.3d 913 (1st Cir. 2008), the First Circuit Court of Appeals (the "First Circuit") articulated a three-part test which the parties agree this Court should apply to determine whether a restitution award is excepted from discharge under § 523(a)(7). In Richmond, the New Hampshire Supreme Court Committee On Professional Conduct (the "Committee") filed a complaint to have a cost assessment against a Chapter 7 debtor deemed nondischargeable under § 523(a)(7). Richmond, 542 F.3d at 915. The debtor, an attorney, had been ordered by the New Hampshire Supreme Court to reimburse the Committee for expenses incurred to investigate and bring disciplinary proceedings against the debtor. Id. at 916. The First Circuit interpreted § 523(a)(7) as requiring that the debt at issue be "(1) ‘a fine, penalty, or forfeiture,’ (2) ‘payable to and for the benefit of a governmental unit,’ and (3) ‘not compensation for actual pecuniary loss" in order to be deemed nondischargeable. Id. at 917 (quoting Whitehouse v. LaRoche , 277 F. 3d 568, 573 (1st Cir. 2002) ). In Richmond , the parties had stipulated that the cost assessment was payable to and for the benefit of a governmental unit. Id. Accordingly, the First Circuit focused on whether the first and third prongs of the test were satisfied and in doing so relied on the Supreme Court's direction in Kelly to "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." Id. (quoting Kelly , 479 U.S. at 43-44, 107 S.Ct. 353 ). Since the New Hampshire Supreme Court had discretion to award costs and did so based on the disciplined attorney's conduct and for deterrent and rehabilitative purposes, the First Circuit found that the cost assessment was a penalty and was not compensation for actual pecuniary loss for purposes of § 523(a)(7). Id. at 918-19, 921. Accordingly, the Richmond court determined that the debt was nondischargeable. Id. at 921.

Here, the parties agree that the Debtor's restitution obligation constitutes a debt that is a "fine, penalty, or forfeiture" under § 523(a)(7), but disagree as to whether the second and third prongs of the Richmond test are satisfied. With regard to the second prong,...