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IN RE PULLEY

December 31, 2003.

In re: Barbara Jean Pulley, Debtor DIANE LEGREIDE, individually and in her capacity as Commissioner of the New Jersey Motor Vehicle Commission, and PETER C. HARVEY, individually and in his capacity as Attorney General of New Jersey, and Attorney General of New Jersey, and Appellants/Defendants,
v.
BARBARA JEAN PULLEY, Appellee/Plaintiff. the STATE OF NEW JERSEY



The opinion of the court was delivered by: JOEL PISANO, District Judge

OPINION

Diane Legreide, the Director of the Division of Motor Vehicles ("Legreide"), Peter C. Harvey, Acting Attorney General for the State of New Jersey ("Harvey"), and the State of New Jersey (the "State," and together with Legreide and Harvey, "Appellants" or the "State") take this appeal from the Order and Opinion of the United States Bankruptcy Court entered June 25, 2003, which granted summary judgment in favor of Debtor Barbara Jean Pulley ("Pulley" or the "Debtor") and discharged motor vehicle surcharges levied against her by the New Jersey Division of Motor Vehicles ("DMV") under section 523(a)(7) of title 11 of the United States Code (the "Bankruptcy Code"). This Court exercises appellate jurisdiction in this matter under 20 U.S.C. § 158(a). See Matter of Halvajian, 216 B.R. 502, 508 (D.N.J.), aff'd, 168 F.3d 478 (3d Cir. 1998) (citing 28 U.S.C. § 158(a)(1)). For the reasons set forth below, the Court affirms the Order and Opinion of the Bankruptcy Court, and concludes that the DMV surcharges assessed against Pulley were properly discharged.

 I. BACKGROUND

  A.Facts

  The basic facts are not in dispute. Based on unpaid parking violations, Jersey City Municipal Court suspended Pulley's driver's license on June 21, 1991. 295 B.R. at 32. DMV insread allowed Pulley, a resident of Jersey City, was subsequently involved in a car accident on July 15, 1991. Id. At the scene of the accident, Pulley was cited for driving without liability insurance, and on September 17, 1991, was convicted in Jersey City Municipal Court of driving without liability insurance and driving with a suspended licence. Id. The DMV sent Pulley surcharge bills on September 1, 1992, September 1, 1993, and September 1, 1994, which were never paid. Id. As a consequence of her failure to pay and in accordance with state law, DMV suspended Pulley's driver's license on both December 27, 1992 and October 17, 1993. Id. On February 25, 2000, Jersey City Municipal Court rescinded its June 21, 1991 suspension of Pulley's driver's license, and Pulley sought reinstatement of driving privileges. 295 B.R. at 32. DMV instead allowed Pulley to apply for a learner's permit as a precursor to applying for a driver's license. Id. at 33.

  On March 24, 1997, Ms. Pulley filed a petition in bankruptcy under chapter 7 of the Bankruptcy Code. Id. at 32. On her schedule of unsecured debts, Pulley listed a debt to "NJ MVS Auto Ins Sur & Coll" for DMV surcharges in the amount of $1,000. Id. On July 7, 1997, the Bankruptcy Court discharged Pulley from "all dischargeable debts." Id. In December 1997, the State advised Pulley to continue payment of her DMV surcharge because the July 1997 discharge did not apply to her in light of a 1995 bankruptcy court ruling that "surcharges are non-dischargeable civil penalties." Id. Pulley's bankruptcy case was closed on April 2, 1998. Id.

  On August 8, 2000, Pulley moved to reopen the case to initiate an adversary proceeding to determine the dischargeability of the DMV surcharges. Id. at 33. On September 29, 2000, the case was reopened and Pulley filed a complaint. Id. On June 25, 2003, the Bankruptcy Court granted summary judgment in favor of Pulley and discharged her debt for the unpaid surcharges. Id. at 62. The State timely filed a notice of appeal, and oral argument was heard by this Court on November 5, 2003.

  B. The Bankruptcy Court's June 25, 2003 Opinion and Order

  In an Opinion and Order dated June 25, 2003, the Bankruptcy Court, Morris Stern, U.S.B.J., granted summary judgment in favor of Pulley and discharged the DMV surcharges levied against her under Bankruptcy Code section 523(a)(7). 295 B.R. at 62. In making his decision, the Bankruptcy Judge considered the development and application of DMV surcharges in the State, the historical context of the Market Transition Facility ("MTF") and the New Jersey Automobile Full Insurance Underwriting Association ("JUA"), whether the JUA and MTF are governmental units, and the flow of bond proceeds. In addition, the Bankruptcy Court examined the legislative history of Bankruptcy Code and relevant public policy concerns, and concluded that the DMV surcharges were dischargeable.

