United States District Court, D. New Jersey
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,
BARBARA JEAN PULLEY, Appellee/Plaintiff. the STATE OF NEW JERSEY
The opinion of the court was delivered by: JOEL PISANO, District Judge
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.
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 On February 25, 2000, Jersey City Municipal Court rescinded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 ultimate remittance (at
its maximum less than half of annual surcharge appropriations) supports
its State benefit contention." 295 B.R. at 37 n.19.
The Bankruptcy Court then considered whether MTF and JUA were
"governmental units" under the Bankruptcy Code. Id. at 45. Applying the
Eleventh Amendment sovereign immunity test as articulated by the Third
Circuit in Christy v. Pa. Turnpike Comm'n, 54 F.3d 1140, 1144 (3d Cir.
1995), Judge Stern concluded that MTF and JUA are not arms of the State,
nor are they a governmental units. Id. at 45-54. In addition, the
Bankruptcy Court examined the legislative history of Bankruptcy Code
section 101(27) which defines "governmental
unit," and subsequent case law. Id. at 54. According to the relevant
legislative history, section 101(27)
defines "governmental unit" in the broadest sense. The
definition encompasses the United States, a State,
Commonwealth, District, Territory, municipality or
foreign state, and a department, agency, or
instrumentality of any of those entities.
"Department, agency, or instrumentality" does not
include entities that owe their existence to State
action such as the granting of a charter or a license
but that have no other connection with a State or
local government or the Federal Government. The
relationship must be an active one in which the
department, agency, or instrumentality is actually
carrying out some governmental function.
Id. at 54-55 (quoting H.R. REP. NO. 95-595, at 311 (1977); see also
S.REP. NO. 95-989, at 24 (1978) (emphasis in original). In light of this
legislative history, Judge Stern determined:
though the Commissioner [of Insurance]'s service
as a liquidator has been found to be a hybrid of both private and public
characteristics, In re Liquidation of Integrity Ins.
Co. 165 N.J. [75,] 90-91 [(N.J. 2000)], the entity
function of MTF is both as a nonprecedent setting
market-opening joint underwriting association and as a
liquidation medium. Neither function is governmental
Id. at 55 (emphasis in original). The Judge further noted that in the
legislative history, Congress provided illustration: "[t]he United States
trustee, even though an employee of the United States, is not a
governmental unit when he is representing an estate in a bankruptcy case"
Id. (quoting H.R. REP. NO. 95-595, at 311 (1977) (emphasis in original).
Comparing the Commissioner of Insurance in his or her capacity as a
liquidator under this scheme to a United States trustee in a bankruptcy
case, Judge Stern concluded that the Commissioner is not a governmental
unit and that MTF and JUA are not governmental in function. Id at 55-56.
The Bankruptcy Court then addressed some of the State's specific
contentions. Judge Stern first rejected the State's argument that the EDA
is the beneficiary of the surcharge funds. Id. at 56-57. Judge Stern
concluded that the "EDA here is simply a facilitator, issuing nongeneral
bonds backed by the stream of DMV surcharge revenue. Bond proceeds are
used to satisfy MTF debt." Id. at 56. Examining the relationship between
the MTF and DMV surcharges and pointing to statements made in a November
2001 prospectus, the Bankruptcy Court concluded that MTF, and not the
EDA, is the beneficiary of the DMV surcharge funds. Id. at 57-58.
Judge Stern also rejected the State's claim that its control of the
flow of DMV surcharge funds through appropriation preclude discharge
under Bankruptcy Code section 523(a)(7) and explained that as a practical matter, annual appropriation is "a foregone conclusion."
Id. at 58. The Bankruptcy Court further explained that the remittance of
surplus surcharge amounts not used to service MTF bond debt to the
General Fund does not alter the result. Id. at 58-59. Instead, Judge
Stern characterized the State as "a contingent beneficiary of the DMV
surcharges a status not sufficient on the fact of § 523(a)(7) to
justify that exception to discharge." Id. at 59. In addition, the
Bankruptcy Court rejected the State's contention that discharge under
section 523(a)(7) would impair the exercise of its police power and
concluded that"[d]ischarge of DMV surcharges is simply not relevant to
the State's enforcement authority to keep roads safe." Id. at 60.
