KELLY v. ROBINSON
Legal provision: Bankruptcy Code, Bankruptcy Act or Rules, or Bankruptcy Reform Act of 1978
Argument of Carl J. Schuman
Chief Justice Rehnquist: Mr. Schuman, you may start whenever you're ready.
Mr. Schuman: Mr. Chief Justice and may it please the Court:
The issue in this case is whether the Congress of the United States intended to allow a convicted criminal sentenced to make restitution to escape punishment by filing a petition of bankruptcy and listing the restitution order as a dischargeable debt.
In broader terms, the issue is whether Congress intended the bankruptcy process to interfere with the orderly administration of criminal justice.
The state of Connecticut, the amici states supporting the state of Connecticut, the amici state and local organizations, submit that Congress had no such intention.
We make this submission in light of the history and language of the Bankruptcy Code and the public policy purposes behind it.
In July of 1980, the Respondent, Carolyn Robinson, pleaded guilty to larceny in the second degree as a result of her unlawful receipt of $9,932.95 in welfare benefits while she was simultaneously receiving social security benefits.
She was sentenced to one to three years in prison, execution suspended, placed on probation for five years, and ordered to make restitution at the rate of $100 per month over the five year period.
She was to make her first payment in January of 1981.
In February of 1981, February 5th, only 20 days later, she filed a petition in Bankruptcy Court.
State agencies did not file any exceptions to discharge and the Petitioner... the Respondent received a discharge in bankruptcy in May of 1981.
The Respondent filed an adversary complaint in Bankruptcy Court to determine the dischargeability of the restitution obligation when in February of 1984 state agencies took action to revoke the Respondent's probation as a result of her failure to make restitution payments.
The bankruptcy and the district courts held that restitution is not a debt within the meaning of the Bankruptcy Code and, in the alternative, that it was excepted from discharge.
The Second Circuit, however, reversed.
The Second Circuit's conclusion is at odds with, in the first place, the judicial history predating the Bankruptcy Code.
This Court has followed the rule that if Congress intends to change a judicially created concept it will do so explicitly.
In 1978, at the time when Congress re-enacted the Bankruptcy Code, it had become judicially accepted that criminal monetary obligations were not debts subject to bankruptcy.
As early as 1848, in fact, this Court summarily affirmed a New York Court of Appeals decision holding that a criminal contempt fine was not a bankruptcy debt.
Subsequent to that decision and in part relying on it, at least six cases, both federal and state, have held or stated in clear terms that criminal monetary obligations, including restitution were not bankruptcy debts.
Now, contrary to the Respondent's position, these decisions did not turn on whether or not the debts were provable or allowable, but rather stated quite clearly that criminal monetary sanctions were not debts of any sort.
Unknown Speaker: I'd like to ask, Mr. Schuman, are there same states that do treat restitution orders as debts and collectable as civil judgments?
Mr. Schuman: --There are some states, Your Honor, that do treat restitution orders as collectable similar to civil judgments.
Unknown Speaker: I guess in the state of Connecticut they're not so treated?
Mr. Schuman: That's correct, Your Honor.
Unknown Speaker: Well, what would the result be in a state where they are treated as collectable civil judgments, under your theory?
Mr. Schuman: The result would be no different.
In both cases--
Unknown Speaker: Why is that?
Mr. Schuman: --Because in those states in which the states have treated the restitution order as in part collectable similar to a civil judgment, they have just chosen different and perhaps innovative ways of enforcing their criminal statutes.
In a sense, in those states victims become private attorney generals that enforce their criminal statutes.
I would note that--
Unknown Speaker: But for purposes of the bankruptcy law, do you normally lock to the state law to determine whether something is a collectable debt?
Mr. Schuman: --No, the question of whether it's a debt within the meaning of the Bankruptcy Code is a federal question.
But in interpreting whether it is a debt or not I think it's relevant to say, it's as a matter of fact crucial to say, that a restitution order is punishment, not a debt.
Certainly the definition of a debt within the meaning of the Bankruptcy Code must be applied.
But even if you apply that definition in those states that force their restitution... or allow for enforcement of restitution by way of a civil judgment, restitution is still not a debt.
I'd like to explain why.
Restitution is an integral part of the criminal justice system.
It allows judges the middle ground between jail on the high end and lesser forms of punishment on the lower.
Unknown Speaker: Well, I just... if you look at the language of the statute, though, under the Bankruptcy Code, it becomes a little bit tricky, because it says a debt means liability on a claim, and a claim means a right to payment, whether or not it's reduced to judgment.
So in a state that treats it as a right to payment on the part of the victim, it makes it more difficult to follow your argument, I suppose.
Mr. Schuman: Well, even in those cases, Your Honor, that conclusion would mean that the victim would be the creditor in Bankruptcy Court.
I don't think it's conceivable to say that Congress intended that victims, who have already suffered enough for their crimes, would have to come into Bankruptcy Court in order to preserve a restitution order from being discharged.
Unknown Speaker: But in any event, it wouldn't prevent the state, in your view, from coming in and getting it--
Mr. Schuman: Well, if Your Honor is suggesting--
Unknown Speaker: --This is a peculiar case, though, because here the state was also the victim.
Mr. Schuman: --Yes, but we would submit that it makes no difference whether the state is the victim in terms of the ultimate outcome.
If Your Honor is suggesting that the fact that a victim may have a right of civil enforcement in some states creates a right to payment, it would create a right to payment to the victim, and I don't think that Congress intended victims to have to come into Bankruptcy Court in order to preserve restitution orders from being dischargeable.
I would add that under federal law a fine, under the Criminal Fine Enforcement Act, can be enforced civilly, under a new 1984 federal statute.
Now, the fact that a criminal punishment can be enforced civilly does not somehow convert it into an ordinary civil debt, as would a breach of contract.
A criminal fine surely is not a debt within the meaning of the Bankruptcy Code, and restitution is not, merely because states may have chosen innovative ways to enforce a criminal sanction.
Unknown Speaker: Mr. Schuman, you stated the agency or the state did not file objections to the discharge.
