In re Troff

• Decision Date: 15 March 2007
• Docket Number: No. 05-4244.,05-4244.
• Citation: 488 F.3d 1237
• Parties: In re Jason Derek TROFF, Debtor, Jason Derek Troff, Plaintiff-Appellant, v. State of Utah, Richard Ellis, in his official capacity as Executive Director of the Utah Department of Administrative Services; and David Johnson III, in his official capacity as Interim Director of the Office of State Debt Collection, Defendants-Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

488 F.3d 1237

In re Jason Derek TROFF, Debtor Jason Derek Troff, Plaintiff-Appellant, v. State of Utah, Richard Ellis, in his official capacity as Executive Director of the Utah Department of Administrative Services; and David Johnson III, in his official capacity as Interim Director of the Office of State Debt Collection, Defendants-Appellees.

No. 05-4244.

United States Court of Appeals, Tenth Circuit.

March 15, 2007.

Michael F. Thomson, Durham Jones & Pinegar, Salt Lake City, UT, for Plaintiff-Appellant.

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

Before HENRY, McWILLIAMS, and TYMKOVICH, Circuit Judges.

ORDER ON REHEARING

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, Mr. 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.

HENRY, Circuit Judge.

This appeal raises the question of whether 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 McDonald's in Salt Lake City, Utah. The Utah Third District Court stayed a prison sentence of fifteen years, placed Mr. 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, Mr. 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 Mr. Troff's probation.

Upon completion of probation, Mr. Troff's restitution obligation was converted to a civil judgment. He continued making restitution payments until March of 2003. In May of that year, Mr. Troff filed for bankruptcy under Chapter 7, and the bankruptcy court discharged his restitution obligation. At the time he filed for bankruptcy, Mr. 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) ("We review questions of statutory interpretations de novo.").

III. Applicable Law

We 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, 107 S.Ct. 353, 93 L.Ed.2d 216 (1986). Finally, we examine Utah's sentencing scheme and Mr. Troff's sentence in light of Kelly. We conclude that the same federalism concerns that gave rise to the Supreme Court's decision in Kelly are present in this case, and they compel us to conclude that, pursuant to § 527(a)(7), Mr. 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. . . .

Mr. 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 Mr. Troff made his monthly payments to the state, the state forwarded them to the victim. Were we to apply a strict plain meaning reading of this statute's text to the instant case, Mr. 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. Ms. 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, 107 S.Ct. 353. The sentencing judge ordered Ms. Robinson to make restitution to the state as a condition of probation. Ms. 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, 107 S.Ct. 353.

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, 107 S.Ct. 353. 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, 107 S.Ct. 353 (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 the core of the Court's holding in Younger v. Harris. Id. at 47, 91 S.Ct. 746 (quoting Younger v. Harris, 401 U.S. 37, 46, 91 S.Ct. 746, 27 L.Ed.2d 669 (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, 91 S.Ct. 746. Writing 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, 91 S.Ct. 746.

[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, 106 S.Ct. 2752. 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. . . .

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, 106 S.Ct. 2752.

IV. Discussion

A. Applicability of Kelly v. Robinson

Mr. 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 Ms. Robinson's case, Connecticut retained Ms. Robinson's restitution payments. Thus, Mr. 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 forwarded to the victim.

Mr. Troff's observation that Kelly's holding reaches beyond its facts is correct. Yet, the Kelly Court's reasoning made clear that it...