Wednesday, January 16, 2008

Mike Nifong: The Honest But Unfortunate Debtor?

Mike Nifong has filed for protection under title 11 of the US Code. His bankruptcy petition and schedules are here.

Nifong lists assets (a house and a car) totalling about $244,000. He lists liabilities of over $180 million. Insolvent? Yes. I think so. The $180 million takes into account the pending claims of six Duke lacrosse players who each filed prosecutorial misconduct suits against him for around $30 million a pop. None of the Duke players' claims have been reduced to judgment. But that doesn't matter for bankruptcy. A debtor has to list all claims against him or his property in a bankruptcy petition. And "claim," under the Bankruptcy Code, means a "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent . . . ."

Nifong's bankruptcy filing invokes an "automatic stay"-- which enjoins creditors (including the Duke players) from taking any act to collect on a "claim." The automatic stay enjons all six civil cases against Nifong. The bankruptcy court will decide whether to lift the stay and let the litigation proceed. But first, the bankruptcy court will likely decide whether the players' claims against Nifong will survive his bankruptcy or be "discharged."

The point of filing of filing a chapter 7 petition for a guy like Nifong is to give him something to live for (financially speaking). He's lost his law license for professional misconduct. He might be able to scrape out a living working retail. But if the Duke six get judgments, he'll be working for them-- unless he can get a discharge of those debts from a bankruptcy court.

Discharge is bankruptcy jargon for forgiveness. Not everybody can earn their way out of debt problem. Official forgiveness of indebtedness in bankruptcy yields a social value we all enjoy--insurance coverage against financial failure. Creditors whose claims are discharged provide the coverage in the form of debt forgiveness. We all pay the premiums. Creditors charge us all a little bit more to cover the risk that a subset of us will default and discharge debt.

The trick is to provide just enough and the right kind of debt forgiveness but not too much. If a person can run to bankruptcy court for debt forgivness, why should he try to live within his means and avoid overwhelming liability in the first place? Putting the same problem another way, finding the optimal scope of bankruptcy discharge is another example of the endlessly fascinating problem of dual causation. Both debtor and creditor have a hand in preventing hopeless financial failure, just the same as both the drug dealer and user are 'responsible' for or 'cause' drug addition. We need discharge policy that encourages creditors to make good underwiting decisions and at the same time encourages debtors to live within their means.

Blowing by a lot of detail, the Bankruptcy Code purports to extend discharge to the "honest and unfortunate debtor" but withhold it from the dishonest, conniving, or undeserving debtor. First, not everyone qualifies for bankruptcy relief. Second, those who qualify cannot discharge all claims against them.

Here's where Nifong has to worry. The Bankruptcy Code excludes from claims for which an individual can obtain a discharge, those "for willful and malicious injury by the debtor to another entity . . . ." The idea is that if you hurt someone intentionally and you cause injury, you're the cheaper avoider of the loss and you don't qualify for the social insurance coverage. The phrase "willful and malicious" is a holdover from the Bankrutpcy Act of 1898. The Restatement of Torts and modern tort rhetoric talks about intentional, reckless and negligent acts-- but makes no mention of "willful and malicious" injury. Bankruptcy lawyers will be watching to see whether this discharge issue is actually litigated in Nifong's case or goes away in a global settlement in the shadow of a discharge. If the parties do litigate, we'll be watching to see whether Nifong will argue that his prosecutorial misconduct was willful but not malicious, or more inscrutably, malicious but not willful. Either way, if Naifong can show that the exception to discharge does not apply, he'll get debt forgiveness and the Duke players will walk away with nothing. That's his only hope of forgiveness, at least on this earth.


Josh Fershee said...

Marie, thanks for a great explanation of the bankruptcy concept. I had not really thought of it that way.

I also like the drug dealer analogy (and, for the record, I don't like drug dealers). If a drug dealer is truly successful, what happens to all his customers? I suppose it depends on the drug. Crack dealers had a lot of dead customers, but the dealers always found new ones. Does this tell us anything about lenders?

Marie T. Reilly said...

It tells us something about lenders and borrowers.

Anonymous said...

But first, the bankruptcy court will likely decide whether the players' claims against Nifong will survive his bankruptcy or be "discharged."

IOW, it's a ploy to try and derail the other civil suits against the city. (First discharge Nifong as a defendant; then the remaining defendants blame Nifong for all the wrongdoing--saying that they and the Durham police were 'just following his orders'.)

All the defendants in the civil suits thus would escape liability with a variant on the Nuremburg defense.

Given the overwhelming evidence, it's about the only trick the defense can try.

Marie T. Reilly said...

