Court Opinion

ID: 9690897
Source: CourtListenerOpinion
Date Created: 2023-08-24 19:50:47.794327+00
Date Added: 2024-06-11T18:19:06.290252
License: Public Domain

KLEIN, Bankruptcy Judge,
concurring:
We should affirm merely because the Supreme Court decision in Kelly v. Robinson, 479 U.S. 36, 107 S.Ct. 353, 93 L.Ed.2d 216 (1986), is dispositive of the discharge status under 11 U.S.C. § 523(a)(7) of restitution ordered as a condition of probation in a state criminal case. The majority’s supplementary quest for an underlying penal purpose is superfluous to restitution that is a condition of probation in state criminal proceedings. Kelly controls.
I write separately to sound a note of caution about the need to be aware of key distinctions when confronting the puzzling subject of restitution in bankruptcy.
I
Kelly controls this appeal because the facts regarding the same issue are so similar that I perceive no principled way to distinguish our appeal. Kelly is the authoritative construction of § 523(a)(7) with respect to restitution orders entered as *214conditions of probation in state criminal cases.
A
Both cases are chapter 7 liquidation cases. Both feature governmental units as the debtor’s victims and the beneficiaries of the restitution orders. Both restitution orders were entered as conditions of probation in criminal sentences. Both involve debtors who contend that their respective restitution obligations are not excepted from discharge per § 523(a)(7).
In Kelly, it was a species of Connecticut welfare fraud (larceny in the second degree for wrongful receipt of welfare benefits); the loss to the governmental unit was the welfare payments. For Mr. War-fel, it was two misdemeanor counts of unsafe storage of chemicals and failure to have a chemical storage permit mandated by applicable law; the loss to the governmental unit was the $6,953.59 expense of the toxic clean-up that followed the emergency response to a fire at his residence.
There are three main differences. Probation had not ended when the Kelly probationer obtained her chapter 7 discharge; Warfel’s had. Connecticut law did not provide for a criminal restitution order to be translated into a civil judgment; California law does. In Kelly, Connecticut wanted ill-gotten gains disgorged, while Warfel is being asked to reimburse cleanup expenses. These differences, however, do not appear to be enough to distinguish our appeal from Kelly.
B
As I read Kelly, the Supreme Court started from the premise that under the former Bankruptcy Act of 1898 there was a judge-made exception to discharge for state-court restitution orders and proceeded to conclude that this judge-made exception was carried forward into the Bankruptcy Code of 1978. Kelly, 479 U.S. at 50-51,107 S.Ct. 353.
The Court discerned the perpetuation of that pre-Code judge-made exception to discharge as reposing in § 523(a)(7):
(a) A discharge [except under § 1328(a)] does not discharge an individual debtor from any debt — ...
(7) to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss, other than [certain tax penalties]....
11 U.S.C. § 523(a)(7).
The problem was that the pre-Code restitution exception did not neatly fit into the language of § 523(a)(7). The section does not mention restitution. Moreover, it excludes orders that are compensation for actual pecuniary loss.
The way the Supreme Court shoehorned the old doctrine into new statute was to reason that the language of § 523(a)(7) was “subject to interpretation” in three respects. Kelly, 479 U.S. at 50, 107 S.Ct. 353. First, the term “fine” was interpreted to subsume restitution obligations. Id. at 51-52, 107 S.Ct. 353. Second, the phrase “payable to or for the benefit of a governmental unit” was interpreted to subsume restitution payments that are to be paid to victims that are governmental units.8 Id. at 52,107 S.Ct. 353. Third, the phrase excluding “compensation for actual pecuniary loss” was interpreted not to encompass restitution orders because “the victim has no control over the amount of restitution awarded or the decision to *215award restitution.” Id. at 52, 107 S.Ct. 353.
In short, the Court stretched the statute by creating some apparent legal fictions. A criminal restitution order is a “fine.” Criminal restitution can be paid to victims and is not “compensation for actual pecuniary loss” notwithstanding that it may be based in whole or in part on the actual loss.
