Denial Of Chapter 13 Discharge for Potential Future Debts.

One hard and fast rule in Bankruptcy is that debts and claims are “set in stone” as of the petition date, or perhaps post-petition if added to the Chapter 13 plan.  Bankruptcy Courts and Trustees do not normally police potential debts that may come up later.  There are some exceptions to the general rule, and a Texas Bankruptcy Court addressed one of them recently.

In In re Sinclair, Ch. 13 Case No. 11-34564 (Bankr. S.D. Tex. September 7, 2016)(click here for opinion), the Debtors filed their Chapter 13 case in May 2011, proposed a confirmed plan, made all payments and completed their financial management course.  Thus, they were eligible for a discharge.  “But, there is a rub,” said  Judge Jeff Bohm.  There existed a criminal case against Mr. Sinclair arising from an alleged sexual relationship with a minor.  The alleged relationship started after the Chapter 13 petition was filed, and is discussed in a little more detail in the Court’s Order.  It resulted in a felony indictment against the Debtor in July 2014, which was still pending as of September 2016.

The issue before the Court was whether the Debtor could be granted a discharge given the language of 11 U.S.C. §1328(h)(2), added as part of the BACPA in 2005.  This subsection states –

The court may not grant a discharge under this chapter unless the court after notice and a hearing held not more than 10 days before the date of the entry of the order granting the discharge finds that there is no reasonable cause to believe that—(1) section 522(q)(1) may be applicable to the debtor; and (2) there is pending any proceeding in which the debtor may be found guilty of a felony of the kind described in section 522(q)(1)(A) or liable for a debt of the kind described in section 522(q)(1)(B).

By its plan language, the Court found, it is not necessary that a debtor be convicted.  It merely requires “reasonable cause to believe” a criminal act resulting in “serious physical injury” occurred and there is presently pending a proceeding in which the debtor may be found liable for a debt due to the criminal act.  As there was a pending criminal case and the Debtor had been indicted, the question was whether the allegations involved a possible finding of “serious physical injury.”

The Code requires the criminal act to cause “serious physical injury.” See § 522(q)(l)(B)(iv) (as made applicable by§ 1328(h)(2)). While this phrase is not defined in the Code, a definition of a similar phrase -“serious bodily injury”- is provided in the Texas Penal Code. There, “‘serious bodily injury’ means bodily injury that creates a substantial risk of death or that causes death, serious permanent disfigurement, or protracted loss or impairment of the function of any bodily member or organ.” See Tex. Penal Code Ann. § 1.07(46) (Westlaw Next 2015). Texas courts find “serious bodily injury” when there is fear of death or serious harm,… harm that is grave, not fatal, … or forced prostitution. Moreover, federal courts evaluate the meaning of “serious bodily injury” in determining sentencing enhancements. To do this, courts first look to the indictment to determine if, on its face, the crime charged “presents a serious potential risk of [physical] injury to a person.”

In the case at bar, the indictment and the incident report assert that Mr. Sinclair, on several occasions, engaged in sexual conduct with a Minor Child [Findings of Fact Nos. 3 & 5]; however, there is no allegation of serious physical injury to the Minor Child. Nevertheless, a criminal court may well find that Mr. Sinclair’s actions did involve a serious physical injury to the Minor Child, even though the indictment and the statement from the Minor Child do not indicate as such… This is because statutory rape laws protect minors from negative consequences of sexual activity, such as sexually transmitted diseases or pregnancy, which pose risks of serious physical injury to the victim… As explained below, sexual relations between a minor and a person over eighteen inherently cause a serious physical injury. Regardless of what the indictment alleges about injuries, courts frequently hold that certain sex offenses–even where force is not used- are necessarily violent crimes because they present a risk of injury to the minor child.

The Fifth Circuit has held that indecency with a child involving sexual contact under Texas Penal Code§ 21.1 is a crime of violence as defined by the United States Sentencing Guidelines. Kirk, 111 F.3d at 395. The Fifth Circuit has also found that such a crime is per se crime of violence… Further, the crime of indecency with a child is used as a sentencing enhancement because it is considered an aggravated felony-it involves a substantial risk that physical force may be used.

Based on the above analysis, the Court concluded that the sexual assault of a child constitutes a criminal act that causes serious physical injury to the child.  If convicted, the Debtor faces a potential fine of up to $10,000 pursuant to Texas state law.  In addition, the victim could seek restitution from the Debtor.  Therefore, there is “reasonable cause to believe” that the Debtor will incur debts arising from criminal conduct and he was denied a Chapter 13 discharge.

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, creditor committees, trustees, court-appointed receivers and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.