In Re Thompson

Opinions of the United
2005 Decisions States Court of Appeals
for the Third Circuit

8-11-2005

In Re Thompson
Precedential or Non-Precedential: Precedential

Docket No. 04-3220

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 PRECEDENTIAL

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

Case No: 04-3220

IN RE: GERALD THOMPSON,
Appellant

On Appeal from the United States District Court
for the Eastern District of Pennsylvania
District Court No.: 03-cv-05937
District Judge: The Honorable Michael M. Baylson

Argued on June 30, 2005

Before: NYGAARD, SMITH, and FISHER, Circuit Judges

(Filed: August 11, 2005)

David A. Scholl, Esquire [Argued]
Regional Bankruptcy Center of Southeastern PA
6 St. Albans Avenue
Newtown Square, PA 19073
Counsel for Appellant

1
Bruno Bellucci, III, Esquire [Argued]
Law Offices of Bruno Bellucci, III, P.C.
747 Shore Road
P.O. Box 359
Linwood, NJ 08221
Counsel for Appellee

OPINION OF THE COURT

SMITH, Circuit Judge.

In this matter of first impression for the courts of appeals,
we must decide whether a restitution order from a state criminal
prosecution for theft by deception, which directs payment to the
fraud victim, is exempt from a Chapter 7 bankruptcy discharge
under 11 U.S.C. § 523(a)(7).1 This case distills into a judgment
between the literal language of this Bankruptcy Code provision
and federalism doctrine as expounded by the Supreme Court in
Kelly v. Robinson, 479 U.S. 36 (1986). Having determined that
the Supreme Court meant what it said in Kelly when it held that

1
Section 523(a)(7) excepts from discharge the
bankrupt’s debts 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... .”

2
Ҥ 523(a)(7) preserves from discharge any condition a state
criminal court imposes as part of a criminal sentence,” id. at 50
(emphasis added), we will affirm the judgment of the District
Court. In this case, at least, federalism concerns embodied in a
long tradition of courts’ unwillingness to discharge monetary
obligations that form part of a state criminal judgment when
applying federal bankruptcy statutes, and Congress’s deference
to that tradition, trump a literal reading of the statutory text. We
thus hold that § 523(a)(7) preserves from discharge Thompson’s
state criminal restitution order-related debt.

I.

In October 1999, Robert Hewitt hired Gerald Thompson,
a developer with cash flow problems, to build a house.
Unbeknownst to Hewitt, Thompson diverted some of Hewitt’s
materials payments to other projects, to the tune of over
$20,000. By the time Hewitt became aware of Thomspon’s
deceit, the complete house Hewitt had paid for was a doorless
skeleton without an exterior finish.

Hewitt lodged a criminal complaint against Thompson in
the Superior Court of New Jersey, Cape May County. The
criminal case was pursued by a county prosecutor. Thereafter,
Thompson filed for bankruptcy protection under Chapter 13, an
action he soon converted to Chapter 7. Hewitt was listed as a
creditor and received notice of the filing and of the deadlines in
the case. Though the debt Thompson owed Hewitt was the

3
result of deception, Hewitt did not object to the discharge of the
debt under § 523(a)(2)(A) or (a)(4), which except from
discharge debts arising from fraud and larceny, respectively.
Hewitt merely sent a letter protesting discharge to the Chapter
7 trustee.2 Thompson received his Chapter 7 discharge on
February 6, 2002. He filed a Chapter 13 bankruptcy petition on
February 21, 2002.

