Cisneros v. COST CONTROL MARKETING & SALES MGT.

• Decision Date: 15 September 1994
• Docket Number: Civ. Action No. 89-0042-C.
• Citation: 862 F. Supp. 1531
• Court: U.S. District Court — Western District of Virginia
• Parties: Henry G. CISNEROS, Secretary of the Department of Housing and Urban Development, Plaintiff v. COST CONTROL MARKETING AND SALES MANAGEMENT OF VIRGINIA, INC., et al., Defendants.

862 F. Supp. 1531

Henry G. CISNEROS, Secretary of the Department of Housing and Urban Development, Plaintiff v. COST CONTROL MARKETING AND SALES MANAGEMENT OF VIRGINIA, INC., et al., Defendants.

Civ. Action No. 89-0042-C.

United States District Court, W.D. Virginia, Charlottesville Division.

September 15, 1994.

Audrey B. Kessner, Sarah E. Canzoneri, Dept. of HUD, Robert S. Whitman, Wash. DC, Eric Johnson Mahr, U.S. Dept. of Justice, Washington, DC, for plaintiff.

Francis T. Eck, Eck, Lewis, Anderson & Collins, Richmond, VA, for Cost Control, Monticello Dev., Peterson, Kujawski, Costenbader & Marley.

Thomas P. Collins, Eck, Lewis, Anderson & Collins, Richmond, VA, for Byron.

Marshall E. Anders, Rosenblum & Anders, P.C., Stroudsburg, PA.

MEMORANDUM OPINION

MICHAEL, District Judge.

This Court referred this case to the Honorable B. Waugh Crigler, United States Magistrate Judge, for proposed findings of fact and a recommended disposition. The Magistrate Judge filed his Report on July 27, 1994. On August 8, 1994 and August 12, 1994 the defendants filed Objections to the Report and Recommendation. Said objections having been lodged with this court in a timely and appropriate manner, this court is required to undertake a de novo determination. Orpiano v. Johnson, 687 F.2d 44, 48 (4th Cir.1982).

The defendants' liability in this case has been established for some time, but remaining before the court is a decision concerning the character and amount of the final judgment. Magistrate Judge Crigler's July 27, 1994 Report and Recommendation found that this court has the authority to enter final judgment, notwithstanding the current bankruptcy proceedings involving the individual defendants Peterson, Marley, and Costenbader. Furthermore, Magistrate Judge Crigler recommended entering final judgment against the above-named defendants and defendant Kujawski in the amount of $8,648,048, although he declined to do so on the basis of the plaintiff's motions for sanctions and contempt.¹ This court adopts both the reasoning and the decision set forth in Magistrate Judge Crigler's July 27, 1994 Report and Recommendation.

I.

The plaintiff instituted this action against the defendants for violations of the Interstate Land Sales Full Disclosure Act, 15 U.S.C. §§ 1701-1720, committed during their sales of lots in Lake Monticello. The court entered summary against the defendants for violating the Act's anti-fraud provisions and then turned to the task of structuring a final judgment. See Kemp v. Cost Control Mktg. & Sales Mgt., 790 F.Supp. 1275 (W.D.Va. 1992) (entering interim judgment). Subsequent to the entry of an Interim Judgment Order on April 22, 1992, defendants Peterson, Marley, and Costenbader filed Chapter 7 bankruptcy petitions in the Western District of Pennsylvania. Although such bankruptcy petitions were discharged in January of 1993, the three defendants reopened their bankruptcy cases on May 20, 1994 for the purpose of enjoining the plaintiff from any further proceedings against them. Based upon their bankruptcy cases, these defendants have asserted that this court has no authority to enter final judgment against them. They are wrong.

In general, a bankruptcy petition stays the continuation of a pre-petition judicial action, 11 U.S.C. § 362(a)(1), and the enforcement of a pre-petition judgment against the debtor, 11 U.S.C. § 362(a)(2); however, several exceptions to the stay exist. In addition, upon discharge of a bankruptcy petition, 11 U.S.C. § 524(a)(2) discharges all debts of the bankrupt, again subject to several exceptions. The issue is whether certain such exceptions apply to this case.

This court and the bankruptcy court share concurrent jurisdiction to determine whether the automatic stay applies to this proceeding and whether the defendants' debts to the plaintiff are dischargeable. See Picco v. Global Marine Drilling Co., 900 F.2d 846, 850 (5th Cir.1990); Brock v. Morysville Body Works, Inc., 829 F.2d 383, 387 (3d Cir.1987); NLRB v. Edward Cooper Painting, Inc., 804 F.2d 934, 936 (6th Cir. 1986); Hunt v. Bankers Trust Co., 799 F.2d 1060, 1069 (5th Cir.1986); In re Baldwin-United Corp. Litig., 765 F.2d 343, 347 (2d Cir.1985). Furthermore, defendants' objections to the contrary notwithstanding, long-standing principles of comity suggest that it is appropriate for this court, rather than the bankruptcy court, to decide the issue because the proceeding was first filed in this court. See Smith v. McInver, 22 U.S. (9 Wheat) 532, 535, 6 L.Ed. 152 (1824) ("In all cases of concurrent jurisdiction, the court which first has possession of the subject must decide it."); see also United States Fire Ins. Co. v. Goodyear Tire & Rubber Co., 920 F.2d 487, 488 (8th Cir.1990); EEOC v. University of Pa., 850 F.2d 969, 972 (3d Cir.1988) (citing Kline v. Burke Constr. Co., 260 U.S. 226, 229, 43 S.Ct. 79, 81, 67 L.Ed. 226 (1922)). This court has been handling this case for approximately five years and, therefore, presumably is more familiar than the bankruptcy court with the nature of the action. Consequently, this court is the appropriate forum in which to decide whether the automatic stay applies to this case and whether the defendants' debt to the plaintiff is dischargeable in bankruptcy.