Finally, discharge of the surcharges, Judge Stern determined, furthers
the "overriding purpose" of the Bankruptcy Code, the notion of a fresh
start. Id. at 60-62.
II. LEGAL DISCUSSION
A. Standard of Review
Federal Rule of Bankruptcy Procedure 8013 provides in pertinent part:
"On appeal the district court . . . may affirm, modify, or reverse a
bankruptcy judge's judgment, order, or decree or remand with instructions
for further proceedings." F.R.Bankr.P. 8013. A bankruptcy judge's
findings of fact "shall not be set aside unless clearly erroneous." Id.
The district court shall review a bankruptcy courts conclusions of law de
novo. I.R.S. v. Pransky, 261 B.R. 380, 384 (D.N.J. 2001); see also Brown
v. Pa. State Employees Credit Union, 851 F.2d 81, 84 (3d Cir. 1988). B. The "Money Trail": The Collection and Distribution of DMV
The State Division of Motor Vehicles collects the surcharge funds at
issue. N.J.S.A. 17:29A-35b(2). DMV surcharge funds collected by the DMV
between October 1, 1991 and August 31, 1996 were to be deposited into the
Guaranty Fund. N.J.S.A. 17:29A-35(b)(2); N.J.S.A. 17:33B-5(a). Funds
deposited into the Guaranty Fund and interest earned thereon would be
utilized exclusively for the costs of the purposes of satisfying the
financial obligations of the JUA. N.J.S.A. 17:33B-5(d).
In 1994, the GDPA created the Market Transition Facility Revenue Fund
("MTF Revenue Fund"), a nonlapsing fund deigned to "pay the principal and
interest and premium, if any, on the Market Transition Facility bonds or
notes." N.J.S.A. 34:1B-21.7, -21.8(a). Commencing on September 1, 1996,
DMV surcharge funds were to be deposited into this new MTF Revenue Fund.
N.J.S.A. 17:29A-35(b)(2). MTF bonds issued by the EDA "shall be payable
solely from the monies in the [MTF] Revenue Fund." N.J.S.A. 34:1B-21.5.
State law provided that "[t]he bonds or notes shall be secured wholly or
in part by the monies in the Market Transition Facility Revenue Fund,"
which was initially funded by the DMV Surcharge Fund. N.J.S.A.
34:1B-21.4, -21.7, -21.14. By the State's own admission, "MTF Revenue
Fund monies may not be used for any other EDA project." (Brief of
Appellants at 6.) DMV surcharge funds "may be appropriated to the Facility
Revenue Fund by the Legislature," N.J.S.A. 34:1B-21.7(b), however, State
law compels this flow of surcharge funds "until such a time as all the
Market Transition Facility bonds, notes and obligations . . . are
discharged and no longer outstanding." N.J.S.A. 17:29A-35b(2). After the
MTF debt is repaid, "moneys collectible under this subsection shall, subject to appropriation, be
remitted to the New Jersey Property-Liability Insurance Guaranty
Association . . . to be used for payment of any loans made by that
association to the New Jersey Automobile Insurance Guaranty Fund . . .;
provided that all such payments shall be subject to and dependent upon
appropriation by the State Legislature." Id. Amounts not used to pay debt
service are remitted to the General Fund. N.J.S.A. 34:1B-21.7(d).
C. Dischargeability Under 11 U.S.C. § 523(a)(7)
Under chapter 7 of the Bankruptcy Code, a debtor is often entitled to
receive a discharge of his or her debts. 11 U.S.C. § 727. There are,
however, exceptions to discharge, which are contained in Bankruptcy Code
Section 523. 11 U.S.C. § 523(a).
The proponent of an exception to discharge bears the burden of proving
the exception. Grogan v. Garner, 498 U.S. 279 (1991);
Pulley, 295 B.R. at 60. Exceptions to discharge are strictly construed
against creditors and liberally construed in favor of debtors. In re
Cohn, 54 F.3d 1108, 1113 (3d Cir. 1995).