On January 31, 2002, Thompson pled guilty to issuing
bad checks in the criminal case that originated with Hewitt’s
complaint. On April 12, 2002, Thompson was sentenced to,
inter alia, five years’ probation and $22,785 restitution. The
restitution was payable at $500 per month through the Cape May
Probation Department. The restitution payments were to be
forwarded to Hewitt ($20,000) and another of Thompson’s

2
Sections 523(a)(2) and (4) are of no use to Hewitt now,
because unlike § 523(a)(7) complaints, which can be filed “at
any time,” creditors with notice must avail themselves of §§
523(a)(2)’s and (4)’s discharge exceptions within a fixed period
in the bankruptcy proceeding itself. See 11 U.S.C. § 523(c)(1);
F ED. R. B ANKR. P. 4007(b)-(c). We recognize the government
interest in resolving fraud claims in the bankruptcy case, and
that at some level Hewitt is culpable for not properly objecting
before Thompson’s discharge. Still, we will not interfere with
the New Jersey criminal judgment. As witnessed by Hewitt’s
litigating to preserve Thompson’s restitution obligation more
than three years after the sentence was imposed, we doubt many
fraud victims will sleep on their rights as Hewitt did.

4
victims.

Thompson filed this action for injunctive relief as part of
his Chapter 13 bankruptcy to determine whether Thompson’s
obligations to Hewitt under the restitution order were discharged
in the Chapter 7 case.3

II.

Thompson conceded at oral argument that neither §
523(a)(7) nor any other Bankruptcy Code provision empowers
a federal court to enjoin the continuance of a state criminal
proceeding to collect a debt incurred through fraud.4 Thompson

3
Upon filing this action, Thompson apparently stopped
making payments. On August 30, 2002, the New Jersey
Superior Court ordered Thompson to show cause why he should
not be incarcerated for failing to make his scheduled restitution
payments.
4
Though some bankruptcy courts have interpreted the
discharge injunction of § 524(a)(2) in that way, probing the
criminal proceeding for its “principal motivation” and enjoining
it where the prosecution is motivated by a desire to compensate
the fraud victim, see, e.g., In re Brinkman, 123 B.R. 318, 322
(Bankr. D. Minn. 1991); In re Kaping, 13 B.R. 621, 623 (Bankr.
D. Or. 1981), we note that it is much easier to find cases that pay
lip service to the proposition than actually attempt to enjoin state
criminal prosecutions. In any event, Thompson wisely did not

5
also acknowledged that a federal court would be powerless to
block a state court from imposing some other punishment, such
as incarceration, upon a debtor as a substitute for his restitution
obligation. Rather, Thompson argues that the “payable to and
for the benefit of a governmental unit” qualifier of § 523(a)(7),
and this Court’s interpretation of the clause in In re Rashid, 210
F.3d 201 (3d Cir. 2000) (per curiam), compels us to prohibit
New Jersey from collecting through the criminal restitution
order Thompson’s debt to Hewitt that was discharged in the
Chapter 7 proceeding. We believe Kelly forecloses Thompson’s
preferred result, and that Rashid and the case it principally relied
upon, In re Towers, 162 F.3d 952 (7th Cir. 1998), invite our
disposition of this case.

Kelly involved a Connecticut welfare cheat, Carolyn
Robinson, who pled guilty to larceny. 479 U.S. at 38. As part
of her sentence, the Connecticut Superior Court ordered
Robinson to pay restitution to the state’s probation office in the
amount of welfare benefits she wrongfully received, $9,932.95.
Id. Robinson filed a Chapter 7 bankruptcy petition three months
later. Id. at 39. When the probation office informed Robinson
that it considered the restitution obligation to have survived her
§ 727 discharge, Robinson filed a declaratory judgment action
to determine whether § 523(a)(7) rendered the restitution
nondischargeable. Id. at 39-40.

press the issue.

