In re Ball, Bankruptcy No. B-99-09154-PHX-RJH. Adversary No. 00-00593.

CourtUnited States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Arizona
Writing for the CourtRANDOLPH J. HAINES
Citation257 BR 309
PartiesIn re Craig Norman BALL, Debtor. Louis A. Movitz, Chapter 7 Trustee, Plaintiff, v. Maricopa County, Defendant.
Docket NumberBankruptcy No. B-99-09154-PHX-RJH. Adversary No. 00-00593.
Decision Date09 January 2001

257 B.R. 309 (2001)

In re Craig Norman BALL, Debtor.
Louis A. Movitz, Chapter 7 Trustee, Plaintiff,
Maricopa County, Defendant.

Bankruptcy No. B-99-09154-PHX-RJH. Adversary No. 00-00593.

United States Bankruptcy Court, D. Arizona.

January 9, 2001.

257 BR 310

Terry Dake, Phoenix, Arizona, for trustee.

Barbara Lee Caldwell, Hebert Schenk & Johnsen, P.C., Phoenix, Arizona, for Maricopa County.


RANDOLPH J. HAINES, Bankruptcy Judge.

The Chapter 7 Trustee is entitled to summary judgment in this adversary proceeding

257 BR 311
to recover a preferential transfer by the Debtor to the Maricopa County Attorney's Office

Factual Background

The material facts are not disputed. Prior to filing the bankruptcy petition, the Debtor wrote a number of checks to Ribelin Sales, a creditor of the Debtor. Eleven of those checks, written between September and November, 1998, were returned for insufficient funds. Ribelin Sales tendered the checks to the Maricopa County Attorney's Office, Bad Check Division, in an attempt to collect on the returned checks.

The Maricopa County Attorney's Office prosecuted the Debtor for issuing bad checks, pursuant to Arizona Revised Statutes ("A.R.S.") § 13-1807.1 The Debtor subsequently paid $10,000.00 to the County Attorney's Office on July 14, 1999.2 The County Attorney's Office paid $8,855.81 to Ribelin Sales3 and kept the balance of $1,144.19 as a fee pursuant to A.R.S. § 13-1809.4 The Debtor filed Chapter 7 on August 2, 1999, which was within ninety days of the payment to the Maricopa County Attorney's Office.

The Chapter 7 Trustee takes the position that the $10,000.00 payment made by the Debtor within ninety days of the bankruptcy petition is an avoidable preferential transfer pursuant to 11 U.S.C. § 547. Ribelin Sales has returned to the Chapter 7 Trustee the $8,855.81 that it received from the Maricopa County Attorney's Office. On September 18, 2000, the Trustee filed this adversary complaint seeking a judgment against Maricopa County5 in the amount of the $1,144.19 fee withheld by the County, plus the Trustee's costs and attorneys' fees.

257 BR 312

The Maricopa County Attorney's Office maintains that the $1,144.19 is not an avoidable preference because the fee was collected pursuant to A.R.S. § 13-1809. Maricopa County asserts that the fee paid is not an avoidable transfer because the County Attorney's Office was not a creditor of the Debtor. The County also argues that the payment of the fee was in the nature of restitution and cannot be avoided as a preference.

The County Was a Creditor for Its Bad Check Processing Fee

The County's principal argument is that "the County Attorney's Office is not a creditor." Because "creditor" includes any "entity that has a claim against the debtor that arose . . . before the order for relief," 11 U.S.C. § 101(10), and "entity" includes a "governmental unit," 11 U.S.C. § 101(15), which indisputably includes the County, the essence of this argument must be that the County's prepetition entitlement to fees pursuant to A.R.S. § 13-1809 does not constitute a "claim." The County does not explain how its right to collect the bad check processing fee is not a claim.

Regardless of what the fee may be called,6 it is a "right to payment," which makes it a claim pursuant to 11 U.S.C. § 101(5).

Some question whether a criminal restitution constitutes a claim was created by dicta in Kelly v. Robinson, 479 U.S. 36, 107 S.Ct. 353, 93 L.Ed.2d 216 (1986), where the Court considered whether a criminal restitution obligation, imposed as a condition of probation, was dischargeable in a chapter 7 case. The Court noted that some courts had construed the prior Bankruptcy Act to exclude "criminal penalties" from the discharge, and others had expanded this exclusion to restitution obligations imposed as part of a criminal sentence. 107 S.Ct. at 359. One state court concluded that such a restitution obligation "does not create a debt nor a debtor-creditor relationship. . . ." Id., quoting State v. Mosesson, 78 Misc.2d 217, 356 N.Y.S.2d 483, 484 (1974).

