Court Opinion

ID: 9703219
Source: CourtListenerOpinion
Date Created: 2023-08-25 23:46:02.313149+00
Date Added: 2024-06-11T15:13:24.682870
License: Public Domain

VOLINN, Bankruptcy Judge,
dissenting:
The opening sentence of Kelly v. Robinson, 479 U.S. -, 107 S.Ct. 353, 93 L.Ed.2d 216 (1986), by specifically limiting its dispositive application to Chapter 7, presaged the need for resolution of the issue before us. As the dissent observed, the majority opinion’s reliance on 11 U.S.C. § 523(a)(7) “leaves open the possibility that such obligations will be dischargeable under Chapter 13.” 107 S.Ct. at 366 n. 6 (Marshall, J., dissenting). This possibility exists due to the “super discharge” available to a Chapter 13 debtor who completes all payments under the plan. Such a debt- or receives a broader discharge under 11 U.S.C. § 1328(a) than he or she would receive under 11 U.S.C. § 1328(b) if the payments were not completed. See 11 U.S.C. § 523(a); compare 11 U.S.C. § 1328(a)(2) with § 1328(c)(2). A Chapter 13 debtor who lives up to the plan is entitled to discharge any debt listed in 11 U.S.C. § 523(a), except for § 523(a)(5), maintenance and child support. Therefore, a § 523(a)(7) debt can be dischargeable under 11 U.S.C. § 1328(a), even though it is non-dischargeable under 11 U.S.C. § 1328(b) or in a Chapter 7 case.
Although a strict reading of the Code might support treating Chapter 13 differently from Chapter 7 in this context, I believe that the rationale of Kelly v. Robinson, supra, is dispositive, and therefore dissent.
I.
A.
In Kelly v. Robinson, supra, the Chapter 7 debtor sought to discharge a restitu*250tion obligation imposed by the state court as a condition of her suspended sentence for larceny in the second degree. The U.S. Supreme Court expressly declined to address whether the restitution obligation was a “debt” within the meaning of the Bankruptcy Code. Instead, the Court held that 11 U.S.C. § 523(a)(7) “preserves from discharge any condition a state criminal court imposes as part of a criminal sentence.” 107 S.Ct. at 361. Section 523(a)(7) excepts from discharge any debt to the extent that it “is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit,1 and is not compensation for actual pecuniary loss.” The Court decided that criminal restitution met these two requirements under the Code as a matter of law:
In our view, neither of the qualifying clauses of § 523(a)(7) allows the discharge of a criminal judgment that takes the form of restitution. The criminal justice system is not operated primarily for the benefit of victims, but for the benefit of society as a whole. Thus, it is concerned not only with punishing the offender, but also with rehabilitating him. Although restitution does resemble a judgment 'for the benefit of the victim, the context in which it is imposed undermines that conclusion. The victim has no control over the amount of restitution awarded or over the decision to award restitution. Moreover, the decision to impose restitution generally does not turn on the victim’s injury, but on the penal goals of the State and the situation of the defendant ...
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Because criminal proceedings focus on the State’s interests in rehabilitation and punishment, rather than the victim's desire for compensation, we conclude that restitution orders imposed in such proceedings operate ‘for the benefit of the State. Similarly, they are not assessed ‘for ... compensation’ of the victim. The sentence following a criminal conviction necessarily considers the penal and rehabilitative interests of the State. Those interests are sufficient to place restitution orders within the meaning of § 523(a)(7).
107 S.Ct. at 362-63.
B.
The majority, here, focuses on the nature of the restitution obligation as a claim or debt, as did the court below, which in turn relied on the reasoning of the circuit court opinion in Kelly v. Robinson. The Supreme Court, in reversing the circuit, adverted at length to the circuit’s claim/debt analysis which provided a rationale for application of the discharge. The Court, in effect, held that the principle of federalism was overriding:
In this case, we must consider the language of §§ 101 [definitions of claims and debts] and 523 in light of the history of bankruptcy court deference to criminal judgments and in light of the interests of the States in unfettered administration of their criminal justice systems.
107 S.Ct. at 358.
After reviewing the treatment of criminal judgments under the Bankruptcy Act of 1898, the Court concluded that Congress enacted the Bankruptcy Code “against the background of an established judicial exception to discharge for criminal sentences, including restitution orders.” 107 S.Ct. at 359. The Court then said:
