In re Jensen

• Decision Date: 30 September 2008
• Docket Number: Bankruptcy No. 05-28263 EEB.,Adversary No. 05-1940 EEB.
• Citation: 395 B.R. 472
• Parties: In re Mary Joann JENSEN, f/d/b/a Credit Corrections, LLC, a/k/a Joey Jensen, Debtor. State of Colorado ex rel. Ken Salazar, Attorney General for the State of Colorado, and Laura E. Udis, Administrator, Uniform Consumer Credit Code, Plaintiffs, v. Mary Joann Jensen, f/d/b/a Credit Corrections, LLC, a/k/a Joey Jensen, Defendant.
• Court: U.S. Bankruptcy Court — District of Colorado

395 B.R. 472

In re Mary Joann JENSEN, f/d/b/a Credit Corrections, LLC, a/k/a Joey Jensen, Debtor State of Colorado ex rel. Ken Salazar, Attorney General for the State of Colorado, and Laura E. Udis, Administrator, Uniform Consumer Credit Code, Plaintiffs, v. Mary Joann Jensen, f/d/b/a Credit Corrections, LLC, a/k/a Joey Jensen, Defendant.

Bankruptcy No. 05-28263 EEB.

Adversary No. 05-1940 EEB.

United States Bankruptcy Court, D. Colorado.

September 30, 2008.

Don D. Jacobson, James A. Kaplan, Denver, CO, for Plaintiffs.

Stephen E. Berken, Denver, CO, for Defendant.

ORDER

ELIZABETH E. BROWN, Bankruptcy Judge.

THIS MATTER comes before the Court on the Plaintiffs' Motion for Summary Judgment. Plaintiffs initiated this adversary proceeding, seeking to except their state court judgment from discharge under either 11 U.S.C. §§ 523(a)(2), (a)(6) or (a)(7). In the Motion, they seek summary judgment on all claims. For the reasons set forth below, the Court grants Plaintiffs' Motion on the § 523(a)(7) claim, holding their judgment nondischargeable.

I. Background

Ms. Jensen formed Credit Corrections, LLC ("Credit Corrections") in 1999 or 2000. According to Ms. Jensen, through this business, she provided "credit repair" services by reviewing each customer's credit report and helping to address any inaccuracies stated in it. Credit repair services are regulated by state and federal law, including the federal Credit Repair Organization Act ("CROA")¹ and the Colorado Credit Services Organization Act ("CCSOA").² Among other things, CCSOA requires credit repair businesses to provide customers with certain disclosures and notices. It also requires a surety bond. The Plaintiffs are charged with enforcing and enjoining violations of these laws in the State of Colorado.

Having received a complaint from one of Ms. Jensen's customers, the Plaintiffs opened an investigation of Ms. Jensen and Credit Corrections in September 2001. Ms. Jensen then hired counsel to assist with "bringing [her] within compliance of the Credit Services Organization Act." In pursuit of this goal, she also obtained a surety bond and began making all of the required customer disclosures.³ Ms. Jensen and her counsel met with Plaintiffs on several occasions and provided them with the information they requested, such as Credit Collection's client list and the amount of fees paid by each of those clients.

Despite Ms. Jensen's attempts to comply, Plaintiffs ultimately determined that Ms. Jensen and Credit Corrections had violated several provisions of the CROA and CCSOA. In June 2002, Plaintiffs sent her a letter, offering to settle if Ms. Jensen signed an Assurance of Discontinuance ("AOD"), admitting to past violations and agreeing to desist from future violations and to pay a $10,000 fine. Ms. Jensen signed the AOD. In this adversary, Ms. Jensen claims that she did so under duress because Plaintiffs had threatened to send her to jail for her violations if she did not agree to this settlement. Plaintiffs dispute these allegations. After signing the AOD, Plaintiffs claim that Ms. Jensen violated its terms by continuing in the credit repair business and by failing to pay the $10,000 fine. Ms. Jensen admits she continued to provide credit repair services and that she failed to pay the fine, but she insists that her post-AOD services complied with all of the relevant statutes.

On June 12, 2003, Plaintiffs filed a complaint against Ms. Jensen and Credit Collections in Denver District Court (the "State Complaint"), alleging seven claims for violations of the CROA, CCOSA and the Colorado Consumer Protection Act ("CCPA")⁴. When she did not timely answer the State Complaint, Plaintiffs moved for the entry of default, which the state court granted. Shortly after, Ms. Jensen filed a late answer. Plaintiffs moved to strike the answer as untimely. Ms. Jensen did not respond to the motion to strike and the court granted Plaintiff's motion. Plaintiffs then requested a default judgment and on December 17, 2003, the state court entered judgment on all seven of Plaintiffs' claims (the "State Court Judgment").