Anonymous, I'm not sure I follow your logic, but if I do-- you are raising another endlessly fascinating question: the effect of a factual determination by a bankruptcy court in a bankruptcy matter on litigation in other cases in which the same factual issue is germane. Will an order of the bankruptcy court finding that Nifong's conduct resulted in "willful and malicious" injury preclude relitigation of Nifong's responsibility in litigation against other agents who may have had a hand in causing the injury?Good question and one that turns on collateral estoppel and res judicata. I'm not an expert on this (to the contrary-- collateral attack issues give me hives). I think a good argument can be made that the legal character of Nifong's conduct for purposes of his bankruptcy discharge raises issues that are distinct to the phrase "willful and malicious injury" and that's all. Lawsuits about the liability of other actors won't raise this precise issue.

The bankruptcy court doesn't have jurisdiction to "discharge" Nifong as a defendant in any other case. All it can do is grant or deny him a "discharge" in his own bankruptcy case.

Anonymous said...

You said: "The $180 million takes into account the pending claims of six Duke lacrosse players who each filed prosecutorial misconduct suits against him for around $30 million a pop."

While $30M each is the amount Nifong listed, it is *NOT* the amount for which anyone has sued him. Neither lawsuit lists an amount at all...

They ask for compensatory and punitive damages in an amount to be established at trial, attorney's fees, costs, and any additional relief the court may deem proper. There are also requests for various non-monetary judgments. They don't list any actual dollar figure, including the mythical $30M.

So in other words, Nifong's $180M is truly just a number pulled out of a hat. He could have just as accurately listed a placeholder $1 each (as he did for all but one of the other players -- in one case, for some reason, he listed $100), or $1B each.

The only known source for the $30M is that the city of Durham was *REPORTEDLY* offered a chance to settle the first lawsuit for $30M and some structural changes to prevent future abuses. How that turned into $180M in debt for Nifong is anyone's guess.

Marie T. Reilly said...

Anonymous: Thanks for this correction. I should have looked at Nifong's schedules as you apparently did. Estimating the value of a claim asserted in a complaint is common for debtor's in bankruptcy. You are right that the $30 million figure doesn't mean anything, really, about the ultimate value of these claims against the estate. You've raised my curiousity about where the $30 million figure comes from. The settlement value of a claim against the city would seem to be completely irrelevant to the value of a player's claim against Nifong.

Anonymous said...


Thank you for the explanation about injury and discharge of debt.

Mr. Nifong was a prosecutor who would like to claim absolute immunity for his actions. His opponents claim he only has qualified immunity because of his inflammatory public statements about the lacrosse players, and his activities as the de facto lead investigator for the Durham Police, who were told to report to him about the case.

Does the bankruptcy judge need to rule on Nifong's immunity? Is the fact that Nifong was a prosecutor have any effect on the bankruptcy part of the case?

Marie T. Reilly said...

Dear Anonymous:

The debtor gets to object to the claims his creditors assert in his bankruptcy case. If the debtor does not object, the claims are "allowed" as asserted, or the bankruptcy court estimates them for purpose of administering the case. Skipping over some detail, a debtor can object to a claim by raising any defense to it that would be valid outside of bankruptcy, or as we say, under "non-bankruptcy law." That would, of course, include any defense that Nifong might have to the claims raised against him by the Duke players based on prosecutorial immunity, etc. (You seem to know much more than I do about the nature of the players' claims against NIfong and his likely defenses). Skipping through a lot of details again, the bankruptcy court may decide to lift the automatic stay and let the cases against Nifong proceed in the courts in which they were originally filed. In that case, bankruptcy wouldn't affect the defenses Nifong could raise at all. Recall though that if the bankruptcy court decides that Nifong's debt to the players, whatever that might turn out to be, is not for "willful and malicious injury" he can discharge the debt in his bankruptcy case. In that case, I start to doubt whether the player plaintiffs will feel much like spending the money to pursue him on these claims-- you know, the whole blood from turnip thing.

Anonymous said...

Dear Prof. Reilly,

Your explanations are very helpful.

If you or your readers would like to see a discussion of whether Mr. Nifong's actions constituted "willful and malicious injury," please see:

Anonymous said...

Obsessed Member

Group: Members
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DAVID F. EVANS, et al., )
Plaintiffs, )
v. ) 1:07cv739
CITY OF DURHAM, N.C., et al., )
Defendants. )
IT APPEARING TO THE COURT that the individual defendant MICHAEL B.
NIFONG has filed a voluntary petition in a Bankruptcy Court which may become dispositive
of this litigation;
IT IS ORDERED that the Clerk of Court terminate this action administratively in his
records as to the individual defendant MICHAEL B. NIFONG and that any party shall have
the right to reopen this case for any purpose on motion and notice to all other parties,
without prejudice to the rights of any of the parties, at any time prior to the 90th day after
the final termination of the bankruptcy proceedings.
This the 28th day of January, 2008.
United States District Court Judge
Case 1:07-cv-00739-JAB-WWD Document 46 Filed 01/28/2008 Page 1 of 1