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Nifong Files Bankruptcy

posted by Bob Lawless

Courtesy of the Law Blog over at WSJ.com, I learned that Michael Nifong has filed bankruptcy. Nifong was the district attorney in the rape case against the three Duke lacrosse players. After Nifong was removed from the case, the charges were later dropped. Nifong was accused of withholding evidence and has lost his law license. The bankruptcy petition and schedules are here courtesy of WRAL television in Raleigh-Durham. Apparently, if it bleeds cash, it also leads.

The news reports I have seen have said that Nifong will not be able to use bankruptcy to erase any damages awards against him if the bankruptcy judge determines that Nifong has "committed wrongdoing." That is close but not quite right. The Bankruptcy Code excepts from discharge any debt for a willful and malicious injury. Thus, the bankruptcy court would have to decide not only that Nifong acted wrongfully but that he acted willfully and maliciously. As I tell my students, this is roughly the difference between acting wrongfully and acting wrongfully and meaning it. It's a higher standard than the press has been suggesting.

More interestingly, perhaps, for us bankruptcy jocks is something brought to my attention by Alan White, a law prof over at Valparaiso University. Nifong fails the means test. He has $927.45/month to pay unsecured creditors and hence a presumption of abuse arises. Nifong will have to convert his case to chapter 13 or dismiss unless he can convince the judge other circumstances exist that make his case not an abuse of the bankruptcy process. What can those other circumstances be? The lawsuits against him would not excuse a chapter 7 filing. Indeed, the existence of the lawsuits would tend to support a claim of abuse given that Nifong would be using the bankruptcy process to escape them.

It was not immediately evident to me what Nifong's strategy is here. The bankruptcy filing might buy him some time in the state lawsuits, but toward what end? Does Nifong really want to use chapter 13? Are there serious grounds to contend his case should stay in chapter 7? I've left the comments open for more adept legal minds to speculate on what might be going on.

Comments

Could there not be an objection based on "fraud or similar fault" in addition to the willful and malicious injury?

Assuming that a court would deem Nifong's debts owed to the Duke lacrosse players to be for willful and malicious injury, he would be better off seeking relief under Chapter 13 since such debts do not fall within the discharge exceptions set forth in section 1328(a)(2). In light of this, and the fact that Nifong's Chapter 7 filing triggers the presumption of abuse, I too have a hard time discerning his strategy.

Yet another case where mandatory credit counseling is sure to help. Do you think Hummingbird included a spiel about how you shouldn't, allegedly, trump up charges on flimsy evidence for political gain, get disbarred, and then get sued by the formerly accused?

Nifong is not eligible for chapter 13 -- unsecured debts are listed at $180,009,081.71, which is way over the cap. He doesn't make any claim that those debts are contingent or unliquidated. Maybe he is hoping that the judge will take into account current net income as listed on Schedules I and J, which is -$75. I think he's going to have a really tough go of it, however: he was very aggressive in his choices in filling out the means test.

Mr. Nifong might have an argument that his debts are not "primarily consumer debts" and thus the means test does not apply. 707(b)(1) only applies when the debtor has primarily consumer debt, which is defined in 101(8) as debt "incurred by an individual primarily for a personal, family, or household purpose." I believe there's a body of case law that holds that most tort claims are not consumer debts.

In response to Justin, I had a similar thought. Indeed, I think he has a great argument that his debts are not consumer debts, but his petition has the checkbox saying his debts are primarily consumer debts. I suppose that checkbox on the petition is not a binding declaration, and he could argue otherwise in court. But, if you are going to argue your debts are primarily business debts, then why check the box? Maybe this is just another example of what Elizabeth Warren and I wrote about a few years ago. Lawyers don't pay attention to that checkbox, meaning that the government's use of that checkbox to count business bankruptcies results in a huge undercount. In Nifong's case, however, this was going to be a high-profile bankruptcy case. If the lawyer was going to take the position that his debts were primarily business debts, I don't know why he indicated otherwise on the petition.

In response to Allan, I'm not sure I see that. The fraud exception to discharge requires that the debtor have obtained money, property, or services because of the fraud. I suppose the idea is that Nifong's withholding of evidence is a fraud, which is a stretch itself, but even if a court were to buy that characterization of Nifong's conduct, it can't be said he obtained money or property as a result.

I found two cases which hold that a tort claim is not a consumer debt (work is slow today). In re Reavis, 2007 WL 2219519, n.7 (Bankr. N.D. Okla.) (professional negligence by accountant) and In re Marshalek, 158 B.R. 704, 707-08 (Bankr. N.D. Ohio 1993) (vehicle accident).
The boxes on the petition force debtors' attorneys into a false choice when the debts are not consumer debts and not business debts. Since the forms are mandatory, and it says "Check one box," you have to pick one. The thing I would think to do is pick business debts and then file an exhibit to the petition saying why the "primarily consumer debt" category really doesn't apply.
Hopefully for Mr. Nifong, this is what his attorney is thinking.

Nifong "passes" the means test if the "additional expense claims" in Part VII of $1,137 are allowed. I probably would have listed those under the marital adjustment though.

In response to Jeff, while Nifong’s unsecured debts exceed the Chapter 13 eligibility requirements, it strikes me that he would have a good argument that the value of the claims arising from the six prosecutorial-misconduct lawsuits is not easily ascertainable such that those claims should be deemed to be unliquidated. If those claims are indeed unliquidated, then Nifong would only have $9,081.71 worth of noncontingent, liquidated, unsecured debts—well within the debt limits of section 109(e). As Jeff points out, Nifong does not indicate on his schedules that those six $30 million claims are unliquidated. This raises the issue that Professor Lawless raised regarding classification of one’s debts: whether checking a particular box on the petition or schedules is a binding declaration. I imagine that Nifong could file an amended Schedule F reclassifying the nature of the claims. If so, this brings us back to the Chapter 7-Chapter 13 issue. Assuming Nifong could prevail in his characterization that his debts are not primarily consumer debts, thereby making him immune to an abuse dismissal, he still runs the risk that the six Duke lacrosse players will file adversary proceedings seeking to determine that Nifong’s debts are nondischargeable under section 523(a)(6) and that a court will agree. Why not file for Chapter 13 instead? If he prevails in his classification of noncontingent, liquidated unsecured debts, and if he overcomes the 1325(a)(7) hurdle (i.e., the court determines that the action of the debtor in filing the petition was in good faith) and submits an otherwise confirmable plan, his debts to the Duke lacrosse players will be discharged once he completes the repayment plan, even if those debts arose from Nifong’s willful and malicious injury.

There are problems with all three options. Neither chapter 7 nor chapter 11 cases discharge debt nondischargeable under 523(a)(6) for willful or malicious injury. As for a chapter 13, there are the jurisdictional issues, including what should happen when the claims do become liquidated, since 109(e) is jursidictional. That said, if the debts are declared nondischargeable, he can always try to convert to a 13, although there might be Marrama issues. It's quite a bind. The real legislative solutions are: 1) that these types of debts should be dischargeable in an individual chapter 11 proceeding; or 2) removal of the jurisdictional cap in chapter 13 cases.

I'd say that this type of manipulative action is what got Mr. Nifong in trouble in the first place. Good luck, Mr. Nifong. You made the moms mad and they'll never give up.

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