While this style of interpretation may be out of fashion, what matters for our purposes is that Kelly is the authoritative interpretation of § 523(a)(7) regarding criminal restitution orders. It is controlling law.
C
Under the Kelly analysis, Warfel loses. Kelly says that his restitution obligation is a “fine” because it was rendered as a condition of probation in criminal sentencing.
The fact that it is a restitution order automatically means that it is payable “to and for the benefit of a governmental unit” even though it is payable to his victim (the entity that paid to clean up his unlawfully stored hazardous materials).
Depending upon how narrowly one construes the discussion in Kelly regarding the permissibility of payments to victims, it was either mere coincidence, or Warfel’s misfortune, that the victim is itself a governmental unit.9
Finally, although Warfel’s restitution was for the actual cost of the toxic cleanup,10 Kelly says it is not “compensation for *216actual pecuniary loss” because the victim cannot force an award of, or any specific amount of, restitution.
The fact that Warfel’s probation expired before he obtained his bankruptcy discharge should make no difference in the Kelly analysis. A state can provide for collection of a criminal fine by any means it wishes, including civil process. Likewise, a state can provide that an unpaid fine remain enforceable after a term pf probation ends. This is exactly what California does.11
As long as the initial restitution obligation was within the Kelly definition of a fine, the termination of probation does not change its character as a fine.
In short, Kelly leaves us no choice but to affirm.
II
Now for the note of caution regarding opportunities for confusion about restitution orders in bankruptcy cases.
A
Restitution is a broad concept that covers a spectrum from a traditional equitable remedy in civil litigation to a specific criminal measure.
Restitution debts at the criminal end of the spectrum, such as restitution entered as a condition of probation in criminal proceedings, are not discharged in bankruptcy. Conversely, restitution ordered as an equitable remedy in civil actions between private parties are not excepted from bankruptcy discharge without some independent basis for nondischargeability, such as fraud, breach of fiduciary duty, or willful and malicious conduct. E.g., 11 U.S.C. §§ 523(a)(2), (4) & (6).
The remaining issues involve the treatment of restitution orders that are in the middle of the spectrum. Two of the recent court of appeals decisions that figure in our majority opinion occupy that middle ground.
B
At the outset, one needs to survey the boundaries of restitution debts that are excepted from bankruptcy discharge merely because they are restitution debts. These are defined by an agglomeration of statutes.
Section § 523(a)(7), which is the subject of this appeal, excludes- a debt from chapter 7 discharge12 “to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a govern*217mental unit, and is not compensation for actual pecuniary loss, other than [certain tax penalties].” The Kelly gloss has already been described.
The most significant of the other statutory provisions is Bankruptcy Code § 1328(a)(3), which provides that a chapter 13 so-called “super-discharge” does not encompass any debt “for restitution, for a criminal fine, included in a sentence on the debtor’s conviction of a crime.” 11 U.S.C. § 1328(a)(3).
This language, which Congress added to § 1328 in 1990 to overrule Penn. Dep’t of Public Welfare v. Davenport, 495 U.S. 552, 110 S.Ct. 2126, 109 L.Ed.2d 588 (1990), is broader than § 523(a)(7) in that neither the identity of the payee, nor the beneficiary of the payment, nor the compensatory nature of a restitution award is relevant.
Section 1328(a)(3), in effect, enacts into positive law for chapter 13 “super-discharges” the legal fictions established in Kelly for chapter 7 discharges. Correla-tively, § 1328(a)(3) makes narrow construction of Kelly more difficult. Construing Kelly to permit chapter 7 discharge of some criminal restitution awards could lead to a unique situation (which, as noted below, has happened in the Third Circuit) in which a chapter 7 discharge would be more powerful than a chapter 13 “super-discharge.”
Next, Congress added § 523(a)(13) in 1994 to deal with federal criminal restitution. A debt is excepted from chapter 7 discharge if it is “for any payment of an order of restitution issued under” the Federal Criminal Code. 11 U.S.C. § 523(a)(13).