  Judge Stern examined in detail the history of New Jersey's DMV surcharge system, and explained that "the dischargeability in bankruptcy of DMV surcharges is knotted with the complexity of the State's generation-long automobile insurance dilemma." 295 B.R. at 37. In 1982, the State enacted the New Jersey Automobile Full Insurance Availability Act, N.J.S.A. 17:30E-1 to-24, to reform the insurance system in the State. Id. at 33. This legislation created the JUA, and unincorporated nonprofit organization designed to be "an insurer of last resort organized to provide affordable automobile liability coverage" and issued policies in its own name. Id. at 33; N.J.S.A. 17:30E-4. JUA was comprised of all insurers that would sell automobile liability insurance in the State, and participation in the JUA was mandatory. 295 B.R. at 33. According to the Bankruptcy Court, JUA's mandatory membership "tends to cast JUA as a private or otherwise nongovernmental enterprise." Id. at 41. In addition, Judge Stern noted that the JUA was subject to state taxation. Id. Another key component to the 1982 reforms was a system of DMV surcharges that were "were intended to fund, in part, JUA's operation." 295 B.R. at 33. By 1990, the JUA had $3 billion in losses and "was hopelessly insolvent." Id. at 33-34; see also N.J.S.A. 17:33B-3(a).

  In an effort to replace the JUA, in 1990, the State passed the Fair Automobile Insurance Reform Act, N.J.S.A. 17:33B-1 to -63, which created the MTF, another joint insurance underwriting association that had the authority to issue its own policies. Id. at 33, 35; N.J.S.A. 17:33b-11. The 1990 legislation created the Guaranty Fund, a funding mechanism into which the DMV surcharges would be deposited. 295 B.R. at 34; N.J.S.A. 17:33B-5. Within the first four years of the MTF's existence, "MTF had added $1.3 billion in losses" to the JUA's already dismal financial condition. 295 B.R. at 33; see also N.J.S.A. 34:1B-21.2(a)(9) (projecting MTF's losses at $1.3 billion).

  At this point, the Property Liability Insurance Guaranty Association ("PLIGA") became involved. 295 B.R. at 35. PLIGA is "a private, nonprofit, unincorporated legal entity," that is comprised of all insurers licensed to conduct business in New Jersey, and was organized in 1974 to play claims of insolvent carriers. Id.; N.J.S.A. 17:30A-6 and -5(f). PLIGA "was compelled to make loans to the Guaranty Fund, initially for JUA debt, at the rate of $160 million per year from 1990 through December 31, 1997." Id. see also N.J.S.A. 17:30A-8. "PLIGA has loaned over $1 billion to fund part of JUA's and then MTF's debt." 295 B.R. at 40 (citing N.J.S.A. 17:30A-8(a)(10)).

  In 1994, the State legislature adopted the Good Driver Protection Act ("GDPA"), N.J.S.A. 34:1B-21.1 to -21.15. 295 B.R. at 35. The GDPA "provided MTF deficit funding on a bulk and immediately available basis through New Jersey Economic Development Authority ("EDA") bonds," and the DMV surcharges were redirected to service this bond debt. Id. at 36. Specifically, state statute empowered the EDA to issue Market Transition Facility bonds to secure payment of the current and anticipated liabilities and expenses of the MTF. Id. at 36, N.J.S.A. 34:1B-21.4. "In redirecting the DMV surcharges to pay the MTF bonds, the legislature relegated payment of the PLIGA loans to a date uncertain, following repayment of the bonds." 295 B.R. at 36 (citing Affiliated FM Ins. Co. v. State, 338 N.J. Super. 540, 556-62 (N.J. Super Ct. App. Div. 2001)). Initially, $665 million in bonds would be issued and repaid from DMV surcharge revenues at a rate of $85 million per year. Id. at 44; Legislative Statement following N.J.S.A. 34:1B-21.1. According to the statute, the MTF bonds could be sold at a public or private sale, and are not an obligation or debt of the State, or any agency or instrumentality of the State. 295 B.R. at 36; N.J.S.A. 34:1B-21.5, -21.9.

  Under current law, DMV surcharges are to be used to service MTF bonds until the bond debt is discharged. 295 B.R. at 36 (citing N.J.S.A. 34:1B-21.4); see also N.J.S.A. 17:29A-35b(2). Funds in excess of the amount required to be used to service the MTF bonds are remitted to the State's General Fund. 295 B.R. at 36-37; N.J.S.A. 34:1B-21.7(b). "After 1994, the surcharges became the sole source of service of MTF bonds, and will in the future fund repayment of more than $1 billion of PLIGA loans." 295 B.R. at 45. The Bankruptcy Court pointed out "that this ...


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