Whitehouse v. LaRoche

• Decision Date: 06 December 2001
• Docket Number: No. 00-1127,00-1127
• Citation: 277 F.3d 568
• Parties: (1st Cir. 2002) SHELDON WHITEHOUSE, Attorney General, STATE OF RHODE ISLAND, and JAN REITSMA, Director of the Rhode Island Department of Environmental Management, Plaintiffs, Appellants, v. DAVID LAROCHE, ET AL., Defendants, Appellees. Heard
• Court: U.S. Court of Appeals — First Circuit

Page 568

277 F.3d 568 (1st Cir. 2002)

SHELDON WHITEHOUSE, Attorney General, STATE OF RHODE ISLAND, and JAN REITSMA, Director of the Rhode Island Department of Environmental Management, Plaintiffs, Appellants, v. DAVID LAROCHE, ET AL., Defendants, Appellees.

No. 00-1127

United States Court of Appeals For the First Circuit

Heard Dec. 6, 2001

Decided January 17, 2002

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF RHODE ISLAND. Hon. Ronald R. Lagueux, U.S. District Judge

[Copyrighted Material Omitted] Terence J. Tierney, Assistant Attorney General, with whom Gary Powers, Deputy Chief Legal Counsel, Department of Environmental Management, was on brief for appellants.

Barry J. Kusinitz for appellee David LaRoche.

Before Torruella, Circuit Judge, Campbell and Cyr, Senior Circuit Judges,

CYR, Senior Circuit Judge.

This appeal by the Rhode Island Attorney General and the Director of the Rhode Island Department of Environmental Management challenges various rulings which prompted the district court to hold that appellee David LaRoche's obligations to the State of Rhode Island, for its costs in remediating water contamination on property owned by LaRoche and for related civil penalties, were expunged by the chapter 7 discharge subsequently obtained by LaRoche. We vacate and remand, with directions that judgment enter for appellants.

I BACKGROUND

In 1988, appellants joined in citizen lawsuits brought against LaRoche in the United States District Court for the District of Rhode Island, claiming violations of the Clean Water Act ("CWA"), 33 U.S.C. § 1251 et seq., and the Rhode Island Water Pollution Control Act ("RIWPCA"), R.I. Gen. Laws § 46-12-1 et seq. (the "CWA/RIWPCA action"). Ultimately, the district court entered partial summary judgment for appellants, after determining that LaRoche had known, prior to purchasing the property, that its faulty septic system was polluting an adjacent river. See Friends of Sakonnet v. Dutra, 738 F. Supp. 623 (D.R.I. 1990). The amount of the remedial damages award against LaRoche remained unresolved.

Creditors instituted involuntary chapter 11 reorganization proceedings against LaRoche in January 1991; the order for relief was entered in February 1991, see In re LaRoche, 969 F.2d 1299, 1300 (1st Cir. 1992), and the chapter 11 trustee was appointed on June 4, 1991.

Meanwhile, the parties had negotiated a settlement of all the remedial issues in the CWA/RIWPCA action pending before the federal district court. Whereupon the district court entered a consent decree, which stated, inter alia: "The intention of the parties is to resolve any pending disputes arising out of this matter. The only responsibilities and obligations that will survive are those set forth in this Stipulation."

In due course, a special master was appointed to marshal a settlement fund from the State and the former owners of the LaRoche property for the purpose of acquiring an adjacent tract of land upon which to construct a new waste water collection and treatment facility. Any excess acreage, over and above that required for the new facility, was to be sold to cover related project costs.

LaRoche agreed to reimburse the State for any "shortfall amount," defined as the difference between ninety percent of the cost of the new waste water collection and treatment facility and the net proceeds from the sale of any excess acreage. In addition, LaRoche promised to "affirm his obligation to pay the [shortfall amount], to the extent then unpaid, as a debt not discharged in any bankruptcy proceeding in which he is the bankrupt whether now pending or hereafter filed."¹ Finally, LaRoche pledged to "procure an order of the United States Bankruptcy Court for the District of Rhode Island in [his involuntary bankruptcy proceeding] affirming his obligation to pay the [shortfall amount] and to perform his other obligations hereunder."

All parties agreed to proceed "expeditiously" and "in good faith" with their respective obligations under the consent decree, which further provided as follows:

LaRoche hereby agrees to the imposition of a civil penalty under the Rhode Island Water Pollution Control Act and regulations issued thereunder equal to the [shortfall amount]. DEM and the Attorney General agree that the imposition of such civil penalty will be stayed for so long as LaRoche complies with his obligations under Section II.3.C of this Stipulation [viz., to seek reaffirmation of his obligation to pay this debt in his involuntary bankruptcy case] and/or for so long as any order procured from the Bankruptcy Court under Section II.3.D [viz., an order approving LaRoche's reaffirmation of his prepetition debt] remains in effect. LaRoche specifically agrees that the civil penalty imposed hereunder constitutes a debt for a fine, penalty or forfeiture payable to and for the benefit of a governmental unit, is not compensation for actual pecuniary loss and is specifically non-dischargeable under 11 U.S.C. [§] 523(a)(7).

