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Note: American Hearing Centers, Inc. (Company) operated a business that distributed hearing aids and other related services to consumers. In its business, Company violated the Maryland Consumer Protection Act by failing to reimburse consumers and their insurance companies from whom it collected double payments. Consumer Protection Division of the Office of the Attorney General for the State of Maryland (Consumer Agency) and Company executed an agreement containing cease and desist, penalty, and restitution provisions. The Agreement required Company to post a US$20,000 surety bond, and/or obtain a US$20,000 letter of credit to be held by Consumer Agency if it continued in its business of selling hearing aids to consumers in Maryland.

When Company filed for bankruptcy after paying only a small portion of the amount owed to Consumer Agency and not posting an LC or bond, Consumer Agency brought an adversary action against Company to determine that its debt could not be discharged, pursuant to U.S.C. § 523(a)(7), which excepts from discharge debts serving as a "[f]ine, penalty or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss." U.S.C. § 523(a)(7). Consumer Agency moved for summary judgment. The U.S. Bankruptcy Court for the District of Maryland, Lipp, J., granted Consumer Agency's motion for summary judgment.

Because it concluded that the agreement to post a bond or LC was, "analogous to an indemnification situation in that the right to payment is contingent upon the [Company's] decision to resume offering for sale and selling hearing aids to consumers," the court stated that the obligations were debts for a fine, penalty, or forfeiture, and not dischargeable. The court stated that the surety bond/letter of credit provision did not interfere with Company's ability to conduct business, and was included in the Agreement in order to deter the Company from engaging in further improper business practices, should the business be continued.

[JEB/alh]

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