Court Opinion

ID: 168917
Source: CourtListenerOpinion
Date Created: 2010-08-14 16:58:28+00
Date Added: 2024-06-11T12:29:19.475664
License: Public Domain

UNITED STATES CO URT O F APPEALS

                                TENTH CIRCUIT

 In re: JASON DEREK TROFF,

           Debtor,
 _________________________

 JASON DEREK TROFF,
                                                         No. 05-4244
             Plaintiff-Appellant,

      v.

 STA TE O F UTA H, RICH ARD ELLIS,
 in his official capacity as Executive
 Director of the Utah Department of
 Administrative Services; and DAVID
 JO HNSON III, in his official capacity
 as Interim Director of the Office of
 State Debt Collection,

             Defendants-Appellees.

                           OR DER ON REHEARING

Before H E N RY , M cW IL LIA M S, TYM KOVICH, Circuit Judges.

      Jason Derek Troff has filed a petition for panel rehearing, in part, to clarify

factual statements in In Re Troff, 479 F.3d 1213 (10th Cir. 2007), concerning the

amount of damage his arson caused. Specifically, M r. Troff observes that the

record does not support the $800,000 figure, and he asks that we omit it.
      Upon consideration, the court grants the petition for rehearing for the

limited purpose of excluding the $800,000 figure. The petition is denied in all

other respects. An amended opinion is attached to this order.

                                                    Entered for the Court,

                                                    Robert Henry
                                                    Circuit Judge

                                         2
                                                                   F I L E D
                                                             United States Court of Appeals
                                                                     Tenth Circuit
                                    PUBLISH
                                                                   March 15, 2007
                  UNITED STATES CO URT O F APPEALS              Elisabeth A. Shumaker
                                                                    Clerk of Court
                               TENTH CIRCUIT

 In re: JASON DEREK TROFF,

           Debtor.
 ________________________
                                               No. 05-4244
 JASON DEREK TROFF,

             Plaintiff-Appellant,

      v.

 STA TE O F UTA H, RICH ARD ELLIS,
 in his official capacity as Executive
 Director of the Utah Department of
 Administrative Services; and DAVID
 JO HNSON III, in his official capacity
 as Interim Director of the Office of
 State Debt Collection,

             Defendants-Appellees.

     Appeal from the United States District Court for the District of Utah
                        (D.C. No. 2:05-cv-382 BSJ)

M ichael F. Thomson, Durham Jones & Pinegar, Salt Lake City, Utah, for
Plaintiff-A ppellant.

Nancy L. Kemp (M ark L. Shurtleff with her on the brief), Utah Assistant Attorney
General, Salt Lake City, Utah, Attorneys for Defendants-Appellees.

Before H ENRY, M cW ILLIAM S, and TYM KOVICH, Circuit Judges.
H ENRY, Circuit Judge.

      This appeal raises the question of w hether 11 U.S.C. § 523(a)(7) permits a

debtor in a Chapter 7 bankruptcy proceeding to discharge a restitution obligation

imposed as part of a state criminal sentence and payable to a private individual.

Exercising jurisdiction pursuant to 28 U.S.C. § 158(a) and (d), we affirm the

district court and hold that the debt is not dischargeable.

                                  I. Background

      In August of 1997, Jason Troff pleaded guilty to arson for setting fire to a

M cDonald’s in Salt Lake City, Utah. The Utah Third District Court stayed a

prison sentence of fifteen years, placed M r. Troff on 36 months’ probation, and

ordered him to pay $239,696 of restitution at a rate of $100 per month as a

condition of his probation. Throughout his probation, M r. Troff made the

monthly payments to the state, and the state forwarded the funds to the victim. In

October of 2000, probation violations prompted the court to extend his probation

an additional 36 months. As with his initial sentence, payment of restitution

remained an express condition of M r. Troff’s probation.

      Upon completion of probation, M r. Troff’s restitution obligation was

converted to a civil judgment. He continued making restitution payments until

M arch of 2003. In M ay of that year, M r. Troff filed for bankruptcy under Chapter

7, and the bankruptcy court discharged his restitution obligation. At the time he

                                          2
filed for bankruptcy, M r. Troff had paid only about $8,000 of his $239,696 debt.