6
 Section 523(a)(7) contains three criteria, each of which
a creditor must establish to prevail. The debt must be (1) a
“fine, penalty, or forfeiture,” subject to the qualifications that (2)
it is “payable to and for the benefit of a governmental unit”; (3)
and “is not compensation for actual pecuniary loss.” Kelly
began its analysis by observing that under the Bankruptcy Act
of 1898, courts, exercising their “traditional[] ... reluctan[ce] to
interpret federal bankruptcy statutes to remit state criminal
judgments,” 479 U.S. at 44, had established an exception to
bankruptcy discharge for criminal sentences, including
restitution orders. Id. at 46. Because Congress had not
explicitly abrogated this judicial exception in the 1978
Bankruptcy Code, under the normal rule of statutory
construction, the Court determined restitution remained in the
class of penalties excepted from discharge. Id. at 47. As it
would several times in the opinion, the Court iterated that its
primary interpretive heuristic for the Bankruptcy Code “must
reflect the basis for this judicial exception, a deep conviction
that federal bankruptcy courts should not invalidate the results
of state criminal proceedings.” Id. Again emphasizing that by
its failure to explicitly address the longstanding judicial
exception to the discharge of state criminal restitution orders in
the 1978 Bankruptcy Code, Congress seemingly accepted it, the
Court continued:

We do not think Congress lightly would limit the
rehabilitative and deterrent options available to
state criminal judges. ... This Court has

7
 recognized that the States’ interest in
administering their criminal justice systems free
from federal interference is one of the most
powerful of the considerations that should
influence a court considering equitable types of
relief. [citing Younger v. Harris, 401 U.S. 37, 44-
45 (1971)]. This reflection of our federalism must
influence our interpretation of the Bankruptcy
Code in this case.

Id. at 49.

Regarding the second of the two qualifying clauses of §
523(a)(7), though the restitution appeared to be calibrated to the
penny of Robinson’s wrongful receipts, the Court did not
consider the restitution to be “compensation for [the State’s]
actual pecuniary loss.” Id. at 52. Because “the decision to
impose restitution generally does not turn on the victim’s injury,
but on the penal goals of the State, and the situation of the
defendant,” the Court reasoned, restitution orders are primarily
intended to effectuate the State’s penal and rehabilitative
interests, and are only incidentally assessed to compensate the
victim. Id. at 53. Accordingly, Thompson’s restitution order
fits § 523(a)(7)’s “fine, penalty, or forfeiture” rubric, and was
not compensation for Hewitt’s actual pecuniary loss.

The first qualifying clause of § 523(a)(7), that the debt be
“payable to and for the benefit of a governmental unit,” was not
in doubt in Kelly – the restitution was payable to the State’s

8
probation office, and the payments would be added to
Connecticut’s treasury. Tellingly, however, the Court, reading
the provision to “create[] a broad exception for all penal
sanctions,” id. at 51, went out of its way to engage this
qualifying clause and to stress that it posed no serious threat to
criminal restitution orders imposed by a state. The Court
declared uncategorically that in its view “neither of the
qualifying clauses of § 523(a)(7) allows the discharge of a
criminal judgment that takes the form of restitution.” Id. at 52.

The only meaningful factual difference between
Kelly and this case is the identity of the victim. Whereas in
Kelly, the state welfare agency was defrauded and the state itself
would receive the debtor’s restitution payments, here the
victim/restitution recipient is an individual. Where, as here,
state criminal restitution orders are implicated, however, this
distinction does not seem to matter under Kelly, and we are to
give great weight to the Supreme Court’s considered dicta in
limning the breadth of situations its decisions govern. See In re
McDonald, 205 F.3d 606, 612 (3d Cir. 2000) (“[W]e should not
idly ignore considered statements the Supreme Court makes in
dicta. The Supreme Court uses dicta to help control and
influence the many issues it cannot decide because of its limited
docket.”).

Nowhere in its discussion of the victim’s role in
restitution orders did the Kelly Court suggest that the “payable
to and for the benefit of a governmental unit” language is

9
actually limited to government victims. The Court noted that (1)
unlike fines, restitution is forwarded to the victim; (2) the
“criminal justice system is not operated primarily for the benefit
of victims”; (3) the criminal context undermines the conclusion
that restitution is for the benefit of victims; (4) victims do not
determine whether and in what amount restitution is ordered;
and (5) the state’s penal goals, not the victim’s injury, generally
determines whether restitution will be imposed. Id. at 52.
Given the many opportunities the Court passed to refer to
“government victims” in this section, Kelly strongly suggests
that, indeed, § 523(a)(7) excepts from discharge all state
criminal restitution orders, regardless of whether the payments
are made to governmental units or individuals.5