The automatic stay imposed by § 362(a)(1) does not apply to "the commencement or continuation of an action or proceeding by a governmental unit to enforce such governmental unit's police or regulatory power." 11 U.S.C. § 362(b)(4). Included in the government's "police or regulatory powers" are situations "where a governmental unit is suing a debtor to prevent or stop violation of fraud ... laws, or attempting to fix damages for violations of such a law...." S.Rep. No. 989, 95th Cong., 2d Sess. 52, reprinted in 1978 U.S.S.C.A.N. 5787, 5838. In such a case, the action is not stayed. Id. In this case, the defendants violated the Interstate Land Sales Full Disclosure Act (the Act), 15 U.S.C. §§ 1701-1720, which is aimed at halting, deterring, and punishing fraudulent conduct in interstate land sales.² Pursuant to its power granted by 15 U.S.C. § 1714, the plaintiff filed this suit for the purpose of punishing the defendants for fraudulent practices and deterring any similar conduct in the future. Based upon the scope of the Act and the particular character of this case, suing the defendants for violating the Act is within the plaintiff's "police or regulatory powers." As a result, this action is excepted from the automatic stay pursuant to 11 U.S.C. § 362(b)(4).³

Furthermore, although a bankrupt's debts generally are discharged when a bankruptcy case is discharged, 11 U.S.C. § 524(a)(2), an exception is made for a debt which is "a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss...." Id. § 523(a)(7). The character of the plaintiff's monetary recovery in this case, restitution in the form of disgorged profits, clearly is covered by § 523(a)(7). The Supreme Court plainly has held that a restitution obligation is not dischargeable in bankruptcy because it falls within § 523(a)(7). Kelly v. Robinson, 479 U.S. 36, 52, 107 S.Ct. 353, 362, 93 L.Ed.2d 216 (1986). Although Kelly dealt with criminal restitution, the Court later made clear that § 523(a)(7) applies both to criminal and civil restitution. See Pennsylvania Public Welfare Dept. v. Davenport, 495 U.S. 552, 562, 110 S.Ct. 2126, 2132-33, 109 L.Ed.2d 588 (1990) (stating that § 523(a)(7) codified an exception for both criminal and civil fines).⁴

In finding that § 523(a)(7) applies to restitution obligations, the Supreme Court stated that in order to be excepted from discharge, debts must satisfy two requirements: (1) they must be to and for the benefit of a governmental unit; and (2) they must be penal, rather than pecuniary, in nature. Kelly, 479 U.S. at 51-52, 107 S.Ct. at 362. The judgment in this case satisfies both parts of the test. The first prong is satisfied because restitution ensures compliance with the Act and safeguards the public interest in such compliance. "To permit the retention of ... illicit profits ... would impair the full impact of the deterrent force that is essential if adequate enforcement of the Act is to be achieved." SEC v. Petrofunds, Inc., 420 F.Supp. 958, 960 (S.D.N.Y. 1976).⁵ Likewise, the second prong is satisfied because the restitution sought in this case is penal in nature and is not driven by the victims' desire for compensation. The money will be paid to the plaintiff rather than the injured victims, and the judgment will punish the defendants for violations of the Act and deter future violations by the defendants and others. Whether any of the money reaches the victims is immaterial to the § 523(a)(7) analysis. See Kelly, 479 U.S. at 52, 107 S.Ct. at 362. Because the automatic stay does not apply to this case and because the defendants' restitution obligation is not dischargeable, this court has authority to enter final judgment.

II.

The general elements that comprise the final judgment are contained in the Interim Judgment Order entered on April 22, 1992. See Kemp v. Cost Control Mktg. & Sales Mgt., 790 F.Supp. 1275 (W.D.Va.1992). Since that time, the defendants have had twenty-seven months in which to present evidence to challenge the court's preliminary findings contained in Kemp. They have not done so.

This court previously ruled that in determining the amount of profits to be disgorged, it will be guided by SEC v. First City Financial Corp., Ltd., 890 F.2d 1215 (D.C.Cir.1989). Accordingly, although the plaintiff bears the burden of proving a figure that reasonably approximates the illegal profits received by the defendants, upon satisfaction of that initial burden the defendants are obligated to demonstrate that such amount is not a reasonable approximation of illegal profits received. Kemp, 790 F.Supp. at 1280 (citing First City, 890 F.2d at 1232)....