Is there a reason for that?
Would you feel a little more comfortable if they had?
Mr. Schuman: No, Your Honor.
There is... let me answer the first question first.
There is perhaps a reason for that.
I would not feel any differently if they had.
The real reason, if it is one, is that this was the first time this issue had arisen in Connecticut and state agencies were admittedly somewhat confused on how to handle it.
But our position is that the state... the Congress did not intend prosecutors to have to file exceptions in Bankruptcy Court, and so it would make no difference in our view whether we thought we should have or not.
Unknown Speaker: Yes, but a claim was filed, wasn't it?
Mr. Schuman: The state did not file a proof of claim, Your Honor, no.
We did not file exceptions, we did not file proof of claim.
Unknown Speaker: Mr. Schuman, there's no suggestion in this case that if this restitution order or this claim is discharged, that the state could not say this is a breach of probation and put them in jail?
Mr. Schuman: --We concede that, Your Honor.
If this Court concludes that the restitution obligation was discharged, we cannot under Perez and the anti-discrimination clauses of the Bankruptcy Code then proceed to incarcerate the Respondent.
Unknown Speaker: You may?
Mr. Schuman: No, we believe--
Unknown Speaker: You may not?
Mr. Schuman: --We believe that if this Court finds that restitution was discharged that the anti-discrimination clauses of the Bankruptcy Code--
Unknown Speaker: Well, it was a condition of his probation that he not be... that he make restitution.
Mr. Schuman: --Yes, Your Honor.
Unknown Speaker: And maybe he can avoid some civil action against him in bankruptcy, but that's all that the discharge does, isn't it?
Mr. Schuman: The civil obligation is discharged.
The question is whether the criminal one is.
Unknown Speaker: Well, do you concede that the discharge of the civil obligation means that the state can't say he's breached his probation?
Mr. Schuman: As I understood your question, Your Honor, you were assuming--
Unknown Speaker: Can you put him in jail for claiming his discharge in bankruptcy?
Mr. Schuman: --We can't put him in jail... we can put him in jail if this Court concludes that the restitution obligation was not discharged.
Unknown Speaker: Oh, yes, oh, yes.
But if it is discharged, you say he's completely free of his criminal sentence?
Mr. Schuman: No.
No, not at all.
Unknown Speaker: Well, what is he free of?
Mr. Schuman: He's free... she in this case is free of the obligation to make restitution.
That is by virtue of the anti-discrimination clauses.
Unknown Speaker: But is she also free... does her criminal sentence... does her probation end?
Mr. Schuman: No, her probation continues.
The criminal conviction remains, and she would be subject to any other--
Unknown Speaker: But that condition that she make restitution is just wiped out?
Mr. Schuman: --If this Court concludes that restitution is a debt, yes.
Unknown Speaker: Mr. Schuman, are you going to get to the waiver point?
Mr. Schuman: Yes, Your Honor.
If you're referring to the consequences--
Unknown Speaker: You brought up the waiver point.
Mr. Schuman: --the consequences of our failure to file exceptions, yes, Your Honor.
The state's position--
Unknown Speaker: At your own time.
Mr. Schuman: --Thank you very much, Your Honor.
The state's position is that the notion that prosecutors should have to file exceptions in Bankruptcy Court is so irrational and leads to absurd results that Congress could not conceivably have intended it.
This notion conflicts with fundamental public policy.
Unknown Speaker: May I interrupt there for just a second.
If you had filed objections, you would have protected these claims from being discharged, wouldn't you?
Mr. Schuman: In all probability we would have in this case.
Unknown Speaker: Well, why is it irrational, if a statute has time to become known in the legal community, why is it irrational to have the prosecutor just recognize this is one thing he has to do in these cases?
Mr. Schuman: Because in the next case it will be extremely difficult, and in the case after that it will--
Unknown Speaker: Why is it difficult?
I mean, creditors always file objection.
You're just another creditor.
Mr. Schuman: --Let's say, Your Honor, the next case is a drunk driving case in which restitution has been imposed, and which it is on occasion in Connecticut.
Now, the Bankruptcy Code has an exception to discharge for injuries occurring as a result of a driver operating while legally intoxicated.
In Connecticut, however, in order to be convicted of a drunk driving offense the proof is only of a person's operating under the influence or operating with greater than.1 percent alcohol in his blood.
So if that defendant who is sentenced to make restitution in that drunk driving case then went into Bankruptcy Court, the state would then have to in that case present additional proof that not only was that person operating under the influence, which the Connecticut Supreme Court has said is a different standard than legally intoxicated; the state would then have to prove part of its case all over again.
Unknown Speaker: You're saying some other case might present your problem.
But how about a case just like this one.
There's no problem on a case like this, is there?
Mr. Schuman: Well, ultimately we would probably win if we filed an exception to discharge.
Unknown Speaker: Probably?
Wouldn't you certainly?
Doesn't the statute expressly... I can't remember the section number... have an express provision for cases like this?
Mr. Schuman: Yes, Your Honor.
But this case is unusual in that it does fit within the express exception.
Unknown Speaker: Well, but that's the only case we have to decide today.
It fits squarely within the express exception.
Mr. Schuman: Well, I would submit, Your Honor, that the decision in this case, if this Court concludes that restitution is a debt subject to bankruptcy, will affect restitution in all other cases, in which it will be hard in some cases and impossible in other cases for state... for prosecutors to file exceptions to bankruptcy.
I would note, Your Honor, even in the case like this one, in which there is a neatly fitting exception to discharge, that there are burdens, burdens that Congress presumably did not intend to impose on prosecutors.
The notion that several years after the crime prosecutors should have to start filing complaints in Bankruptcy Court and participating as supplicants in a federal court--
Unknown Speaker: Well, that's not just the prosecutor.
You have a probation department, there's a probation officer making sure she's making her monthly payments.
If she doesn't make the payments, presumably he follows up on it.
Don't you have some kind of a checkoff system on people on probation?
Mr. Schuman: --Certainly.
