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THOMPSON v. HEWITT

July 9, 2004.

GERALD THOMPSON, Appellant,
v.
ROBERT HEWITT, Appellee.



The opinion of the court was delivered by: MICHAEL BAYLSON, District Judge

MEMORANDUM

I. Procedural History and Jurisdiction

Gerald Thompson ("Debtor" or "Appellant") appeals a final order of the United States Bankruptcy Court for the Eastern District of Pennsylvania, which declared Debtor's restitution obligations non-dischargeable. Debtor's restitution obligations arose out of a criminal prosecution pending in the Superior Court of Cape May County, New Jersey. In a Memorandum and Order dated September 13, 2003 ("the Bankruptcy Order" or "Order"), the United States Bankruptcy Court for the Eastern District of Pennsylvania, per the Honorable Kevin J. Carey ("the Bankruptcy Court"), entered judgment against Debtor and in favor of Robert Hewitt ("Creditor" or "Appellee") in an adversary proceeding initiated by Debtor against Creditor.

  This Court has jurisdiction to hear this appeal pursuant to 28 U.S.C. § 158(a)(1). The Court held oral argument on June 3, 2004. For the reasons which follow, the decision of the Bankruptcy Court will be affirmed. II. Issues Presented on Appeal

  Appellant presents the following issues on appeal:
1. Does Kelly v. Robinson, 479 U.S. 36, 107 S.Ct. 353, 93 L.Ed.2d 216 (1986), preclude discharge of an obligation which had not become the subject of a restitution order prior to a Chapter 7 discharge order and which, subsequent to discharge, became the subject of a post-discharge restitution order which — as Appellant admitted and as stipulated to by the parties — was not payable to or for the benefit of a governmental unit and was intended to be compensation for actual pecuniary loss of the non-governmental "victim"?
2. Is In re Rashid, 210 F.3d 201 (3d Cir. 2000), which holds that restitution is dischargeable if it is not payable for the benefit of a governmental unit and is intended as compensation for actual pecuniary loss of the victim, properly to be interpreted as applying only to federal restitution orders, when it relies heavily upon and expressly adopts the reasoning of In re Towers, 162 F.2d 952 (7th Cir. 1998), which addressed state court restitution orders?
III. Parties' Stipulated Facts
  The parties have agreed to the following facts:
1. Debtor commenced a Chapter 13 case on August 27, 2001, at Bankruptcy No. 01-32128 (Bankr. E.D. Pa.) ("the First Bankruptcy Case"), which was converted to a Chapter 7 case on September 25, 2001.
2. Appellee was listed as a creditor in this case and received notice of the filing of and the deadlines in this case. 3. No objection to Debtor's discharge or the dischargeability of his debt to Appellee was ever filed in the First Bankruptcy Case or appears on the First Bankruptcy Case's docket, although Appellee did send a letter to the Chapter 7 Trustee protesting Debtor's discharge of his debt.
4. Although the case known as Indictment No. 01-02-00130-1 ("The N.J. Criminal Case"),*fn1 Superior Court of New Jersey, Cape May County — Criminal Division ("the N.J. Court") had been commenced prior to Debtor's discharge in the First Bankruptcy Case, no restitution or other order was entered directing Debtor to pay any sum to Appellee as of the date of Debtor's discharge in the First Bankruptcy Case on February 6, 2002.
5. An Order was entered on April 12, 2002 in the N.J. Criminal Case ("the Restitution Order"), which awarded Appellee restitution of $22,785, plus costs, against Debtor, to be paid at $500/month.*fn2
6. On September 12, 2002, the N.J. Court advised the Bankruptcy Court that it was willing to accept any agreement that Debtor and Appellee reached between them as a resolution of the restitution aspect of the Restitution Order.*fn3
7. Appellee agreed to accept payments of not less than $200/month for 12 months and $300/month thereafter in payment of restitution under the Restitution Order, subject only to Debtor's right to continue to contest the dischargeability of the debt owed to him by Appellee, in light of the discharge received by Debtor in the First Bankruptcy Case.
8. All of the payments made by Debtor pursuant to the agreement are payable to and for the benefit of Appellee.
9. All of the payments made by Debtor pursuant to the agreement are compensation for actual pecuniary losses claimed by Appellee.
IV. Opinion of the Bankruptcy Court

  The Bankruptcy Court concluded that enforcing the Restitution Order would not violate the discharge injunction of 11 U.S.C. § 524(a)(2), nor would it violate the automatic stay of 11 U.S.C. § 362.

