Wednesday, August 27, 2008

9th Circ BAP Holds $77,088 of Costs of Prosecution Dischargeable in Ch 13 Since is Not a "Criminal Fine": Judge Dunn Writes BAP Opinion Over a Dissent

by Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

6/08/08; In re Joseph Elliot Ryan, BAP Case No ID-07-1316-DMkMo

This recent 9th Circuit BAP opinion, written for the court by Judge Randall Dunn in his capacity as a BAP judge, fills an important gap in the nexus between bankruptcy and criminal law in the 9th Circuit. Besides reminding attorneys to be very mindful of the distinctions among the various components of a criminal judgment, this opinion states clearly that criminal prosecution costs ARE dischargeable in Chapter 13 cases.

The legal issue here is a simple definitional one: does the phrase "criminal fine" in § 1328(a)(3) of the Bankruptcy Code include the costs of prosecution awarded against a debtor in a criminal judgment? This subsection of the Code excludes from a Chapter 13 discharge "any debt . . . (3) for restitution, or a criminal fine, included in a sentence on the debtor's conviction of a crime." The underlying bankruptcy court for the District of Idaho held that such costs of prosecution fell within the definition of a criminal fine, and so were exempt from discharge. In a split 2-1 decision the BAP reversed the bankruptcy court and discharged the debt.

Debtor had been convicted in federal court of possession of an unregistered firearm, served his time in prison, paid a fine of $7,500, his restitution of $750,000 was eliminated by the trial court, leaving him to pay $83,420 in costs of prosecution. He filed a Chapter 7 case and received a discharge, then filed a Chapter 13 case listing the costs of prosecution as his sole debt, filed an adversary proceeding to determine the dischargeability of that debt, which was dismissed by the bankruptcy court as being premature,. So he completed payments under the plan--of which $2,775 was paid on the costs of prosecution claim, with a balance remaining of $77,088--and received a discharge order. He then renewed his adversary proceeding to determine dischargeability of the remaining balance on the costs of prosecution claim, which the bankruptcy court ruled was not dischargeable because it was a "criminal fine" under Section 1328(a)(3).

"Criminal fine" is not defined anywhere in the Code, so its meaning is ambiguous and the courts must look to the statutory context and legislative history to determine legislative intent.

The statutory context is viewed through two basic countervailing policy goals: on the one hand providing a fresh start to overburdened debtors requires exceptions to discharge to be interpreted strictly in favor of debtors, especially in Chapter 13 cases; on the other hand historical deference to criminal courts requires excluding criminal sanctions from bankruptcy discharge. Judge Dunn then analyzed how these two policies have been applied by the Supreme Court in two seminal cases dealing with the interplay between bankruptcy and criminal law, Kelly v. Robinson, 479 U.S. 36 (1986) and Pa. Dept. of Pub. Welfare v. Davenport, 495 U.S. 552 (1990). His 7-page history of these decisions and their progeny is a valuable discourse in these policy tensions, particularly between the Supreme Court and Congress. Kelly held that criminal restitution obligations
were exempt from discharge in Chapter 7 cases since such obligations are "not compensation for actual pecuniary loss" as stated under Section 523(a)(7); in contrast Davenport held that criminal restitution obligations were NOT exempt from discharge in Chapter 13 cases since they are a "debt" under Section 1328(a).

Congressional reaction to the Davenport decision sets up Judge Dunn's well-reasoned legislative history analysis. Within months of Davenport, Congress amended Section 1328(a) to add an exception from discharge for criminal restitution, and a few years later in 1994 inserted the "criminal fine" language to Section 1328(a)(3). The legislative history behind the first amendment makes very clear that its express intent is to overrule Davenport, specifically referring to criminal restitution obligations. In contrast, the legislative history behind the second amendment, adding the "criminal fine" language. does not help define that term. Judge Dunn's primary statutory interpretation argument is that Congress could easily have explicitly added costs of prosecution to the exemption from discharge at either of these opportunities and did not do so. To buttress this he also notes that in the time between the 1986 Kelly opinion and the 2000 and 2004 amendments, a number of bankruptcy courts and circuit courts of appeal had determined that costs of prosecution were not dischargeable under Chapter 7, and these cases "presumably were known to Congress" and yet still it did not include costs of prosecution in these amendments to Chapter 13 discharge. Nor did it adopt the broader exception language of Section 523(a)(7) into Chapter 13 discharge exceptions. By way of contrast, BAPCPA's constriction of the Chapter 13 superdischarge was largely accomplished by Congress incorporating exceptions to discharge straight from Section 523(a); Congress certainly knows how to do that if it wants to.

Finally, on the rationale that "[d]efinitions or interpretations of terms under other relevant federal statutes are useful to inform our interpretation of such terms, used but not defined in the Bankruptcy Code," Judge Dunn's BAP opinion examined federal statutory and case law in determining that costs of prosecution are not covered by the term "criminal fines" in federal criminal law.

The dissent dismisses Judge Dunn's "great deal of time and analysis" to arrive at a narrow reading of "criminal fines", and instead asserts that one need only to look at federal criminal opinions to see that costs of prosecution are treated as criminal fines. The source of this disagreement between the majority and the dissent is the interpretation of a couple 9th Circuit opinions from the 1970's and 1980's and whether, as the dissent asserts, these opinions treated costs of prosecution as criminal fines for purposes of sentencing. As the dissent concludes, "reasonable minds may differ," but its argument is not helped by its overly general assertion that "treating reimbursement costs as criminal fines within Section 1328(a)(3) is a more natural reading of that section" and more in keeping with "the history behind the1994 amendment that added "criminal fine" to Section 1328(a)(3)," but says this without citing anything in that history supporting that assertion.

BOTTOM LINE: SO... criminal fines, restitution AND prosecution costs are NOT dischargeable under Chapter 7, whereas in Chapter 13 criminal fines and restitution are also NOT dischargeable but prosecution costs ARE.

Note: pre-BAPCPA law applies to this case because the Chapter 13 case was filed before BAPCPA's enactment, but be aware that its enactment did not change Section 1328(a)(3), thus presumably making this case still good law after BAPCPA.

by Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

© 2008 Bankruptcy Litigation Support for Attorneys