In re Wright, Bankruptcy No. 485-00059
| Decision Date | 24 June 1988 |
| Docket Number | Adv. No. 485-0058.,Bankruptcy No. 485-00059 |
| Citation | 87 BR 1011 |
| Parties | In re Ronald Walter WRIGHT and Jo Ann Wright, Debtors. FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff, v. Ronald Walter WRIGHT, Defendant. |
| Court | U.S. Bankruptcy Court — District of South Dakota |
T. Randall Wright, Dixon & Dixon, P.C., Omaha, Neb., Roger W. Damgaard, Woods, Fuller, Shultz & Smith, P.C., Sioux Falls, S.D., for plaintiff.
John Harmelink, Harmelink & Fox Law Offices, Yankton, S.D., for defendant.
This matter is before the Court on the plaintiff's motion for summary judgment on its complaint to determine the dischargeability of certain debts of Ronald Wright. The original complaint of the plaintiff, the Federal Deposit Insurance Corporation (FDIC), alleged that the debtor, Ronald W. Wright, while serving as a director, officer, and employee of the Oakland Savings Bank in Oakland, Iowa (the Bank), committed certain acts in 1982 constituting fraud or defalcation, and caused willful and malicious injury to the Bank. The FDIC, as the receiver of the Bank, requested a judgment against the debtor for any damages and loss suffered by the FDIC as a result of the debtor's acts, and that this indebtedness to the FDIC be declared nondischargeable pursuant to 11 U.S.C. §§ 523(a)(4) and (a)(6).
In September, 1987, the FDIC moved to amend its complaint to include a cause of action for nondischargeability pursuant to 11 U.S.C. § 523(a)(7). In January, 1988, this Court allowed the FDIC to supplement its pleading pursuant to Fed.R.Civ.P. 15(d). An "amended complaint" was filed on February 8 and the debtor-defendant's answer was filed on February 18.
On February 19, 1988, the FDIC moved for summary judgment on its amended complaint. It alleged that the issues of fraud, defalcation, and willful and malicious injury had already been litigated in an Iowa Federal District Court criminal action against Wright and, thus, the debtor was collaterally estopped from relitigating these issues. In addition, the FDIC requested that the restitution to be paid to the FDIC, ordered as a condition of Wright's probation, be declared nondischargeable as a matter of law.
The debtor-defendant resisted the motion for summary judgment. He alleged that the requisite intent necessary to establish fraud or defalcation pursuant to 11 U.S.C. § 523(a)(4) had not been determined. He also stated that specific intent to harm, as required by 11 U.S.C. § 523(a)(6), had not been found. Last, he asserted that the restitution ordered in his criminal sentence was compensation for the actual pecuniary loss suffered by the FDIC and should be declared dischargeable.
The Court took the summary judgment matter under advisement. Consideration of this motion is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I).
The debtors, Ronald and JoAnn Wright, filed their Chapter 7 bankruptcy petition on February 12, 1985. After requesting and receiving an extension of time to file a complaint to determine the dischargeability of a debt, the FDIC filed its complaint against Ronald Wright on August 30, 1985.
While the FDIC's nondischargeability complaint was pending in this Court, the debtor, Ronald Wright, was indicted by a federal grand jury in the Southern District of Iowa on fifteen counts of willfully and knowingly misapplying and causing to be misapplied monies and funds of the Oakland Savings Bank, with the intent to injure and defraud the Bank, in violation of 18 U.S.C. § 656. The indictment charged that Wright, as an officer and director of the Bank, made nominee loans1 in 1982 to certain individuals for the benefit of Oakland Forging, Inc. At the time of making the nominee loans, Wright was a shareholder and the chairman of the board of directors for Oakland Forging. See Ronald Wright Deposition at 46-47, 53.
A jury found Wright guilty on nine counts of the indictment. See Verdict Forms, Exhibit F, Plaintiff's Motion for Summary Judgment hereinafter Verdict Forms. The District Court for the Southern District of Iowa sentenced him to concurrent eighteen-month prison terms on Counts 1, 9, 11, 13, and 15. The imposition of sentence was suspended and Wright was placed on concurrent three-year terms of probation for Counts 6, 10, 12, and 14. As a condition of probation, the district court ordered Wright to make restitution to the FDIC in the amount of $414,774.35 for Counts 6, 9, 10, 11, 12, 13, 14, and 15. See Judgment and Probation/Commitment Order, Exhibit G, Plaintiff's Motion for Summary Judgment. The conviction on Count 10 later was reversed by the Eighth Circuit Court of Appeals. See United States v. Wright, 835 F.2d 1245 (8th Cir.1987).