At the heart of the issue before this Court is the exception to
discharge contained in Bankruptcy Code section
523(a)(7). Under section 523(a)(7), a
debt is nondischargeable if it is (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.
11 U.S.C. § 523(a)(7). It is the second component of this standard,
whether the DMV surcharges levied against Ms. Pulley is payable to and
for the benefit of a governmental unit, that is at issue in this case.
There are a series of recent cases from various Courts of Appeals that
discuss the parameters of dischargeability under section 523(a)(7). In 1995, the Fourth Circuit
decided U.S. Dep't of Housing and Urban Dev. v. Cost Control Mktg. &
Sales Mgmt. of Va., Inc. in which it examined Bankruptcy Code section
523(a)(7) in the context of a civil disgorgement
order entered by a court during the course of fraud litigation.
64 F.3d 920, 927 (4th Cir. 1995) [hereinafter, "Cost Control
Marketing"]. According to that court, HUD measured its disgorgement
remedy by the amount lost by the victims of the fraud. Id. Although
HUD stated on the record that it intended to reimburse the victims, the
court noted that "the final judgment orders payment to HUD and imposes
no obligation on HUD to disburse the money to anyone." Id. Explaining
that "the Supreme Court has given § 523(a)(7) a broad reading and
has held that it applies to all criminal and civil penalties, even
those designed to provide restitution to injured private citizens," the
Fourth Circuit concluded that the debt was nondischargeable under
section 523(a)(7). Id. at 927-28 (citing Kelly v. Robinson,
479 U.S. 36 (1986)).
In In re Towers, 162 F.3d 952 (7th Cir. 1998), the Seventh Circuit
Court of Appeals, dealing with a similar issue, concluded that civil
restitution to be paid to victims of the debtor's fraud was dischargeable
under section 523(a)(7). Focusing on the language of 523(a)(7) "payable
to and for the benefit of a governmental unit," the Towers court
explained that the state was obligated to distribute the funds to the
victims. Id. at 955-56. Although "the judge did not state in so many
words that the Attorney General must redistribute to the victims whatever
can be squeezed out of Towers," taking into consideration a law which
provided for the victims' participation in the distribution of assets
"under the direction of the court," the Court of Appeals determined that
the state had no discretion with regard to distribution of the funds.
Id. Further articulating the meaning of 523(a)(7), the Seventh Circuit
explained: "the context in which the word `benefit' appears `payable to
and for the benefit of a governmental unit' implies that the `benefit' in
question is the benefit of the money that is `payable to' the
governmental unit." Id. at 956. The court distinguished its case from the
Supreme Court's decision in Kelly v. Robinson, because "[i]n Kelly the
government received and kept the money; not so here." Id.
In 2000, the Third Circuit considered these issues and concluded that
the debtor's restitution obligation should be discharged under
523(a)(7). In re Rashid, 210 F.3d 201, 203 (3d. Cir. 2000). Quoting
Towers, the Third Circuit explained that where the state collects a debt
from a citizen for redistribution to "private creditors," it is difficult
to prove that the debt satisfies the second prong of the 523(a)(7)
analysis, i.e, that the debt is payable to and for the benefit of a
governmental unit, even where the funds pass through a government
account. Id. at 207-08 (emphasis added). Adopting the reasoning of the
Towers court, the Third Circuit explained that "[t]he word payable
clearly casts an economic light over the phrase that suggests that the
benefit must be conferred from the monetary value of the debt to be paid
by the defendant and not the more abstract benefit of criminal
deterrence." Id. The court concluded that because the restitution was
ultimately payable to private individuals, the debt was dischargeable in
his chapter 7 bankruptcy. Id.
The question before the Court is whether the DMV surcharges levied
against Ms. Pulley satisfy the standard contained in section
523(a)(7) of the Bankruptcy Code,
specifically, whether the surcharges at issue are payable to and for
the benefit of a governmental unit. The State contends that the DMV
surcharges are not dischargeable under Bankruptcy Code section
523(a)(7), based on the flow of those
surcharges. The Court disagrees, and finds that the DMV surcharges
are not payable to and for the benefit of a governmental unit, and that
the surcharges do not meet the 523(a)(7) standard. Accordingly, the
Bankruptcy Court's June 25, 2003 Opinion and Order is affirmed.
