Pennsylvania Department of Public Welfare v. Davenport

PETITIONER:Pennsylvania Department of Public Welfare
RESPONDENT:Davenport
LOCATION:Michigan Chamber of Commerce

DOCKET NO.: 89-156
DECIDED BY: Rehnquist Court (1988-1990)
LOWER COURT: United States Court of Appeals for the Third Circuit

CITATION: 495 US 552 (1990)
ARGUED: Feb 20, 1990
DECIDED: May 29, 1990

ADVOCATES:
David A. Searles – on behalf of the Respondents
Walter W. Cohen – on behalf of the Petitioners

Facts of the case

Question

Audio Transcription for Oral Argument – February 20, 1990 in Pennsylvania Department of Public Welfare v. Davenport

William H. Rehnquist:

We’ll hear argument now in No. 89-156, Pennsylvania Department of Public Welfare v. Edward J. Davenport.

Mr. Cohen.

Walter W. Cohen:

Mr. Chief Justice, and may it please the Court:

The issue before the Court in this case is whether Congress in enacting the Bankruptcy Code of 1978 intended that a criminal convicted of welfare fraud and sentenced to pay restitution as a condition of probation in a state court can walk out of the state courthouse and into the federal courthouse to have the judge’s criminal restitution order wiped out in a bankruptcy process.

The facts of the case are not in dispute.

The defendants in September of 1986 entered guilty pleas.

They were sentenced to pay restitution in the amount of $4,145 at the rate of $208 per defendant per month payable to the county probation department.

A period of months passed.

They failed to pay and they then proceeded in a Chapter 13 bankruptcy filing.

The probation department of the county filed a previolation notice and subsequently held a hearing and then the bankruptcy court instituted an adversary proceeding at the instance of the Respondents and an order was entered discharging the state court restitution sentence as a debt.

That decision was reversed by the judge in the Eastern District based upon this Court’s reasoning in Kelly v. Robinson.

But the Third Circuit in a two-to-one decision reversed and the order of discharge stood, cert was granted by this Court to address the question of whether a restitution order is a debt that is dischargeable in a Chapter 13 bankruptcy proceeding.

It is Petitioners’ position that Congress did not intend to void a lawful state court criminal sentence in any way through the bankruptcy process or in particular here through a Chapter 13 proceeding.

To have done so would have trampled on the principles of federalism in comity that this Court in 1971 in Younger v. Harris discussed so thoroughly where the Court recognized the fundamental policy in our system of government against federal interference with state criminal prosecutions.

Further, the language of the Bankruptcy Code does not clearly spell out that criminal court orders of this nature are to be voided through discharge in a Chapter 13 proceeding.

Additionally, there was a string of pre-Code cases going back as far as the case of In re Moore in Kentucky Bankruptcy Court in 1901 where courts refused to discharge criminal restitution sentences.

That is very important under the test that the Supreme Court set forth in the Midlantic case and the Court said that if Congress intends for legislation to change the interpretation of a judicially-created concept, it makes that intent specific.

Sandra Day O’Connor:

Mr. Cohen, were criminal monetary sanctions considered debts in pre-Code Chapter 13-type proceedings?

Walter W. Cohen:

They were not, Justice O’Connor.

Sandra Day O’Connor:

Were they dischargeable?

Walter W. Cohen:

The criminal court orders were not… they were dischargeable, but under the definition of debt.

I’m sorry, they were not dischargeable.

But under the definition of debt, which was a much narrower definition at that time, they did not fall under that definition.

Sandra Day O’Connor:

Are there cases that you cite holding that criminal monetary sanctions were nondischargeable?

Walter W. Cohen:

Yes, Your Honor, and In re Moore is one of them.

But it’s… it’s a whole string of cases cited in our brief that stands for that proposition.

In the Ron Pair Enterprises case, this Court also said that we must look very carefully to its clear expression of congressional intent when there is a clear conflict with state and federal laws of great importance.

Here the conflict is between the Bankruptcy Code and the criminal laws of the Commonwealth of Pennsylvania.

In Kelly v. Robinson, this Court said you must look to… one must look to the whole law.

And if we do that, we find no solid specific evidence of any congressional intent to change that pre-Code law to allow for discharge of criminal sentences.

Byron R. White:

Well, what’s the language that’s involved here?

What’s the claim?

What makes it… why is it claimed to be dischargeable?

Because it is said to be a debt?

Walter W. Cohen:

Because it is said to be a debt.

Byron R. White:

Well,–

Walter W. Cohen:

A debt is defined as a liability on a claim.

A claim is a right to payment–

Byron R. White:

–So why don’t we have to… aren’t you going to have to tell us what a debt is or isn’t?

Walter W. Cohen:

–A debt is a liability on a claim and claim is a right to payment.

It is our position that there is no right to payment when you have a situation of the probation department essentially being the payee after a criminal court judge has ordered that a sentence of restitution be imposed as a condition of probation.

Byron R. White:

And it isn’t… it isn’t… it’s… I suppose he is supposed to pay it, isn’t he.

