32 ELR 20438 -- Whitehouse v. LaRoche

Whitehouse v. LaRoche

No. 00-1127 (277 F.3d 568) (UNITED STATES COURT OF APPEALS FOR THE FIRST CIRCUIT January 17, 2002)

ELR Digest

The court vacates and remands a district court decision holding that a property owner's bankruptcy expunged his obligation to pay the state of Rhode Island civil penalties and remediation costs stemming from water contamination on his property. In 1991, a district court issued a consent decree under which the owner agreed to reimburse the state for any shortfall amount between the cost of a new wastewater treatment facility and the proceeds from the sale of excess acreage. The owner also agreed to affirm the shortfall amount as a debt not discharged in bankruptcy and to seek a bankruptcy court order of his affirmation. The owner received a Chapter 7 discharge in 1995, but waited two years thereafter before submitting a bankruptcy court motion to reaffirm the shortfall amount. The bankruptcy court rejected the motion to reaffirm. The state sought from the district court that issued the consent decree a declaration that the owner had breached the reaffirmation agreement, thereby triggering a consent decree provision that imposed a civil penalty equal to the unpaid shortfall amount. The district court held that the owner's bankruptcy discharged his debt because the state failed to commence a bankruptcy court proceeding and obtain a bankruptcy court ruling that the civil penalty was nondischargeable.

The court first holds that the district court erred in ruling that the state forfeited its rights by not commencing a bankruptcy court proceeding. The consent decree did not contain a provision required by the Bankruptcy Code that the reaffirmation would not cause the owner undue hardship. Thus, even if the owner had filed a timely motion to reaffirm the shortfall amount, it would not have been allowed. The court also holds that the state's failure to initiate a bankruptcy court proceeding did not irretrievably forfeit its right to recover the shortfall amount as a civil penalty. Creditors relying on the Bankruptcy Code § 523(a)(7) exception from discharge for fines, penalties, or forfeitures payable to the government may seek a nondischargeability determination in bankruptcy courts and nonbankruptcy courts, which are vested with concurrent jurisdiction over § 523(a)(7) proceedings. A creditor may invoke the jurisdiction of any nonbankruptcy forum before or after the close of the bankruptcy proceeding. The district court that issued the consent decree in 1991 had concurrent jurisdiction over the dischargeability of the shortfall amount and subsequent civil penalty. Thus, the owner cannot escape his obligation to reaffirm the shortfall amount or trigger a civil penalty, and the 1995 general bankruptcy discharge does not relieve the owner of the obligation to pay the unpaid shortfall amount as a civil penalty.

The full text of this opinion is available from ELR (25 pp., ELR Order No. L-433).

Counsel for Plaintiffs
Terence J. Tierney, Ass't Attorney General
Attorney General's Office
150 S. Main St., Providence RI 02903
(401) 274-4400

Counsel for Defendants
Barry J. Kusinitz
Law Offices of Barry J. Kusinitz
128 Dorrance St., Providence RI 02903
(401) 331-9400/831-4200

[OPINION OMITTED BY PUBLISHER IN ORIGINAL SOURCE]