ANN M. NEVINS, Bankruptcy Judge.
Before the court is the question of whether a restitution order entered in a state criminal proceeding is a dischargeable obligation under 11 U.S.C. § 523(a)(7). If so, Benson Snaider (the "Debtor") asks the court to hold in contempt the State of Connecticut Client Security Fund Committee (the "Client Security Fund"), the State of Connecticut Department of Administrative Services (the "Department of Administrative Services"), and Account Control Technology, Inc. ("ACT")
The United States District Court for the District of Connecticut has jurisdiction over this case by virtue of 28 U.S.C. § 1334(b). This court derives its authority to hear and determine this matter on reference from the District Court for the District of Connecticut pursuant to 28 U.S.C. §§ 157(a), (b)(1), and the District Court's General Order of Reference dated September 21, 1984. This is a "core proceeding" pursuant to 28 U.S.C. §§ 157(b)(2)(A) and (I). This memorandum constitutes the court's findings of fact and conclusions of law pursuant to Rule 52(a) of the Federal Rules of Civil Procedure, applicable in this proceeding pursuant to Rules 7052 and 9014(c) of the Federal Rules of Bankruptcy Procedure.
The following facts are undisputed.
Long ago, the Debtor represented Minchin Buick, Inc., ("Minchin") as its attorney in an eminent domain proceeding (the "Eminent Domain Case") against the City of Stamford. ECF No. 109 ¶¶ 2, 3. The City of Stamford initially offered Minchin $800,000.00 for a condemned piece of property, and that amount was deposited in the Debtor's client fund account until the case's resolution. ECF No. 109 ¶ 3. After seven years of litigation and a four-day trial in 2011, the Debtor obtained an award of $1,143,360.00 for Minchin, plus costs and pre-judgment interest, and earned a contingency fee of $273,860.33. ECF No. 109 ¶ 4. On July 6, 2011, the Debtor delivered to Minchin a check in the amount of $469,553.53—the difference between the award of $1,143,360.00 and the $800,000.00 already received—but he no longer possessed the $800,000.00. ECF No. 109 ¶ 5.
In November of 2011, Minchin sued the Debtor in the Connecticut Superior Court for recovery of the $800,000.00 (the "Civil Case"); during the same month, the Debtor was charged with first-degree larceny (the "Criminal Case") in connection with the missing funds. ECF No. 109 ¶¶ 6, 14. On February 16, 2012 (the "Petition Date"), amid the ongoing Civil and Criminal Cases, the Debtor and his wife jointly filed the instant Chapter 7 bankruptcy case (the "Bankruptcy Case") and listed an $800,000.00 debt to Minchin in their bankruptcy schedules. ECF No. 109 ¶ 1; see also ECF No. 1.
Two months later, on April 11, 2012, the Debtor pleaded guilty in the Criminal Case. ECF No. 109 ¶ 15. On the same date, Judge Richard F. Comerford of the Connecticut Superior Court imposed a five-year suspended sentence and five years' probation and ordered the Debtor to pay restitution in an unspecified amount for Minchin's lost out-of-pocket expenses. ECF No. 109 ¶ 15. On May 21, 2012, Minchin filed a claim for reimbursement with the Client Security Fund, a respondent here.
On May 30, 2012, the Debtor received a discharge in the Bankruptcy Case without objection. ECF No. 109 ¶ 10. On November 28, 2012, counsel for the Debtor filed a notice of bankruptcy discharge in the Civil Case. ECF No. 109 ¶ 12. On January 13, 2013, Minchin ended the Civil Case and instead filed a "Motion for Determination of Restitution" in the Criminal Case on February 26, 2013. ECF No. 109 ¶ 16. At a hearing on Minchin's motion held April 8, 2013, Judge Gary White raised jurisdictional and standing concerns and marked the motion off.
On May 15, 2013, the Court Support Services Division, Office of Adult Probation filed a motion for modification in the Criminal Case to clarify the restitution amount owed by the Debtor. ECF No. 109 ¶ 18. During a hearing on July 29, 2013, Judge Comerford fixed restitution at $536,000.00.
On July 14, 2014, Minchin received a dividend of $18,705.12 from the bankruptcy estate, and the Bankruptcy Case closed on August 29, 2014.
On June 23, 2015, the Connecticut Support Services Division notified the Debtor of his obligation to begin making monthly payments of $29,777.78 toward full repayment of the $536,000.00 restitution amount by January 11, 2017. ECF No. 109 ¶ 25. Almost two years later, the Debtor appeared before Judge White on April 20, 2017, at a probation violation hearing in the Criminal Case to address the Debtor's failure to make restitution payments. ECF No. 109 ¶¶ 26, 27. During the hearing, Judge White terminated the Debtor's probation, contingent on payment of $2,000.00 to Court Support Services Division, Office of Adult Probation. ECF No. 109 ¶ 28. On the same date, pursuant to Conn. Gen. Stat. § 53-a-28, Judge White issued a written restitution order in the Criminal Case (the "Restitution Order"), payable to the Client Security Fund. ECF No. 109 ¶ 29.