Finally, the Criminal Code was amended in 1994 to adopt a bankruptcy-resistant federal victim restitution scheme. 18 U.S.C. §§ 3663-64. According to that scheme, restitution is to be ordered to each victim in the full amount of each victim’s losses without consideration of the economic circumstances of the defendant, and the court, in the same manner as with fines, specifies the manner of payment and a schedule in light of the defendant’s economic circumstances. 18 U.S.C. § 3664(f). The United States can enforce the restitution order, and the victim is entitled to an abstract of judgment that can be registered and enforced in the same manner as any federal civil money judgment. 18 U.S.C. § 3664(m). Restitution orders and fines are expressly excepted from all bankruptcy discharges, including the § 1328(a) “super-discharge.” 18 U.S.C. § 3613(e) & (f).13
C
This background enables better understanding of the recent court of appeals decisions discussed in the majority opinion.
The Ninth Circuit recently ventured into the middle ground between civil and criminal restitution under § 523(a)(7) when presented with an attorney discipline cost award entered by California’s State Bar Court. It was not entered in a criminal matter and hence was not controlled by Kelly. The Ninth Circuit reasoned that in order for the cost award to qualify as a *218“fine, penalty, or forfeiture” within the meaning of § 523(a)(7) the state statute authorizing the award had to be “penal” in nature. Accordingly, the debt was not excepted from discharge. State Bar v. Taggart (In re Taggart), 249 F.3d 987, 992-94 (9th Cir.2001). It is, of course, that decision that precipitated our majority’s quest for “penal” purpose in the instant appeal.
The Seventh Circuit dealt with a civil restitution order in favor of consumer fraud victims that had been issued pursuant to a state consumer fraud and deceptive business practices statute. Towers v. Illinois (In re Towers), 162 F.3d 952, 954-56 (7th Cir.1998), cert. denied, 527 U.S. 1004, 119 S.Ct. 2340, 144 L.Ed.2d 237 (1999).
The Seventh Circuit construed Kelly narrowly as limited to state criminal restitution orders and focused upon the language of § 523(a)(7), unencumbered by the Kelly gloss. Moreover, it reasoned that §§ 523(a)(2), (4), and (6), were available discharge exceptions that protect the “deterrence effects of restitution” so that the court could resist the result-oriented temptation of “hammering away at ‘for the benefit of until it fit the mold” of § 523(a)(7). Towers, 162 F.3d at 956. It concluded that the channeling of restitution payments to the victims was fatal to the § 523(a)(7) discharge exception.
The Third Circuit adoption of Towers’ narrow reading of Kelly came in an appeal that was a non-recurring artifact. A federal criminal restitution order that antedated the 1994 enactment of § 523(a)(13) was ineligible for the § 523(a)(7) discharge exception because it was payable to the victim. Rashid v. Powell (In re Rashid), 210 F.3d 201, 206-08 (3d Cir.2000).
In so holding, the Third Circuit limited Kelly to state criminal restitution orders and did not mention the implications that may follow from the fact that the federal restitution judgment was probably nondis-chargeable in chapter 13 by virtue of § 1328(a)(3). The ironic, and apparently unique, consequence is that Rashid’s chapter 7 discharge turned out to be more powerful than the chapter 13 “super-discharge.”
Thus, courts of appeals are putting a sharper point on the pencil in § 523(a)(7) matters and looking behind restitution orders that are not entered in criminal proceedings. The Taggart lesson in the Ninth Circuit is that one must find “penal” purpose in the authority for restitution in a non-criminal setting. The Third and Seventh Circuits both view paying restitution to non-governmental victims as fatal to § 523(a)(7) nondischargeability.
All of those decisions, however, came in cases in which the courts could distinguish Kelly as not controlling. Once freed of the Kelly gloss, they were able to focus on the implications of the actual language of § 523(a)(7) in connection with such matters as “penal” purpose or who was getting the money.
In this appeal, I see no principled distinction from Kelly. Hence, there is no need to look for “penal” purpose. Indeed, if we were to conclude that there is no “penal” purpose in the underlying statute, Kelly would nevertheless mandate affir-mance.

