Roberto Lugo 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

Citation: 886 F.2d 602Docket: 89-5090

Court: Court of Appeals for the Third Circuit; October 26, 1989; Federal Appellate Court

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The case involves Roberto Lugo, who appealed against the New Jersey Division of Motor Vehicles (DMV) and other related parties regarding a $3,000 surcharge imposed after his conviction for driving under the influence. The central issue was whether this surcharge could be discharged under Chapter 7 of the Bankruptcy Code. The district court ruled that the surcharge constituted a 'debt' but was excepted from discharge under 11 U.S.C. § 523(a)(9), which excludes debts arising from vehicle operation while intoxicated.

Lugo was convicted on June 5, 1985, and fined $250, with additional costs and a $100 surcharge. Subsequently, on January 12, 1986, the DMV billed him $3,000 under the New Jersey Merit Rating Plan, which imposes surcharges on DUI offenders to fund the New Jersey Automobile Full Insurance Underwriting Association (JUA). Failure to pay the surcharge would result in the revocation of Lugo's driver's license.

After Lugo filed for bankruptcy on July 30, 1986, he included the surcharge as a debt. The DMV restored his driving privileges post-bankruptcy filing, and he received a discharge from bankruptcy on December 12, 1986. However, after the discharge, the DMV issued another surcharge bill, threatening to suspend his license if the surcharge was not paid, indicating that the DMV did not acknowledge the bankruptcy discharge regarding the surcharge. The court ultimately affirmed the lower court's ruling that the surcharge was not dischargeable under bankruptcy law.

On February 19, 1988, Lugo reopened his Chapter 7 bankruptcy petition, filing an adversary proceeding to discharge a surcharge as a pre-petition debt. The Bankruptcy Court determined that the surcharge did not constitute a 'debt' under the Bankruptcy Code, thus was not dischargeable. However, upon appeal, the district court ruled the surcharge was indeed a 'debt' but found it non-dischargeable under 11 U.S.C. § 523(a)(9). The court needed to ascertain if the Merit Rating Plan surcharge from the DMV was a pre-petition debt eligible for discharge under 11 U.S.C. § 727(b). The Bankruptcy Court had previously classified the surcharges as additional premiums for necessary insurance rather than pre-petition debt, asserting that they funded a legislative plan for providing insurance access and equalizing rates based on driving history. These surcharges were directed to the DMV and subsequently to the Joint Underwriting Association (JUA) for an 'at-risk' insurance pool, rather than being collected by insurance companies directly. Contrarily, the district court characterized the surcharge as a pre-petition debt, aligning with the broad definitions of 'debt' and 'claim' in the Bankruptcy Code, which aimed to allow comprehensive relief in bankruptcy proceedings. Congress intended for a liberal interpretation of 'claim' to encompass all legal obligations, regardless of their nature or status.

Congress has defined 'claim' broadly, intending it to encompass a wide range of potential obligations. The determination of whether a claimant has a 'right to payment' under Section 101(4)(A) primarily depends on state law, although federal law may occasionally take precedence. In the case of In re Remington Rand Corp., it was emphasized that for a bankruptcy court to recognize or reject a claim, there must be an independent obligation created by either state or federal law.

Appellees argue that a Merit Rating Plan surcharge should not be classified as a 'debt' under Section 101(11) since it constitutes post-petition 'insurance payments' based on the debtor's pre-petition driving history. They reference cases like In re A.C. Williams Co. and In re Primrose Bedspread Corp. to support their position, asserting that these surcharges are similar to insurance premiums determined by past claims experience.

However, the court finds these precedents inapplicable. The Merit Rating Plan surcharge is applied regardless of vehicle ownership, meaning it is not tied to a future insurance premium based on driving history. Specifically, under New Jersey law, only vehicle owners are required to have insurance, and the debtor, Lugo, did not own a vehicle at the time of his conviction for drunk driving. Consequently, the Bankruptcy Court's characterization of the surcharge as an additional premium for required insurance coverage is incorrect. The district court correctly identified the surcharge as a misnomer since it does not add to a premium, concluding that the Plan surcharge does not represent an 'additional insurance premium.'

Appellees contend that the Plan surcharge is not a 'debt' since it cannot be converted into a money judgment, thereby failing to meet the 'right to payment' criterion under 11 U.S.C. Sec. 101(4)(A). However, the district court concluded that, despite New Jersey's inability to enforce surcharge obligations as a money judgment, the potential for a suspended driver's license effectively allows for enforcement of this right. The court referenced Miller v. Anckaitis, which highlights the necessity of automobiles for employment, indicating that license suspension may be a more effective enforcement tool than a money judgment, especially for debtors without assets.