Utah appealed the bankruptcy court’s decision, and the district court held that the

restitution obligation was not dischargeable.

                              II. Standard of Review

      The sole issue on appeal is whether § 523(a)(7) permits the discharge of a

restitution obligation imposed as part of a criminal sentence. “In reviewing a

bankruptcy court decision under 28 U.S.C. § 158(a) and (d), the district court and

the court of appeals apply the same standards of review that govern appellate

review in other cases.” In re Hodes, 402 F.3d 1005, 1008 (10th Cir. 2005).

Because this case requires us to determine the meaning of 11 U.S.C. § 523(a)(7),

we review the district court’s decision de novo. United States v. RX Depot, Inc.,

438 F.3d 1052, 1054 (10th Cir. 2006) (“W e review questions of statutory

interpretations de novo.”).

                               III. Applicable Law

      W e begin our analysis with an examination of 11 U.S.C. § 523(a)(7). For

reasons set forth in greater detail below, our analysis does not end with the text.

Next, we discuss Kelly v. Robinson, a Supreme Court case holding that restitution

obligations imposed as part of a criminal sentence are nondischargeable. 479

U.S. 36, 53 (1986). Finally, we examine U tah’s sentencing scheme and M r.

Troff’s sentence in light of Kelly. W e conclude that the same federalism concerns

that gave rise to the Supreme Court’s decision in Kelly are present in this case,

                                          3
and they compel us to conclude that, pursuant to § 527(a)(7), M r. Troff’s

restitution obligation may not be discharged.

                              A. The Bankruptcy Code

       Section 523(a)(7) states in the pertinent part:

             (a) A discharge under section 727, 1141, 1228(a), 1228(b), or
       1328(b) of this title 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 . . . .

       M r. Troff contends that the plain meaning of this text requires discharge

because the restitution in this case is not “payable to and for the benefit of a

governmental unit” because, although M r. Troff made his monthly payments to

the state, the state forwarded them to the victim. W ere we to apply a strict plain

meaning reading of this statute’s text to the instant case, M r. Troff’s argument

would be stronger. However, the Supreme Court’s decision in Kelly makes clear

that we must look beyond such a reading to federalism concerns and to the history

of this statute.

                                B. Kelly v. Robinson

       In Kelly, the Supreme Court addressed a question almost identical to the

one here. M s. Robinson was convicted of larceny after she wrongfully accepted

nearly $10,000 in welfare benefits from the State of Connecticut. 479 U.S. at 38.

The sentencing judge ordered M s. Robinson to make restitution to the state as a

                                           4
condition of probation. M s. Robinson subsequently filed for bankruptcy under

Chapter 7, and the bankruptcy court discharged her court-imposed restitution

obligation. The Supreme Court held that restitution obligations imposed as part

of a criminal sentence were not dischargeable under § 523(a)(7) because

principles of federalism do not permit a bankruptcy court to interfere with a state

criminal sentence. Id. at 53.

      The first aspect of Kelly that bears on our decision in this case is the

Supreme Court’s method of statutory interpretation. The Court emphasized that

in the context of the Bankruptcy Code, “the text is only the starting point[],” and

that courts “must consider the language of . . . 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.” Id. at

43. Because federal courts had interpreted bankruptcy laws to avoid conflict with

state criminal sentencing since the inception of bankruptcy, the Court reasoned

that “[i]f Congress had intended, by § 523(a)(7) or by any other provision, to

discharge state criminal sentences, we can be certain that there would have been

hearings, testimony, and debate concerning consequences so wasteful, so inimical

to purposes previously deemed important, and so likely to arouse public outrage.”

Id. at 51 (internal quotation marks omitted).

      The Kelly Court noted that its decision rested on the same “‘fundamental

policy against federal interference with state criminal prosecutions’” that was at

                                           5
the core of the Court’s holding in Younger v. Harris. Id. at 47 (quoting Younger

v. Harris, 401 U.S. 37, 46 (1971)). In Younger, the Court concluded that federal

courts could enjoin state criminal prosecutions in only extraordinarily rare

circumstances. 401 U.S. at 53-54. W riting for the Younger Court, Justice Black

explained that state control over criminal justice was a lynchpin in the unique

balance of interests he described as “Our Federalism.” Id. at 44.