On May 10, 2017, the Department of Administrative Services—one of the respondents—demanded payment of the $536,000.00 on behalf of the Client Security Fund based on the Restitution Order. ECF No. 109 ¶ 32.
Four months after the demand of payment, on September 19, 2017, the Debtor filed a complaint in the United States District Court for the District of Connecticut against the Respondents.
On June 6, 2018, United States District Judge Janet C. Hall dismissed the Debtor's claims for lack of subject matter jurisdiction. See, Snaider v. Account Control Tech., Inc., No. 3:17-CV-1564 (JCH), 2018 WL 2725447 (D. Conn. June 6, 2018). Judge Hall concluded the bankruptcy court was the appropriate forum for determining whether the Respondents had violated the discharge injunction and dismissed the Debtor's claim about the state court Restitution Order's alleged unenforceability on Rooker-Feldman grounds. Snaider, 2018 WL 2725447 at *4-9.
On July 11, 2018, the Debtor returned to this court and filed the instant motion seeking to reopen the Bankruptcy Case and seeking sanctions against the Respondents for violations of the discharge injunction.
On August 22, 2018, this court held a hearing on the Debtor's motion to reopen. Following the hearing, the court granted the Debtor's motion for the limited purpose of adjudicating the alleged violation of the discharge injunction set forth in § 524 of the Bankruptcy Code. ECF No. 105. The court ordered statements of disputed facts, as well as briefing on the following: (1) the applicability to the facts present here of Kelly v. Robinson, 479 U.S. 36 (1986), and its progeny; (2) the relevance of the timing of the Restitution Order, the initiation of the Bankruptcy Case, and the bankruptcy discharge to the relief sought by the Debtor; and (3) any additional arguments in support of the parties' respective positions. ECF No. 107.
Consistent with his arguments before the District Court and his assertions during the August 23, 2018 hearing, the Debtor now asks this court to conclude the Restitution Order constitutes a discharged debt, now unenforceable against him. ECF Nos. 94, 112. Alternatively, the Debtor proposes the Restitution Order is an invalid "abuse of process." ECF Nos. 94, 112. I have considered both arguments and, for the reasons developed below, both are unavailing.
The bankruptcy discharge secures a debtor's "fresh start" by enjoining "the commencement or continuation of an action . . . to collect, recover or offset any such debt as a personal liability of the debtor." 11 U.S.C. § 524(a)(2); see, Marrama v. Citizens Bank of Mass., 549 U.S. 365, 381 (2007)("[T]he Bankruptcy Code is intended to give a "fresh start" to the `honest but unfortunate debtor.'"). A bankruptcy court "may hold a creditor in civil contempt for violating a discharge order if there is no fair ground of doubt as to whether the order barred the creditor's conduct." Taggart v. Lorenzen, 139 S.Ct. 1795, 1799 (2019)(emphasis in original); see also, In re Sanchez, 941 F.3d 625, 628 (2d Cir. 2019)(per curiam)(holding "that bankruptcy courts, like Article III courts, possess inherent sanctioning powers").
In a bankruptcy proceeding under Chapter 7 of the Bankruptcy Code, an order of discharge "discharges the debtor from all debts that arose before the date of the bankruptcy filing." 11 U.S.C. § 727(b). However, certain debts are not discharged, including "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. . . ." 11 U.S.C. § 523(a).
Presently, the Debtor argues the Restitution Order is "compensation for actual pecuniary loss" sustained by Minchin and therefore is not within the ambit of § 523(a)(7). In response, the Respondents rely on the Supreme Court's decision in Kelly v. Robinson, 479 U.S. 36 (1986).