Unknown Speaker: And when a person defaults, isn't there a follow-up procedure that's set up?
And why is it so hard to say that they have filed for bankruptcy when you've got to file a form in the Bankruptcy Court?
I jut don't understand this impossibility argument.
I presume you've got good lawyers in Connecticut.
If this case is so important, why didn't you go into Bankruptcy Court?
You say this case is so important.
Mr. Schuman: Again, Your Honor, in this case I will admit that state agencies were a little perplexed because this was the first time it happened.
But our position is that Congress did not intend for prosecutors to have to participate in bankruptcy, and the reason is in part in the drunk driving case that I've explained.
It's also, for example, in a negligent homicide case.
If restitution is imposed in a negligent homicide case, there will be no applicable exception to discharge, because the only one that's close pertains to willful and malicious injury.
Unknown Speaker: What kind of restitution could you have in a negligent homicide case?
Is that a common remedy in a death case?
Mr. Schuman: Well, in Connecticut restitution has been imposed in a negligent homicide case to pay the victim's funeral expenses, for example.
Unknown Speaker: I see.
Mr. Schuman: Now, take for example a drug case.
In some cases, not in Connecticut but in other states, restitution has been imposed in a drug sale case in order to force the defender, the defendant, to pay the Government the costs of the Government's undercover operations which elicited or which brought out the drug sale.
Now, there's nothing in the Bankruptcy Code that's even close to a drug sale.
There would be no way that the state or Federal Government, for that matter, could file an exception in Bankruptcy Court in order to prevent a criminal defendant from escaping the consequences of his crime.
Unknown Speaker: Well, Mr. Schuman, you've certainly given us some very good practical reasons why we would want to find in your favor.
But you're dealing with a very complicated bankruptcy statute, with a very broad definition of claim, very broad definition of debt, that made sweeping changes from what the law was before 1978.
And it seems to me you ought to devote some of your discussion to, you know, why this isn't a debt or a claim as that term is defined in the bankruptcy statute.
I asked you about that initially, I think, and I still have real difficulty understanding why this isn't a right to payment.
Certainly the state has a right to enforce the payment of the restitution order, and I think that argument falls awfully flat, to say that it isn't a claim and isn't a debt.
I'm wondering why you don't try to fit the thing under the exception in 5523(a)(7), which as I understand the code says... would not require the state to go in and file a claim.
It would be automatically excluded under the Bankruptcy Code itself if the thing... if the restitution order is considered a debt for a fine, penalty, or forfeiture, payable to or for the benefit of a governmental unit.
Now, the problem there, of course, is the additional clause of
"and is not compensation for actual pecuniary loss. "
In this particular case maybe it's a pecuniary loss to the state, but in most criminal cases it would not be, would it?
Mr. Schuman: Well, we contend, Your Honor, that a restitution order, although it has a compensatory effect and does constitute compensation in terms of its effect, in purpose does not serve to compensate people.
It serves to vindicate the societal interest.
It is punishment in a milder form, because it forces the offender to confront the consequences of its act, of his act, in a way--
Unknown Speaker: xxx your loss and this replaces it.
Mr. Schuman: --That's the effect of it, Your Honor.
Unknown Speaker: Well, isn't that enough to satisfy (a)(7)?
Mr. Schuman: Well, Your Honor, that is an alternative argument.
I must mention that.
We believe that 523(a)(7) does not primarily refer to criminal fines and penalties.
523(a)(7) says that to the extent a debt is for a fine or penalty and then goes on.
It is not a definitional section.
The historical note and the predecessor provision under the Bankruptcy Act clearly state, or suggest at least, that this is designed to refer to civil fines and penalties.
Unknown Speaker: Well, is a criminal fine a debt?
Mr. Schuman: No.
Criminal fines would stand in the same place as criminal restitution.
It would be outside of bankruptcy completely.
I think that this is perhaps clearest from the history of the cases predating the Bankruptcy Code, because, as I've stated, these cases made clear that criminal monetary obligations were outside of bankruptcy.
Now, in 1978 Congress did nothing to alter this settled view.
It did expand the concept of debt to bring in matters that were outside of bankruptcy previously because they were non-provable or non-allowable or too contingent or unliquidated.
But it did nothing to alter the fact that certain criminal obligations were outside of bankruptcy for reasons unrelated to their speculative nature.
And the fact that Congress expanded the concept of debt in some ways to bring in non-provable claims, but not in other ways, is the strongest indication, or at least a strong one, that Congress did not intend to do so.
The fact is, Congress specifically stated that the bankruptcy laws are not designed to be a haven for criminal offenders, but are designed to give relief from financial overextension.
That was the reason that Congress broadened the concept of debt.
It was to bring in speculative debts.
It manifested no intention whatsoever to change the settled view of the law whereby--
Unknown Speaker: That comment that you're referring to in the House report was really made with regard to the provision for automatic stays, where the Congress was saying that criminal proceedings don't have to be automatically stayed.
I don't think that comment refers at all to whether a resulting criminal fine is a debt.
Mr. Schuman: --Well, Your Honor, the comment is associated in the historical note, or in the legislative history, with the automatic stay.
But it would make no sense for Congress to exempt criminal actions from an automatic stay and only to then nullify in part the result of that criminal prosecution.
There was a reason that Congress made explicit the exception from the automatic stay for criminal obligations or for criminal actions, and that was because in the 1970's, as this Court in Midlantic observed, courts had started broadening the effect of the automatic stay.
So Congress thought it wise to specify the exceptions from the automatic stay, and that's why it did so with regard to criminal actions.
But there was no need for Congress to change the settled view of the law that had kept criminal obligations outside of bankruptcy altogether.
Unknown Speaker: 523(a)(7) isn't very helpful, arguably not helpful in this case, because it is compensation for actual pecuniary loss.
Mr. Schuman: Well, Your Honor, we would submit that that might be its effect, but it's not its purpose, and that for the most part--
Unknown Speaker: No, I'm saying it wouldn't fit here because here it is compensation for actual pecuniary loss, wouldn't you say?