In Towers, the Seventh Circuit held that a civil restitution
order won by the State of Illinois, and payable to Towers’ fraud
victims, was dischargeable in a Chapter 7 bankruptcy
proceeding notwithstanding § 523(a)(7). Absent the “principal
interpretive tool used in Kelly – the proposition that courts are

5
Citing the provision’s legislative history, the Court
noted that “[i]t seems likely that the limitation of § 523(a)(7) to
fines assessed ‘for the benefit of a governmental unit’ was
intended to prevent application of that subsection to wholly
private penalties such as punitive damages.” Kelly, 479 U.S. at
50 n. 13. This observation bolsters the inference that the Court
would extend the § 523(a)(7) discharge exception to state
criminal restitution payments directed to individual victims.

10
‘reluctant to interpret federal bankruptcy statutes to remit state
criminal judgments’ (479 U.S. at 44)” – Judge Easterbrook
reasoned that Ҥ 523(a)(7) offers weak support for exempting
restitution orders from discharge, for it does not mention
restitution, and it operates only if the penalty is ‘for the benefit
of a governmental unit’ – a condition not easy to satisfy when
the governmental body is collecting for private creditors.”
Towers, 162 F.3d at 954. Without the aid of federalism doctrine
with which to interpret the provision, the plain language of the
“payable to...” qualifier indicated that restitution obligations that
were paid to Towers’ victims could not be saved by the state’s
passthrough role. Id. at 955. Nor could the benefit be said to be
the government’s when it experienced the civil prosecution as
a cost, and the public interest in adjudicative efficiency urged
that fraud claims be litigated within the bankruptcy case. Id. at
956.

Relying heavily on Towers, this Court in Rashid held
that a federal criminal restitution order that arose before the
1994 addition of § 523(a)(13), which exempts from discharge
restitution obligations arising under Title 18 of the United States
Code, was dischargeable because the “payable to and for the
benefit of a governmental unit” requirement was not satisfied.6

6
Given the federalism interests central to Kelly, and the
observation that Congress has left § 523(a)(7) untouched since
Kelly’s broad pronouncement that the provision “preserves from
discharge any condition a state criminal court imposes as part of

11
Rashid, 210 F.3d at 207-08. Though the record was ambiguous
whether the government served a passthrough role in
distributing the restitution payments to victims, it was “clear that
the benefit – the money – is ultimately payable to the victims.” 7
Id. at 208. In this light, the panel wrote, it “would pervert the
clear, unambiguous language of § 523(a)(7) if we found that
Rashid’s restitution obligation was ‘payable to’ a governmental
unit,” and thus § 523(a)(7) did not save the debt from discharge.
Id.

Importantly for present purposes, Rashid noted that the
Kelly Court “grounded its opinion on federalism concerns” and
cited approvingly Towers’ observation that “§ 523(a)(7) ‘offers
weak support for exempting restitution orders from discharge’

a criminal sentence,” we think it would be anomalous were
federal criminal restitution orders to pass through bankruptcy
intact while their state analogs are discharged.
7
The same situation obtains here. Though Thompson’s
restitution payments pass through the Cape May Probation
Department before reaching Hewitt, as illustrated by the fact
that Hewitt himself is contesting the discharge and not the
Probation Department or the Cape May Office of the Prosecutor,
the restitution is effectively paid by Thompson to Hewitt. See
also Towers, 162 F.3d at 955 (refusing to take a “beadeyed”
reading of the restitution order that placed the Illinois Attorney
General in the role of collecting and redistributing the restitution
payments to the listed victims).

12
without the aid of federalism concerns.” Id. at 207 (emphasis
added) (quoting Towers, 162 F.3d at 954). Moreover, we
believe that contrary to Thompson’s averments during oral
argument, Rashid, by distinguishing itself and Towers from
Kelly on federalism grounds, invites a contrary result in the
situation presented in this case.

