FILED U.S. COURT OF AP P E A LS E LE V EN T HC IRC U IT APR 20 , 2006 THOMAS K. KAH

N CLERK [ P UB L I S H] I N THE UN I TE D STATE S C OU RT OF APPE ALS F O R T H E E L E V E N T H C IR C U IT

________________________ N o. 04- 16079

________________________ D . C . D o c k e tN o . 0 3 - 1 4 2 1 7 - C V - D MM BK CY . N o . 0 3 - 3 1 3 1 8 - SH I n R e : V I C T O R V E R O L A , D e b to r . __________________________________________________ B R U C E H . C O L T O N , S ta te A tto r n e y , P la in tif f - A p p e lle e , v ersu s V I C T O R V E R O L A , D e f e n d a n t- A p p e lla n t.

________________________ A pp ea l fr om the U ni t ed S t at es D i stri ctC ou rt f orthe S outhe r n D i s tr i c tof F l or i da

_________________________ ( A p r i l 20, 2006)Ho no ra bleRic ha rd Mil ls, Unite d St ate s D istri c t Judg efo r t heCe ntra l D ist

ri c t of I llino is, * sitti ngby designation. 479 U.S. 36, 107 S. C t. 353 (1986) 1 495 U.S. 552, 110 S. C t. 2126 (1990) 2 2 B ef ore B IR C H and M A R C U S , C i rc ui tJudg es , and M IL L S , D i stri ctJudg e. * P E R C U R I A M: D ef endant -app el l ant , V i ct or V er ol a, appeal s a n o rderof the di stri ctcourt r e ve r s i ng the ba nkrupt c y c our t ’ s de c i s i on tha tthe r e s t i tut i on obl i ga t i on a r i s i ng fr om hi s F l ori da conv i ct i on for f raud ul enttra nsac t i on s w as di sc hargeabl e und er C hapt er7 o f the B ankrup t cy C od e ( “ C od e” ). T hi s app ea l re qu i re s us t o con si der w he the rthe S upr e m e C our t ’ s de c i s i on i n K e l l y v. R obi ns on i s s t i l l va l i d f ol l ow i ng 1 b o th th e B a n k ru p tc y R e f o r m A c t o f

1 9 9 4 a n d th e S u p r e m e C o u r t’s d e c is io n in P e n n s y lv a n ia D e p a r tm e n t o f P u b lic W e lf

a r e v . D a v e n p o r t. B e c a u s e w e f in d th a t it 2 i s a nd thatthe di stri ctcourtdi d n oterr i n fai l i ng t o fol l ow the anal ys i s e m pl oyed b y th e S e v e n th a n d T h ir d c ir c u its in d e te r m in in g w h e th e rr e s titu tio n is b e in g p a id “to a n d f o rth e b e n e f

it o f a g o v e r n m e n t u n it” f

o rth e p u rp o s e s o f

1 1 U .S .C . § 5 2 3 ( a ) ( 7 ) , w e A F F I R M. I . B AC KG RO UN D T he f a c t s unde r l y i ng thi s appe a l a r e noti n di s put e . I n N ove m be r2001, the N in e te e n th J u d ic ia l C ir c u it C o u r t, S a in t L u c ie C o u n ty , F lo r id a , a d ju d g e d V e r o la3

gu i l ty of f

raud ul enttra nsac t i on s m ade betw ee n 1 99 4 and 19 98 , i n v i ol at i on of F l a. S t a t . § 517. 301( 1) ( a ) ( 2001) . R 1- 7, E xh. 3 a t1. H e w a s s e nt e nc e d t o thi r ty - f our m on ths i n p ri son. O n 6 D ec em ber 200 1, he st i pu l at ed t o and w as ordered t o p ay $ 2 ,5 3 8 ,5 5 7 .0 5 in r e s titu tio n a s a c o n d itio n o f te n y e a r s p r o b a tio n . I d ., E x h . 2 a t 1 . A c c or di ng t o the r e s t i tut i on or de r , V e r ol a w a s t o pa y the t ot a l a m ountof r e s t i tut i on

