Yates v. District of Columbia

IN THE UNITED STATES BANKRUPTCY COURT
DISTRICT OF MARYLAND
at GREENBELT
In Re:
*
Melvin Stanley Yates, II, 	* 	Case No. 03-13176-TJC
* 	(Chapter 7)
Debtor 	*
*
*
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* * * * * * * * * * * * * * * * * * * 	*
* 	Adv. Proc. No. 06-1305-TJC
Melvin Stanley Yates, II, 	*
*
Plaintiff 	*
*
*
vs. 	*
*
District of Columbia, 	*
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Defendant 	*
*
MEMORANDUM OF DECISION
Defendant, the District of Columbia (the “District”), filed a motion for summary
judgment in this adversary proceeding on May 5, 2006. Plaintiff Melvin Yates, the chapter 7
Date signed November 03, 2006
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Debtor (the “Debtor”), filed an opposition, and the District filed a reply brief. The Court has
reviewed the briefs and all of the exhibits submitted therewith. Oral argument is deemed
unnecessary because the facts and legal arguments are adequately presented in the parties’ briefs
and the exhibits submitted in support. See Local Rule 9013-1(b)(4).1 For the reasons stated in
this memorandum, the District’s motion for summary judgment will be granted.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334, 157(a), and the
standing order of reference of the United States District Court for the District of Maryland. This
is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(O).
I. PROCEDURAL HISTORY
This adversary proceeding was commenced by the Debtor on March 16, 2006 with the
filing of Debtor’s Complaint for Permanent Injunction to Bar Violations of 11 U.S.C. §525(a)
and an Injunction of This Court, and for Damages in Violation of the Injunction.2 The Debtor
sought a permanent injunction to enjoin the District from: (1) pursuing contempt proceedings
based upon pre-petition claims against the Debtor in District of Columbia v. Yates, Civil Action
No. 962-02, in the Superior Court for the District of Columbia (the “Civil Action”); (2)
proceeding against the Debtor to enforce an injunction issued in the Civil Action based upon pre-
petition transactions; and (3) proceeding against the Debtor to collect any civil penalties awarded
in the Civil Action based upon 11 U.S.C. §523(a)(2) claims. In addition, the Debtor sought
1 As explained below, the Debtor filed a motion for a temporary restraining order and preliminary injunction with
the complaint. The Court heard lengthy argument on that motion, which presented issues that are substantially
similar to those addressed herein.
2 The complaint was amended on March 21, 2006 to include an allegation regarding the District’s violation of 11
U.S.C. §524(a)(2). The references to complaint in this memorandum are to the amended complaint.
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damages against the District for its alleged violation of the preliminary injunction entered by this
court on October 7, 2003 and for violation of 11 U.S.C. §§ 525(a) and 524(a)(2).
In connection with the complaint, the Debtor filed a motion for a temporary restraining
order and a preliminary injunction against the District,3 and a hearing was held on the motion on
April 17, 2006. At the conclusion of the hearing, this court issued a bench ruling denying the
motion for the temporary restraining order and preliminary injunction.4
II. STATEMENT OF FACTS NOT IN DISPUTE
Much of the relief requested by the Debtor already has been addressed by one or more
courts through the history of this case or centers on the meaning of prior court rulings.
Accordingly, the court will repeat in some detail the procedural history of the litigation between
the Debtor and the District as pertinent to the Debtor’s claims for relief in his complaint.
The dispute between the parties began in June 2001 when the District initiated criminal
proceedings against the Debtor in the District of Columbia. In the criminal proceedings, the
District alleged that the Debtor committed fraud and misconduct in the District in the operation
of his household goods moving and storage business, M.Y. Enterprises, Inc. Pursuant to an
October 2001 plea agreement, the Debtor pled guilty and was sentenced to jail time and agreed
to pay restitution to consumers.
In February 2002, the District initiated the Civil Action in the Superior Court, which was
a civil enforcement penalty proceeding against the Debtor and M.Y. Enterprises, Inc. for
3 The Debtor amended the motion for a temporary restraining order and preliminary injunction on April 6, 2006.
4 The Debtor appealed the April 17, 2006 ruling to the United States District Court for the District of Maryland on
April 17, 2006. No stay has been granted of this court’s order denying the preliminary injunction.
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misleading consumers in violation of the District of Columbia Consumer Protection Procedures
Act. On February 26, 2002, the Superior Court entered a preliminary injunction against the
Debtor (the “Sup. Court 2002 Injunction”). In the Sup. Court 2002 Injunction, the Superior
Court made detailed findings of fact concerning the unethical and fraudulent business practices
of the Debtor and his companies in the household goods moving business. Sup. Court 2002
Injunction at p. 2. In the Sup. Court 2002 Injunction, the Superior Court enjoined the Debtor
from continuing to engage in such practices (id. at p. 3-4), and required that the Debtor post a
$100,000 surety bond in the name of the District as surety for the benefit of any consumer
injured as a result of the Debtor’s misconduct while engaged in the moving business. Id. at p. 5-
6.
The Debtor did not post the required surety bond, and the Superior Court found him in
contempt of the Sup. Court 2002 Injunction. The District sought a contempt order after the
Debtor began operating Worldwide Moving & Storage, Inc. without obtaining the required
surety bond.5
The Debtor filed his chapter 7 petition with this court on March 19, 2003, and a discharge
order was entered on June 20, 2003.6 The District commenced an adversary proceeding number
03-1218 against the Debtor (the “03-1218 Action”) seeking a determination that certain claims
5 M.Y. Enterprises, Inc. filed a chapter 7 petition with this court on March 21, 2002, and ceased operating shortly
thereafter.
