January 15, 1980.
Bankruptcy Reform Act — Crimes and Offenses — Criminal Prosecution — Injunction — Constitutionality — Bad Check Law Provision
A debtor failed to prove bad faith, harassment of other extraordinary circumstances necessary to obtain an injunction against a state's continued criminal prosecution which commenced pre-petition under a state bad check law. A debtor may not escape punishment for criminal acts by filing Chapter 13 petition under Section 362(b) of the Bankruptcy Code.
A state bad check law provision which requires state court judges to impose a restitutionary remedy upon a Chapter 13 debtor is unconstitutional as applied to a Chapter 13 debtor since it thwarts the rehabilitative purpose of Chapter 13 and is therefore, unenforceable against a Chapter 13 petitioner. See Section 362(b) at ¶ 8603.
[Opinion of the Court]
This matter is before the Court upon the complaint of a Chapter XIII debtor seeking a permanent injunction staying state criminal proceedings and a declaratory judgment to the effect that the Tennessee bad check statute is unconstitutional as it applies to a Chapter XIII debtor. Both plaintiff debtor and defendants State of Tennessee and Thomas H. Shriver move for judgment on the pleadings pursuant to Bankruptcy Rule 712(b) which incorporates the provisions of F.R.C.P. 12(c) by reference.
Findings of fact and conclusions of law pursuant to Bankruptcy Rule 752 follow.
Sometime prior to September 8, 1978, the debtor uttered a bad check to Shumates Naturalizer in the amount of $62.54. On September 8, 1978, defendant Shriver accepted a state criminal warrant sworn out by John M. Lombardo, an employee of Shumates, charging the debtor with violation of Tennessee's bad check statute, T.C.A. §§ 39-1959 through 39-1967.
Relevant sections provide as follows:
39-1959. Drawing check or order without sufficient funds unlawful. — It shall be unlawful for any person with fraudulent intent to make or draw or issue or utter or deliver any check, draft or order for the payment of money drawn on any bank, corporation, firm or person for the purpose of obtaining money, services, or any article of value, or to obtain credit, knowing at the time of making, drawing, uttering or delivering said draft, check or order that the maker, or drawer, has not sufficient funds in, or on deposit with, such bank, corporation, firm or person, for the payment of such check, or draft, or order in full, and all other checks, drafts or orders upon such funds then outstanding.
39-1965. Separate offenses. — Each making, drawing, issuing, uttering or delivering of any such check, draft or order as aforesaid shall constitute a separate offense.
39-1966. Penalties for violation of §§ 39-1959 — 39-1965 — Any person violating §§ 39-1959 — 39-1965 upon conviction shall be punished as follows: (a) When the amount for which the check, draft, or order is drawn is for an amount not exceeding one hundred dollars ($100), it shall be punishable upon conviction as a misdemeanor by confinement in the county jail or workhouse for not more than eleven (11) months and twenty-nine (29) days or fine not exceeding five hundred dollars ($500), or both in the discretion of the court or jury.
(b) When the amount for which the check, draft, or order is drawn or where the combined amount of more than one check, draft, or order, or any combination thereof, is for more than one hundred dollars ($100), it shall be punishable by confinement in the penitentiary for not less than three (3) years nor more than ten (10) years.
(c) In addition to either of the punishments prescribed in paragraph (a) or paragraph (b), as appropriate, the court shall require the convicted person to pay to the holder of the check, draft or order the amount due thereon. 39-1967. Person causing arrest not liable for false arrest or false imprisonment. — In the event of the existence of prima facie evidence of fraudulent intent as above defined and notice given hereunder, if required, any person, firm, or corporation causing the arrest of the drawer of such check, draft or order shall not be criminally or civilly liable for false arrest or false imprisonment. (Emphasis added).
