In re Towers
| Decision Date | 30 January 1998 |
| Docket Number | No. 97 C 6005.,97 C 6005. |
| Parties | In re James TOWERS, Debtor. The PEOPLE OF THE STATE OF ILLINOIS EX REL. James E. RYAN, Attorney General of Illinois, Appellant, v. James TOWERS, Appellee. |
| Court | U.S. District Court — Northern District of Illinois |
James Douglas Newbold, Joan Ellen Smuda, Illinois Attorney General's Office, Faith Andrea Lukin, Attorney General, David A. Belofsky & Associates, P.C., Chicago, IL, for People of the State of Illinois.
John M. Kennelly, Kennelly & Associates, Oak Park, IL, for Appellee.
James Towers, Kennelly & Associates, Oak Park, IL, Pro se.
The People of the State of Illinois, ex rel. James E. Ryan, Attorney General of Illinois, (State) appeals that part of the order of the United States Bankruptcy Court entered on July 7, 1997, denying the State's motion for summary judgment (July 7 order). In its order, the bankruptcy court found that the debt owed by James Towers (Towers) to the State for restitution of $210,082.34 for violations of the Illinois Consumer Fraud and Deceptive Business Practices Act (ICFA), 815 ILCS 505/1 et seq., is dischargeable under Chapter 7 of the Bankruptcy Code. On appeal, the State argues that the bankruptcy court erred in so finding and that the order for restitution is nondischargeable under 11 U.S.C. § 523(a)(7), which excepts from discharge any debt that is "for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not for actual pecuniary loss. . . ." This court has jurisdiction pursuant to 28 U.S.C. § 158(a). For the reasons stated herein, we reverse the bankruptcy court's order in relevant part and grant the State's motion for summary judgment.
The district court accepts the bankruptcy court's fact-findings unless clearly erroneous. Fed.R.Bankr.P. 8013; see also, In re Tolona Pizza Products Corp., 3 F.3d 1029, 1033 (7th Cir.1993). Since neither party disputes the facts in this case we accept the undisputed facts as set forth by the bankruptcy court in its July 7 order.
Towers was president of Update Financial Services Corporation (UFSC), a consumer debt financing business. A representative of UFSC contacted individuals whose homes were in danger of foreclosure, and entered into contracts with them for UFSC to find financing to save their homes from foreclosure. UFSC charged the homeowners a fee and commission for its work, and at least some of its customers were required to enter into an agreement to escrow funds for closing. All escrow funds and a portion of the application fee were to be refunded if UFSC could not arrange a loan large enough to prevent the foreclosure.
On June 4, 1986, the State brought suit in the Circuit Court of Cook County, Chancery Division (No. 86-CH-5458), under the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/1 et seq., against Towers, individually, and in his official capacity as president of UFSC (state court litigation). The State also sued several of Towers' fellow officers and several banks. The suit alleged that Towers and his colleagues were guilty of fraudulent business practices in their operation of UFSC. The State alleged, inter alia, that Towers and the other defendants failed to refund monies due customers from their escrow accounts, and failed to return the application fee when UFSC's financing efforts failed. Towers' attorney filed an unverified answer to the verified complaint, disputing the consumer fraud claims made by the State.
The case remained for a number of years in the Chancery Division of the Circuit Court. Eventually, the state court entered a default order against Towers and Percy Middleton, UFSC's secretary. On August 22, 1991, the state court entered a final judgment order and permanent injunction order (final judgment) against Towers and Middleton. The final judgment provided that Towers and Middleton were enjoined from engaging in the business of mortgage banking in Illinois. It also required Towers and Middleton to pay a state civil penalty of $50,000, investigative costs of $50,000, and restitution of $210,082.34.
On April 2, 1987, while the state court litigation was pending, Towers filed a petition under Chapter 7 of the Bankruptcy Code (No. 87-B-4905) (1987 bankruptcy case). On August 7, 1987, the automatic stay was modified in this bankruptcy case to permit the State to proceed with the pending state court litigation against Towers. Although it held a claim against Towers, the State did not file a complaint to determine the dischargeability of the debt owed by Towers to the State. See 11 U.S.C. § 523(c); Fed.R.Bankr.P. 4007. An order of discharge was entered on August 6, 1987 and the 1987 bankruptcy case was closed on October 15, 1987.