6 The case was closed on December 28, 2005. In connection with the filing of the adversary proceeding complaint,
the Debtor moved to reopen his bankruptcy case, and that motion was granted on March 20, 2006.
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against the Debtor were nondischargeable under 11 U.S.C. §§523(a)(2)7 and (a)(7)8 . The parties
entered into a stipulation dated March 23, 2004 (the “Stipulation”), which Stipulation provides
the basis for one of the claims for relief by the Debtor in his complaint in this case. In the
Stipulation, the District agreed to dismiss with prejudice any assertion of nondischargeability of
debts under 11 U.S.C. §523(a)(2), and to dismiss without prejudice the “remaining counts of
paragraph 2 of the complaint” in the 03-1218 Action. Stipulation, March 23. 2004, entered in the
03-1218 Action. The “remaining counts raised in paragraph 2” of the complaint were for
penalties, restitution, costs and attorney fees and “monetary awards” in the Civil Action that
would be nondischargeable under 11 U.S.C. §523(a)(7). Complaint to Determine
Dischargeablity of Debts at p. 1-2, June 19, 1003, filed in the 03-1218 Action.
The Debtor commenced adversary proceeding number 03-1244 against the District (the
“03-1244 Action”), seeking to enjoin the District from continuing the Civil Action and to hold
the District liable for damages resulting from alleged violations of the automatic stay under 11
U.S.C. §362. In the 03-1244 Action, this court issued a preliminary injunction on October 7,
2003 (the “Bank. Court 2003 Injunction”). The Bank. Court 2003 Injunction granted in part and
denied in part the Debtor’s requested relief. Because the Debtor’s complaint in this case raises
issues concerning the scope of the second “Further Ordered” paragraph of the Bank. Court 2003
Injunction, it will be repeated here in its entirety:
7 As pertinent to this case, Section 523(a)(2) excepts from discharge any debt “…obtained by (A) false pretenses, a
false representation or actual fraud…” 11 U.S.C. § 523(a)(2).
8 As pertinent to this case, Section 523(a)(7) excepts from discharge any debt “to the extent such debt is for a fine,
penalty, or forfeiture payable to or for the benefit of a governmental unit, and is not compensation for actual
pecuniary loss…” 11 U.S.C. § 523(a)(7).
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FURTHER ORDERED: That the District of Columbia be and is
hereby enjoined from conditioning any license or employment
opportunity of Mr. Yates based upon his payment or nonpayment or
on the posting of the aforementioned surety bond for the benefit of
any consumer injured, as defined in the Preliminary Injunction, to
the extent such payment, nonpayment, or bond requirement relates
to any claims arising prior to March 19, 2003, which have been
discharged by the discharge order entered herein unless and until
any and all of such claims are determined herein to be non-
dischargeable.
Bank. Court 2003 Injunction at p. 2. The Bank. Court 2003 Injunction specifically permitted the
District to seek enforcement of the surety bond requirement in the Sup. Court 2002 Injunction
with regard to claims that arose after the petition date, March 19, 2003, but prohibited the
District from conditioning any license or employment of the Debtor based upon the Debtor’s
payment of the surety bond to the extent the bond requirement was imposed as surety for pre-
petition claims.
Subsequently, the parties filed summary judgment motions in both the 03-1218 and 03-
1244 Actions. As pertinent here, and giving due regard to the Stipulation, this court permitted the
District to go forward with the Civil Action to seek relief that would be nondischargeable under
Section 523(a)(7), subject to the terms of the Bank. Court 2003 Injunction. Order Granting
Summary Judgment in Part and Denying Summary Judgment at p. 3, 5, entered July 20, 2004,
(entered in the 03-1288 Action and the 03-1244 Action). This court explained the determination
of whether any awards obtained by the District in the Civil Action would be nondischargeable
would be made if and when the District obtained such awards.
This court next denied the Debtor’s request for a stay pending appeal of the court’s order
allowing the Civil Action to proceed. In doing so, this court specifically reiterated its prior
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ruling on an issue the Debtor continues to raise in this case. The Debtor contended that because
the District had dismissed with prejudice the Section 523(a)(2) claims in the Stipulation, and
therefore those claims were discharged, the District was precluded from relying on any evidence
of the fraudulent nature of those claims in pursuing the Civil Action. The introduction of that
evidence, argued the Debtor, would violate the discharge provisions of the Bankruptcy Code and
was prohibited because those claims had been dismissed with prejudice. This court previously
rejected that contention, and said so again in the order denying the stay pending appeal:
Th[is] court held that the withdrawal with prejudice of the Section
532(a)(2) nondischargeablility count by D.C. in its adversary
proceeding was preclusive only of whether any alleged debt of Plaintiff
in favor of D.C. was nondischargeable pursuant to Section 523(a)(2);
but not as to the underlying existence of fraud. Because the issue of
nondischargeability is one that only the bankruptcy court has the
jurisdiction to adjudicate, see Brown v. Felsen, 442 U.S. 127, 135-36,
99 S. Ct. 2005, 2211-12 (1979), under res judicata theories, D.C. is
precluded from ever seeking a determination that any such debt is
nondischargeable under Section 523(a)(2). However, th[is] court ruled
that D.C. was not precluded from litigating the existence of, or
attempting to litigate the existence of fraudulent acts in the Superior
Court in connection with the Civil Litigation claims that may be in the
nature of Section 523(a)(7) penalties.