      [Federalism] represent[s] a system in which there is sensitivity to the
      legitimate interests of both State and National Governments, and in
      which the National Government, anxious though it may be to
      vindicate and protect federal rights and federal interests, always
      endeavors to do so in ways that will not unduly interfere with the
      legitimate activities of the States.

Id.

      To avoid conflict with state criminal justice systems, the Kelly Court

broadly interpreted § 523(a)(7)’s requirement that in order to be non-

dischargeable, a “fine, penalty, or forfeiture” must be “payable to and for the

benefit of a governmental unit and [] not compensation for actual pecuniary loss.”

Kelly, 478 U.S. at 52. The Court explained that although restitution often focuses

on money owed to a non-governmental victim,

      [t]he criminal justice system is not operated primarily for the benefit
      of victims, but for the benefit of society as a whole. . . . Although
      restitution does resemble a judgment for the benefit of the victim, the
      context in which it is imposed undermines that conclusion. . . .
      Unlike an obligation which arises out of a contractual, statutory, or
      common law duty, here the obligation is rooted in the traditional
      responsibility of a state to protect its citizens by enforcing its
      criminal statutes and to rehabilitate an offender . . . .

                                          6
Id. (internal quotation marks omitted). Hence, the Court concluded that any

restitution obligation imposed as part of a state criminal sentence confers a

benefit on a governmental unit. Id. at 53.

                                   IV. Discussion

                       A. Applicability of Kelly v. Robinson

      M r. Troff contends that we ought to confine Kelly to its facts and disregard

much of the opinion as dicta. He maintains that, if read narrowly, Kelly does not

apply here because in M s. Robinson’s case, Connecticut retained M s. Robinson’s

restitution payments. Thus, M r. Troff maintains that the Supreme Court’s broad

interpretation of “for the benefit of a governmental unit” is not applicable in this

case because the payments here are forw arded to the victim.

      M r. Troff’s observation that Kelly’s holding reaches beyond its facts is

correct. Yet, the Kelly Court’s reasoning made clear that it would apply the rule

to any obligation imposed as part of a criminal sentence. See Id. at 53 (holding

that “[b]ecause criminal proceedings focus on the State’s interest in rehabilitation

and punishment, rather than the victim’s desire for compensation, we conclude

that restitution orders imposed in such proceedings are ‘for the benefit of’ the

State.”). Furthermore, even if we disagreed with the breadth of Kelly’s holding or

its rationale, we are not free to blaze our ow n trail because “this court considers

itself bound by Supreme Court dicta almost as by the Court’s outright holdings. . .

.” Gaylor v. United States, 74 F.3d 214, 217 (10th Cir. 1996). Thus, Kelly–dicta

                                          7
and all–applies.

                      B. Restitution Under Utah Criminal Law

      Criminal law is axiomatically public law. W hen imposed as part of a

criminal sentence, restitution ensures that offenders pay their debt, not only to

their victims, but also to society. Restitution imposed as part of a criminal

sentence under Utah law is not merely “compensation for [a victim’s] actual

pecuniary loss” under § 523(a)(7); rather, it serves the goals of the state’s

criminal justice system. The Utah code distinguishes between two types of

restitution, complete and court-ordered. Utah Code Ann. § 76-3-201(4)(c) (1999).

Complete restitution is a calculation of the amount necessary to compensate a

victim for all pecuniary losses. Utah Code Ann. § 76-3-201(4)(c)(i) (1999).

Court-ordered restitution–the amount the defendant will be required to pay as part

of his criminal sentence–takes into account not only the amount necessary to

make a victim whole, but also the financial burden on the defendant, his ability to

pay on an installment basis, and “the rehabilitative effect on the defendant of the

payment of restitution and the method of payment.” Utah Code Ann. § 76-3-

201(8)(c) (1999) (current version at Utah C ode A nn. § 77-38a-302(5)(c) (2004))

(emphasis supplied). “[L]ike the Connecticut statute examined in Kelly, this Utah

statute . . . ‘provides for a flexible remedy tailored to the defendant’s situation.’”

