In re Currey

• Decision Date: 31 August 1992
• Docket Number: Adv. No. 92-6039.,Bankruptcy No. 91-02735
• Citation: 144 BR 490
• Parties: In re Fred CURREY d/b/a Owyhee Cattle Co. and L. Annette Currey, Debtors. C. Barry ZIMMERMAN, Trustee, Plaintiff, v. ITANO FARMS, INC., Does I through V, inclusive, and Ronald D. Schoen, Chapter 12 Trustee, Defendants.
• Court: U.S. Bankruptcy Court — District of Idaho

144 B.R. 490 (1992)

In re Fred CURREY d/b/a Owyhee Cattle Co. and L. Annette Currey, Debtors C. Barry ZIMMERMAN, Trustee, Plaintiff, v. ITANO FARMS, INC., Does I through V, inclusive, and Ronald D. Schoen, Chapter 12 Trustee, Defendants.

Bankruptcy No. 91-02735, Adv. No. 92-6039.

United States Bankruptcy Court, D. Idaho.

August 31, 1992.

Barry A. Peters, Boise, Idaho, for plaintiff.

Richard B. Eismann, Nampa, Idaho, for defendants.

MEMORANDUM OF DECISION

JIM D. PAPPAS, Bankruptcy Judge.

This is a preference action. The relevant facts have been stipulated by the parties.

In April, 1991, Debtor Fred Currey was convicted of passing bad checks to Defendant Itano Farms, Inc. arising out of a purchase by Debtor of cattle from the Defendant. The state criminal court placed Debtor on probation and ordered that he pay Defendant restitution in the amount of $50,250, the face amount of the worthless checks.

On August 19, 1991, Debtor and his wife filed for Chapter 7 relief. The Plaintiff is the trustee of their bankruptcy estate. During the ninety days prior to the filing of this petition, Debtor made three restitution payments to Defendant Itano Farms, Inc. totaling $14,821. Plaintiff seeks to recover these payments as preferences under Section 547(b) of the Bankruptcy Code.¹

From the record and briefs of the parties, it appears that the only defense offered to Plaintiff's claim by Defendants is the argument that the restitution payments made by Currey to Itano Farms, Inc. under the state court order were not "to or for the benefit of a creditor . . ." as required by Section 547(b)(1). This contention relies upon the analysis and language of the decision by the U.S. Supreme Court in Kelly v. Robinson, 479 U.S. 36, 107 S.Ct. 353, 93 L.Ed.2d 216 (1986).

In Kelly, the issue decided by the Court was whether a state court ordered obligation to make restitution to the victim of a crime could be discharged in the offender's Chapter 7 case. The Court held that such an obligation was not discharged by virtue of an expansive reading of the exception found in Section 523(a)(7) of the Code for debts "for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit. . . ." 11 U.S.C. § 523(a)(7). In its analysis, the Court suggested that restitution obligations are not payments solely for the benefit of the victim, but rather for the benefit of society as a whole. Kelly, 479 U.S. at 52, 107 S.Ct. at 362. Therefore, the obligation fell within the statutory language excepting it from discharge, the Court reasoned.

The Court in Kelly, because of its approach, was not required to address another argument offered by the victim that the restitution obligation was not discharged because it did not constitute a "debt" as defined by the Code. While the Court expressed "serious doubts" about the intention of Congress to include the restitution obligation as a debt for discharge purposes, it expressly declined to decide this question. Id. at 50, 107 S.Ct. at 361. Because of the nature of the Court's ruling, its comments on this issue are therefore dicta, notwithstanding Defendant Itano Farms' arguments otherwise. However, the Court's analysis in the text of this decision is certainly relevant.

The Kelly decision instructs that because a restitution order arises out of a state's interest in rehabilitation and punishment of the offender-debtor, and not strictly because of the victim's desire for compensation, that discharge of the obligation under the federal bankruptcy laws could potentially frustrate the purpose of the state criminal proceedings. Congress would likely not intend, according to the Court, to hamper the flexibility of the state courts in conducting its legitimate endeavors in such manner. Id. at 49, 107 S.Ct. at 360.

While not a binding holding by the Supreme Court, this discussion was sufficiently persuasive to be adopted by at least one lower court in In re Nelson, 91 B.R. 904 (N.D.Cal.1988), a case with facts very similar to the action at bar. Relying upon Kelly, the Court found that the trustee could not recover the payments made to the beneficiary of a restitution order as a preference:

The Court believes that a fair reading of Kelly leaves little doubt about the proper outcome of this appeal. While an historical exception to avoidance of restitution does not appear to be as clearly established as the exception for discharge of restitution, this Court finds that the reasons for an exception are similarly compelling.