Order Denying Plaintiff’s Motion for Injunction Pending Appeal at p. 5-6, September 8, 2004,
entered in the 03-1244 Action.9
9Prior to trial in the Civil Action, the Debtor moved in the Superior Court to preclude any evidence of fraud based
on actions that gave rise to the claims under 11 U.S.C. §523(a)(2), arguing that these claims were dismissed with
prejudice. The Superior Court denied that motion, and permitted the fraud evidence to be used by the District in the
Civil Action. Order Denying Defendant’s Motion In Limine, May 20, 2004 (entered in the Civil Action). The
Debtor then moved in the 03-1244 Action for a preliminary injunction prohibiting the District from using the
Section 523(a)(2) fraud evidence in the Civil Action as violative of the Bankruptcy Code, and the motion was denied
by this court by order entered on August 9, 2004. The Debtor appealed the bankruptcy court order and the United
States District Court affirmed the bankruptcy court’s ruling. Docket 123 in the 03-1244 Action; Case No. 04-02845-
RTW, United States District Court for the District of Maryland. The Fourth Circuit affirmed the district court’s
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The Superior Court conducted a jury trial on the Civil Action in November 2004. 	The
Jury Verdict form reflects that the jury found numerous instances of misrepresentations of
material fact by the Debtor and his company M.Y. Enterprises, Inc. On December 23, 2004, the
Superior Court entered in the Civil Action the Order (1) Denying [Debtor’s] Motion for
Judgment as a Matter of Law or in the Alternative a New Trial; and (2) Entering Final Judgment
and Awarding Equitable Relief (the “Final Judgment”). As its title suggests, the Final Judgment
both addressed the Debtor’s motion for a new trial and awarded equitable relief. In denying the
Debtor’s motion for a new trial, the Superior Court, among other things, concluded that the
evidence supported a finding that the Debtor was liable both directly and as principal of M.Y.
Enterprises, Inc.: The Debtor “had dealings with … the consumers and made the
misrepresentations or omitted material facts himself” and also was “responsible for all key
decisions, and controlled the company’s activities.” Final Judgment at p. 4
In granting equitable relief, the Superior Court awarded civil penalties of $7,000 against
the Debtor in favor of the District. It also issued permanent injunctive relief against the Debtor
and any of his companies, summarized briefly as follows:
• 	Requiring that the Debtor or his companies will not charge a consumer’s credit
card more than the original amount agreed to between the parties except in certain
defined exceptions.
• 	Prohibiting the Debtor or his companies from misrepresenting the price of
services, the compensation available to consumers for goods that are lost or
damaged while in Debtor’s custody, or the valuation coverage available to
consumers for lost or damaged goods.
ruling in an unpublished decision on July 27, 2005. Case No. 04-2504, United States Court of Appeals for the
Fourth Circuit.
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• 	Requiring the Debtor and his companies to obtain signed disclosures from
consumers prior to entering into contracts with them.
Final Judgment at p. 8-9. Finally, the Superior Court required that the Debtor post a surety bond
in the amount of $75,000 by February 14, 2005 or refrain from managing or controlling a
company that provides local moves of household goods. Id. at p. 9. The bond was for the benefit
of both the District and any consumer injured by the Debtor. The parties have stipulated that the
bond was for the benefit only of certain claims that arose after the effective date of the Final
Judgment – December 23, 2004.
On January 18, 2006, the Superior Court issued an order of civil contempt against the
Debtor, finding that he did not comply with the terms of the Final Judgment, and ordered that his
companies not engage in business in the District until he complied with the surety bond
requirement of the Final Judgment. Thereafter, the Debtor re-opened his bankruptcy case and
filed this adversary proceeding seeking to prevent the District from enforcing against him the
surety bond requirement in the Final Judgment on a number of grounds.
III. CONCLUSIONS OF LAW
The Debtor’s complaint asserts five claims for relief. In determining whether to grant
summary judgment to the District, the court will address each of the Debtor’s claims for relief in
turn after reviewing the standards that apply to a motion for summary judgment.
A. Summary Judgment Standard
Summary judgment under Fed. R. Civ. P. 56, made applicable to these proceedings under
Fed. R. Bankr. P. 7056, is appropriate where there is no genuine issue of material fact and the
moving party is entitled to judgment as a matter of law. One of the principal purposes of
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summary judgment is to isolate and dispose of all factually unsupported claims or defenses.
Celotex v. Catrett, 477 U.S. 317, 323, 106 S. Ct. 2548 (1986). To that end, the court considers
all evidence in a light most favorable to the nonmoving party. See Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 255, 106 S. Ct. 2505 (1986) (all justifiable inferences are drawn in the non-
movant’s favor). The mere existence of an alleged factual dispute does not defeat a motion for
summary judgment; rather the standard requires that there be no genuine issue of material fact.
Id. at 247-48. Only disputes over the facts that might affect the outcome of the lawsuit under
applicable law will preclude entry of summary judgment. Id. Therefore, once a motion for
summary judgment is made and supported as provided in the Rule, the non-moving party must
set forth specific facts showing that there is a genuine issue for trial. Fed. R. Civ. Proc. 56(e).
