In re Hackney

• Decision Date: 18 October 1988
• Docket Number: Bankruptcy No. 4-87-03201 JB5,Adversary No. 4-88-0135 AJ.
• Citation: 93 BR 213
• Parties: In re Lori HACKNEY, Debtor. COUNTY OF SACRAMENTO, a political subdivision of the State of California, Plaintiff, v. Lori HACKNEY, aka Lori Eileen Hackney, aka Lori Eileen Boyd, aka Lori Boyd, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of California

93 B.R. 213 (1988)

In re Lori HACKNEY, Debtor COUNTY OF SACRAMENTO, a political subdivision of the State of California, Plaintiff, v. Lori HACKNEY, aka Lori Eileen Hackney, aka Lori Eileen Boyd, aka Lori Boyd, Defendant.

Bankruptcy No. 4-87-03201 JB5, Adversary No. 4-88-0135 AJ.

United States Bankruptcy Court, N.D. California.

October 18, 1988.

Lee B. Elam, County Counsel, Richard G. Llata, Deputy County Counsel, for plaintiff.

Lori Hackney, in pro per.

MEMORANDUM OF DECISION

LESLIE TCHAIKOVSKY, Bankruptcy Judge.

The question presented by this case is whether a creditor's nondischargeable claim against the debtor is reinstated when the debtor's pre-petition payment of that claim is recovered as a preference by the debtor's chapter 7 trustee. For the reasons stated below, the court concludes that the claim is reinstated and grants plaintiff's motion for summary judgment.

SUMMARY OF FACTS

In 1984, the debtor was convicted of welfare fraud and sentenced to three years probation conditioned on her payment of restitution to the County of Sacramento (the "County"), the plaintiff herein. On May 1, 1987, the debtor paid the County $2,402.28 in partial satisfaction of her restitution obligation. On July 8, 1987, less than 90 days after making the restitution payment, the debtor filed a chapter 7 case. Shortly thereafter, in a separate adversary proceeding, the debtor's chapter 7 trustee obtained a judgment against the County, directing the County to return the restitution payment to the estate as a preference. The court's opinion in that adversary proceeding is reported in In re Hackney, 83 B.R. 20 (Bkr.Ct.N.D.Cal.1988). In this adversary proceeding, the County seeks a declaration of dischargeability as to its claim under 11 U.S.C. § 502(h), arising from the recovery of the restitution payment as a preference. The County seeks summary judgment against the debtor in the amount of $2,069, the balance of the restitution debt after the surrender of the preference.

DISCUSSION

A. SUMMARY JUDGMENT

Summary judgment is proper whenever the evidence before the court shows ". . . that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." F.R.C.P. 56; Hershman v. Sierra Pacific Power Co., 434 F.Supp. 46 (D.Nev.1977). The County has presented sufficient evidence to the court to establish: (1) the original amount and nondischargeable nature of the pre-petition debt, (2) the amount that it was forced to surrender to the debtor's chapter 7 trustee, and (3) the balance of the debt after the surrender. The debtor, who is unrepresented by counsel, filed no written opposition to the motion. However, she did appear at the hearing and read a handwritten statement into the record. From this statement, it could be inferred that she had read and substantially understood the plaintiff's moving papers and the authorities cited therein. Her opposition to the motion, which will be discussed below, was based solely on a legal ground. She did not contend that there was any genuine issue as to any material fact. Therefore, summary judgment appears to be an appropriate way to resolve the question presented by this case.

B. RESTITUTION DEBT AS PREFERENCE

The United States Supreme Court has held that a criminal restitution obligation, imposed as a condition of probation, is not discharged in a case under chapter 7 of the Bankruptcy Code. Kelly v. Robinson, 479 U.S. 36, 107 S.Ct. 353, 93 L.Ed.2d 216 (1986). In so deciding, however, the Court declined to decide whether or not the restitution obligation was a debt. The Court noted that under the Bankruptcy Act, while there was no express exception from discharge for such claims, the weight of authority held that such claims were not "debts" within the meaning of the Bankruptcy Act and thus were not affected by a bankruptcy discharge. Kelly v. Robinson, supra, 107 S.Ct. at 358-359. The Court expressed serious doubt that the Bankruptcy Code had abrogated this well established rule, particularly given the absence of a clear expression of such an intent. However, the Court concluded that it did not have to decide this question since, if the restitution obligation were a debt, it was clearly nondischargeable in a chapter 7 case under 11 U.S.C. § 523(a)(7) (fines or penalties payable to governmental units other than to compensate for pecuniary loss).

