Lugo v. Paulsen

• Decision Date: 26 October 1989
• Docket Number: No. 89-5090,89-5090
• Parties: , 21 C.B.C. 1121, 19 Bankr.Ct.Dec. 1419, Bankr. L. Rep. P 73,088 Roberto LUGO, Appellant, v. Glenn PAULSEN, individually and in his capacity as Director of the New Jersey Division of Motor Vehicles; N.J. Automobile Insurance Surcharge and Collection; New Jersey Automobile Full Insurance Underwriting Association; and W. Cary Edwards, individually and in his capacity as Attorney General of New Jersey.
• Court: U.S. Court of Appeals — Third Circuit

Page 602

886 F.2d 602

58 USLW 2274, 21 C.B.C. 1121, 19

Bankr.Ct.Dec. 1419,

Bankr. L. Rep. P 73,088

Roberto LUGO, Appellant, v. Glenn PAULSEN, individually and in his capacity as Director

of the New Jersey Division of Motor Vehicles; N.J.

Automobile Insurance Surcharge and Collection; New Jersey

Automobile Full Insurance Underwriting Association; and W.

Cary Edwards, individually and in his capacity as Attorney

General of New Jersey.

No. 89-5090.

United States Court of Appeals, Third Circuit.

Argued June 27, 1989.

Decided Sept. 28, 1989.

Rehearing and Rehearing In Banc Denied Oct. 26, 1989.

Neil J. Fogarty (argued), Hudson County Legal Services Corp., Jersey City, N.J., for appellant.

Sherrie L. Gibble (argued), Felice J. Weiner, Office of Atty. Gen. of N.J., Trenton, N.J., for appellee State of N.J., Div. of Motor Vehicles, Glenn Paulsen, Director, DMV.

Michael E. Buckley, Francis & Berry, Morristown, N.J., for appellee New Jersey Auto. Full Ins. Underwriting Assoc.

Before MANSMANN, SCIRICA and SEITZ, Circuit Judges.

OPINION OF THE COURT

SCIRICA, Circuit Judge.

The issue before us is whether an insurance surcharge, levied by the State of New Jersey on persons convicted of driving while under the influence of intoxicating liquor, may be discharged under Chapter 7 of the Bankruptcy Code. The district court determined that the surcharge qualified as "debt," but fell within the exception to discharge in 11 U.S.C. Sec. 523(a)(9) for debts arising from judgments arising out of the operation of a vehicle while legally intoxicated. We will affirm.

I.

On June 5, 1985, Roberto Lugo was convicted in the Municipal Court of East Rutherford, New Jersey of driving while under the influence of intoxicating liquor in violation of N.J.Stat.Ann. Sec. 39:4-50(a)(West 1985). The Municipal Court imposed a $250 fine, costs, and a $100 surcharge. Lugo complied with the order. In addition, Lugo's driver's license was revoked for six months and he was required to attend a 12-hour educational program.

On January 12, 1986, the New Jersey Division of Motor Vehicles (DMV) billed Lugo $3000, payable over three years, under the New Jersey Merit Rating Plan (N.J.Stat.Ann. Sec. 17:29A-35(b)(2) (West 1985 & Supp.1989)), ¹ which levies a surcharge on drivers convicted of driving under the influence of intoxicating liquor. Merit Rating Plan surcharges fund the New Jersey Automobile Full Insurance Underwriting Association (JUA), ² an unincorporated, non-profit association of insurers licensed to provide automobile insurance in New Jersey. The DMV collects the surcharges, remitting at least 90% to the JUA, and retaining up to 10% for administrative expenses. The Merit Rating Plan provides that if a driver fails to pay the surcharge, the driver's license "shall be revoked forthwith until the surcharge is paid to the Division of Motor Vehicles." N.J.Stat.Ann. Sec. 17:29A-35(b)(2).

Accordingly, Lugo's surcharge bill included a "Notice of Proposed Suspension," which stated:

This bill is a notice of proposed suspension of your driving privileges pursuant to P.L.1983 C.65; N.J.S.A. 17:29A-33 et seq. and N.J.S.A. 39:5-30. Your payment must be received within 30 days of the bill date. Failure to pay by Feb. 11, 1986 will result in the suspension of your driver's license until full payment is made.

Lugo failed to pay the $3000 surcharge. On July 30, 1986, he filed a petition under Chapter 7 of the Bankruptcy Code, listing in his debt schedule the $3000 surcharge owed to the JUA and listing the DMV and its subdivision, Automobile Insurance Surcharge and Collections, as scheduled creditors. After learning of Lugo's bankruptcy petition, the DMV restored his driving privileges in October, 1986. On December 12, 1986, Lugo received his discharge in bankruptcy. Notice of discharge was sent to all listed creditors by the Bankruptcy Court.

Following discharge, Lugo received another surcharge bill from the DMV, which again included a notice of proposed suspension of driving privileges for failure to pay the surcharge. In response to inquiry by Lugo's attorney, a representative of the DMV stated that Lugo's driver's license would be suspended if he did not pay the surcharge notwithstanding his discharge in bankruptcy.

Consequently, on February 19, 1988, Lugo re-opened his Chapter 7 bankruptcy petition, and filed an adversary proceeding seeking to have the surcharge discharged as a pre-petition debt. The Bankruptcy Court reviewed his complaint, and, on cross motions for summary judgment, held that the surcharge was not a "debt" within the meaning of the Bankruptcy Code and therefore was not subject to discharge. Lugo v. Paulsen, No. 88-0127, slip op. (Bankr.D.N.J.1988).