On October 17, 1978, the debtor filed her Chapter XIII petition. The plan of arrangement which accompanied the petition proposed full payment to all listed creditors, including Shumates Naturalizer. Under Bankruptcy Rule 13-401(a) the filing of the petition operates
as a stay of the commencement of continuation of any action against the debtor, or the enforcement of any judgment against him, or of any act or the commencement or continuation of any court proceeding to enforce any lien against his property, or of any court proceeding for the purpose of rehabilitation of the debtor or the liquidation of his estate.
On October 25, 1978, counsel for the debtor applied for a stay of all actions against the debtor, "civil or criminal", based on an antecedent debt, including debts based on worthless checks." On that same date, this court entered a short order interpreting Bankruptcy Rule 13-401 to apply to all actions against the debtor "at this stage of the proceedings." This order was directed to creditors and not a state court. The parties agree, however, that this interpretation had the effect of blocking the District Attorney General from continuing his criminal prosecution of the debtor in that witnesses were enjoined from testifying. The District Attorney General filed a "Motion to Amend", seeking modification of the order of October 25, 1978, to permit him to continue with his criminal prosecution.
After intervention by the State of Tennessee, counsel for the debtor filed a complaint against the two defendants on January 25, 1979, seeking a permanent injunction and declaratory judgment to the effect (1) that the bad check statute is unconstitutional in its entirety as it applies to a wage earner who has filed a petition under Chapter XIII of the Bankruptcy Act in that it provides a creditor with an illicit alternative means of collecting its indebtedness in conflict with the policy and purpose of Chapter XIII of the Bankruptcy Act; (2) that the specific remedy provided for in T.C.A. § 39-1966(c) is unconstitutional as applied to a wage earner seeking relief under Chapter XIII of the Bankruptcy Act in that it conflicts with the policy and purpose of Chapter XIII of the Bankruptcy Act; (3) that the penalties imposed by T.C.A. § 39-1966(a) and (b) are unconstitutional in the context of Chapter XIII of the Bankruptcy Act in that they conflict with the purpose and policy of that Chapter; that the penalties imposed by T.C.A. § 39-1966 are unconstitutional in the context of Chapter XIII of the Bankruptcy Act, because they conflict with the paramount policy and purpose of that Chapter.
In their answer filed March 8, 1979, defendants admitted all the material facts alleged in the complaint, but denied all the legal conclusions derived therefrom except the allegations as the remedy prescribed by T.C.A. § 39-1966(c) in the context of a Chapter XIII proceeding. With respect to this allegation, they admitted "that it will be unconstitutional for any State Court to issue any order requiring repayment of the bad check which conflicted with a plan adopted under Chapter XIII of the Bankruptcy Act."
A minor exception was the date of filing of the criminal warrant.
All parties have now submitted motions for judgment on the pleadings under Bankruptcy Rule 712. Granting a motion for judgment on the pleadings is inappropriate "unless the movant clearly establishes that no material issue of fact remains to be resolved and that he is entitled to judgment as a matter of law." In considering such a motion, the trial court is required to view the facts presented in the pleadings and the inferences to be drawn from them in the light most favorable to the non-moving party. 5 WRIGHT MILLER, FEDERAL PRACTICE AND PROCEDURE § 1368. Applying this standard, the Court cannot say as a matter of law that either party is entitled to judgment.
In determining whether to grant a permanent injunction staying state criminal proceedings, the court must first consider the impact of the abstention doctrine and 28 U.S.C. § 2283. The theory that the Federal Court should abstain from deciding certain disputes involving state law long has been recognized. Beal v. Missouri Pacific R.R., 312 U.S. 45, 61 S.Ct. 418, 85 L.Ed. 577 (1941); Zwicker v. Koota, 389 U.S. 241, 88 S.Ct. 391, 19 L.Ed.2d 244 (1967); Cameron v. Johnson, 390 U.S. 611, 88 S.Ct. 1335, 20 L.Ed.2d 182 (1968).
A court of the United States may not grant an injunction to stay proceedings in a State Court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments. 28 U.S.C. § 2283.