The court asserted that 'debt' in bankruptcy is not limited to consumer or business transactions but encompasses all types of obligations. It emphasized that requiring a claim to be reducible to a money judgment would contradict the broad congressional intent in defining 'claim.' The decisions in In re Villarie and In re Pellegrino, cited by appellees, were found unconvincing. In Villarie, the court ruled that an employee's loan from a retirement fund was not dischargeable as it lacked an enforceable right to payment. Pellegrino involved a criminal restitution obligation that was unenforceable under state law.

In contrast, the DMV possesses the means to enforce the surcharge through license revocation, qualifying it as a 'debt.' The court then examined whether the obligation arose pre-petition, noting that while federal law dictates claims under the bankruptcy code, state law determines when a right to payment arises. Under New Jersey law, the DMV's right to payment occurs upon a DUI conviction, which was established before Lugo filed for bankruptcy. The court agreed with the district court that the potential use of the surcharge for future costs does not alter its classification as a pre-petition debt.

The insurance surcharge is classified as a pre-petition debt under the Bankruptcy Code, leading to an examination of exceptions to discharge outlined in Section 523. Specifically, Section 523(a)(7) excepts certain governmental debts from discharge, while Section 523(a)(9) addresses debts arising from judgments related to driving while intoxicated (DWI). The district court determined that the Merit Rating Plan surcharge does not fall under Section 523(a)(7), but it does fall under Section 523(a)(9), negating the need to further discuss Section 523(a)(7).

Section 523(a)(9) specifies that debts stemming from a judgment or consent decree against a debtor due to operating a vehicle while intoxicated are excepted from discharge. The district court found that the insurance surcharge meets this criterion. Lugo contends that Section 523(a)(9) applies solely to judgments favoring victims of drunk driving incidents and argues that the municipal court's judgment against him does not constitute a valid 'judgment' under this section. He claims it fails to establish 'liability' as required. However, the court concludes that the municipal court's judgment indeed imposes 'liability,' which is interpreted broadly, and affirms that it qualifies as a judgment entered in a court of record, thus satisfying the requirements of Section 523(a)(9).

Lugo argues that the term 'wherein' in the statute indicates Congress intended that nondischargeable liabilities be specified in the judgment. He claims that since his municipal court judgment did not include the Merit Rating Plan surcharge, it cannot be discharged under Sec. 523(a)(9). Furthermore, Lugo states that the surcharge does not 'arise from' the judgment but from the New Jersey Merit Rating Plan. However, it is concluded that the statutory requirements are satisfied, as the surcharge, imposed by N.J.Stat. Ann. 17:29A-35, activates upon a judgment of conviction. Therefore, the surcharge does 'arise from' a judgment, and the statute's application extends beyond liabilities explicitly in the judgment. The interpretation of Sec. 523(a)(9) does not limit its scope to civil tort judgments. Lugo's reference to Gleason v. Thaw emphasizes a narrow construction of discharge exceptions, yet the phrase 'to any entity' suggests broader applicability. The legislative history reveals that prior proposals did not pass, but the version of Sec. 523(a)(9) introduced by Senator Dole aimed to make debts arising from drunk driving nondischargeable, aligning with Senator Danforth's earlier remarks about defining drunk driving as a willful and malicious offense for bankruptcy purposes.

Senator Metzenbaum, in remarks on the Omnibus Act, highlighted a provision that renders debts incurred from drunk driving nondischargeable in bankruptcy. He noted that under existing laws, such debts were typically considered dischargeable due to being categorized as negligent rather than willful and malicious. The intent behind this change is to protect victims of drunk driving and to deter the behavior. The Senate Judiciary Committee's report echoed this sentiment, stating that debts from drunk driving would remain non-dischargeable regardless of the court's findings on the driver's behavior.

Although the Omnibus Act itself was not enacted, a related provision, Sec. 523(a)(9), was later included in the Bankruptcy Amendments and Federal Judgeship Act of 1984. Accompanying statements emphasized that debts from drunk driving are presumed to be willfully and maliciously incurred. Legislative discussions indicated that Congress was particularly concerned about the dischargeability of judgments against debtors found liable for injuries from drunk driving. 

While Senator Danforth's original proposal was more limited, Congress ultimately created a broader exception under Sec. 523(a)(9), reflecting a strong legislative intent to deter drunk driving and protect victims. The current provision explicitly states that debts resulting from drunk driving are nondischargeable, aligning with earlier legislative efforts.