91 B.R. at 906. The Nelson court goes on to describe the recovery of restitution payments as preferences by the offender's trustee as "an ironic and unseemly specter that would impose undue burdens and uncertainties on the state (not to mention the victim), would lead to federal remission of state criminal judgments, and would hamper the sentencing decisions of state judges." Id.

Were the above the current state of the statutory and case law on this topic, this Court might accept Defendants' position without much difficulty. Under the Kelly approach, Defendant here should not be a creditor because the restitution obligation would not be a "debt" for bankruptcy law purposes. After Kelly and Nelson, though, the Supreme Court issued its decision in Pennsylvania Dept. of Public Welfare v. Davenport, 495 U.S. 552, 110 S.Ct. 2126, 109 L.Ed.2d 588 (1990). The opening paragraph of that decision succinctly summarizes its holding:

"In Kelly v. Robinson, 479 U.S. 36, 50 107 S.Ct. 353, 361, 93 L.Ed.2d 216 (1986), this Court held that restitution obligations imposed as conditions of probation in state criminal actions are non-dischargeable in proceedings under Chapter 7 of the Bankruptcy Code, 11 U.S.C. § 701 et seq. The Court rested its holding on its interpretation of the Code provision that protects from discharge any debt that is "a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss." § 523(a)(7). Because the Court determined that restitution orders fall within § 523(a)(7)\'s exception to discharge, it declined to reach the question whether restitution orders are "debts" as defined by § 101(11) now § 101(12) of the Code. In this case, we must decide whether restitution obligations are dischargeable debts in proceedings under Chapter 13, § 1301 et seq. The exception to discharge relied on in Kelly does not extend to Chapter 13. We conclude, based on the language and structure of the code, that restitution obligations are "debts" as defined by § 101(11). We therefore hold that such payments are dischargeable under Chapter 13."

Davenport, 495 U.S. at 555, 110 S.Ct. at 2129.

The Court's analysis in Davenport, as compared to the historical and policy-based methods used in Kelly, was founded on "the fundamental canon that statutory interpretation begins with the language of the statute itself." Id. at 557-58, 110 S.Ct. at 2130. Reviewing the definitional provisions of the Code for the terms "debt" and "claim," the Court found Congress intended an expansive meaning for such terms; that a restitution order was properly included within the definition of these terms; and that therefore, restitution orders created "debts" as that word is used by Congress in the Code. The Court was naturally compelled to distinguish its holding in Kelly:

"Contrary to petitioners\' argument, however, the Court\'s prior characterization of the purposes underlying restitution orders does not bear on our construction of the phrase "right to payment" in § 101(4)(A), an essential element to a "debt" under the Code. The Court in Kelly analyzed the purposes of restitution in construing the qualifying clauses of § 523(a)(7), which explicitly tie the application of that provision to the purpose of the compensation required. But the language employed to define "claim" in § 101(4)(A) makes no reference to purpose. The plain meaning of a "right to payment" is nothing more nor less than an enforceable obligation, regardless of the objectives the State seeks to serve in imposing the obligation."

Id. at 559, 110 S.Ct. at 2131.

In other words, according to the Court, had Congress intended that the term "debt" in the Code exclude restitution obligations, it would have had no reason to specifically except such from discharge in Section 523(a)(7). However, since this exception does not apply to Chapter 13, it must therefore be assumed that Congress intended restitution obligations to be dischargeable in such proceedings, a deliberate and proper exercise of the legislative body's province to make public policy choices. Id. at 563, 110 S.Ct. at 2133.

Later in 1990, Congress amended Section 1328(a) of the Code to add a new exception to discharge in Chapter 13 cases for "restitution included in a sentence on the debtor's conviction of a crime." 11 U.S.C. § 1328(a)(3) as enacted in Pub.L. No. 101-581 (1990). Senator Grassley, in his floor statement on the legislation creating the Chapter 13 discharge exception criticized the majority holding in Davenport, praised the opinion written by the dissenters, Justices Blackmun and O'Connor, and observed that "the filing of chapter 13 bankruptcy by an assortment of welfare cheats, crooks, and even violent criminals has become a kind of `growth industry' in the wake of Davenport." 136 Cong.Rec. S17603 (daily ed. Oct. 27, 1990) (statement of Sen. Grassley).

As can be seen, while restitution orders have been given attention by the Supreme Court and Congress in the particular context of dischargeability under the Bankruptcy Code, no study has been given by these bodies to the preference issue. Defendants suggest Kelly should serve as this Court's beacon. Plaintiff urges the more mechanical "plain meaning" approach exhibited in Davenport. Congress has yet to specifically speak to the subject. The position of the Court is a difficult one, however, for the several reasons set forth below, this Court would...