(Emphasis added.) The district court explicitly retained "continuing jurisdiction over this Stipulation and the performance of the parties hereto."

Although LaRoche was granted a chapter 7 discharge, see 11 U.S.C. § 727,² on March 3, 1995, it was more than two years later, on April 10, 1997, before he finally submitted a motion to reaffirm the "shortfall amount" indebtedness.

Following a hearing which appellants elected not to attend, the bankruptcy court rejected the motion to reaffirm submitted by LaRoche.³ At the same time, the bankruptcy court expressed concern that its rejection of the motion to reaffirm might obstruct the State's efforts to recover the "shortfall amount." Accordingly, the bankruptcy court directed that its order -- rejecting LaRoche's motion to reaffirm the "shortfall amount" indebtedness -- be served upon all parties to the CWA/RIWPCA consent decree and "[t]hat all entities who oppose the entry of this Order shall have ten (10) days from the entry of this Order within which to file a motion under Fed. R. Bankr. P. 9023 to alter and amend this Order."

Appellants elected not to submit a Rule 9023 motion, opting instead for a motion before the district court (which had retained jurisdiction over the CWA/RIWPCA consent decree) seeking a judicial declaration that LaRoche had breached the reaffirmation agreement, thereby rendering himself liable for the alternative civil penalty in a sum equal to the "shortfall amount," estimated at more than one million dollars. LaRoche responded that (i) the consent decree was void and unenforceable due to appellants' failure to comply with the prerequisites to reaffirmation, see Bankruptcy Code § 524(c), 11 U.S.C. § 524(c), and (ii) consequently, the general discharge he was granted relieved him of all liabilities, including those asserted by appellants.

For their part, appellants argued that the consent decree itself expressly defined the civil penalty imposed upon LaRoche as a fine payable to and for the benefit of a governmental unit, rather than as compensation for actual pecuniary loss. Accordingly, appellants contended, the civil penalty imposed against LaRoche was rendered nondischargeable as a matter of law. See id. § 523(a)(7).

In due course, the district court determined that the characterization which the consent decree ascribed to the LaRoche indebtedness for the civil penalty in the shortfall amount -- viz., a nondischargeable "civil penalty" -- was not conclusive. Consequently the district court opined, in order to safeguard their rights it was incumbent upon appellants not only to have submitted a proof of claim, but also to have commenced an adversary proceeding to obtain a bankruptcy court ruling that the LaRoche indebtedness for the shortfall amount was a nondischargeable civil penalty. Failing that, the district court reasoned, the general discharge in bankruptcy granted LaRoche in the bankruptcy court presumptively discharged the civil penalty in the "shortfall amount" as contemplated by the CWA/RIWPCA consent decree.

II DISCUSSION

Appellants contend that the explicit language employed in the CWA/RIWPCA consent decree -- triggering a contingent "civil penalty" if and whenever LaRoche were to default on his obligation to procure bankruptcy court approval of the reaffirmation agreement relating to the "shortfall amount" indebtedness to appellants -- rendered the civil penalty nondischargeable under Bankruptcy Code § 523(a)(7), 11 U.S.C. § 523(a)(7). Accordingly, appellants insist, the interpretation the district court ascribed to the CWA/RIWPCA consent decree contravened the "law of the case" doctrine, which "makes binding upon a court a ruling made [in] the same . . . level [of court] during prior stages of the same litigation." Lacy v. Gardino, 791 F.2d 980, 984 (1st Cir. 1986).

The district court ruling -- viz., that appellants failed either to establish or preserve their entitlement to a judicial determination that their claim was excepted from discharge -- presents us with a mixed question of law and fact subject to de novo review. See, e.g., Warfel v. City of Saratoga, 268 B.R. 205, 209 (B.A.P. 9th Cir. 2001) (noting that dischargeability exceptions under § 523(a)(7) normally turn upon whether undisputed facts fit pertinent legal rule). Similarly, a judicial interpretation of the terms of a consent decree is subject to plenary review. See Braxton v. United States, 500 U.S. 344, 350 (1991).

Bankruptcy Code § 523(a)(7) excepts from discharge in bankruptcy any debt "for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, [which] is not compensation for actual pecuniary loss." 11 U.S.C. § 523(a)(7). Thus, in order to establish that the instant consent decree imposed a nondischargeable obligation upon LaRoche, appellants needed to establish that their claim was based on (i) a "fine, penalty, or forfeiture," (ii) "payable to and for the benefit of a governmental unit," and (...