Aplt’s App. at 114 (M emorandum Opinion and Order, filed Aug 15, 2006)

(quoting Kelly, 479 U.S. at 53). “Because [Utah’s] criminal proceedings focus on

                                           8
the State’s interests in rehabilitation and punishment, rather than the victim’s

desire for compensation, . . . orders imposed in such proceedings operate ‘for the

benefit of’ the State.” Kelly, 479 U.S. at 53.

                         C. M r. Troff’s Criminal Sentence

      It is uncontroverted that the court-imposed restitution obligation in this

case was part of M r. Troff’s criminal sentence and a condition of his probation.

The Utah state court mandated that M r. Troff comply with seventeen conditions if

he w as to remain out of prison and on probation, one of w hich required that M r.

Troff “[p]ay restitution in the amount of $239,969.” Aplt’s App. at 72 (State of

Utah Protected Progress/Violation Report, filed Oct. 6 2001). W hen the court

extended M r. Troff’s probation in October of 2000, it reiterated that M r. Troff

was to “continue paying restitution.” A plt’s A pp. at 87 (Salt Lake County

Sentencing Report, dated Oct. 30, 2000). 1    Because the court-imposed restitution

obligation was part of M r. Troff’s criminal sentence, M r. Troff’s attempt to

discharge the debt is squarely within the cross-hairs of the Supreme Court’s

decision in Kelly.

      1
        M r. Troff also maintains that the restitution obligation should be
dischargeable because it was converted to a civil judgment after M r. Troff
finished serving his probation. Although this conversion may alter the
consequences for M r. Troff’s non-payment, it does not change the fact that the
court-imposed restitution was part of his criminal sentence.

                                          9
                           D. Decisions in Other Circuits

       Not all courts confronting § 523(a)(7) have looked to legislative history in

construing the term “for the benefit of a governmental unit.” 11 U.S.C. §

523(a)(7). However, the two cases that M r. Troff attempts to apply are clearly

distinguishable from this case. In order to conclude that M r. Troff’s restitution

obligation was dischargeable, the Bankruptcy Court applied In re Tow ers, a

Seventh Circuit decision. 162 F.3d 952 (7th Cir. 1998). In Towers, an Illinois

court found that M r. Towers had violated the Illinois Consumer Fraud and

Deceptive Business Practices Act. Id. at 953. The court assessed a civil penalty

of $50,000 and ordered M r. Towers to pay $210,000 in restitution to the

individuals he had deceived. Id. The Seventh Circuit concluded that the

$210,000 of restitution owed to the individuals was dischargeable because the

funds were not “payable to and for the benefit of a governmental unit” under the

meaning of § 523(a)(7). Id. at 955. Judge Easterbrook, writing for the court,

emphasized that finding otherwise would “torture[] the language of § 523(a)(7).”

Id. at 956.

       In In re Rashid, the Third Circuit held that M r. Rashid’s restitution

obligation, imposed as part of a federal criminal sentence before Congress

amended the Bankruptcy Code to extend Kelly to federal criminal proceedings in

1994, was dischargeable under the plain language of § 523(a)(7). 210 F.3d 201,

208 (3rd Cir. 2000). As in Towers, the court held that funds payable to private

                                          10
victims were not “payable to and for the benefit of a governmental unit” under the

meaning of § 523(a)(7). Id. at 207.

      Although the Seventh and Third Circuits confined their reading of §

523(a)(7) to the text’s plain meaning, it is important to note that Towers and

Rashid did not require their respective courts to face the federalism concerns that

we confront here and that were paramount to the holding in Kelly because neither

case dealt with a state criminal sentence. In Towers, the fine the bankruptcy court

discharged was a civil matter not issued as part of a criminal sentence pursuant to

the criminal title of the Illinois Code. 162 F.3d at 945. Rashid dealt with a

federal sentence imposed before Congress amended the bankruptcy code to make

such obligations non-dischargeable. 210 F.3d at 204. Because Rashid and Towers

dealt with restitution orders outside the ambit of state criminal sentences, they

were free to disregard the legislative history that animated Kelly and focus on §

523(a)(7)’s text.