The nonmovant may rely on any evidentiary materials listed in Rule 56(c), except the motions
themselves. Celotex, 477 U.S. at 325. If reasonable minds could differ as to the import of the
evidence, summary judgment should not be granted. Liberty Lobby, Inc., 477 U.S. at 248.
Here, there is no dispute of material fact as the entire record before this court consists of
documents, orders and other filings made in the Civil Action and the bankruptcy case. Neither
party has objected to the submission of these record documents. Rather, the dispute between the
parties revolves around the legal significance under the Bankruptcy Code of these documents,
primarily the enforcement of a surety bond requirement imposed upon the Debtor by the
Superior Court in the Civil Action.
B. The Debtor’s First Claim for Relief: Section 525(a) of the Bankruptcy Code
In his first claim for relief, the Debtor contends that the District has willfully and
deliberately violated 11 U.S.C. §525(a) by obtaining a permanent injunction requiring the Debtor
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to post a surety bond as a condition of employment or licensing based upon claims the District
knew preceded the filing of the bankruptcy petition. Debtor’s Amended Complain at p. 13.
Based on the uncontroverted record of this case, however, the court has no difficulty concluding
that the District has not violated Section 525(a) for two independent reasons: (1) the District did
not seek or obtain the imposition of the surety bond and the injunction “solely because” the
Debtor was a debtor in bankruptcy, was insolvent or failed to pay a dischargeable debt; and (2)
the surety bond obligation is a nondischargeable debt. Accordingly, the court will grant summary
judgment in favor of the District on the Debtor’s first claim for relief.
Section 525(a) is intended to protect debtors from discriminatory treatment by a
governmental unit. It provides that a governmental unit may not deny, revoke, suspend, or
refuse to grant a license, permit, charter, franchise, or other similar grant “solely because” a
person (1) has been or is a debtor under the Bankruptcy Code; (2) has been insolvent before or
during a case under the Bankruptcy Code; or (3) has not paid a debt that is dischargeable under
the Bankruptcy Code.10
Section 525(a) is a codification of the Supreme Court’s ruling in Perez v. Campbell, 402
U.S. 637, 91 S. Ct. 1704 (1971), in which the Supreme Court held that a state could not, without
10 11 U.S.C. §525(a) reads:
…a governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter,
franchise, or other similar grant to, condition such a grant to, discriminate with respect to such a grant
against, deny employment to, terminate the employment of, or discriminate with respect to employment
against, a person that is or has been a debtor under this title or a bankrupt or a debtor under the Bankruptcy
Act, or another person with whom such bankrupt or debtor has been associated, solely because such
bankrupt or debtor is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act,
has been insolvent before the commencement of the case under this title, or during the case but before the
debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title
or that was discharged under the Bankruptcy Act.
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violating the fresh start policy, refuse to renew the driver’s license of a debtor whose tort
judgment, resulting from an automobile collision, was discharged and unpaid. See Collier on
Bankruptcy, ¶ 525.02 (15th ed.). The provision is intended to protect the debtor’s right to a
“fresh start” in bankruptcy by prohibiting discriminatory treatment by a governmental unit.11
“The common qualities of the property interests protected under section 525(a) ... are that these
property interests are unobtainable from the private sector and essential to a debtor’s fresh start.”
Stoltz v. Brattleboro Housing Authority (In re Stoltz), 315 F.3d 80, 90 (2d Cir. 2002). Section
525(a) was enacted “to ensure that governmental units do not deprive debtors of grants that are
essential to a debtor’s fresh start.” Id. at 94.
Section 525 does not bar discrimination based upon nonpayment of a debt that is not
dischargeable. Johnson v Edinboro State College, 728 F.2d 163 (3d Cir.1984) (Section 525(a)
does not prohibit a state college from retaining a transcript of a debtor whose educational loans
were not dischargeable). In addition, if there is a reason for the governmental action taken that is
not based upon the prohibited criteria, then there has not been discrimination based solely on one
of the prohibited criteria. “Section 525 means nothing more or less than that the failure to pay a
dischargeable debt must alone be the proximate cause of the cancellation - the act or event that
triggers the agency’s decision to cancel, whatever the agency’s ultimate motive in pulling the
11 The legislative history of Section 525(a) makes it clear that the specific forms of discrimination set forth in the
Bankruptcy Code are not exhaustive and that the courts are to apply Section 525(a) so as to protect debtors from
forms of discrimination that are similar to those contained therein. Accordingly, for purposes of this decision, and
because the Court concludes that the District did not violate Section 525(a), the Court assumes, but does not need to
decide, that the imposition of the surety bond requirement would be the type of discriminatory treatment that would
be prohibited by Section 525(a) if it were imposed for a prohibited reason.
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trigger may be.” FCC v. NextWave Pers. Communs. Inc., 537 U.S. 293, 301-302, 123 S.Ct. 832
(2003).
In this case, there is no dispute that the District is a governmental agency as contemplated
in Section 525. However, the Court concludes that there are two independent reasons that the
District did not violate Section 525(a) in seeking the imposition of the surety bond requirement
or an injunction based on the Debtor’s inability to post the bond.
First, the record establishes overwhelmingly that the District did not seek to impose the
surety bond requirement for a reason prohibited by § 525(a), but instead, sought the bond
requirement to redress the Debtor’s fraudulent and improper business practices in the District.