Mr. Schuman: --No, I wouldn't.
Unknown Speaker: Why not?
Mr. Schuman: Well, for two reasons.
One is peculiar to this case, in that the amount that the debtor had to pay was less than the amount of the loss.
But moving beyond that--
Unknown Speaker: Does that mean it's not compensation for actual--
Mr. Schuman: --Well, it's certainly not full compensation.
But moving beyond... and it suggests that the sentencing court had other purposes in mind in compensating the state.
Restitution was designed to achieve punitive purposes and not compensatory purposes.
Unknown Speaker: --Well, of course.
But every... that's the purpose of every fine, penalty, or forfeiture.
When you use the language (a)(7) does, you're assuming that part of the purpose may well be penal.
But in addition to the penalty, it can't be compensation for actual pecuniary loss.
If it's part of each, it doesn't qualify.
I assume that's how you read it.
I don't know how else you can read it.
Mr. Schuman: Well, we would submit, Your Honor, that again restitution is not a compensatory device.
It is a punitive one, and for the most--
Unknown Speaker: Even if it were, though, (a)(7) wouldn't be very useful in most cases anyway because... are these restitution remedies normally payable to a governmental unit?
In other states, are they ever payable directly to the victim?
Mr. Schuman: --Not to my knowledge.
They're usually filtered through a governmental unit, dispersed by the governmental unit.
But it might be for... governmental unit in the Bankruptcy Code is defined to include the state as a larger entity.
So it might... since restitution serves punitive purposes, it might be for the benefit of the polity as a whole.
I'd like to make clear, however, that it appears from the history of 523(a)(7) that it refers primarily to civil fines and penalties, and that criminal fines and penalties were considered outside of bankruptcy altogether and so there was no need for... there would be no need for prosecutors to have to file exceptions to bankruptcy.
Unknown Speaker: Well, why do you suppose Congress didn't say so?
Mr. Schuman: Because, Your Honor, it did not need to.
And the rule that this Court... and that was true in Midlantic as well, where there was a judicial exception to the trustee's abandonment power.
This Court found that Congress did not need to specify that that exception would carry through, but because it did not manifest any intent to change the prior history this Court presumed that the Congress intended to carry it through.
And that's certainly the case here.
Now, I would note, in addition to the burdens that I've mentioned of filing exceptions to discharge, this Court in Imbler v. Pachtman clearly stated that a prosecutor's energy and commitment should be to prosecuting criminal cases.
And I think it would be contrary to this Court's prior decision in Imbler and the public policy surrounding it for prosecutors to start becoming bankruptcy lawyers and supplicants in Bankruptcy Court.
I think that there are some cases in which--
Unknown Speaker: Don't the U.S. Attorney's Offices have a civil division?
Mr. Schuman: --Yes, they do, Your Honor, yes.
But in Connecticut state prosecutors would have to represent the division of criminal justice, and it would be I think contrary to notions of federalism and contrary to notions of finality for prosecutors to become supplicants in Bankruptcy Court.
Unknown Speaker: Would it cost them any more than this case has?
Mr. Schuman: I'm sorry, Your Honor, I didn't hear the question.
Unknown Speaker: Would it cost the state any more to have gone into Bankruptcy Court than it has cost you to date in this case?
Mr. Schuman: Perhaps in this case no--
Unknown Speaker: Yes or no?
Mr. Schuman: --No.
Unknown Speaker: Thank you.
Mr. Schuman: In other cases, the cost to society will be that a person sentenced to make restitution will be able to commit the perfect crime.
I'd like to reserve the remainder of my time.
Argument of Francis X. Dineen
Chief Justice Rehnquist: Thank you, Mr. Schuman.
We'll hear now from you, Mr. Dineen.
Mr. Dineen: Mr. Chief Justice and may it please the Court:
The question presented in this case is whether under the specific facts of this case the state was obligated to come into the Bankruptcy Court and file a complaint seeking a determination of non-dischargeability of this criminal restitution order.
And if I may please, I would just like to address three factual matters before I continue with the argument.
One is, there was a statement made about the amount of money that was being paid under the restitution order.
The restitution order entered by the court was in the amount of $9,932.95.
That was the precise amount of the welfare overpayment that was involved.
Although the order did say that it was to be paid at the rate of $100 per month, Your Honors will note that in the record on page 22A there is a reference in the letter that we received three years after the discharge that the state was now seeking to collect from the debtor a total at that point of $9,482.
So they were seeking really the full amount, less the amount she had paid up until that time.
And again, in the record at page 44A you will see in the complaint that was filed against the debtor for the revocation of the probation, again we have a figure of the balance owing at $9,382.95, again seeking the full amount of that restitution order.
So it appears twice that the state was seeking the full amount as the compensation.
Unknown Speaker: And therefore it isn't a discharge... it is discharged regardless of 523(a)(7)?
Mr. Dineen: Therefore, I present those facts to show that this really is... that simply illustrates that this was really compensation for actual pecuniary loss, and therefore the non-dischargeability section, 523(a)(7), simply does not apply because, one, it was compensation for actual pecuniary loss; and two, as has been discussed, even though it had a penal function, it would have to have a penal function for 423(a)(7) to apply in the first instance.
Unknown Speaker: Well, it's interesting that the pecuniary loss language appears in the section with respect to a fine, penalty, or forfeiture.
Do you know of any fines, penalties, or forfeitures that are actually compensation for pecuniary loss?
Mr. Dineen: Other than restitution, no.
Unknown Speaker: No, do you think restitution is a fine, penalty, or forfeiture?
Mr. Dineen: If it is not a fine, penalty, or forfeiture, then--
Unknown Speaker: My question is, do you know of any fines, penalties, or forfeitures that are compensation for pecuniary loss.
Mr. Dineen: --Yes.
Unknown Speaker: What?
Mr. Dineen: Restitution, as in this case.
Unknown Speaker: So you think restitution is a fine, penalty, or forfeiture?
Mr. Dineen: Yes, I think restitution is.
I would say it's a form of a penalty and it does represent compensation for actual pecuniary loss.