  A. Discharge Injunction of 11 U.S.C. § 524(a)(2)

  Section 524(a)(2) reads in pertinent part:
(a) A discharge in a case under this title —
. . . (2) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived. . . .
11 U.S.C. § 524(a)(2). In concluding that there would be no violation of the discharge injunction of 11 U.S.C. § 524(a)(2), the Bankruptcy Court ruled that the Supreme Court's decision in Kelly, supra, applied to this matter, and excepted from discharge Debtor's obligations under the state court Restitution Order pursuant to 11 U.S.C. § 523(a)(7). Section 523(a)(7) states in pertinent part:
(a) A discharge under section 727 . . . of this title does not discharge an individual debtor from any debt —
. . .
(7) to the extent such debt is for a [1] fine, penalty of forfeiture [2] payable to and for the benefit of a governmental unit, and [3] is not compensation for actual pecuniary loss, other than a tax penalty. . . .
11 U.S.C. § 523(a)(7).*fn4 Even though no one filed an objection to discharge in the First Bankruptcy Case, the Bankruptcy Court concluded that Appellee was not obligated to file an objection to render his Section 523(a)(7) debt non-dischargeable because, as the Bankruptcy Court interpreted Kelly and other precedent, Section 523(a)(7) debts are naturally non-dischargeable. Debtor had requested that the Bankruptcy Court consider the two qualifying phrases in Section 523(a)(7), i.e., whether the restitution obligation is "payable to and for the benefit of a governmental unit," and "not compensation for actual pecuniary loss." Debtor argued that among the parties stipulated facts were stipulations that "[a]ll of the payments made by the Debtor pursuant to this agreement are payable to and for the benefit of the [Creditor]" and "[a]ll of the payments made by the Debtor pursuant to this agreement are compensation for actual pecuniary losses claimed by the [Creditor]." The Bankruptcy Court, citing precedent, noted that stipulations regarding legal issues are not binding on the court, and was not persuaded by Debtor's argument regarding the finality of these stipulations.

  The Bankruptcy Court focused instead upon the interests of the state and judicial systems in ordering restitution in criminal cases. Relying heavily on Kelly's language regarding "for whose benefit" courts typically impose restitution orders, the Bankruptcy Court concluded that "the State of New Jersey's imposition of restitution obligations on the Debtor is not for the purpose of making [Creditor] whole, but, rather, is part of the criminal sentence imposed by the State for penal and rehabilitative purposes, thereby causing the debt to fall within the § 523(a)(7) exception to discharge." Order, supra, at 8. That is, the Bankruptcy Court decided that New Jersey receives the benefits of criminal deterrence and rehabilitation — which, albeit, are not quantifiable monetary benefits — from the continued enforcement of the Restitution Order.

  The Bankruptcy Court distinguished Rashid v. Powel (In re Rashid), 210 F.3d 201 (3d Cir. 2000), having concluded that Rashid was limited to federal criminal restitution judgments. In Rashid, the Third Circuit held that a restitution obligation imposed under the Victim and Witness Protection Act was not excepted from discharge under Section 523(a)(7), because the money was not payable to a governmental unit, but rather ultimately would be paid to the victims of the crime. Debtor argued that since the money he must pay under the Restitution Order ultimately will be paid to Creditor (regardless if the "probation court" first collects the money, see supra note 1), Debtor's debt should qualify for discharge under Section 523(a)(7). However, because the instant case concerns whether a state Restitution Order should be discharged, and because Rashid decided whether a federal restitution judgment could be discharged under Section 523(a)(7), the Bankruptcy Court concluded that Kelly, which involved a state restitution order, was more applicable and more controlling than Rashid. The Bankruptcy Court found that this case implicated federalism concerns similar to those that influenced the Supreme Court in Kelly. See infra Part V.A.

  B. Automatic Stay of 11 U.S.C. § 362

  Debtor had argued that further prosecution of the Criminal Prosecution to enforce the Restitution Order obligations would violate the automatic stay provision of Sections 362(a)(1), (a)(3), and (a)(6). Debtor also had requested that sanctions be imposed against Creditor, pursuant to Section 362(h), for willfully violating the automatic stay provisions. The Bankruptcy Court found these arguments unpersuasive.

  The Bankruptcy Court noted that Creditor is not the party prosecuting the Criminal Prosecution, nor did Creditor violate the automatic stay of Section 362(a) by participating in any proceedings in the Criminal Prosecution to enforce the Restitution Order. The Bankruptcy Court further wrote:
As [the Bankruptcy Court] concluded in [its] August 13, 2002 Memorandum and Order denying the Debtor's motion seeking a preliminary injunction in this adversary proceeding, Bankruptcy Code § 362(b)(1) expressly excepts the continuation of the state court criminal proceeding from the reach of the automatic stay — even if the criminal proceeding's purpose is to collect a debt or enforce payment of a criminal restitution obligation.
Order, supra, ...

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