Since the abstention theory is discretionary, the Supreme Court developed guidelines for the courts to follow in Younger v. Harris, 401 U.S. 37,91 S.Ct. 746, 27 L.Ed. 669 (1971). In that case the Court wrote "Our Federalism represents a system in which there is sensitivity to the legitimate interests of both State and National Governments, and in which the National Government, anxious through it may be to vindicate and protect federal rights and federal interests always endeavors to do so in ways that will not unduly interfere with the legitimate activities of the States." Id. at 44. The bare holding of that case is that a federal court should not join a state criminal prosecution begun prior to the institution of the federal suit except in very unusual situations, where necessary to prevent immediate irreparable injury. The requirement can be met by a "showing of bad faith, harassment or any other unusual circumstances that would call for equitable relief." Id. at 54. Where there is no suggestion of bad faith or official harassment, where there is a clear showing that the state is providing an appropriate forum for determining the question raised, and where there is no showing that the pending prosecution is only one of a series which the plaintiff has to face, an injunction should not issue. Kugler v. Helfant, 421 U.S. 117, 95 S.Ct. 1524, 44 L.Ed.2d 15 (1975); Mitchum v. Foster, 407 U.S. 225, 92 S.Ct. 2151, 32 L.Ed.2d 705 (1972); Perez v. Ledesma, 401 U.S. 82, 91 S.Ct. 674, 27 L.Ed.2dd 701 (1971).
Several courts have addressed the issue of abstention with respect to bankruptcy proceedings. In Diversa-Graphics v. Lefkovitz, 8 CBC 59 (S.D. N.Y. 1976), the debtor requested an injunction staying prosecution for certain labor law violations. The court refused, stating that "Only a state criminal prosecution conducted in bad faith, or designed to harass, or brought under a statute flagrantly unconstitutional in its totality meet the narrow ground of great and immediate urgency sufficient to overcome the federal policy (of noninterference)." Id. at 66. The court added that the Bankruptcy Act is not to be construed as "insulating the debtor from the exercise of the state's power expressed in its penal enactments."
Similar results were reached in In the Matter of Richie's Villa Capri, Inc., 14 CBC 144 (S.D. N.Y. 1977) where the bankruptcy court refused to restrain the town from enforcing criminal sanctions for violations of the municipal code and In the Matter of Fortiner Realty Co., Inc., 17 CBC 375 (M.D. Fla. 1978) where the court refused to enjoin proceedings for alleged violations of real estate laws and regulations. Again in Porter v. Gaston, 462 F. Supp. 370 (E.D. Ark. 1978) the court refused to enjoin state proceedings where the debtor would be given opportunity to defend the charges and there was no reason to believe that state court would ignore any legitimate defenses raised. The court distinguished In re Penny, 414 F. Supp. 1113 (W.D. N.C. 1976) where bad faith was found. Penny had been "prosecuted in criminal court by a lawyer privately retained by the payee of the bad check and neither the District Attorney nor a representative of the North Carolina Attorney General's office appeared at the hearing on the motions to stay. Instead, the State again was represented by the lawyer privately retained by the payee." Porter v. Gaston, supra, at 373. See also In re Convenient Food Mart, 3 Bankr. Ct. Dec. 389 (E.D. Ark. 1977).
Under the new Bankruptcy Code the position of the Bankruptcy Code the position of the bankruptcy court vis a vis state criminal proceedings is clear. 11 U.S.C. § 362(b) provides that the filing of a petition does not operate as a stay of the commencement or continuation of a criminal action or proceeding against the debtor. "This exception embodies the principle that the bankruptcy laws are not a haven for criminal offenders, but are designed to give relief from financial over-extension." 2 Bankr. L. Rep. (CCH) 1979, ¶ 8603. The exception of criminal proceedings from the stay is "consistent with the policy of making bankruptcy available as relief to financially pressed debtors and not as a shelter from the consequences of criminal acts." 2 COLLIER ON BANKRUPTCY ¶ 352.05 (15th ed.).