Our interpretation of the Code also must reflect the basis for this judicial exception, a deep conviction that federal bankruptcy courts should not invalidate the results of state criminal proceedings. The right to formulate and enforce penal sanctions is an important aspect of the sovereignty retained by the States. This Court has emphasized repeatedly ‘the fundamental policy against federal interference with state criminal prosecutions.’ Younger v. Harris, 401 *251U.S. 37, 46, 91 S.Ct. 746, 751, 27 L.Ed.2d 669 (1971).
107 S.Ct. at 360. (Emphasis added.) Later the Court also said:
... This Court has recognized that the States’ interest in administering their criminal justice systems free from federal interference is one of the most powerful of the considerations that should influence a court considering equitable types of relief. See Younger v. Harris, 401 U.S., at 44-45, 91 S.Ct. at 750-51. This reflection of our federalism also must influence our interpretation of the Bankruptcy Code in this case.
107 S.Ct. at 361. (Emphasis added.)
The majority fails to address the federalism rationale which was held to be paramount by the U.S. Supreme Court in Kelly. The principle of federalism as it concerns insulation of “the results of state criminal proceedings” from a bankruptcy discharge should be no less applicable in Chapter 13 than it is in Chapter 7.
II.
It could be contended that because Chapter 13 provides for repayment of creditors by virtue of a plan, there, is a rehabilitative aspect to it which provides counterbalancing policy considerations not present in Chapter 7; that because of this substantial distinction, the courts should not lightly negate or neutralize the super discharge which Congress provided as an incentive for the debtor to commit to a repayment plan under Chapter 13 rather than to leave creditors high and dry under Chapter 7.
Developing case law attenuates such an argument. The case of In re Goeb, 675 F.2d 1386 (9th Cir.1982), held that the test for a good faith Chapter 13 plan did not require substantial repayment to unsecured creditors. In that case the debtors’ primary purpose was to restructure their tax payments over a five year period. Under the plan, priority and secured creditors were to be paid in full. Unsecured creditors were to be paid one cent on the dollar. The trial court refused to confirm. The circuit reversed, concluding that the standard for confirmation should be “good faith,” which does not necessarily include substantial payment to unsecured creditors. See also Downey Savings & Loan Ass’n v. Metz (In re Metz), 820 F.2d 1495 (9th Cir.1987), discussing cases approving zero payment plans.
In Chapter 13 cases that seek to retire claims arising from intentional torts, courts are divided on the question of good faith. See, e.g., In re Slade, 15 B.R. 910 (9th Cir. BAP 1981), affirming confirmation of a plan where the debtor sought to retire a $25,000 embezzlement debt; In re Brock, 47 B.R. 167, 170 (Bankr.S.D.Cal.1985), where the plan was rejected because it was found that the Chapter 13 had been filed solely to discharge an embezzlement debt.
These cases demonstrate that the discretionary basis for best efforts, bona fide effort and good faith, can result in debtors being able to discharge a restitution obligation without any or only a token payment. This is further emphasized by Section 1328(b), which provides for a best efforts discharge even where the plan is not complied with, so long as the creditors get what they would receive in a Chapter 7— which in most cases would be little or nothing. The policy considerations stated by Kelly v. Robinson, supra, would preclude such a result.
CONCLUSION
The propriety of the injunction entered by the court below is controlled by the principles of federalism stated in Kelly v. Robinson, supra. In my view, the Order After Hearing for Preliminary Injunction should be reversed to the extent that it enjoined the State of California, its political subdivisions, agents, and employees, from enforcing the restitution order against Charles C. Heincy in the Superior Court criminal case. I therefore respectfully dissent.

. The victim in Kelly v. Robinson was a government agency, so the first requirement of 11 U.S.C. § 523(a)(7) was clearly met. As pointed out by the dissent, the majority opinion interpreted this requirement broadly enough to cover cases in which the victim is, as here, a private individual. See 107 S.Ct. at 364 n. 3 (Marshall, J., dissenting).