The District brought the Civil Action against the Debtor before he filed his petition, based on his
allegedly misleading consumers in connection with his household goods moving business in
violation of the District of Columbia Consumer Protection Procedures Act. Supra at p. 3-4. The
District sought and obtained the Sup. Court 2002 Injunction in which the Superior Court made
detailed findings of the Debtor’s fraudulent business practices. Supra at p. 4. The Civil Action
was tried before a jury, and the Verdict Form makes it clear that the jury found the Debtor and
his companies guilty of misrepresentation. Supra at p. 8. In the Final Judgment, the Superior
Court upheld the jury findings of fraud and enjoined the Debtor and his companies from
engaging in unethical practices, required them to make certain disclosures to consumers before
entering into contracts with them, and obligated them to post a surety bond to cover any
consumer claims that arise from the Debtor’s misrepresentations that occur after the effective
date of the Final Judgment. Supra at p. 8-9.
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Accordingly, this court finds and concludes that the District sought and obtained the
surety bond and the permanent injunction based on the Debtor’s fraudulent and unethical
business practices. The Debtor has come forward with no evidence to rebut the clear meaning of
these documents and has failed to show that one of the three enumerated factors in Section
525(a) was the proximate cause for the District seeking the imposition of the surety bond.
Hollow rhetoric does not suffice. As such the District did not act “solely because” the Debtor
was a debtor in a bankruptcy case, was insolvent or had failed to pay a dischargeable debt. The
District, therefore, did not violate Section 525(a) by seeking the imposition or enforcement of the
injunction and surety bond requirements of the Final Judgment.
The court concludes that the District did not violate Section 525(a) for a second,
alternative reason. As stated above, by its terms, Section 525(a) prohibits governmental
discrimination based on a debtor’s failure to pay a debt “that is dischargeable” under the
Bankruptcy Code. To the extent the Debtor contends that the District is seeking sanctions for his
failure to post a surety bond, the court concludes that the surety bond requirement is not a
dischargeable debt under the Bankruptcy Code and, therefore, Section 525(a) does not apply to
it. The court reaches this conclusion for two reasons.
First, both parties stipulated at the April 17, 2006 hearing that the surety bond
requirement was a prospective remedy, and would be applied only to pay claims that arise after
the effective date of the Final Judgment.12 As pertinent to this case, a discharge in a chapter 7
case only “discharges the debtor from all debts that arose before” the petition date. 11 U.S.C. §
727(b). As such, the surety bond requirement was not subject to discharge in the Debtor’s
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chapter 7 case under the provisions of Section 727(b) because it was imposed to pay for post-
petition consumer claims. Accordingly, the decision of the District to prevent the Debtor from
conducting business in the District without posting a surety bond to pay for future (i.e., post-
petition) consumer claims cannot be said to violate Section 525(a).
Second, assuming arguendo, that the surety bond requirement is considered a pre-petition
debt, it would not be subject to discharge under Section 523(a)(7). See, In re Suter, 2005 WL
2989336, at *7 (D. Md. Nov. 7, 2005), aff’d, District of Columbia v. Suter, 2006 WL 1476200
(4th Cir. May 25, 2006). Section 523(a)(7) provides that a debt is not dischargeable “to the
extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a
governmental unit, and is not compensation for actual pecuniary loss” and creates a broad
exception to discharge. Kelly v. Robinson, 479 U.S. 36, 51, 107 S.Ct. 353 (1986); United States
Dept. of Housing & Urban Develop. v. Cost Control Marketing & Sales Management of
Virginia, Inc., 64 F.3d 920, 927 (4th Cir. 1995) (“Moreover, because discharge in bankruptcy is
not intended to be a haven for wrongdoers” Section 523(a)(7) prevents the discharge of certain
debts payable to governmental units.) 	For a debt to be found non-dischargeable under Section
523(a)(7), three factors must be met: “(1) the debt must be payable to and for the benefit of a
governmental unit; (2) it must be in the nature of a fine, penalty, or forfeiture; and (3) it must not
be compensation for actual pecuniary loss.” In re Smith, 317 B.R. 302, 306 (Bankr. D.Md.
2004) (citing In re Hollis, 810 F.2d 106, 108 (6th Cir. 1987)). Here, the District is a
governmental unit. See 11 U.S.C. § 101(27); In re Fay Assoc. Ltd. Partnership, 225 B.R. 1, 6 n.
4 (Bankr. D.D.C. 1998). To determine whether the surety bond requirement meets the standard
12 See Transcript of April 17, 2006 hearing on motion for preliminary injunction, e.g., p. 27, lns. 3-8.
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of “fine, penalty or forfeiture” language of § 523(a)(7), the court looks to the underlying purpose
of the statute. Id. at 312. In Suter, the court explained that:
the purposes of the District of Columbia's consumer protection laws
are to ‘(1) assure that a just mechanism exists to remedy all improper
trade practices and deter the continuing use of such practices; (2)
promote, through effective enforcement, fair business practices
throughout the community; and (3) educate consumers to demand high
standards and seek proper redress of grievances.’ D.C. Code § 28-
3901.
Suter at *8. The overall goal of the statute is to “provide oversight and enforcement of consumer
protection law. . . .” Id. In Suter, the United States District Court for the District of Maryland
affirmed a bankruptcy court holding that a restitution award under the District of Columbia’s
Consumer Protection Procedures Act was non-dischargeable under Section 523(a)(7). Id. at *7.