Of course the Court noted that the Bankruptcy Code dramatically altered the definition of "claim," but the Kelly dicta could be interpreted to imply that the current Code definition of "claim" must be interpreted in light of the history under the Act, suggesting that such prior history would exclude criminal restitution obligations from the discharge, and perhaps even except restitution from the definition of "claim":

We recognize, as the Court of Appeals emphasized, that the Code\'s definition of "debt" is broadly drafted, and that the legislative history, as well as the Code\'s various priority and dischargeability provisions, supports a broad reading of the definition. But nothing in the legislative history of these sections compels the conclusion that Congress intended to change the state of the law with respect to criminal judgments.

Id. at 361, n. 12.

Ultimately, however, the Kelly Court did not conclude that criminal restitution was excluded from the Code's definition of "claim," but rather only that restitution was excluded from discharge pursuant to 11 U.S.C. § 527(a)(7):

We have serious doubts whether Congress intended to make criminal penalties "debts" within the meaning of § 101(4). But we need not address that question in this case, because we hold
257 BR 313
that § 523(a)(7) preserves from discharge any condition a state criminal court imposes as part of a criminal sentence.

Id. at 361.

The actual holding in Kelly, of course, has no application here, because the fee at issue here was not imposed "as a part of a criminal sentence," since there has been no criminal sentence, and, more importantly, the issue here is not whether the fee obligation was dischargeable, but rather whether its payment prepetition was a preference.

The Supreme Court subsequently answered the question left unanswered in Kelly, holding unequivocally that restitution is a "debt" within the meaning of § 101(12), and therefore a "claim" within the meaning of § 101(5), even if it arises under criminal law. Penn. Dept. of Public Welfare v. Davenport, 495 U.S. 552, 557-60, 110 S.Ct. 2126, 2130-31, 109 L.Ed.2d 588 (1990) ("The plain meaning of a `right to payment' is nothing more nor less than an enforceable obligation, regardless of the objective the State seeks to serve in imposing the obligation."). Accord, Wyle v. C.H. Rider & Family (In re United Energy Corp.), 944 F.2d 589 (9th Cir.1991) (restitution rights were antecedent debts); In re Towers, 162 F.3d 952 (7th Cir.1998), cert. denied Illinois ex rel. Ryan v. Towers, 527 U.S. 1004, 119 S.Ct. 2340, 144 L.Ed.2d 237 (1999) (civil restitution payable to, but not for the benefit of, the state was a dischargeable debt in chapter 7); Hardenberg v. Virginia (In re Hardenberg), 42 F.3d 986 (6th Cir.1994) (criminal fines and costs were "debts" that were dischargeable in a chapter 13 case); Babitzke v. Mantelli (In re Mantelli), 149 B.R. 154, 156 (9th Cir. BAP 1993) ("Even if the debtor's payment of the $3,830.00 pursuant to a civil contempt order were in the nature of `restitution,' the Supreme Court in Davenport has recognized that restitution obligation creates a `debt'. . . ."); California v. Heincy (In re Heincy), 78 B.R. 246 (9th Cir. BAP 1987) (criminal restitution obligation is a debt that may be dischargeable in chapter 13), rev'd on other grounds, 858 F.2d 548 (9th Cir. 1988) (dischargeability issue not ripe until chapter 13 plan payments are completed); Zimmerman v. Itano Farms, Inc. (In re Currey), 144 B.R. 490 (Bankr.D.Idaho 1992) (a criminal restitution obligation is a debt, and therefore prepetition payment of such debt is recoverable as a preference); Becker v. County of Sacramento (In re Hackney), 83 B.R. 20 (Bankr.N.D.Cal. 1988) (same).

Consequently, regardless whether the fee obligation pursuant to A.R.S. § 13-1809 is a criminal fine or a restitution obligation, it creates a "debt" and therefore a "claim" by the County. Because the County is an entity that has a claim, it is a creditor by virtue of the plain language of § 101(10), and therefore payment of that fee satisfies the first element of a preference pursuant to § 547(b)(1).

No Policy Precludes Application of Preference Law to Criminal Fines and Fees

The County repeatedly emphasizes that A.R.S. § 13-1809 is a criminal statute, and that "bankruptcy laws are not a haven for criminal offenders." This argument rests on two fundamental misconceptions of bankruptcy law and preference law. These same...

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