“ thr ough the D e pa r tm e ntof C or r e c t i ons , w i th a n a ddi t i ona l 4% f e e f orha ndl i ng, pr oc e s s i ng, a nd f

or w a r di ng s a i d r e s t i tut i on t o the vi c t i m s ( s ) . ” I d. V er ol a had previ ou sl y f i l ed for bankrup t cy i n M ar ch 20 00 and, i n O ct ob er 2002, he s oughta de t e r m i na t i on of the di s c ha r ge abi l i ty of

hi s r e s t i tut i on obl i ga t i on u n d e r1 1 U .S .C . § 5 2 3 ( a ) ( 7 ) . T h e b a n k ru p tc y c o u r t g r a n te d s u m m a r y ju d g m e n t in fa vo r of V er ol a a nd foun d t he re st i tut i on ob l i gat i on di sc hargeabl e. T he court e xpl a i ne d tha t , be c a us e the r e s t i tut i on or de rm a de i tc l e a rtha tthe m one y , a l though i tw as t o b e c ol l ec t ed by the D epar tm entof C orre ct i on s, w as then t o b e f orw ar ded t o t he vi ct i m s, the se cond re qu i re m entfor e xcept i ng a debtfr om di sc harge – that the debtbe “ payabl e t o and for the benefi tof a gov ernm ent al un i t ” – w as l ef t uns a t i s f i e d. S e e § 523( a ) ( 7) . T he di s tr i c tc our tr e ve r s e d a nd c onc l ude d tha tthe S up re m e C ou rt ’ s opi ni on i n K el l y m ade c l ea r thatal l st at e- i m po se d cri m i nal rest i tu t i o n o b l i g at i o n s m eetth e req u i rem en t s p rescri b ed b y § 5 2 3 (a)(7 ) an d , th u s, ar e notdi sc hargeabl e.4

O n appe a l , V e r ol a a r gue s tha tthe di s tr i c tc our te r r e d i n f i ndi ng the r e s t i tut i on obl i ga t i on nondi s c ha r ge a bl e . I n s o a r gui ng, he a s s e r t s tha t( 1) the S upr e m e C our t ’ s de c i s i on i n D a ve npor t“ a br oga t e d” i t s de c i s i on i n K e l l y ; ( 2) the 1 9 9 4 a me n d me n t s t o th e Ba n k ru p t c y Co d e e f f e c t i v e l y p r e e mp t e d th e Su p r e me C o u rt ’ s ru l i n g i n K el l y; an d (3 ) th e d i stri ctco u rterred i n fai l i n g t o fo l l o w th e t est s e t o u t b y th e S e v e n th a n d T h ir d C ir c u its f o rd e te r m in in g w h e th e rr e s titu tio n is

“ payabl e t o and for the benefi tof a gov ernm entun i t ” f or the pu rposes of § 5 2 3 ( a ) ( 7 ) . I I . DI S CUS S I ON

“ W e r evi ew l egal concl usi on s by e i ther the bank rupt cy courtor the di stri ct c o u r t d e n o v o .” I n r e th e N e w P o w e rC o ., 4 3 8 F .3 d 1 1 1 3 , 1 1 1 7 ( 1 1 th C ir . 2 0 0 6 ) . T i t l e 11 U . S . C . § 523( a ) ( 7) e xc e pt s f r om ba nkrupt c y di s c ha r ge a de bt“ t o the e xt e nt such debti s f

or a f i ne, penal ty, or forf

ei ture pay abl e t o and for the benefi tof a g o v ern m en t al u n i t , an d i s n o tco m p en sat i o n fo r actu al p ecu n i ary l o ss. ” In K el l y, the S upr e m e C our t“ h[ e ] l d tha t§ 523( a ) ( 7) pr e s e r ve s f r om di s c ha r ge a ny c ondi t i on a s t at e c ri m i nal courti m po se s a s partof a c ri m i nal se nt ence . ” K el l y, 47 9 U . S . at 50, 107 S . C t . a t361. M or e s pe c i f i c a l l y , the C our t“ c onc l ude [ d] tha tr e s t i tut i on o r d e r s im p o s e d in [ c r im in a l] p r o c e e d in g s o p e r a te ‘f o rth e b e n e f

it o f’ th e S ta te . S i m i l a r l y , the y a r e nota s s e s s e d ‘ f or. . . c om pe ns a t i on’ of the vi c t i m . ” I d. a t53,5