Based on the foregoing, this court finds that the surety bond required by the Superior Court of
the District of Columbia is a fine, penalty or forfeiture under Section 523(a)(7) as it is an effort
by the District to enforce the District’s consumer protection laws. Likewise, as the purpose of
the surety bond requirement is to protect the citizens of the District, it is not compensation for
pecuniary loss. See, United Sates Dept. of Housing & Urban Develop. v. Cost Control, 64 F.3d
at 928 (“We interpret these cases to say that so long as the government’s interest in enforcing a
debt is penal, it makes no difference that injured persons may thereby receive compensation for
pecuniary loss.”) The surety bond requirement, therefore, is a nondischargeable debt and Section
525(a) does not apply.
C. The Debtor’s Second Claim For Relief: The Bank. Court 2003 Injunction
In his second claim for relief, the Debtor contends the District violated the second
injunction provision of the Bank Court 2003 Injunction, by seeking a permanent injunction
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requiring the Debtor to post a surety bond as a condition of employment based upon claims that
preceded the filing of the bankruptcy petition. Debtor’s Amended Complaint at p. 13. Based on
the plain language of the Bank. Court 2003 Injunction and the record of this case, the court
concludes that the District has not violated the Bank. Court 2003 Injunction. Accordingly, the
court will grant summary judgment in favor of the District on the Debtor’s second claim for
relief.
This court entered the Bank. Court 2003 Injunction after the Superior Court issued its
Sup. Court 2002 Injunction. Broadly speaking, the gravamen of the Bank. Court 2003 Injunction
was that the District could not seek the imposition of an obligation on the Debtor to pay pre-
petition claims (including requiring the Debtor to post a bond for such claims) until such time as
those claims were determined to be nondischargeable.13 The Bank Court 2003 Injunction
contained the following provision upon which the Debtor relies in his second claim for relief:
FURTHER ORDERED: That the District of Columbia be and is
hereby enjoined from conditioning any license or employment
opportunity of Mr. Yates based upon his payment or nonpayment or
on the posting of the aforementioned surety bond for the benefit of
any consumer injured, as defined in the Preliminary Injunction, to
the extent such payment, nonpayment, or bond requirement relates
to any claims arising prior to March 19, 2003 [the petition date],
which have been discharged by the discharge order entered herein
unless and until any and all of such claims are determined herein to
be non-dischargeable.
Bank. Court 2003 Injunction at p. 2.
In this case, the parties have stipulated that the surety bond obligation in the Final
Judgment serves only as surety for claims that arise after the effective date of the Final
13 Because the court determines that the District has not violated the Bank. Court 2003 Injunction, the court need not
address whether that injunction has continued vitality now that the Civil Action has been resolved on the merits.
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Judgment. As such, it cannot be used to pay any claims “arising prior to March 19, 2003” and
does not violate the plain meaning of the Bank. Court 2003 Injunction.
The Debtor, however, takes a broader view of the above-quoted provision. The Debtor
seeks an expansive interpretation of the phrase “to the extent such payment, nonpayment, or
bond requirement relates to any claims arising prior to March 19, 2003, which have been
discharged ….” The Debtor contends that because the District successfully introduced in the
Civil Action evidence of his fraudulent consumer conduct that gave rise to pre-petition claims,
the imposition of the surety bond “relates” to those claims and therefore violates the Bank. Court
2003 Injunction.
When a party disputes the interpretation of an order, a court “must construe its meaning,
and in so doing may resort to the record upon which the judgment was based.” Colonial Auto
Ctr. v. Tomlin (In re Tomlin), 105 F.3d 933, 940 (4th Cir. 1997) quoting Spearman v. J & S
Farms, Inc., 755 F. Supp. 137, 140 (D.S.C. 1990). See also, Security Mut. Casualty Co. v.
Century Casualty Co., 621 F.2d 1062, 1066 (10th Cir. 1980) (“If there is any ambiguity or
obscurity or if the judgment fails to express the rulings in the case with clarity or accuracy,
reference may be had to the findings and the entire record for the purpose of determining what
was decided.”). The bankruptcy court is “in the best position to interpret its own orders.” Tomlin,
105 F.3d at 941, quoting Texas N.W. Ry. Co. v. Atchison, Topeka and Santa Fe Ry. Co. (In re
Chicago, Rock Island & Pac. R.R. Co.), 860 F.2d 267, 272 (7th Cir. 1988).
The court concludes that the Debtor’s argument concerning the scope of the quoted
provision of the Bank. Court 2003 Injunction is simply a rehash of the Debtor’s argument that
has been rejected by this court, the district court and the court of appeals, as well as by the
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Superior Court, and perhaps the D.C. Court of Appeals as well. After the Debtor and the District
entered the Stipulation in which the District agreed to dismiss the Section 523(a)(2) claims (see
supra at p. 4-5), the Debtor sought on a number of instances to prevent the District from
introducing evidence of the fraudulent acts that gave rise to those claims. See note 9 and
accompanying text. First, the Superior Court denied the Debtor’s motion in limine seeking to
bar the introduction of evidence of the pre-petition fraudulent acts that gave rise to the dismissed,
dischargeable claims. Id. Subsequently, this court reiterated its ruling that:
... the withdrawal with prejudice of the Section 532(a)(2)
nondischargeablility count by D.C. in its adversary proceeding was
preclusive only of whether any alleged debt of Plaintiff in favor of D.C.
was nondischargeable pursuant to Section 523(a)(2); but not as to the
underlying existence of fraud. Because the issue of nondischargeability
is one that only the bankruptcy court has the jurisdiction to adjudicate,
see Brown v. Felsen, 442 U.S. 127, 135-36, 99 S. Ct. 2005, 2211-12
(1979), under res judicata theories, D.C. is precluded from ever seeking
a determination that any such debt is nondischargeable under Section
523(a)(2). However, th[is] court ruled that D.C. was not precluded from
litigating the existence of, or attempting to litigate the existence of
fraudulent acts in the Superior Court in connection with the Civil
Litigation claims that may be in the nature of Section 523(a)(7)
penalties.