On January 18, 1995, Towers filed another Chapter 7 petition (No. 95-B-102), which is the subject of the present litigation. In response to Towers' petition, on April 7, 1995, the State filed its adversary complaint to determine dischargeability of debt, seeking to except from discharge the civil penalty, restitution payment, and investigative costs1 assessed against Towers in the final judgment of the state court Consumer Fraud Act case. An order of discharge was entered on May 26, 1995. On June 2, 1995, Towers filed his response to the adversary complaint and on February 7, 1996, the State filed the instant motion for summary judgment, arguing that 11 U.S.C. § 523(a)(7) excepts from discharge Towers' obligations for restitution in the amount of $210,082.34 and civil penalty in the amount of $50,000. On April 23, 1996, Towers filed a cross-motion for summary judgment, arguing that any claim of the State against him as debtor was discharged pursuant to Bankruptcy Rule 4004(c).
On July 7, 1997, the bankruptcy court issued its order granting in part the State's motion and denying Towers' motion. Specifically, the court held that the debt owed by Towers to the State for restitution is dischargeable under 11 U.S.C. § 523(a)(13), but that the debt Towers owes the State for penalties is not dischargeable under 11 U.S.C. § 523(a)(7). The State now appeals that portion of the bankruptcy court's order finding that the debt owed to the State for restitution is dischargeable under § 523(a)(13).
The district court reviews the bankruptcy court's legal conclusions under a de novo standard. In re UNR Indus., 986 F.2d 207, 208 (7th Cir.1993). Since this matter is before the court on cross-motions for summary judgment, and since there are no material factual disputes between the parties, we review de novo whether the bankruptcy court was correct in denying in part the State's summary judgment motion by holding that Towers' obligation to pay the State restitution is dischargeable as a matter of law.
A motion for summary judgment may be granted when there are no issues of material fact and the movant is entitled to a judgment as a matter of law. Fed.R.Civ.P. 56(c); Renovitch v. Kaufman, 905 F.2d 1040, 1044 (7th Cir.1990). The movant must point to those portions of the record that demonstrate the absence of any genuine issue of material fact, Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986), and all reasonable inferences are drawn in favor of the non-movant, see e.g., Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608, 26 L.Ed.2d 142 (1970); Bank Leumi Le-Israel, B.M. v. Lee, 928 F.2d 232, 236 (7th Cir.1991). Summary judgment should be granted when it is clear that the plaintiff could not carry his burden of persuasion at trial on one or more elements. See generally Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50, 106 S.Ct. 2505, 2510-11, 91 L.Ed.2d 202 (1986).
In its final judgment the Illinois state court in the underlying Consumer Fraud Act case found that Towers was obligated to pay $210,082.34 in restitution. In its motion for summary judgment the State argued that this obligation is not dischargeable under § 523(a)(7) of the Bankruptcy Code.2 That section provides as follows:
11 U.S.C. § 523(a)(7). The State argued in its motion (and argues again here on appeal) that despite its apparent narrow scope of application, § 523(a)(7) has been interpreted broadly to except from discharge all claims for criminal and civil restitution. See Kelly v. Robinson, 479 U.S. 36, 53, 107 S.Ct. 353, 362-63, 93 L.Ed.2d 216 (1986) (); United States Dept. of Housing & Urban Dev. v. Cost Control Marketing and Sales Management of Virginia, Inc. (CCMV), 64 F.3d 920, 927-28 (4th Cir.1995) (), cert. denied, (517 U.S. 1187, 116 S.Ct. 1673, 134 L.Ed.2d 777 (1996)). The State argued that since the restitution order against Towers was penal in nature and therefore "not in compensation of actual pecuniary loss," it was excepted from discharge under § 523(a)(7).
The bankruptcy court rejected the State's attempt to categorize the restitution order as a "fine, penalty, or forfeiture" which is excepted from discharge under § 523(a)(7), instead holding that the restitution order in question was dischargeable under a separate provision of the Bankruptcy Code that was never discussed by either party, 11 U.S.C. § 523(a)(13). That section provides:
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