                    E. State and Congressional Reliance on Kelly

      Holding that M r. Troff’s restitution obligation is dischargeable w ould

undermine Kelly and disrupt two decades of Congressional reliance on the notion

that the holding applied whether the crime’s victim was the government or a

private individual. Congress has extended the rule of Kelly to federal criminal

restitution orders. Rashid, 210 F.3d at 204. In fact, the Supreme Court’s failure

to expand Kelly met with immediate disapproval in Congress. In Pennsylvania

                                          11
Department of Public Welfare v. Davenport, the Court held that restitution

obligations imposed as part of criminal sentences were dischargeable in Chapter

13 proceedings. 495 U.S. 552, 562 (1990). In the same year the decision was

handed down, Congress overruled Davenport and adopted Kelly’s interpretation

of § 523(a)(7) in enacting the Criminal Victims Protection Act of 1990, Pub. L.

No. 101-581, § 3, 104 Stat. 2865 (enacted Nov. 15, 1990) (codified as 11 U.S.C. §

1328(a)(3)) (excepting from discharge any debt “for restitution, or a criminal

fine, included in a sentence on the debtor’s conviction of a crime”).

      Finally, curtailing Kelly would upset the well-settled expectations of state

legislatures and sentencing courts. Utah’s mandatory restitution provisions

reflect the legislature’s judgment that restitution is an important part of any

criminal sentence not only because it forces the criminal to pay for the harm he

caused but because of its rehabilitative effects as w ell. Permitting offenders to

discharge their court-imposed obligations merely because they were no longer on

probation would subvert Utah’s sentencing scheme and allow bankruptcy courts

to “hamper the flexibility of state criminal judges in choosing the combination of

imprisonment, fines, and restitution most likely to further the rehabilitative and

deterrent goals of state criminal justice systems.” Kelly, 479 U.S. at 49 (internal

quotation marks omitted). Had the state criminal court wished to have M r.

Troff’s payments terminate at the conclusion of his probation, it could have

sentenced him accordingly.

                                          12
                                  V. Conclusion

      For the foregoing reasons, we A FFIRM the district court and hold that M r.

Troff’s restitution obligation was not dischargeable under § 523(a)(7).

                                        13
05-4244, Troff v. State of Utah

T YM K O VIC H, J., concurring.

      I fully concur in Judge Henry’s disposition. I write separately because this

case raises a stark reality I wish to highlight: W hat happens when the Supreme

Court ignores the plain meaning of a statute?

      The statute at issue here is not ambiguous or unclear. It prohibits discharge

of debts that (1) arise from a fine, penalty, or forfeiture, (2) are payable to a

governmental unit, and (3) are not compensation for actual victim loss. 11 U.S.C.

§ 523(a)(7). In this case, Troff’s debt fails the second and third elements, and,

one would think, that would be the end of the story.

      But the Supreme Court in Kelly v. Robinson, 479 U.S. 36 (1986), tells us

that we should discount the statutory text for policy considerations. The Kelly

Court could easily have ruled as a textual matter in favor of the government in

that case since (1) the recipient of restitution was a governmental agency, not a

private person, and (2) the losses were linked to the state’s welfare program, not

to specific victims. Instead of leaving well enough alone, however, the Court

departed from ordinary textual analysis and followed the lure of policy maker.

Thus, we get odd language from Kelly such as “the text is only the starting point,”

followed by language endorsing a policy assessment— we need figure out what is

“for the benefit of society as a whole.”

      I agree with the bankruptcy court below that the Supreme Court
overreached in Kelly. I probably would also agree with the Supreme Court that

the better national policy is for state criminal restitution orders to be non-

dischargeable in bankruptcy. But that is not what Congress said in § 523. It is

the Court’s interpretation of the statute that commands that the debtor lose here,

not the language Congress chose to use in the statute. As tempting as it would be

to ignore the Supreme Court’s interpretation of the text in favor of the actual text,

that is not our role at the circuit court level.

       In the end, Kelly is a textbook example of the Court ignoring the plain

meaning of a statute to further competing policy goals w ith very good arguments

on each side. It is not altogether clear the Court made the best choice. It appears

nonetheless that Congress over the years has acquiesced in that interpretation, so

perhaps this is a case of “no harm, no foul.” Even so, subject to the vagaries of

stare decisis, the Supreme Court could and should correct its error by taking this

case and narrowing the holding of Kelly to the statutory text.

                                             2