On appeal, the district court found that the surcharge was a "debt" within the meaning of the Bankruptcy Code. The district court held, however, that the surcharge was non-dischargeable under the exception to discharge in Sec. 523(a)(9) of the Bankruptcy Code, 11 U.S.C. Sec. 523(a)(9)(Supp. V 1988). Lugo v. Paulsen, 94 B.R. 335, 340 (D.N.J.1989) This appeal followed.

II.

We must first determine whether the Merit Rating Plan surcharge levied by the DMV is a pre-petition "debt" that may be discharged in Chapter 7 under 11 U.S.C. Sec. 727(b) (1982). ³ Relying on In re Graham, 85 B.R. 713, 716 (Bankr.D.N.J.1988) (Merit Rating Plan surcharges characterized as "additional premium[s] payable for [ ] necessary insurance" rather than as pre-petition "debt"), the Bankruptcy Court found that the surcharge was not a pre-petition debt subject to discharge in a Chapter 7 proceeding. The Bankruptcy Court observed that the surcharges provided funding for a comprehensive legislative plan to furnish automobile insurance to persons unable to obtain insurance elsewhere and to help equalize policy rates based on individual driving records. ⁴ Under the New Jersey Automobile Insurance Reform Act, all surcharges are assessed and paid directly to the DMV and eventually to the JUA as insurer of the "at-risk" pool, rather than collected by insurance companies individually as had been customary prior to the Act. See New Jersey Automobile Insurance Reform Act of 1982, 1983 N.J. Laws 230, 231, codified at N.J.Stat.Ann. Secs. 17:29A-33-17:30E-24 (West 1985 & Supp. 1989). Because the Merit Rating Plan surcharges are "infused directly into the auto insurance system," the Bankruptcy Court reasoned, the surcharge is an additional premium required for future liability insurance and, as such, it would not qualify as a debt incurred pre-petition.

On this issue, the district court disagreed with the Bankruptcy Court, and held that the surcharge was properly characterized as a pre-petition debt under the Bankruptcy Code. We agree with the district court.

The Bankruptcy Code defines "debt" as a "liability on a claim," 11 U.S.C. Sec. 101(11)(1982), and defines "claim" as a "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured...." 11 U.S.C. Sec. 101(4)(A)(1982). The latter definition was designed to allow the broadest possible interpretation of "claim," as the Code "contemplates that all legal obligations of the debtor, no matter how remote or contingent, be able to be dealt with in bankruptcy" to permit the "broadest possible relief in the bankruptcy court." H.R.Rep. No. 595, 95th Cong., 1st Sess. 309 (1977); S.Rep. No. 989, 95th Cong., 2d Sess. 21 (1978), U.S.Code Cong. & Admin.News, pp. 5787, 5807, 5963, 6266. Courts have recognized Congress' intent to permit broad relief in bankruptcy and have followed its directive to interpret "claim" liberally. See, e.g., Kelly v. Robinson, 479 U.S. 36, 50 n. 12, 107 S.Ct. 353, 361 n. 12, 93 L.Ed.2d 216 (1986)(definition of "debt" broadly drafted); In re Remington Rand Corp., 836 F.2d 825, 829 (3d Cir.1988) (Congress defined "claim" in broadest possible terms); Matter of M. Frenville Co., Inc., 744 F.2d 332, 336 (3d Cir.1984)(Congress intended definition of claim to be "very broad"), cert. denied, 469 U.S. 1160, 105 S.Ct. 911, 83 L.Ed.2d 925 (1985); In re Robinson, 776 F.2d 30, 35 (2d Cir.1985) (discussing breadth of various courts' definition of "claim" in bankruptcy), rev'd on other grounds, Kelly v. Robinson, 479 U.S. 36, 107 S.Ct. 353, 93 L.Ed.2d 216 (1986). Whether a claimant has a "right to payment" under Sec. 101(4)(A) is dependent on state law, although in some instances "overriding federal policy would require us to consult federal law." In re Remington Rand Corp, 836 F.2d at 830. As noted in Remington Rand, "[r]eference to non-bankruptcy law is critical: unless state or federal law independently creates obligations, the bankruptcy court is not presented with a claim to either recognize or reject." Id. at 830.

Appellees urge us to adopt the finding of the Bankruptcy Court that the Merit Rating Plan surcharge was not a "debt" under Sec. 101(11), claiming that these surcharges are post-petition "insurance payments." They argue that the State of New Jersey, in levying the surcharge, is not attempting to collect a pre-petition debt, but rather is relying on the debtor's pre-petition driving history to determine the cost of insuring the future operation of a motor vehicle by that person. ⁵ Appellees rely on In re A.C Williams Co., 51 B.R. 496 (Bankr.N.D.Ohio 1985), and In re Primrose Bedspread Corp., 67 B.R. 659 (Bankr.D.N.J.1986), to suggest that the imposition of the surcharge is indistinguishable from an insurance company's reliance on a debtor's pre-petition driving record to determine the cost of future driving insurance.

In In re A.C. Williams Co., a corporation emerging from a Chapter 11 reorganization ⁶ requested that the Bankruptcy Court enjoin the Ohio Bureau of Workers' Compensation from using the corporations' pre-petition claims experience in calculating its experience rating and the resulting premiums owed the...