The Court rejects the State's argument that appropriation renders the
debt at issue nondischargeable. The State contends that the DMV surcharge
funds are not available for bond debt service without annual appropriation. It argues that "the Legislature is
not compelled to make such an appropriation" and that "[a]ppropriation
should not be belittled; it is a fundamental power of the Legislature."
(Brief of Appellants at 16, 23.) The State further maintains that
"[t]here is no legal obligation for the State even to transfer DMV
surcharges to the EDA the monies are `subject to appropriation.'" (Brief
of Appellant at 21.) Because of its control over the funds, the State has
argued, the surcharges are "payable to and for the benefit of a
governmental unit." The Court does not agree.
In defense of its argument, the State has cited N.J.S.A. sections
17:29A-35b and N.J.S.A. 34:1B-21.7b. Although DMV surcharge funds "may
be appropriated to the Facility Revenue Fund by the Legislature,"
N.J.S.A. 34:1B-21.7b, New Jersey law also requires that DMV surcharge
funds be used first to satisfy MTF debt. Specifically, section 17:29A-35b
Commencing on September 1, 1996, or such earlier time
as the Commissioner of Banking and Insurance shall
certify to the State Treasurer that amounts on deposit
in the New Jersey Automobile Insurance Guaranty Funds
are sufficient to satisfy the current and anticipated
financial obligations of the New Jersey Automobile
Full Insurance Underwriting Association, all plan
surcharges collected by the Division of Motor Vehicles
under this subsection b. shall be remitted to the
Division of Motor Vehicles Surcharge Fund for transfer
to the Market Transition Facility Revenue Fund, as
provided in section 12 of P.L. 1994, c. 57
(C.34:1B-21.12), for the purposes of section for of
P.L. 1994, c. 57 (C.34:1B-21.4) until such a time as
all the Market Transition Facility bonds, notes and
obligations issued pursuant to that section 4 of that
act and the costs thereof are discharged and no longer
outstanding. From the date of certification by the
Commissioner of Banking and Insurance that the moneys
collectible under this subsection are no longer needed
to fund the association or at such time as all Market
Transition Facility bonds, notes and obligations
issued pursuant to section 4 of P.L. 1994, c. 57
(C.34:1B-21.4) and the costs thereof are discharged
and no longer outstanding moneys collectible under
this subsection shall, subject to appropriation, be
remitted to the New Jersey Property-Liability
Insurance Guaranty Association created pursuant to
section 6 of P.L. 1974, c. 17 (C.17:30A-6) to be used
for payment of any loans made by that association to
the New Jersey Automobile Insurance Guaranty Fund
pursuant to paragraph (10) of subsection a. of section
8 of P.L. 1974, c. 17 (C.17:30A-8); provided that all
such payments shall be subject to and dependent upon appropriation by
the State Legislature.
N.J.S.A. 17:29A-35b(2) (emphasis added). It is the finding of this Court
that this language imposes on the State an obligation to disburse the DMV
surcharge funds to MTF bondholders before taking any other action; only
after the MTF bond obligations are satisfied does the State have
influence over the distribution of the funds through appropriation.
Moreover, depending on the amount collected in surcharges each year, it
is possible for there to be no surplus, and that nothing is transferred
to the General Fund. The mere possibility of a turnover of funds to the
State after the bond debt is serviced does not dictate the Court's
decision. This Court is satisfied that under the language of section
17:29A-35b(2) that repayment of MTF debt is not discretionary, and that
the surcharge is dischargeable under Cost Control Marketing, Towers, and
This Court adopts the reasoning of the Third Circuit in In re Rashid210
F.3d 201, 203 (3d Cir. 2000), in the context of the dischargeabilty of
DMV surcharges under Bankruptcy Code section 523(a)(7).