Our claim is if restitution is not at all a fine, penalty, or forfeiture, then the non-dischargeability provision of 423(a)(7) simply would not apply at all.
So in order for it to apply in the first instance, we must first determine is criminal restitution a fine, penalty, or forfeiture.
If it is not, 523(a)(7) doesn't apply.
If it is, then we look at 523(a)(7) and see whether it applies.
Indeed, 523(a)(7) has two exceptions to it.
Unknown Speaker: Yes, but if you decided restitution is not a fine, penalty, or forfeiture, but that there were some fines, penalties, or forfeitures that were compensation for pecuniary loss, you would certainly conclude that Congress intended some fines to be dischargeable if they were compensation for pecuniary loss.
Mr. Dineen: Yes, some fines.
Some fines, if they are compensation for pecuniary--
Unknown Speaker: Are dischargeable.
Mr. Dineen: --Well, 523(a)(7) doesn't say they are dischargeable.
It simply says they are not dischargeable and they may be non... they may be non-dischargeable under some other section.
A fine doesn't become dischargeable... is fact, 523(a)(7) says fines, penalties, and forfeitures are not going to be discharged.
Unknown Speaker: Unless.
Mr. Dineen: Unless, and one exception is if they're payable for the benefit of a private individual.
Unknown Speaker: So you think if it fit under one of the other exceptions, so be it?
Mr. Dineen: If it fit under one of the other exceptions, that it would be non-dischargeable.
And indeed, in this case, even though this was a criminal restitution order which was compensation for actual pecuniary loss and therefore 523(a)(7) did not apply, it may well be, and we essentially concede, that under some other provision of 523(a) it may still be a non-dischargeable debt, because 523(a)(4) states explicitly that a debt for larceny is a non-dischargeable debt.
Unknown Speaker: But the creditor has to come in.
Mr. Dineen: --But the creditor has to come in under 523(c).
And indeed, this Court made special note of that particular requirement in the case of Brown against Felson, which I would like to give Your Honors the citation for, 442 U.S. 127, a 1979 case in which it was held by this Court that collateral estoppel with respect to a state court creditor's judgment ought not to apply in the Bankruptcy Court... in that case, it was being sought to apply by the debtor in an adversary proceeding relating to non-dischargeability... because the issues are different.
That is to say, the creditor's judgment was related to a collection action on the one hand in the state court, and the question of whether the underlying transaction was one involving fraud was a different kind of issue which was, as this Court said, something that belonged within the exclusive province of the Bankruptcy Court as a result of those amendments in 1970 which required that certain kinds of non-dischargeable debts... and those are the ones under 523(a)(2), (4), and (6)... although they're non-dischargeable, must be brought into the Bankruptcy Court for a determination by the Bankruptcy Judge as to whether they are dischargeable or not under the meaning of those sections in the Bankruptcy Code.
And then 523(c) goes on to say, if the creditor does not come in... the language is very clear... the debt shall be discharged.
And that really brings me to the second factual point that I wanted to make clear, and that is in this case both the Office of Adult Probation and the Department of Income Maintenance were listed in the schedules.
Both were given notice by the court of the bankruptcy, and indeed they had a total of 66 days under the notice in which to come in and file their complaint.
And in fact, they could have asked for additional time to come in if they wished, but they simply did not do so.
Unknown Speaker: Mr. Dineen, what sort of proceedings would have taken place in the Bankruptcy Court if the state had filed a proof of its claim and made an objection?
Mr. Dineen: Well, the normal proceeding is what we call an adversary proceeding.
They file a complaint and it simply proceeds in the manner of a regular civil proceeding, as such proceedings may go in federal court.
Unknown Speaker: What are the elements that the state would have to prove?
Mr. Dineen: In this case, it would have to prove that this was a debt for larceny.
That is the language in the Bankruptcy Code, so they would allege essentially that.
They would say that the taking was a wrongful taking at the time of the taking and that it was with intent to remain--
Unknown Speaker: Would the state court judgment be admissible or would it be conclusive on those issues?
Mr. Dineen: --This Court ruled in Brown against Felson that, although res judicata does not apply, that collateral estoppel may well apply with respect to issues that had been litigated in the state court, with respect to factual findings that had been litigated.
So very likely a good deal of what had happened would be admissible, certainly, under the--
Unknown Speaker: Well, Mr. Dineen, if you're right, though, then a good many restitution orders that are typically entered all around the country, as in negligent homicide cases, just wouldn't qualify at all, would they?
Mr. Dineen: --There are some, Your Honor--
Unknown Speaker: Well, there are many.
And it seems to me under your view as a practical matter, if you're right there will be an enormous disincentive for any judge in the country to ever consider ordering restitution instead of just sending somebody to jail, because they'll know that there is a complete incentive for someone who's struggling to meet restitution payments to just file for bankruptcy.
And I can't believe that if Congress had thought about this problem for one minute, that we would have a decision like we have to review here.
And I think the consequences of sustaining your position are absolutely frightening, and I'd like you to comment on it.
Mr. Dineen: --Your Honor, I think a good deal of the restitution orders that would be entered would fit within the ambit of the various non-dischargeability sections as they appear in 523(a).
That is to say--
Unknown Speaker: Some of them might.
Mr. Dineen: --Yes, Your Honor.
All the fraud, all the false pretenses, all the false financial statements, all the defalcation, larceny, embezzlement, willful and malicious injury to person and property... all of those are non-dischargeable under the Bankruptcy Code, as well as others.
It may be that in certain instances where there would be a restitution obligation that might be contemplated and a court at that time would say, well, this is a kind that, if the debtor were to file, this individual were to file bankruptcy, might be dischargeable in bankruptcy, and therefore, just like any other creditor in considering whether to sue somebody or not, because if I do and I get a judgment and I spend all that time and money and get down to the end, then they're going to file bankruptcy.
So why should I do it.
Those kinds of considerations that are really considered on a regular basis by creditors when they proceed would be considered by a judge at the time of entering a sentence, and he might say: Well then, maybe I can't do it, maybe I ought not to do it, and so forth.