"If a state criminal action is pending when the federal action is commenced, the federal court cannot give either injunctive or declaratory relief and must dismiss the action except in the rare case in which the Younger standard of bad faith, harassment, or other extraordinary circumstances is satisfied." C.A. WRIGHT, HANDBOOK OF THE LAW OF FEDERAL COURTS § 52A at 234 (3rd ed. 1976). See also Younger v. Harris, supra; Samuels v. Mackell, 401 U.S. 66, 91 S.Ct. 764, 27 L.Ed.2d 688 (1971). The burden of proof is on the debtor to establish clearly his right to the extraordinary relief which is sought. United Transportation Union v. Michigan, 401 U.S. 576, 91 S.Ct. 1076, 28 L.Ed.2d 339 (1971).
In the instant case, it is clear that the state criminal prosecution was commenced prior to the filing of the Chapter XIII petition. Plaintiff must show "bad faith, harassment or other extraordinary circumstance" to obtain an injunction against continued prosection of the state court criminal action. Plaintiff has not met the burden of proof; no proof of any such conduct was presented. The request for a permanent injunction against the continued prosection of this criminal case must be denied. The Bankruptcy Rule 13-401(a) stay is dissolved in so far as it applies to continuation of the criminal case.
In so far as T.C.A. § 39-1966(a) and (b) provides for punitive penalties to be imposed upon a Chapter XIII debtor, this court sees no constitutional defect in them. A debtor cannot escape punishment for criminal acts by filing a Chapter XIII petition. See Diversa-Graphics, Inc. v. Lefkowitz, supra; contra, Hillsdale Foundry Co. v. People of Michigan, 2 COLLIER BANKRUPTCY CASES 542 (Bankr. Dec. W.D. Mich. 1974). Conversely, a state may not circumvent U.S. CONST. ART. VI, SEC. 2 by enacting a statute in direct conflict with a superior federal statute. See Perez v. Campbell, 402 U.S. 637 (1971). The policy of Chapter XIII of the Bankruptcy Act is to "permit an individual to pay his debts and avoid bankruptcy by making periodic payments to a trustee under bankruptcy court protection with the trustee fairly distributing the funds deposited to creditors until all debts have been paid." Senate Report No. 95-989, 45th Cong., 2d Sess. at 12 (1978). See Hallenbeck v. Penn. Mutual Life Insurance Co., 323 F.2d 566, 573 (4th Cir. 1963). By requiring a state court judge to impose a restitutionary remedy upon a Chapter XIII debtor, T.C.A. § 39-1966(c) unconstitutionally thwarts this salutory, rehabilitative purpose in violation of the Supremacy Clause of the United States Constitution ART. VI, Sec. 2. The State of Tennessee admits as much in its answer. In so far as it applies to a person who is subject to the jurisdiction of the bankruptcy court as a result of having filed a Chapter XIII petition, T.C.A. § 39-1966(c) is hereby declared unconstitutional and unenforceable against such a person.
This court's declaration does not affect the state's power to continue a criminal prosecution after the accused has filed a Chapter XIII petition, but only the penalty which may be imposed upon the debtor upon conviction.
A serious question is presented where creditors use the bad check statute as a collection device against a Chapter XIII debtor, offering to drop all charges if the debt is paid. There is no evidence before this court that such is the case here. The debtor's actual criminal intent, and the creditor's purpose in pursuing prosecution, will be key factors scrutinized by the court in ascertaining whether criminal prosecutions of debtors for violation of the bad check statute are commenced in good faith or are nothing more than civil debt collection efforts. This court retains full power, under such circumstances, to issue whatever orders may be necessary to protect its jurisdiction and to protect the administration of bankruptcy estates and debtor's plans of arrangement from unwarranted interference by creditors who abuse state criminal process in an attempt to collect their debts.
It is so ORDERED.