107 S . C t . a t363 ( om i s s i on i n or i gi na l ) . T hus , the C our tf ound tha tr e s t i tut i on o b lig a tio n s im p o s e d b y s ta te s a s p a r t o f c r im in a l s e n te n c e s w e r e n o t d is c h a r g e a b le i n a C hapt e r7 pr oc e e di ng. V er ol a’ s r es t i tut i on ob l i gat i on i s e xact l y that . V er ol a neverthel es s a rgues thathi s r es t i tut i on ob l i gat i on shou l d b e di sc harged because (1) K el l y i s no l on ger bi ndi ng pr e c e de nta nd ( 2) hi s r e s t i tut i on obl i ga t i on doe s notm e e tthe s e c ond r e qui r e m e nttha tthe r e s t i tut i on be pa y a bl e “ t o a nd f orthe be ne f

i tof a gove r nm e nt u n it,” e v e n u n d e rK e lly . A . K e lly 1. E ff ec tof D avenpo rt V e r o la a s s e r ts th a t th e S u p r e m e C o u r t’s o p in io n in D a v e n p o r t e s s e n tia lly ab ro g at ed i t s ru l i n g i n K el l y. In D av en p o rt , th e C o u rtad d ressed an att em p tb y a C hapt er13 debt or t o h ave ast at e- court -i m po se d cri m i nal re st i tut i on order di sc harged. 49 5 U . S . at55 6, 11 0 S . C t . at21 29 . T he C ou rthel d t hatsuch

“ re st i tut i on orders [w er e] ‘ debt s’ as defi ned b y § 10 1(11 ) [ of the B ankrup t cy C od e] , ” m aki ng them subj ec tt o d i sc hargeabi l i ty anal ys i s und er§ 5 23 (a ). Id. at 555, 110 S . C t . a t2129 ( a l t e r a t i on om i tt e d) . T he C our tc onc l ude d tha t , be c a us e the pa r t i c ul a r“ e xc e pt i on t o di s c ha r ge r e l i e d on i n K e l l y [ ( § 523( a ) ( 7) ) di d] note xt e nd to C h ap te r1 3 ,” r e s titu tio n o b lig a tio n s w e r e d is c h a r g e a b le th e r e u n d e r . I d .Th eCourt in Ke lly a dmi tte d “hav[in g ] se ri ou s dou bts wh e ther C on gre ss intend e d to 3 makec rimin a l penalti e s ‘ debts ’ w ith in t heme aningof

§ 1 01 (4 )”of

theB ank ru ptcy Code , b ut conclude d that it “need not address that que stion” beca use its holding wa s based upon § 523(a) (7). Ke lly , 479 U.S. at 50, 107 S. Ct . at 361. Title 11 U.S.C. § 1328(a)(3) , which madestate-c ourt-imposed criminal restitution orders 4 discharg eableunder Chapter 13, wa s added to the Code in reac tion to the Davenpor t decision by way of the Criminal Victims Protection Act of 1990. SeeIn re Clar k, 222 B.R. 114, 119 (B ankr. N. D. Oh io 1 99 7) (c itingS. Rep. No . 1 01 -4 34 , reprint e d in 19 90 U. S.C. C.A .N . 4 05 , 4 07 1; H .R. Rep. No. 101-681( I), reprinted in 1990 U.S.C.C.A.N. 472, 6571). 6 A l though the C our ti n D a ve npor ta r gua bl y r e ve r s e d di c t a i n K e l l y e xpr e s s i ng doubt ove rw he the rC ongr e s s i nt e nde d t o i nc l ude r e s t i tut i on or de r s i n the c a t e gor y of

“ debt s” for purpo se s of the C od e, i tdi d n otqu es t i on the general ho l di ng thatst at ecourt -i m po se d res t i tut i on ob l i gat i on s a re no tdi sc hargeabl e und er§ 5 23 (a )( 7). 3 N or di d i tshake the un derl yi ng m ot i vat i ng pri nci pl e that“ fe dera l bank rupt cy c our t s s houl d noti nva l i da t e the r e s ul t s of s t a t e c r i m i na l pr oc e e di ngs [ be c a us e t ] he r i ghtt o f or m ul a t e a nd e nf