Now, may I just add one thing, Your Honor, with respect to that, and it's this.
As this Court decided in the case of Beardon against Georgia, there are people who are poor and against whom restitution orders are entered, who may be unable for financial reasons to pay the restitution order.
And as I understand the ruling in Beardon against Georgia, that fact alone ought not to be a basis for revoking their probation and bringing the person back in and re-instituting the sentence and the rest.
But if a good faith effort had been made to work to obtain money and so forth and wages to pay, that ought to be taken into consideration.
And so there's a concern in Beardon against Georgia about the poor person who is unable to pay the restitution order, and that really does dovetail into the Bankruptcy Code, because in the Bankruptcy Code we now have Section 707(b) that says that a regular bankruptcy may be dismissed by the Bankruptcy Judge if he finds that it would create a substantial abuse of that chapter.
And that means that if somebody comes into bankruptcy and is able to pay on their bills, but is going to file a bankruptcy but has future income and can pay, that kind of a bankruptcy is subject to dismissal under 707(b) as a substantial abuse of that chapter.
And if you then were to try and go into chapter 13 and file a wage-earner plan under chapter 13, that again is subject to a Section 1325(b) which says that that chapter 13 plan has got to include all of your disposable income over the next three years.
So there's a dovetailing of these provisions that forces somebody who is able to pay to have to pay if the debt fits within the ambit of those that might be a discharge debt in the bankruptcy.
Unknown Speaker: Mr. Dineen, as to those, as to those restitution orders that the provisions of the Bankruptcy Code don't happen to provide for... and you must admit, it seems to be sort of haphazard as to whether they will provide for them or not... it's not only a question of the judge when entering such a restitution order having to have in mind what the consequences will be, as you've describe them and as any creditor must do, although it seems strange to analogize a judge giving a sentence to a creditor.
It isn't only a matter of that.
When these provisions were enacted, there were presumably a number of restitution orders already extant, that had already been promulgated by state judges.
And it seems to me a very considerable step for the Federal Government to be saying: We are going to set aside state criminal penalties.
It isn't just a matter of having the judges having to take account of the federal law.
They would have been setting aside state criminal penalties on the basis of, you must admit, less than very explicit indication.
Mr. Dineen: There was a time gap between the enactment--
Unknown Speaker: That's right.
Mr. Dineen: --and the promulgation of the code, and actually the code taking effect, too.
Unknown Speaker: And you're asking us to read the statute to in effect amount to the Federal Government saying: Yes, there are a lot of state criminal penalties out there, but we're going to set them aside.
Mr. Dineen: Well, yes, the Bankruptcy Code does establish a set of priorities, a set of kinds of conduct that are not going to be discharged.
And other kinds of indebtedness obligations that are not so enumerated in 523(a) will then be discharged.
And I think that really represents a determination by the Congress, the elected representatives of all the many states, that this is the kind of relief that's going to be available in the bankruptcy system.
Unknown Speaker: Well, Congress may have had in mind only, though, those obligations arising out of the civil system, and perhaps it didn't have in mind at all abrogating existing systems of criminal law and procedures in the various 52 states.
Mr. Dineen: The reason why we claim that this provision relates to criminal fines and penalties and forfeitures, I've stated them generally in the brief.
That title itself,
"fines, penalties, and forfeitures. "
is lifted as a chapter heading in title 18 of the United States Code and clearly represents criminal fines, penalties, and forfeitures.
That's the precise term.
But in addition to that, there is a harmony or a balance in the Bankruptcy Code between what is dischargeable on the one hand under 523(a), 523(a) for example, and that particular non-dischargeability Section 523(a)(7), and on the other hand what is allowed and what is going to be paid as allowed claims under 726.
And 726(a)(4) does set up some priorities, and it allows fines and penalties and forfeitures now for the first time to participate in the estate and to be paid.
As you may recall or may know, under the old Bankruptcy Act, Section 57(j) did not allow penalties and forfeitures.
There were not--
Unknown Speaker: They were not discharged.
Mr. Dineen: --That is correct, they were not discharged nor were they allowed.
And so here we have a major change.
Unknown Speaker: And you didn't have to file.
Mr. Dineen: I beg your pardon, Your Honor?
Unknown Speaker: You didn't have to file.
You didn't have to file a claim or anything else.
Mr. Dineen: You did not have to file a claim.
Unknown Speaker: And they weren't considered a debt.
Mr. Dineen: That is correct.
The rationale that had developed was that fines and penalties were not considered debts, and the language that was used in those cases was because they were not provable.
Debt, as you recall, under the old Bankruptcy Act had within it in the definitional section that it had to be provably as well as in the discharge section saying that you were discharged from your provable debts.
So twice the concept of provability appeared in the old Act.
Unknown Speaker: How would restitution have been treated under the old Act, restitution orders?
They were certainly in existence then.
Mr. Dineen: --Well, it's interesting, Your Honor--
Unknown Speaker: You said a while ago that a restitution order, a criminal restitution order, could very well be considered a fine, penalty, or forfeiture.
Mr. Dineen: --And as I said--
Unknown Speaker: And hence, under the old law it shouldn't have been dischargeable, shouldn't have been provably wouldn't have been a debt.
So how did it suddenly become one?
Mr. Dineen: --Because the Congress made a significant change both in the definition of what is a debt, what is a claim, and the legislative history that this Court has cited in the case of Ohio against Kovacs said it's the broadest possible definition.
So that all possible claims, all possible obligations, will be treated in the bankruptcy case.
That is the language in the legislative history that this Court cited in Ohio against Kovacs.
Unknown Speaker: Did the non-dischargeability of fines and forfeitures under the old law appear in the non-dischargeability section?
Mr. Dineen: Under the old law, no.
Unknown Speaker: No, it didn't.
But it does here.
Mr. Dineen: Yes.
Unknown Speaker: And you don't have... to say something is non-dischargeable, you're excluding those claims or debts that are not dischargeable?