Towers concerns a civil rather than criminal order
of restitution. Federal criminal restitution orders
and civil restitution orders share one important
distinction from Kelly – neither implicates the
federal court’s longstanding “reluctan[ce] to
interpret federal bankruptcy statutes to remit state
criminal judgments.”

Rashid, 210 F.3d at 208 n.3 (quoting Kelly, 479 U.S. at 44).

III.

Unlike Towers and Rashid, the federalism considerations
repeatedly stressed in Kelly are implicated with full force here.
Read through the lens of federalism, our decision to discount a
literal reading of the qualifying clause of § 523(a)(7) at issue is
unremarkable. The correctness of this tack is fortified by
judicial tradition and Congressional acquiescence concerning

13
the nondischargeability of state criminal restitution orders.8
Indeed, in reversing the Second Circuit’s decision, which
“focused primarily on the language of ... § 523 of the Code,” the
Supreme Court observed that under its cases the text “is only the
starting point” of statutory construction. Kelly, 479 U.S. at 43.

8
Congress’s willingness to assert its authority under the
Bankruptcy Clause to address the dischargeability of criminal
restitution orders – superseding Supreme Court decisions when
necessary – marks as conspicuous its silence in the wake of
Kelly’s broad wording. As noted above, in 1994, Congress
made federal criminal restitution orders nondischargeable when
it enacted 11 U.S.C. § 523(a)(13).
Four years earlier, a mere six months after the Court in
Pennsylvania Dep’t of Public Welfare v. Davenport, 495 U.S.
552, 564 (May 29, 1990), ruled that state criminal restitution
orders were dischargeable under Chapter 13, Congress
superceded that decision. See The Criminal Victims Protection
Act of 1990, Pub. L. No. 101-581, § 3, 104 Stat. 2865, 2865
(enacted Nov. 15, 1990) (codified as 11 U.S.C. § 1328(a)(3))
(excepting from Chapter 13 discharge any debt “for restitution,
or a criminal fine, included in a sentence on the debtor’s
conviction of a crime”). Given that Congress’s choice to allow
broader discharges under Chapter 13 than under Chapter 7
formed part of Davenport’s rationale for refusing to extend the
rule of Kelly to Chapter 13 discharges, Davenport, 495 U.S. at
563, we are confident that Congress agrees with Kelly that state
criminal restitution orders are not dischargeable under Chapter
7 either, and that this rule obtains regardless of whether the
victim-restitution payee is a governmental unit or an individual.

14
“In expounding a statute, we must not be guided by a single
sentence or member of a sentence, but look to the provisions of
the whole law, and to its object and policy.” Id. (tracing the
aphorism to United States v. Heirs of Boisdore, 49 U.S. (8
How.) 113, 122 (1849)). In essence, the Supreme Court
acknowledged here that while reading “restitution” into §
523(a)(7), it read the subsection’s qualifying clauses out of the
provision, at least where the restitution is imposed as part of a
criminal sentence in state court.

Here, as in Kelly, “we must consider the language of ...
§ 523 in light of the history of bankruptcy court deference to
criminal judgments and in light of the interests of the States in
unfettered administration of their criminal justice systems.”
Kelly, 479 U.S. at 43-44. This deference is manifest in
Congress’s acceptance of the judicially-created exception of
state criminal restitution orders from discharge in bankruptcy
liquidations. Id. at 53 (predicating the result in Kelly on “the
strong interests of the States, the uniform construction of the old
[Bankruptcy] Act over three-quarters of a century, and the
absence of any significant evidence that Congress intended to
change the law in this area”). Notwithstanding that in practical
terms Thompson’s restitution payments are “payable to” Hewitt,
Kelly dictates that we not interfere with New Jersey’s criminal
restitution order. We will thus affirm the judgment of the
District Court.

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