or c e pe na l s a nc t i ons i s a n i m por t a nta s pe c tof the s ove r e i gnty r e t a i ne d by the S t a t e s . ” K e l l y , 479 U . S . a t47, 107 S . C t . a t360. A c c or di ngl y , w e f

i nd tha tthe opi ni on i n D a ve npor t , pa r t i c ul a r l y i n l i ghtof th e f a c t th a t C o n g r e s s s o o n th e r e a f te ra m e n d e d th e B a n k ru p tc y C o d e to o v e r ru le the de c i s i on by s pe c i f

i c a l l y m a ki ng c r i m i na l r e s t i tut i on obl i ga t i ons nondi s c ha r ge a bl e unde rC hapt e r13 a s w e l l , ha d no e f f e c tr e l e va ntt o thi s c a s e on the 4 C o u rt ’ s h o l d i n g i n K el l y. 2 . E f f e c t o f 1 9 9 4 A m e n d m e n tsWe note Verola’s argument in apparent re liance upon thedoctrine of e x pressi o u nius e

st 5 exc lusio alteriusmight havehad moreforc e had all three provisions been draf ted at once , as opposed to the provisions specific ally protec ting f

ederal re stitut ion orders a nd criminal restitution orders under Chapter 13 havingbeen drafte d after the Court’s rulingin Kelly had alre ady expli citly

extended the protec tion of § 523(a) (7) to state c riminal restitution obli g ations under Chapter 7. 7 V e r o la a ls o a s s e r ts th a t C o n g r e s s ’s 1 9 9 4 a d d itio n to th e C o d e o f 1 1 U .S .C . § 52 3(a) (13), w hi ch exem pt s f rom di sc harge r es t i tut i on ob l i gat i on s i m po se d u nd er t i t l e 18 of

the U ni t e d S t a t e s C ode , e f f e c t i ve l y c ha nge d the m e a ni ng of § 523( a ) ( 7) be c a us e C ongr e s s di d nott a ke the oppor tuni ty e xpl i c i t l y t o a dd a n e xe m pt i on f or st at e- i m po se d res t i tut i on ob l i gat i on s und erC hapt er7. H e m akes a s i m i l ar ar gu m entw i th res pectt o C on gres s’ s e ar l i eraddi t i on of 11 U . S . C . § 1 32 8(a) (3). 5 A s ha s be e n obs e r ve d by the S e ve nth C i r c ui t , “ [ i ] f C ongr e s s w a nt s t o s upe r c e de the S upr e m e C our t ’ s de c i s i ons , i tm us ta m e nd the s t a tut e the C our tha s c ons true d; c ont i nui ty of

t e xte qua l s c ont i nui ty of m e a ni ng. ” I n r e T ow e r s , 162 F . 3d 952, 954 ( 7th C i r . 1998) . T o the c ontr a r y of V e r ol a ’ s a r gum e nt , w e f i nd tha tthe 1994 a m e n d m e n ts to th e C o d e r e f le c t, if a n y th in g , C o n g r e s s io n a l ap p r o v a l o f th e r e s u lt reach ed b y th e C o u rti n K el l y. B . “ P ayab l e” T est F in a lly , V e r o la c h a lle n g e s th e d is tr ic t c o u r t’s r e f u s a l to f o llo w th e a n a ly s is em pl oyed by the S eventh and T hi rd C i rc ui t s r egar di ng the se cond pron g o f § 523( a ) ( 7) . T he c our t s i n both c a s e s poi nt e d outtha tK e l l y i nvol ve d a r e s t i tut i on8

o r d e ru n d e rw h ic h a “g o v e r n m e n ta l u n it k e p t th e r e s titu tio n ,” b e c a u s e “th e s ta te w a s i t s e l f

the vi c t i m . ” T ow e r s , 162 F . 3d a t955; s e e I n r e R a s hi d, 210 F . 3d 201, 207 ( 3d C i r . 2000) ( pe rc ur i a m ) . B oth c our t s r e j e c t e d the a r gum e nttha tr e s t i tut i on p a id to a p r iv a te v ic tim is s till p a id f o rth e b e n e f

it o f th e g o v e r n m e n t b y w a y o f its de t e r r e nte f

f e c ta nd c onc l ude d tha tthe r e s t i tut i on or de r s i n the i rc a s e s w e r e not e xc e pt e d f