In Kelly, the Supreme Court considered whether a discharged Chapter 7 debtor continued to be liable for the balance of a pre-bankruptcy restitution order entered in a state criminal proceeding. Kelly, 479 U.S. at 38-40. The Supreme Court held the restitution order non-dischargeable, stating, "we hold that § 523(a)(7) preserves from discharge any condition a state criminal court imposes as part of a criminal sentence." Kelly, 479 U.S. at 50. In reaching its holding, the Kelly Court examined the pre-1978 "established judicial exception to discharge for criminal sentences"; the nature and purpose of restitution; and its own "deep conviction that federal bankruptcy courts should not invalidate the results of state criminal proceedings." Kelly, 479 U.S. at 46-53. Though restitution may "resemble a judgment `for the benefit of' the victim," the Court observed that restitution "is concerned not only with punishing the offender, but also with rehabilitating him." Kelly, 479 U.S. at 52. Because restitution furthers a state's penal goals, it is both "for the benefit of a governmental unit" and distinct from "compensation for actual pecuniary loss." Kelly, 479 U.S. at 52-53 ("The criminal justice system is not operated primarily for the benefit of victims, but for the benefit of society as a whole."); see also, Mills v. Caisse (In re Caisse), 568 B.R. 6, 17 (Bankr. S.D.N.Y. 2017)("In short, a criminal judgment that includes restitution is always for the benefit of a governmental unit because it vindicates the governmental unit's interest in the punishment and the rehabilitation of the defendant.").
While the Debtor's argument centers around his contention that the Restitution Order reflects compensation for the actual pecuniary loss sustained by Minchin, Kelly explicitly rejects the idea that restitution is compensation for the victim. Restitution "may be calculated by reference to the amount of harm the offender has caused," but it does not follow that restitution is compensation for pecuniary loss. Kelly, 479 U.S. at 52. Kelly further explains:
Kelly, 479 U.S. at 52.
Subsequent case law has not restricted Kelly's straightforward holding. In this Circuit, the Bankruptcy Court for the Eastern District of New York has observed, "Kelly and its progeny make it abundantly clear that in general, restitution orders as a class are excepted from discharge." U.S. v. Gelb (In re Gelb), 187 B.R. 87, 92 (Bankr. E.D.N.Y. 1995); see also, Grant v. U.S. Dep't of Defense (In re Grant), No. 16-02019 (JJT), 2017 WL 2960206 at *5 (Bankr. D. Conn. July 10, 2017) ("A fine or condition imposed as part of the penal purpose of a criminal sentence is nondischargeable."); State of Connecticut Dep't of Labor v. Davis (In re Davis), No 15-03009 (JAM), 2017 WL 1200921 at *7 (Bankr. D. Conn. Mar. 30, 2017) ("Kelly stands for the proposition that obligations that are primarily penal in nature are excepted from discharge, regardless of whether the obligation is labeled a `fine, penalty, or forfeiture.'"). More recently, the Bankruptcy Court for the Southern District of New York rejected a debtor's argument that a restitution order was dischargeable as compensation for actual pecuniary loss sustained through a debtor-operated Ponzi scheme. Caisse, 568 B.R. at 18-19. In a thorough opinion, the Caisse court noted the "continuing vitality of Kelly's broad holding" due to Congress's legislative inaction and emphasized that, in Kelly, "the Supreme Court `went out of its way . . . to stress that it posed no serious threat to criminal restitution orders imposed by a state.'" Caisse, 568 B.R. at 18-19 (quoting In re Thompson, 418 F.3d 362, 366 (3d Cir. 2005)).
The Kelly Court's emphasis on the rehabilitative aims of restitution is consistent with Connecticut law. As articulated by the Connecticut Supreme Court, "[r]estitution simply serves the state's rehabilitative interest in having a defendant take responsibility for his conduct through the act of making the victim whole." State v. Silas S., 301 Conn. 684, 693 (Conn. 2011) (quoting State v. Fowlkes, 283 Conn. 735, 744 (Conn. 2007)); see also, State v. Pieger, 240 Conn. 639, 650 (Conn. 1997)(quoting Kelly's observation that restitution is "an effective rehabilitative penalty because it forces the defendant to confront, in concrete terms, the harm his actions have caused").
The Debtor nonetheless argues that courts have interpreted Kelly as "pertaining only to restitution orders imposed as a criminal penalty or fine payable to a governmental agency and not imposed as compensation to the crime victim for loss due to criminal activity." ECF No. 112. In support of his position, the Debtor cites the following cases: Hughes v. Sanders, 469 F.3d 475 (6th Cir. 2006); Matter of Towers, 162 F.3d 952 (7th Cir. 1998); Scheer v. State Bar of California (In re Scheer), 819 F.3d 1206 (9th Cir. 2016); In re Rashid, 210 F.3d 201 (3d Cir. 2000); and Heitmanis v. Rayes (In re Rayes), 496 B.R. 449 (Bankr. E.D. Mich. 2013). None of the cases cited originate in the Second Circuit, and as ACT rightly points out, each is inapposite.