Statements from legislators indicate that Congress prioritized combating drunk driving over protecting judgments. The Ninth Circuit identified three objectives when adopting Section 523(a)(9) of the Bankruptcy Code: to deter drunk driving, ensure that individuals causing injury while driving drunk do not evade civil liability through bankruptcy, and protect victims of drunk driving. The congressional record does not indicate an intention to limit Section 523(a)(9) to civil tort judgments alone, and it was meant to deter drunk driving. While Merit Rating Plan surcharges are civil and remedial, they can deter drunk driving as they arise from such conduct. 

The principle that exceptions to discharge in Section 523(a) should be narrowly construed to uphold the Bankruptcy Code’s goal of providing debtors a 'fresh start' is acknowledged, and certain debts from drunk driving accidents may not be covered by Section 523(a)(9). The surcharge imposed under New Jersey's Merit Rating Plan on individuals convicted of DUI is deemed a 'debt' under the Bankruptcy Code and is excepted from discharge under Section 523(a)(9). Other claims presented by the appellant regarding Section 525, the Supremacy Clause, and Section 1983 need not be addressed. The judgment of the district court is affirmed, with each party bearing its own costs.

The preamble to the Act establishes the New Jersey Merit Rating Plan, which sets forth criteria for motor vehicle violation convictions and an accident surcharge system. It mandates that automobile insurance rates for insured individuals cannot exceed average rates as defined in the Act. Appellees acknowledge that these surcharges are not punitive, asserting that they are civil and remedial, as supported by case law including Kelly v. Robinson and Clark v. New Jersey Division of Motor Vehicles. 

In cases In re A.C. Williams Co. and In re Primrose Bedspread Corp., the debtors contended that a debtor-in-possession in Chapter 11 should not be evaluated based on pre-petition experiences for post-petition liabilities. The district court noted that Lugo did not benefit from a $3000 surcharge, but Appellees argued that he would receive medical benefits under New Jersey law regardless of vehicle ownership, emphasizing that this does not determine the surcharge's classification as an insurance premium. 

The existence of a valid claim hinges on the claimant's right to payment and the timing of that right. Courts generally do not recognize obligations for criminal restitution as 'debt' under the Bankruptcy Code due to concerns about federalism and the non-dischargeability of criminal judgments. Merit Rating Plan surcharges, being civil, are not influenced by these considerations. Under Chapter 7, only pre-relief debts are dischargeable, while tort judgments from drunk driving accidents were previously dischargeable unless they stemmed from willful or malicious acts, a loophole closed by Section 523(a)(9). The dischargeability of the surcharge under Chapter 13 remains undecided.

The Merit Rating Plan surcharges are deemed a debt but are excepted from discharge under 11 U.S.C. Sec. 523(a)(9), meaning they cannot be eliminated through Chapter 7 bankruptcy. The court did not need to consider other claims related to 11 U.S.C. Sec. 525, the Supremacy Clause, and 42 U.S.C. Sec. 1983 since the surcharge's dischargeability was already determined. The judgment of the district court is affirmed, with each party responsible for its own costs. New Jersey statute N.J.Stat. Ann. Sec. 17:29A-35(b) stipulates that surcharges apply to certain motor vehicle violations, requiring annual payments for three years, and provides for immediate license suspension upon non-payment. The surcharges, identified as remedial and civil rather than punitive, are not classified as insurance premiums. Appellees acknowledged this distinction, and the court noted that the surcharge does not confer benefits to the payer, although under New Jersey law, medical benefits may still be available if the payer is injured while driving an insured vehicle.

Lugo's potential benefits under New Jersey insurance laws do not determine whether the surcharge qualifies as an insurance premium. According to case law, a valid claim hinges on (1) the claimant's right to payment and (2) when that right originated. Courts typically avoid categorizing obligations for criminal restitution as debts under the Bankruptcy Code due to federalism concerns and the principle that criminal judgments should not be dischargeable in bankruptcy. Merit Rating Plan surcharges are deemed civil and remedial, thus exempt from these considerations.

Under Chapter 7 bankruptcy, only debts incurred before filing for relief can be discharged, and tort judgments linked to drunk driving were generally dischargeable until the enactment of Section 523(a)(9), which closed a loophole by disallowing discharge for such judgments stemming from willful or malicious acts. The issue of whether the surcharge is dischargeable under Chapter 13 remains unresolved. The discussion would only arise if the surcharges were determined to be dischargeable in Chapter 7, conflicting with the federal Bankruptcy Code.