The monetary amount awarded in the State Court Judgment is comprised of several categories of damages, some of which were awarded under more than one claim. In their brief, Plaintiffs clarify that the total amount awarded of $900,581 is comprised of:

• $228,836 representing the amount customers paid Credit Corrections for credit repair services;

• $457,672 in double damages for wilful violations of the CCSOA;

• $100,000 penalty for violation of Colo. Rev.Stat. § 6-1-150(1)(u);

• $100,000 penalty for violation of Colo. Rev.Stat. § 6-1-150(1)(z);

• $10,000 fine for violation of the AOD;

• $4,073 in attorneys fees and costs.

In this adversary proceeding, Plaintiffs assert that each of these categories of damages is nondischargeable under §§ 523(a)(2), (a)(6) and/or (a)(7).

II. Standards for Determining Summary Judgment Motions

Federal Rule of Civil Procedure 56(c), made applicable to this case by Fed. R. Bankr.P. 7056, provides in relevant part that: "[t]he judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). The Plaintiffs bear the initial burden of making a prima facie demonstration of the absence of a genuine issue of material fact and entitlement to judgment as a matter of law. See Mitchell v. City of Moore, Oklahoma, 218 F.3d 1190, 1197 (10th Cir.2000). If Plaintiffs carry their initial burden, Ms. Jensen, as nonmovant, must then come forward with specific facts showing that there is a genuine issue for trial. Spaulding v. United Transp. Union, 279 F.3d 901, 904 (10th Cir.2002). To accomplish this, Ms. Jensen must identify facts by reference to affidavits, deposition transcripts, or specific exhibits. Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 671 (10th Cir.1998). Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment. Schwartz v. Brotherhood of Maint. of Way Employees, 264 F.3d 1181, 1183 (10th Cir.2001). Disputes as to immaterial facts will not preclude summary judgment. Frank v. U.S. West, Inc., 3 F.3d 1357, 1361 (10th Cir.1993).

III. Discussion

Section 523(a)(7)⁵ provides that a discharge granted in bankruptcy does not apply to any debt "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...." Courts have parsed this statute into three discrete elements: (1) there must be a debt for a fine, penalty, or forfeiture; (2) that debt must be payable to and for the benefit of a governmental unit; and (3) that debt cannot constitute compensation for actual pecuniary loss. See In re Warfel, 268 B.R. 205, 209 (9th Cir. BAP 2001). The "fine, penalty or forfeiture" may be either criminal or civil in nature. E.g., United States v. WRW Corp., 986 F.2d 138, 145 (6th Cir.1993). The Supreme Court has also recognized that restitution may constitute a "fine, penalty or forfeiture" for purposes of § 523(a)(7) in certain circumstances. Kelly v. Robinson, 479 U.S. 36, 53, 107 S.Ct. 353, 93 L.Ed.2d 216 (1986). Whether a particular obligation meets the elements of § 523(a)(7) is a question of law. See Kentucky Natural Res. & Envtl. Prot. Cabinet v. Seals, 161 B.R. 615, 618 (W.D.Va.1993); In re Richmond, 351 B.R. 6, 10 (Bankr. D.N.H.2006), aff'd, 378 B.R. 22 (D.N.H. 2007), aff'd, 2008 WL 4277313 (1st Cir. 2008).

The Defendant has asserted two types of defenses to this claim. First, she has denied that several of the awards made in the State Court Judgment satisfy either the first or third element of a § 523(a)(7) claim (the "Elements Defense"). In particular, she has asserted several awards are not in the nature of a "fine, penalty, or forfeiture." She asserts that some awards represent compensation in contravention of the third element. In raising the Elements Defense, however, she has not asserted genuine issues of disputed facts, but has instead argued for a contrary interpretation of the legal requirements of a § 523(a)(7) claim as applied to the facts.

Second, she has asserted a defense that she did not actually violate the laws of CROA, CCOSA or CCPA (the "No Violation Defense"). She admitted to violations when she signed the AOD, but she claims that she did so only under duress. Thus, she asks this Court to look behind the State Court Judgment and hear the issue of whether she in fact violated the statutes pertaining to credit repair services. While the Court acknowledges that there are disputed facts related to her No Violation Defense, for the reasons set forth below, these facts, and her No Violation Defense, are not material to a determination under § 523(a)(7). Alternatively, the Defendant is precluded from raising her No Violation Defense by the doctrine of res judicata. Consequently, there are no genuine issues of material fact pertaining to the § 523(a)(7) claim and, therefore, it is appropriate for the Court to determine it on a summary judgment basis.

A. The Elements of a § 523(a)(7) Claim Have Been Established.

The State Court Judgment consists of several separate monetary awards, which have different characteristics. Thus, the Court must consider each category of award separately to assess whether the elements of § 523(a)(7) are met.

1. Penalties assessed under Colo.Rev. Stat. § 6-1-112(1)

The State Court Judgment found in Plaintiffs' favor on the State Complaint's second and third claims for relief and awarded Plaintiffs $100,000 on each claim. The judgment does not, however, expressly label these amounts as "penalties." Nevertheless, in the second and third claims of the State...