The surcharges at issue here are first collected by the DMV, not the
Department of the Treasury. The money is then deposited into the MTF
Revenue Fund, and is dedicated to servicing the financial obligations
of the MTF. The funds are used to repay investors, whether private or
public, before any surplus reaches the Department of the Treasury. The
fact that funds pass through a government is irrelevant here; the State
is collecting the debt for service of the MTF debt and redistribution
to private creditors. See 210 F.3d at 207-08. Accordingly, the
Court concludes that the DMV surcharges do not satisfy the standard set
forth in section 523(a)(7).
The legislative history of Bankruptcy Code section 101(27)
supports the Court's decision. Although Congress expressed an interest
in defining governmental unit "in the broadest sense," the legislative history of section 101(27) also reveals that for an entity to be
considered a governmental unit, "[t]he relationship must me an active one
in which the department, agency, or instrumentality is actually carrying
out some governmental function." H.R. REP. NO. 95-595, at 311 (1977). The
main function of the JUA and MTF is as underwriters, issuers of insurance
policies, functions that are non-governmental in nature. Like the
participation of a United States trustee in a bankruptcy case, the
participation of the Commissioner of Insurance in the operation of the MTF
does not convert the MTF into a governmental unit. PLIGA's involvement
has no effect the State conceded at oral argument that "PLIGA is not a
governmental unit for our purposes here." (Tr. at 6:2-5.)
In addition, the State contends that DMV surcharges collected benefit
it and its agencies because the funds are used to pay for State programs,
including alcohol-abuse programs. (Brief of Appellants at 4-5, 11, 14.)
This use of the DMV surcharges, its accompanying benefits, and the
State's control over DMV surcharge funds, however, takes place only after
the MTF bond debt is paid and the surplus, if any, is remitted to the
General Fund. Because any such benefit occurs after the bond debt is
serviced and the funds are distributed to private citizens, it is not
The State also argues that a recent change in state law should affect
the outcome of this case. The laws at issue are P.L. 2003, c 89, pursuant
to which the MTF will be consolidated into PLIGA, and P.L. 2003, c 13,
whereby MTF bonds will be retired in 2011. (Brief of Appellant at 12-13.)
According to the State, when the MTF bonds are retired, "DMV surcharge monies appropriated to the EDA will be used to pay debt
service on newly-issued bonds to support the New Jersey Motor Vehicle
Commission." (Id. at 13.) PLIGA will process remaining claims and perform
related administrative duties. (Id. at 12-13.) The State claims that
"[t]he court's decision creates instability: if the [Bankruptcy Court's]
decision is affirmed, DMV surcharge debts will be dischargeable for the
next eight years then be rendered nondischargeable starting in 2011,
simply because the monies will be used for debt service on different
bonds." (Id. at 13.) Likewise, at oral argument, the State claimed that
the Bankruptcy Court's ruling will cause further confusion in light of
bankruptcy procedure. Specifically, the State argued that because a
bankruptcy case can be reopened at any time, the State can reopen all
chapter 7 matters to deem a debt nondischargeable when changes in the law
occur, i.e., in 2011. (Tr. at 24:5-12.)
The Court is not persuaded by these arguments. First, it is the role of
this Court to adjudicate only the case before it. In making a decision,
the Court is not obligated to consider changes in law that may be
scheduled to take effect eight years from the date of its decision,
particularly in light of the tumultuous history of the JUA, MTF, and
insurance surcharge system of the State. Changes in state law can be
quite common, and this Court will not rule in anticipation of these
future changes. In addition, this District has held that the law that
should apply in a dischargeability action is the law as of the date of
discharge, Hudson Cty. Welfare Dep't v. Roedel, 34 B.R. 689, 693-94
(D.N.J. 1983), which is in this case, the law that was in effect on July
7, 1997. Thus, there will be no confusion as to what law should apply,
and the State will not be in a position to reopen cases in 2011 to render
DMV surcharges nondischargeable based on changes in the law.
For the reasons stated above, the Court holds that the State has not
met its burden of proving the exception to discharge in this case. It is
therefore the finding of the Court that the DMV surcharges assessed
against Pulley were properly discharged and the United States Bankruptcy
Court's June 25, 2003 Order and Opinion is affirmed. An appropriate order follows.
This case is closed.
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