Walter W. Cohen:

Your Honor, it is a sentence.

It’s not a debt.

He must pay it–

Byron R. White:

Well, he’s suppose to pay it, isn’t he?

Walter W. Cohen:

–He is suppose to pay it if he is to follow the sentencing–

Byron R. White:

And if he doesn’t, he’ll be in jail.

Walter W. Cohen:

–That’s correct, if he has the ability to pay it.

Under Bearden v. Georgia the Court very properly clearly held that you cannot send somebody to jail.

Byron R. White:

That’s right.

Walter W. Cohen:

We don’t have debtor’s prisons.

Byron R. White:

That’s right.

Walter W. Cohen:

You can’t send somebody to jail if they cannot afford to pay it.

But a sanction of going to jail does not give the victim in this case, the Pennsylvania Department of Public Welfare, any right to collect the money.

This is not a civil judgment order, in other words.

It is a criminal sentence.

Sandra Day O’Connor:

Well, I suppose if someone qualifies for bankruptcy, that’s pretty good evidence that they don’t have the ability to pay.

Walter W. Cohen:

Yes, Your Honor, but a criminal restitution sentence… and this is specifically in Pennsylvania, but I don’t think that we’re asking this Court to just hold for Pennsylvania obviously… but specifically in the Pennsylvania statute, a restitution order for welfare fraud can continue even beyond the term of possible sentence for the underlying crime, which in this case was seven years.

So that the probation order and the restitution order can continue far beyond the three-year period of consideration for the issue of what is available for the creditors in the bankruptcy proceeding.

Anthony M. Kennedy:

Does the probation… does the welfare department have a right of setoff against future payments for the nonpayment of the fine?

Walter W. Cohen:

The department would be able to proceed to recoup if the individuals are still on welfare.

There is no process in Pennsylvania–

Anthony M. Kennedy:

Well, that’s… that’s… that’s exercising a right… a right of payment, I take it.

Walter W. Cohen:

–It’s an exercise of recoupment for the money that was taken, but that is–

Anthony M. Kennedy:

Well, you call it… you call it recoupment.

Walter W. Cohen:

–Not under the criminal court order, Your Honor.

Only in a separate process, which is not the process before the Court.

Anthony M. Kennedy:

Well, what do they have to do in order to recoup other than just read the court order?

Walter W. Cohen:

They have to proceed civilly.

Anthony M. Kennedy:

And how do… how do they do that?

Walter W. Cohen:

The welfare department does not recoup on the basis of the criminal restitution order.

So there–

Anthony M. Kennedy:

How it does it proceed civilly?

Walter W. Cohen:

–It proceeds by going into court and seeking a civil judgment for the money unlawfully paid.

And the standards that the department uses are… are the standard basically for proceeding civilly as opposed to criminally is a lower standard.

If they are proceeding criminally, they are looking at the intent.

They are looking at the prior history, the intent of the individuals involved and if they determine that it is risen to the level of a criminal prosecution, then they prosecute criminally.

But the restitution order of the court is a sentence of the court.

Anthony M. Kennedy:

So the recoupment can only be after a civil proceeding?

Walter W. Cohen:

That’s correct, Your Honor.

Byron R. White:

I suppose that wouldn’t make… make it a debt that was dischargeable.

Walter W. Cohen:

If it were in a civil proceeding.

Byron R. White:

Yes.

Walter W. Cohen:

If this Court had a civil judgment order in front of it.

But what this Court has is a criminal sentence from another court, a court that is enforcing the criminal laws of the state, a court that is making a judgment of what is the purpose of the sentencing process.

And it is our position, which we advance of course in the briefs, that the purpose of a restitution sentence is the same as any other sentence.

It is for purposes of rehabilitation of the defendant.

It is for deterrence, retribution, punishment, but it is not to collect the debt that is owed.

Anthony M. Kennedy:

If you had a state where the welfare department could recoup simply based on the criminal judgment, would the debt be… would the transaction be a debt in those states?

Walter W. Cohen:

Your Honor, there are some states that in fact have in the criminal statute a civil process to enact a… to proceed civilly toward a civil judgment.

But it is still our position that Congress did not intend to set up in the bankruptcy process, a method that people convicted of crimes can escape from their sentence.

Byron R. White:

Well, wouldn’t… wouldn’t you say that this bankrupt owed the… the… is it the state, the city… the… Pennsylvania… is it the state that we are talking about?

Walter W. Cohen:

The Department of Public Welfare paying out–

Byron R. White:

Didn’t the bankruptor owe them some money?

Walter W. Cohen:

–As a result of the sentence–

Byron R. White:

No, no, no.

No.

Just… from the moment he… he committed a fraud he owed them some money didn’t he?

Walter W. Cohen:

–That’s correct.

Byron R. White:

And couldn’t he have listed that as a debt that he owed to–

Walter W. Cohen:

He did do that.

Byron R. White:

–He did do that and why isn’t that debt dischargeable?

Walter W. Cohen:

Because that is different from the criminal sentence itself.