The Sixth Circuit decision Hughes v. Sanders and the Seventh Circuit decision Matter of Towers both address restitution orders entered in civil proceedings. Hughes concerned a civil sanction issued to discipline a party for non-criminal litigation conduct, to be paid to a private litigant for damages, litigation costs, and attorney's fees. Hughes, 469 F.3d at 479. In Towers, the Seventh Circuit Court of Appeals considered a restitution order resulting from a civil suit brought by the Illinois Attorney General under the Illinois Consumer Fraud and Deceptive Business Practices Act. Towers, 162 F.3d at 953. Because the order intended the restitution to be paid to the victims of the consumer fraud, the Towers court could not find that "any governmental unit receives a financial benefit from the restitution" as ordered, and the court held the civil restitution order dischargeable. Towers, 162 F.3d at 956. Significantly, neither decision disputes Kelly's applicability to criminal restitution orders. See, Hughes, 469 F.3d at 478 ("Kelly applies narrowly to criminal restitution payable to a governmental unit."); Towers, 162 F.3d at 954 ("Kelly dealt with a criminal restitution order, and as we have mentioned its animating concern was limited to criminal cases.").
In Scheer v. State Bar of California, the Court of Appeals for the Ninth Circuit faced facts superficially resembling those here. In Scheer, the debtor—an attorney—failed to return an unearned retainer to a former client. Scheer, 819 F.3d at 1208. Then, unlike here, the matter proceeded to California-mandated attorney fee arbitration, and the arbitrator ordered repayment of the fees. Scheer, 819 F.3d at 1208. When the debtor failed to comply, the President Arbitrator sued the debtor in state bar court, resulting in an order suspending the debtor's law license until she returned the unearned fees. Scheer, 819 F.3d at 1208. The Ninth Circuit Court of Appeals ultimately held that the arbitration award was a dischargeable obligation constituting compensation for actual loss. Scheer, 819 F.3d at 1211. In distinguishing Kelly, the court concluded that the "unique concerns of state criminal proceedings and . . . pre-Bankruptcy Code practices" motivating the Kelly decision were not present. Scheer, 819 F.3d at 1211.
The Debtor also cites In re Rashid, where the Third Circuit Court of Appeals held a federal restitution order dischargeable because it did not implicate the federalism concerns contemplated in Kelly. Rashid, 210 F.3d at 207-08. Insofar as it involves a federal restitution order, Rashid has limited applicability here, especially considering In re Thompson, 418 F.3d 363 (3d Cir. 2005), where the Third Circuit Court of Appeals relied on Kelly to hold a state criminal restitution order non-dischargeable. See, Thompson, 418 F.3d at 368 ("Notwithstanding that in practical terms Thompson's restitution payments are "payable to" [the victim], Kelly dictates that we not interfere with New Jersey's criminal restitution order.").
Debtor's substantive argument
Addressing the Rayes decision and its mention of dicta, the Bankruptcy Court for the Southern District of New York observed in the Caisse decision, "[w]e are to give great weight to the Supreme Court's considered dicta in limning the breadth of situations its decisions govern." Caisse, 568 B.R. at 19 (alteration in original)(quoting Thompson, 418 F.3d at 366). Moreover, as additionally noted in Caisse, the District Court for the Eastern District of Michigan later disregarded the Rayes holding. As the Caisse court explains:
Caisse, 568 B.R. at 18 (some internal citations omitted).
In sum, I am not persuaded by the authority cited by the Debtor that Kelly does not control the outcome here. None of the decisions cast doubt on Kelly's enduring applicability to state criminal restitution orders; instead, each found Kelly's underpinnings unrelated to civil proceedings, attorney fee arbitration proceedings,
The Debtor raises two additional contentions about the Restitution Order's dischargeability. First, the Debtor asserts that the Restitution Order cannot have the effect of restitution because the amount fixed did not consider the Debtor's ability to pay, as required by Conn. Gen. Stat. § 53a-30(a). The Debtor alternatively posits that the Restitution Order is invalid because (a) his sentence was complete at the time the Restitution Order entered, and (b) the Restitution Order entered in favor of the Client Security Fund, not the victim of the crime.
The Debtor's arguments about the invalidity of the Restitution Order mirror the claims he raised before the District Court. See Snaider, 2018 WL 2725447 at *2, *4-5. In dismissing the Debtor's amended complaint, Judge Hall stated, "[T]o the extent that [the Debtor's] claim under Count Two argues that the Restitution Order is invalid because [the Client Security Fund] was not a victim or because the state court failed to hold an evidentiary hearing or other criminal proceeding, that claim is dismissed with prejudice under Rooker-Feldman."
I have considered all other arguments made by the Debtor and find them to be without merit.
For the reasons discussed above, and pursuant to 11 U.S.C. § 523(a)(7) and Kelly v. Robinson, 479 U.S. 36 (1986), the Restitution Order is determined to be non-dischargeable. No violation of the discharge injunction of 11 U.S.C. § 524 has occurred. Accordingly, it is hereby