Mr. Dineen: You're saying that they're not dischargeable, but on the other hand you're allowing them--
Unknown Speaker: Well, you're saying the reason they're not dischargeable, the reason you say that they're not dischargeable is because they are a claim, and you want to exclude certain claims from dischargeability.
Mr. Dineen: --Yes, I'm saying fines and penalties and forfeitures are--
Unknown Speaker: Otherwise it wouldn't be in (a)(7).
Mr. Dineen: --That's correct.
They are non-dischargeable.
Unknown Speaker: So that tends to support your argument that fines and penalties are debts, because otherwise they wouldn't be excepted from discharge.
Mr. Dineen: Precisely, Your Honor.
They would not--
Unknown Speaker: xxx possibilities, of course.
Mr. Dineen: --That's a possibility.
But I think when you look at the 1973 Commission report, which for the first time in the evolution of the Bankruptcy Code talks about introducing this question of whether fines and penalties ought to be discharged or not, it says in the legislative history there in the 1973 Commission report that prior to this fines and penalties had not been discharged because they had not been found to be provable.
And it says, it is well settled, and they cite Collier.
And if you look at the Collier sections, there are these cases, the criminal fines, the criminal penalty cases.
They're all there.
That's exactly what the Commission report was talking about.
Unknown Speaker: But the non-dischargeability, so-called, wasn't written into the statute, was it, under the old law?
Mr. Dineen: Under the old law, it was not, it was not.
Unknown Speaker: You couldn't find anything about fines and penalties in the old law.
Mr. Dineen: Only in the allowability section, 57(j), which said penalties and forfeitures were not allowed.
Unknown Speaker: Not allowed.
Mr. Dineen: But in the dischargeability, no, you could not find it.
And what the courts had developed was this concept that they were not provably therefore, because we had provability in those days, they could not be discharged.
If they're not provably they're not dischargeable.
What I'm saying is that the code has abolished provability has enlarged greatly the whole concept of claim and debt, and has included now, as the legislative history says, all possible claims to come within the bankruptcy case.
Unknown Speaker: But claims or debts are still allowable or not allowable.
Mr. Dineen: Yes, fines and penalties and forfeitures are now allowed and will be paid, but they have a reduced level of priority in the code.
But it goes on to say, for the first time explicitly, fines and penalties and forfeitures now explicitly are non-dischargeable.
But the code makes two exceptions to that.
One is if they're payable to a private individual and the other one is if they represent compensation for actual pecuniary loss.
Those are the exceptions, which simply means then that we are thrown back on the other non-dischargeability section in 523(a).
Unknown Speaker: Is it possible that that second exception, not for pecuniary loss, might mean loss to the Government itself, the governmental entity imposing the fine, and be limited to that?
Do we have enough history about that phrase to know what was intended?
Mr. Dineen: Well, we have some history about the phrase to the extent that really that language came out of 57(j).
The language in part came from the Commission report, which talks about and makes it very clear that certain kinds of fines are going to be discharged.
The Commission report says that.
So there is a blending.
There is a blending of the language that came from the 1973 Commission report on the one hand and there is the history that we had under 57(j) on the other hand, because that said penalties and forfeitures are not allowed except as they may be compensation for pecuniary loss.
In that case, there were some criminal costs.
There were two cases.
There was a Buckingham Trust case and there was a In Re Capanigri case, both of which held that, although criminal fines would not be allowed to participate in the distribution of the estate in a bankruptcy case, those costs that were taxed represented pecuniary loss to the... these were fines and penalties, so that those costs would be allowed and would be paid out of the estate.
So that history comes out of, to some extent, out of 57(j).
I must say that the old cases that are cited in the Petitioner's brief, really all of them up to 1978 represent these situations of fines and penalties.
Criminal restitution appears in the Moseson case, which is a 1974 case, which is after the Commission report had been prepared.
And then there's another one, the Washburn case, a California case, 1979 case, which is after the Code was enacted.
So there had not really developed... I don't think it is fair to say that there had developed a judicially created concept within the meaning of Midlantic that criminal restitution orders are not debts.
I don't think that that had developed as such.
I think the only case that we had on a criminal restitution order up to 1973 was that Moseson case, a New York trial court case.
Unknown Speaker: xxx--
Mr. Dineen: Up to, up to.
The claim is made that since there was a judicially developed concept, that that gets carried over into the code.
Unknown Speaker: --I see.
Mr. Dineen: And I'm saying there wasn't any judicially developed concept in existence with respect to criminal restitution orders at the time of the enactment of the code.
We only had that one case.
At least that's the only one that's cited.
Unknown Speaker: But it was perfectly clear that criminal fines--
Mr. Dineen: Absolutely.
Unknown Speaker: --were not provably they weren't considered provable claims.
Mr. Dineen: That is correct.
That is absolutely correct, and that was the basis on--
Unknown Speaker: Well, it seems to me that if you say that a criminal restitution order should be treated as a fine, penalty, or forfeiture, that you would treat it just like a criminal fine, a real criminal fine.
Mr. Dineen: --Yes, and with respect--
Unknown Speaker: And that the courts should have been doing it that way under the old law.
Mr. Dineen: --And with respect to criminal fines and penalties, the code has very explicitly now dealt with that in a manner quite different from the way it did under the Act.
It has now explicitly stated that fines and penalties and forfeitures are being dealt with, but they're being dealt with as: one, non-dischargeable to the extent that they are true fines, penalties, and forfeitures; and two, they're being dealt with because they are being allowed to participate in the estate.
Unknown Speaker: But only if... only if the state files a claim, isn't that right?
Mr. Dineen: Yes, of course.
The state has to file a claim in order to participate in the distribution from the estate.
Unknown Speaker: And the code doesn't say in so many words that it's criminal fines, penalties, and forfeitures.
It says fines, penalties, and forfeitures, doesn't it?
Mr. Dineen: That is correct.
Unknown Speaker: So that it's possible to construe it as meaning only civil fines, penalties, and forfeitures?
Mr. Dineen: I don't think so, Your Honor.