Order Denying Plaintiff’s Motion for Injunction Pending Appeal at p. 5-6, September 8, 2004,
entered in the 03-1244 Action. The order reiterated a bench ruling made by this court in August
2004, to the same effect. The Debtor appealed this court’s order, and the district court affirmed
this bankruptcy court’s ruling. Docket 123 in the 03-1244 Action; Case No. 04-02845-RTW,
United States District Court for the District of Maryland. See supra note 9. The Debtor appealed
the district court’s affirmance of the bankruptcy court to the Court of Appeals for the Fourth
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Circuit. Id. In affirming the district court’s ruling in an unpublished decision on July 27, 2005,
Case No. 04-2504, the court of appeal’s description of the issue on appeal makes it clear that all
three courts resolved the very issue the Debtor continues to pursue in this case:
Melvin Stanley Yates, II, appeals from the district court’s order
affirming the determination by the bankruptcy court that the District of
Columbia was not precluded from introducing evidence of fraudulent
conduct by Yates in its civil action to enforce the Consumer Protection
Procedures Act, D.C. Code Ann. §§ 28-3904,3909 (2001), against
Yates after it had voluntarily dismissed with prejudice its claim that
any debt in its favor against Yates based on fraud was
nondischargeable in Yates’ bankruptcy action.
The court rejects the Debtor’s contention that the Bank. Court 2003 Injunction should be
interpreted to mean that the District was barred from introducing evidence of Debtor’s fraudulent
conduct in the Civil Action after it had voluntarily dismissed with prejudice its Section 523(a)(2)
claims. Such an interpretation of that order not only is inconsistent with its plain meaning, but it
is entirely contrary to the express record before this court.
D. The Debtor’s Third Claim for Relief: Section 524(a)(2) of the Bankruptcy Code
In his third claim for relief, the Debtor contends that the District violated 11 U.S.C.
§524(a)(2) by seeking contempt sanctions against the Debtor for violating the requirement that
the Debtor must post a surety bond as a condition of employment or licensing based upon claims
that preceded the filing of the petition in bankruptcy. Debtor’s Amended Complaint at p. 14.
This court disagrees.
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Section 524 describes the breadth and effect of an injunction granted under the
Bankruptcy Code. 14 Section 524(a)(2) provides that a discharge “operates as an injunction
against the commencement or continuation of an action, the employment of process, or an act, to
collect, recover or offset any such debt as a personal liability of the debtor, whether or not
discharge of such debt is waived.” 11 U.S.C. §524(a)(2). A discharge under 11 U.S.C. §727(b)
relieves a debtor of personal liability for all pre-petition debts but those excepted under the
Bankruptcy Code. Section 524(a)(2) “operates to permanently stay any attempt to hold the
debtor personally liable for discharged debts.” In re Rosenfeld, 23 F.3d 833, 836 (4th Cir. 1994).
“The purpose of the discharge injunction is to ensure that once a debt is discharged, the debtor
will not be pressured in any way to repay it.” In re Everly, 346 B.R. 791, 795 (8th Cir. B.A.P.
2006) (citations omitted).
In this case, the District was free under Section 523(a)(7) to pursue the Civil Action to
seek an award consistent with that section. The District did so and has obtained the award set
forth in the Final Judgment. As an alternative basis for its determination that the District did not
violate Section 525(a), this court ruled above that the surety bond requirement was a
nondischargeable debt pursuant to Section 523(a)(7) of the Bankruptcy Code. Supra, at p. 15-16.
That holding is equally applicable here. Accordingly, for the reasons stated at pages 15-16, this
court concludes that the surety bond requirement is nondischargeable pursuant to 11 U.S.C. §
523(a)(7).
14 As stated above, the Debtor received a discharge in his chapter 7 case.
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Further, as the parties have agreed that the surety bond applies to prospective claims only,
and not to pre-petition debts, the injunction of Section 524(a)(2) is not applicable to that portion
of the surety bond requirement.
E. The Debtor’s Fourth Claim for Relief: Evidence of Year 2000 Claims
In the Debtor’s fourth claim for relief, he contends that in its request to use pre-petition
claims to support its application for a permanent injunction, the District asked the Superior Court
to also allow it to use claims arising wholly outside of the District of Columbia for that purpose.
He contends that the District was allowed to present the testimony of permanent residents of the
State of Maryland and Virginia regarding their pre-petition claims against M.Y. Enterprises, Inc.
and the Debtor. According to the Debtor, these claims concerned acts performed wholly within
the States of Maryland and Virginia, between residents of those states, and a Maryland
corporation, and the Debtor who was, and still is, a Maryland resident. The Debtor contends that
these claims were discharged by the discharge order and could not be the basis for imposing civil
penalties upon the Debtor because they occurred wholly outside the District and beyond the
reach of its laws. Debtor’s Amended Complaint at p. 14-15.