The same question was presented in a subsequent chapter 13 case in this Circuit. Since 11 U.S.C. § 523(a)(7) does not apply in a chapter 13 case, in that case, the bankruptcy court was forced to decide whether or not the restitution obligation was a debt in order to determine whether it was dischargeable. The bankruptcy court held that the restitution obligation was a debt and that the debt was dischargeable in a chapter 13 case. That judgment was affirmed on appeal by the Bankruptcy Appellate Panel. In re Heincy, 78 B.R. 246 (9th Cir.BAP 1987).

The holding in Heincy, supra, was binding on this court at the time the trustee filed his preference action against the County. As a consequence, the bankruptcy court in Hackney, supra, felt compelled to find that the debtor's restitution payment to the County was recoverable as a preference. Heincy, supra, has now been reversed on the ground that, for reasons not relevant to this case, it was premature to decide whether or not the restitution obligation involved in that case was a debt which could be discharged in a chapter 13 case. In re Heincy, 858 F.2d 548 (9th Cir.1988) Had the Heincy case been reversed before the bankruptcy court decision in Hackney, supra, one can only speculate whether the bankruptcy court would have ordered the debtor's pre-petition payment to the County recovered as a preference. Unfortunately, the decision in Hackney, supra, is final. A decision cannot be set aside once it is final simply because it was based on a legal precedent that is subsequently reversed. 11 Wright and Miller, Federal Practice and Procedure, § 2863, p. 204 (West Publishing Co.1973); Title v. United States, 263 F.2d 28 (9th Cir.1959) cert. denied 359 U.S. 989, 79 S.Ct. 1118, 3 L.Ed.2d 978. Therefore, in determining the issue presented by this adversary proceeding, this court must set aside any concern that the debtor's pre-petition payment of her restitution obligation may not have been properly recoverable as a preference.

C. EFFECT OF AVOIDANCE OF PREPETITION PAYMENT OF NONDISCHARGEABLE DEBT

As stated above, the question presented by this summary judgment motion is whether a creditor who is forced to surrender as a preference the pre-petition payment of its nondischargeable claim has its nondischargeable claim against the debtor reinstated or receives nothing more than a claim against the estate under 11 U.S.C. § 502(h). The County assumes that the claim is reinstated and thus offers no argument or authority as to why that is or should be so. The defendant argues that she has paid the nondischargeable debt, that it is not her fault that the bankruptcy trustee recovered the payment, and that it would be unfair to have the nondischargeable debt reinstated. Under this view, the plaintiff's claim under 11 U.S.C. § 502(h) is a new claim which can only be asserted against the estate.

Neither the statutes nor the case law contain any clear answer to this question. The only section of the Bankruptcy Code that directly addresses the rights of a creditor who is forced to return an avoided transfer is 11 U.S.C. § 502(h), which provides as follows:

(h) A claim arising from the recovery of property under section 522, 550, or 553 of this title shall be determined, and shall be allowed under subsection (a), (b), or (c) of this section, or disallowed under subsection (d) or (e) of this section, the same as if such claim had arisen before the date of the filing of the petition.

Section 550 includes in its coverage preferences avoided by the trustee under 11 U.S.C. § 547. Bankruptcy Rule 3002(c)(3) gives the transferee thirty days from the date the judgment avoiding the transfer becomes final to file a proof of claim against the estate. Thus, clearly, under 11 U.S.C. § 502(h), the recipient of a preference who is forced to surrender a preference to a bankruptcy trustee has the right to file a claim against the debtor's bankruptcy estate.¹

However, nothing contained in either 11 U.S.C. § 502(h) or Bankruptcy Rule 3002(c)(3), clearly indicates whether the claim given the transferee of the avoided transfer is the same claim that existed before the creditor was preferred or a new claim. One can argue that it would be unreasonable to infer from 11 U.S.C. § 502(h) such a drastic result as the reinstatement of a nondischargeable claim against the debtor. Section 502 has as its subject matter the allowance of claims or interests against a bankruptcy estate, not the dischargeability of a claim against the debtor. The terms "allowed" and "disallowed" refer only to the right of a claimant to share in any dividend from a bankruptcy estate, not to any right to pursue the debtor after discharge. The term "determined" can be argued to imply more, since the Code speaks of a determination of dischargeability. 11 U.S.C. § 523(d). However, this reference is at best ambiguous. The Code also speaks of a determination of secured status; 11 U.S.C. § 506. Moreover, a creditor's right to a claim under nonbankruptcy law and the amount of that claim must be "determined" before it can be allowed or disallowed.

There is some case authority for the proposition that the claim under 11 U.S.C. § 502(h) is a claim against the debtor, not just a claim against the estate. In re Verco, 10 B.R. 347, 7 BCD 639 (9th Cir.BAP 1981) reversed in part and remanded 704 F.2d 1134, 10 BCD 819 (9th Cir.1983). In that case, a debtor-in-possession avoided as a fraudulent transfer a pre-petition sale of personal property which did not comply with the bulk transfer laws. As a result of that...