I don't believe it is, because of the history that we have under 57(j) and because of the history, the legislative history we have in the 1973 Commission report.
I think it's very clear that what's being talked about in the references to Collier's there and in the reference to fines and penalties being non-provable is these criminal fines and penalties, these very cases.
Unknown Speaker: Well, were civil penalties provable under the old statute?
Mr. Dineen: Penalties were treated as penalties.
Unknown Speaker: Well then, I don't see why that necessarily proves your point.
Mr. Dineen: Because the doctrine that had developed was this doctrine with respect to criminal fines and penalties.
In the Parker case, a civil penalty was found to be dischargeable.
So there was a diversity of view with respect to civil penalties.
Unknown Speaker: Mr. Dineen, are you sure... are you entirely confident that you're not going to win the case and lose the client?
Is it clear to you that the consequence of the discharge in bankruptcy will not be the ability of the state to revoke the parcel, one of its conditions not having been met, or the probation?
Mr. Dineen: Well, the debtor will remain on probation.
The debtor is on probation, and there are conditions--
Unknown Speaker: I'm not talking about remaining.
One of the conditions of the probation was that the debtor pay these particular amounts.
Now, to be sure the obligation to pay them has been removed by the Bankruptcy Act if you win this case.
Does that mean that the state cannot revoke the probation?
Mr. Dineen: --Well--
Unknown Speaker: Since one of its conditions, thanks to the supervening power of the Federal Government, has not been met?
Mr. Dineen: --It would be our claim that it could not revoke the probation solely on the basis of her refusal to pay after it has been discharged.
If they revoke the probation solely on that basis, our claim would be that that would violate 525, the anti-discrimination clause in the Bankruptcy Code.
Unknown Speaker: xxx--
Mr. Dineen: --Yes, yes.
That really evolves out of the Perez against Campbell case, Your Honor, and that's a provision in which the Congress has really adopted the Perez against Campbell ruling and elaborated and enlarged upon it and said that a governmental unit cannot discriminate in granting any kind of benefits or whatever on the basis solely because somebody either filed a bankruptcy or discharged a debt in bankruptcy.
So 525 has taken the Perez against Campbell ruling and really codified it now into the Bankruptcy Code and enlarged upon it.
Unknown Speaker: --xxx If this restitution order... do you think this restitution order was enforceable in court before bankruptcy?
Could somebody sue on it?
Could somebody actually collect it?
Mr. Dineen: It was enforceable in the sense that the probation officer could, if she wasn't paying... and in fact, I should point out she wasn't paying for three years.
We sent a letter--
Unknown Speaker: All right, but not otherwise?
The person the money went to, I mean--
Mr. Dineen: --Oh, yes, they could have sued them... they could have sued her for the debt.
Unknown Speaker: --Well, the discharge certainly prevents suing.
Mr. Dineen: Oh, yes, there's no question.
The Bankruptcy Court and the district court--
Unknown Speaker: But why should it also prevent the state from saying, well look, whether we can sue or not, there's been a breach of our condition and we're going to put you back in jail?
Why do you think that violates the bankruptcy law?
Mr. Dineen: --I believe that violates 525 of the Bankruptcy Code because--
Unknown Speaker: Has anybody ever tested that out?
Mr. Dineen: --Well, we're not there yet, I don't think.
Unknown Speaker: Does your argument on this point go so far as to say that the judge at the time he imposes sentence, including the restitution order, could make it a condition of parole that the defendant not file any bankruptcy proceeding during the period of parole?
Mr. Dineen: I think the judge, in the situation where it's the kind of a debt, let's say, that would not--
Unknown Speaker: This kind of case.
Let's stick to this kind of case.
Mr. Dineen: --Oh, in this kind of case I don't think the judge could make that condition, to answer you very directly on your question.
But I think in this kind of a case the judge wouldn't need to, because the judge would know now, and everybody would know, that the prosecutor simply has to come in and file a complaint to determine non-dischargeability.
But if the judge wanted to as a condition of the order say, I'm ordering you to pay restitution and I'm also ordering that you not file a bankruptcy, as a condition of bankruptcy--
Chief Justice Rehnquist: Your time has expired, Mr. Dineen.
Mr. Dineen: --Oh, I'm sorry.
I was trying to answer His Honor's question.
Chief Justice Rehnquist: It is expired.
Mr. Dineen: Thank you, Your Honors.
Rebuttal of Carl J. Schuman
Chief Justice Rehnquist: Mr. Schuman, you have four minutes left.
Do you have anything more to say?
Mr. Schuman: Yes, Mr. Chief Justice.
If Congress had intended to work a wholesale change in criminal justice whereby large groups of restitution orders in crimes such as negligent homicide, drugs, and, as I've pointed out, in other crimes, surely it would have been explicit.
It was not.
Now, not only are there large categories of crimes in which restitution orders would be dischargeable without any remedy for the state, but there's a category of bankruptcy in which a debtor could escape other restitution orders.
If a debtor went into chapter 13 instead of chapter 7 as in this case, there would probably be no applicable exception to discharge for any sort of restitution order, because the only exceptions to discharge in chapter 13 pertain to long-term debts and alimony or child support.
There is no larceny exception to discharge in chapter 13.
So if this Court rules that restitution is dischargeable, then defendants ordered to pay restitution may just circumvent it by going into chapter 13.
The second point I would like to make is that the state believes that its inability or its possible inability to incarcerate a person who has... for failure to pay restitution when the restitution has been discharged, if this Court so rules, is an interpretation of Perez v. Campbell.
Now, it may be possible that what the Perez Court really meant was that the debtor in bankruptcy gets a clean economic slate, but does not get a clean criminal record as a result of a bankruptcy discharge.
Thank you very much.
Chief Justice Rehnquist: Thank you, Mr. Schuman.
The case is submitted.
Unknown Speaker: The honorable court is now adjourned until Tuesday next at ten o'clock.
Argument of Speaker
Mr. Speaker: The opinion of the Court in No. 85-1033, Kelly versus Robinson will be announced by Justice Powell.