. The Court’s discussion suggested that it would not matter if restitution was paid to a non-governmental victim. As the actual victim was a governmental unit, the Court's broader comment is arguably dictum.

. Although the Ninth Circuit has not squarely decided whether the payee’s identity matters, it extended Kelly to protect from discharge a federal criminal restitution order in favor of a governmental payee without mentioning the issue. FDIC v. Soderling (In re Soderling), 998 F.2d 730 (9th Cir.1993).

. It appears restitution was ordered per three provisions of the California Penal Code: '§§ 1203.1(e), 1203.11, and 1214.5:
§ 1203.1(e) The court shall also consider whether the defendant as a condition of probation shall make restitution to a public agency for the costs of an emergency response pursuant to Article 8 (commencing with Section 53150) of Chapter 1 of Part 1 of Division 2 of the Government Code.
Cal.Penal Code § 1203.1(e).
. § 1203.11 In any case in which, pursuant to Section 1203.1, the court orders the defendant, as a condition of probation, to make restitution to a public agency for the costs of an emergency response, all of the following shall apply:
(a)The probation department shall obtain the actual costs for an emergency response from a public agency, and shall include the public agency's documents supporting the actual costs for the emergency response in the probation department’s sentencing report to the court.
(b) At the sentencing hearing, the defendant has the right to confront witnesses and present evidence in opposition to the amount claimed to be due to the public agency for its actual costs for the emergency response.
(c) The collection of the emergency response costs is the responsibility of the public agency seeking the reimbursement. If a defendant fails to make restitution payment when a payment is due, the public agency shall by verified declaration notify the probation department of the delinquency. The probation department shall make an investigation of the delinquency and shall malte a report to the court of the delinquency. The report shall contain any recommendation that the probation officer finds to be relevant regarding the delinquency and future payments. The court, after a hearing on the delinquency, may make modifications to the existing order in the furtherance of justice.
(d) The defendant has the right to petition the court for a modification of the emergency response reimbursement order whenever he or she has sustained a substantial change in economic circumstances. The defendant has a right to a hearing on the "proposed modification, and the court may make any modification to the existing order in the furtherance of justice.
Cal.Penal Code § 1203.17
*216§ 1214.5(a) In any case in which the defendant is ordered to pay more than fifty dollars ($50) in restitution as a condition of probation, the court may, as an additional condition of probation since the court determines that the defendant has the ability 'to pay, as defined in Section 1203.lb(b), order the defendant to pay interest at the rate of 10 percent per annum on the principal amount remaining unsatisfied.
Cal.Penal Code § 1214.5(a).

. California Penal Code § 1214.2 provides in relevant part:
(a) [i]f a defendant is ordered to pay a fine as a condition of probation, the order to pay a fine may be enforced during the term of pro-balion in the same manner as is provided for the enforcement of money judgments.
(b) [a]n order to pay a fine as a condition of probation may also be enforced as follows: ... (2) If any balance remains unpaid at the end of the term of probation, in the same manner as a judgment in a civil action.
Cal.Penal Code § 1214.2.

. For convenience, the term “chapter 7 discharge” is used as a proxy for “discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b)” in the preambular language of § 523(a), and includes discharges under chapters 7, 11, and 12, as well as the so-called “hardship” discharge under chapter 13. 11 U.S.C. § 523(a).

. The pertinent provisions are:
(e) Discharge of debt inapplicable. — No discharge of debts in a proceeding pursuant to any chapter of title 11, United States Code, shall discharge liability to pay a fine pursuant to this section, and a lien filed as prescribed by this section shall not be voided in a bankruptcy proceeding.
(f) Applicability to order of restitution. — In accordance with section 3664(m)(l)(A) of this title, all provisions of this section are available to the United States for the enforcement of an order of restitution.
18 U.S.C. § 3613(e) — (f).