Issue 1: Whether the debtor-defendant's obligation to pay restitution as a condition of his probation is nondischargeable as a matter of law, if the amount of the restitution equals the amount of the nominee loans.
Issue 2: Whether the debtor-defendant is collaterally estopped from litigating the issues of fraud and defalcation pursuant to 11 U.S.C. § 523(a)(4), if he was convicted on eight counts of misapplication of bank funds in violation of 18 U.S.C. § 656.
Issue 3: Whether the debtor-defendant is collaterally estopped from litigating the issue of willful and malicious injury to the Bank pursuant to 11 U.S.C. § 523(a)(6), if he was convicted on eight counts of misapplication of bank funds in violation of 18 U.S.C. § 656.
Bankruptcy Rule 7056 states that Federal Rule of Civil Procedure 56, governing summary judgments, applies in adversarial proceedings. Summary judgment will be granted if there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). All facts must be viewed in the light most favorable to the party opposing the motion, and he must be given the benefit of all reasonable inferences. Stokes v. Lokken, 644 F.2d 779, 782 (8th Cir.1981). In consideration of a motion for summary judgment, the court may utilize the pleadings, depositions, answers to interrogatories, admissions on file, and affidavits submitted by the parties. Rule 56(c).
As to Issue 1, this Court holds that Wright's obligation to pay restitution is nondischargeable as a matter of law pursuant to 11 U.S.C. § 523(a)(7). The restitution ordered by the District Court for the Southern District of Iowa is payable to and for the benefit of a governmental unit and is not "compensation for actual pecuniary loss." This holding is based on the following discussion.
Before beginning an analysis under 11 U.S.C. § 523(a)(7), this Court finds that the restitution order in the instant case will be treated as a pre-petition obligation of debtor Wright, although he was not indicted, convicted, or sentenced until after the bankruptcy filing. Without deciding whether restitution is a "debt" or "claim," this Court recognizes the broad definition of "claim" as contained in the Code: a "right to payment, whether or not such right is reduced to judgment, . . . unliquidated, . . . contingent, . . . or unmatured." 11 U.S.C. § 101(4). The legislative history of Section 101(4) states that this statute "contemplates that all legal obligations of the debtor, no matter how remote or contingent, will be able to be dealt with in the bankruptcy case." H.R.Rep. No. 595, 95th Cong., 1st Sess. 309 (1977), reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5963, 6266. Looking only at the time frame involved in this bankruptcy, the acts which gave rise to Wright's criminal liability occurred pre-petition. At that point in time, there existed the likelihood that the criminal liability would be dealt with by some sort of criminal sanction, which could include restitution. The unmatured or contingent "obligation" existed pre-petition. See Hennigan, Criminal Restitution and Bankruptcy Law in the Federal System, 19 Conn.L.Rev. 89, 100 (1986); cf. In re Zerodec Mega Corp., 59 B.R. 272, 275 (Bankr.E.D.Pa.1986) (). In addition, if restitution was an obligation considered to arise at the time of sentencing, the prosecution could defer criminal proceedings until after the petition had been filed, and thereby escape operation of the bankruptcy laws. Hennigan, supra, at 100. Therefore, federal law and public policy militate in favor of treating the restitution as a pre-petition claim in this proceeding.
11 U.S.C. § 523(a)(7) excepts from discharge under 11 U.S.C. §§ 727, 1141, 1228(a), 1228(b), or 1328(b) any debt "to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss. . . ." 11 U.S.C. § 523(a)(7). In Kelly v. Robinson, 479 U.S. 36, 107 S.Ct. 353, 93 L.Ed.2d 216 (1986), the Supreme Court held that this provision of the Bankruptcy Code "preserves from discharge any condition a state criminal court imposes as part of a criminal sentence." Id. at 50, 107 S.Ct. at 361. In particular, the Kelly Court found that restitution orders imposed in criminal proceedings were nondischargeable within the meaning of Section 523(a)(7).
In Kelly, the debtor-defendant was ordered to make restitution for welfare fraud as a condition of her probation. Kelly, 479 U.S. at 39, 107 S.Ct. at 355. The Court first addressed whether Kelly's criminal restitution obligation was a debt within the meaning of the Bankruptcy Code. Id. at 49, 107 S.Ct. at 361. The Court found it unnecessary to decide whether criminal penalties were "debts" within the meaning of 11 U.S.C. § 101(4), because the debt, if it was one, was nondischargeable.2 Id. at 50, 107 S.Ct. at 361.
The Court next considered whether the restitution obligation was dischargeable, assuming that it was a debt. It stated that neither of...
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