r om di s c ha r ge unde r§ 523( a ) ( 7) be c a us e the “ the c ont e xti n w hi c h the w ord ‘ ”benefi t ” app ea rs – “ payabl e t o and for the benefi tof a gov ernm ent al un i t ” – im p lie s th a t th e “b e n e f

it” in q u e s tio n is th e b e n e f it o f th e m o n e y th a t is “p a y a b le t o” the go vernm ent al un i t . ’ ” R as hi d, 21 0 F . 3d at20 8 (qu ot i ng T ow er s, 16 2 F . 3d at 9 5 6 ) . W e d o n o t f

in d th is ap p r o a c h to b e ap p lic a b le to V e r o la ’s r e s titu tio n o r d e r . F i rs t , bo th ci rc ui tca se s m ay be ea si l y di st i ng ui shed fr om thi s c as e. T ow er s concerns the di sc hargeabi l i ty of ast at e c i vi l re st i tut i on order. T ow er s, 16 2 F . 3d at 9 5 3 . R a s h id a d d r e s s e s th e d is c h a r g e a b ility o f a f e d e r a l c r im in a l r e s titu tio n o r d e r . R as hi d, 21 0 F . 3d at20 3. A s not ed by the courti n R as hi d, “ F eder al cr i m i nal r e s t i tut i on or de r s a nd c i vi l r e s t i tut i on or de r s s ha r e one i m por t a ntdi s t i nc t i on f r om K el l y – nei ther i m pl i ca t es the fe dera l court ’ s l on gst andi ng ‘ re l uct an[c e] t o i nt erpret f e d e r a l b a n k ru p tc y s ta tu te s to r e m it s ta te c r im in a l ju d g e m e n ts .’” I d . a t 2 0 8 n .3 ( quot i ng K e l l y , 479 U . S . a t44, 107 S . C t . a t353) ( a l t e r a t i on i n or i gi na l ) . S e c ond,The Third Circuit its elf re cognized this tension. See In re Thompson, 418 F .3d 362, 368 6 (3 d Cir. 20 05 ) ( dis tin guis hingTo wers and Ra sh id a nd statin gtha

t “ [n]otwi ths tandingthat in prac tical terms [the debtor’s] restitution pay ments are‘payable to’ [an individual], Kelly dictates that we not interf

erewith [ the state’s] criminal re stitut ion order.” ).

9 d esp i t e th e factth atK el l y i n v o l v ed a rest i tu t i o n o rd er i n w h i ch th e v i ct i m w as a gove r nm e nte nt i ty , the C our tge ne r a l l y he l d tha t“ § 523( a ) ( 7) pr e s e r ve s f r om di sc harge any c on di t i on a s t at e c ri m i nal courti m po se s a s partof a c ri m i nal s e nt e nc e . ” K e l l y , 479 U . S . a t50, 107 S . C t . a t361 ( e m pha s i s a dde d) . T o the e xt e ntthe di s t i nc t i on be tw e e n r e s t i tut i on or de r s doe s not , i n e a c h c a s e , e xpl a i n the d if f e r e n t ap p r o a c h ta k e n , th e a n a ly s is e m p lo y e d in T o w e r s a n d R a s h id d ir e c tly c o n f lic ts w ith K e lly . B e c a u s e K e lly r e m a in s b in d in g S u p r e m e C o u r t p r e c e d e n t, 6 the di stri ctcourtdi d n oterr i n fai l i ng t o em pl oy the anal ys i s s ug gest ed by T ow er s a nd R a s hi d. I I I . CONCL US I ON V e r ol a appe a l s the di s tr i c tc our t ’ s r e ve r s a l of the ba nkrupt c y c our t ’ s de c i s i on th a t h is s ta te - c o u r t- im p o s e d c r im in a l r e s titu tio n o b lig a tio n w a s d is c h a r g e a b le in h is C h ap t er 7 b an k ru p t cy p ro ceed i n g s. B ecau se th e S u p rem e C o u rt ’ s h o l d i n g i n K el l y, tha t§ 523( a ) ( 7) m a ke s a l l s t a t e - i m pos e d c r i m i na l r e s t i tut i on obl i ga t i ons nondi sc hargeabl e, i s s t i l l the l aw of the l and, w e AF F I RM .