First, to the extent the Debtor is arguing that the District violated the Bankruptcy Code
by relying on evidence of pre-petition fraudulent conduct that may have given rise to claims that
have been discharged, that claim has been addressed in the context of the Debtor’s second claim
for relief above, and will not be addressed again here. Supra at p. 16-20. See also supra at note 9
and accompanying text.
Second, whether the Superior Court properly allowed the jury to consider evidence of
actions taken by the Debtor outside the District in determining whether the Debtor violated the
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District’s consumer protection laws is a matter exclusively within the purview of the Superior
Court. That issue implicates no concern of the Bankruptcy Code. Thus to the extent the Debtor
contends the Superior Court allowed the jury to consider acts that occurred outside of the District
in determining whether the Debtor violated the District’s consumer protection laws, the Debtor
must seek redress in that court.
F. The Debtor’s Fifth Claim for Relief: The Scope of the Section 523(a)(2) Dismissal
In the Debtor‘s fifth claim for relief, he points out that the District dismissed with
prejudice its claim for monetary awards under Section 523(a)(2). He contends that the civil
penalty awarded by the Superior Court in the Final Judgment is a monetary award that was
encompassed by the Stipulation that resulted in the dismissal of the Section 523(a)(2) claims. He
therefore contends that the civil penalties awarded by the Superior Court should be barred by the
District’s dismissal with prejudice of the Section 523(a)(2) claims. Debtor’s Amended Complaint
at 15.
This claim fails for several reasons. First, 11 U.S.C. § 523(a)(2) excepts from discharge
debts obtained by “false pretenses, a false representation, or actual fraud.” In contrast, 11 U.S.C.
§ 523(a)(7) excepts from discharge any debt “for a fine, penalty, or forfeiture payable to and for
the benefit of a governmental unit, and is not compensation for actual pecuniary loss.” By their
own terms, these provisions encompass different types of debts and thus the Stipulation
dismissing with prejudice the District’s claims under Section 523(a)(2) does not bar the District
from seeking fines and penalties under Section 523(a)(7). More critically, as the Debtor well
knows, this court has previously held that the District may pursue any claims for fines and
penalties under Section 523(a)(7) with the full knowledge that all claims arising under Section
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523(a)(2) were dismissed with prejudice. Supra at 6. In addition, as set forth above in the section
addressing the Debtor’s second claim for relief, this court, the district court, the court of appeals,
and the Superior Court all have held that the District is not barred from relying on the Debtor’s
fraudulent conduct that gave rise to the Section 523(a)(2) claims in pursuing the Section
523(a)(7) claims in the Civil Action. Finally, the Court has reviewed the Stipulation as well as
the complaint in the 03-1218 Action, and concludes that the District was quite clear that it was
dismissing with prejudice the Section 523(a)(2) claims, and not any awards in the Civil Action
that would be nondischargeable under Section 523(a)(7).
In the Final Judgment, the Superior Court expressly stated that the award of $7,000 was a
“civil penalty” payable to the District for the Debtor’s violation of consumer protection laws. As
such, it fits squarely within 11 U.S.C. 523(a)(7) as a “fine [or] penalty . . . payable … to a
governmental unit” and it is nondischargeable. 11 U.S.C. 523(a)(7). Consequently, the Court
finds that the District’s dismissal of the Section 523(a)(2) claims does not bar the District from
obtaining the nondischargeable civil penalties under Section 523(a)(7).
IV. CONCLUSION
For the foregoing reasons the court will grant the District’s motion for summary
judgment and will enter an order accordingly. 15
15 The primary relief the Debtor seeks in his complaint is a permanent injunction. A permanent injunction “resolves
the merits of a claim and imposes an equitable remedy because a legal one is inadequate”, whereas a preliminary
injunction “maintains a particular relationship between the parties in anticipation of a decision on the merits,
pending completion of the litigation.” United States Dept. of Labor v. Wolf Run Mining Co., Inc., 452 F.3d 275,
280 (4 th Cir. 2006) (citing eBay, Inc. v. MercExchange, LLC, ___ U.S. ___, 126 S.Ct. 1837, 1839 (2006)). “The
standard for a permanent injunction is essentially the same as for a preliminary injunction with the exception that the
debtor must establish success on the merits and that the focus on irreparable harm includes the question whether the
debtor has an adequate remedy at law.” National City Bank of Indiana v. Turnbaugh, 367 F.Supp.2d 805, 821
(D.Md. 2005), aff’d, 463 F.3d 805 (4 th Cir. 2006); see also Western North Carolina Alliance v. North Carolina Dept.
of Transp., 312 F.Supp.2d 765, 778 (E.D.N.C. 2003) (“The Fourth Circuit standard for issuance of a permanent
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cc: 	Charles Elliot Wagner
7801 16th St., N.W.
Washington, D.C. 20012
Nancy Alper
Office of the Attorney General for the District of Columbia
441 4th St., N.W., Suite 6N93
Washington, D.C. 20001
Office of the US Trustee
6305 Ivy Lane
Suite 600
Greenbelt, MD 20770
End of Memorandum
injunction is similar to its standard for issuance of a preliminary injunction.”). Because the court has determined
that judgment should be entered against the Debtor on the merits of his claims for relief, there is no need to address
the remaining factors to be considered in determining whether to grant a permanent injunction.
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