Byron R. White:

Well, I know, but isn’t that debt dischargeable?

He lists this as is a debt.

I defrauded the department and I owe them some money and he lists it as a debt.

Now isn’t that dischargeable?

Walter W. Cohen:

Oh, because… that process and what the court did here was to actually end up with $120 paid out to the creditors and said that that was one of the debts… one of many debts that was dischargeable.

But we are not looking at a civil judgment or a civil claim.

We are looking a criminal court sentence.

Byron R. White:

But the restitution order… isn’t it measured by what the fellow took from somebody else?

Walter W. Cohen:

It can be.

Byron R. White:

Wasn’t it here?

Walter W. Cohen:

And in this case it was.

But at the same time a restitution order can be entered and has been entered in Pennsylvania in 1987 in 5,000 cases measured not by the total loss, but by some judgment as to what in terms of rehabilitation of the defendant, what amount of money would indicate to that defendant that he or she is paying back money for something that he or she did wrongly.

Byron R. White:

I suppose that he could have been convicted for some fraud but he might just have independently paid the money back to the… to the city or to the department of welfare.

Walter W. Cohen:

To the state.

Byron R. White:

He might have done that and still been convicted mightn’t he?

Walter W. Cohen:

That would be possible.

Byron R. White:

But there certainly wouldn’t be any restitution order.

Walter W. Cohen:

That’s correct under those circumstances, Your Honor.

Byron R. White:

Then why should there be if his debt has been discharged?

Walter W. Cohen:

The restitution order came before any proceeding in bankruptcy.

The restitution order was a valid order.

If he were to challenge that order, that should be challenged through the state court process.

Byron R. White:

But suppose it didn’t.

Suppose… suppose the discharge is first and the criminal proceeding second?

Walter W. Cohen:

I still don’t think it matters, Your Honor, because I think that–

Anthony M. Kennedy:

Well, the question is does… does the Pennsylvania criminal court have authority to impose the restitution order even if the debt has been discharged.

Walter W. Cohen:

–It is our position that they do.

Antonin Scalia:

Restitution for something that he doesn’t owe?

Walter W. Cohen:

Restitution for something that the bankruptcy court has said that he doesn’t owe but that the criminal court judge can still say is a violation of the laws of the Commonwealth of Pennsylvania in the judgment made by the state legislature.

And that’s why in this discussion I think we are pointing out the whole problem of did Congress of the United States intend to limit the authority of a state court judge or to wipe out the sentence of a state court judge where the judge is enforcing the laws of the Commonwealth, laws that the state legislature are suppose to be able to enact to protect the citizens and laws, in fact in this instance, that this Court in Bowen v. Roy indicated were important laws… the ability of the state to police welfare fraud.

Antonin Scalia:

Mr. Cohen, you say there has to be some… some indication in the statute… clear indication, or whatever terminology you use.

Why isn’t there?

I mean claim is defined… is defined… well, debt… debt means liability on a claim.

Claim means right to payment essentially.

And then you have Section 523(a)(7) which makes it very clear that… that a debt includes a fine, penalty or forfeiture.

It says that… that a discharge will not discharge an individual from any debt to the extent such debt is for a fine, penalty, or forfeiture.

Walter W. Cohen:

And–

Antonin Scalia:

It seems to me clear that Congress thinks that a fine, penalty or forfeiture, criminal though it be, is a debt.

Walter W. Cohen:

–Your Honor, in Kelly v. Robinson this Court did act based upon that section of the Bankruptcy Code and acted to uphold the restitution order basically in that Connecticut case.

But the issue of whether a sentence–

Antonin Scalia:

Because it said it did not exclude it.

Right?

Walter W. Cohen:

–It said to the extent that it is a debt it is not dischargeable.

Anthony M. Kennedy:

Well, they didn’t reach the question.

They really didn’t reach the question.

Walter W. Cohen:

They didn’t reach–

Anthony M. Kennedy:

All right.

Walter W. Cohen:

–That’s… that’s correct, Your Honor.

Antonin Scalia:

Well, I don’t care about the question, I’m talking about the text.

To the extent… the text says to the extent such debt is for a fine, penalty or forfeiture.

And you’re telling us that that language is meaningless because a debt can never be for a fine, penalty or forfeiture.

Walter W. Cohen:

No, Your Honor.

I… I would say in response directly to your question that the fine, penalty or forfeiture that the Congress is speaking of there is a civil fine, penalty or forfeiture, not a criminal fine, penalty or forfeiture.

There is no discussion… and that’s why we are standing here talking about congressional intent… there is no discussion of criminal fines, penalty, or forfeiture.

In fact, the Congress said that the bankruptcy laws are not to be a have for criminal offenders.

The bankruptcy laws are intended to protect honest debtors attempting, when they are financially overextended, to have a fresh start and not to protect criminal offenders.

Antonin Scalia:

I… I… I’ve heard of a civil penalty in a civil forfeiture.

I must say I’ve never heard of a civil fine.

A civil fine.

I thought a fine was always a criminal exaction.

I mean, we’re just talking about words here, but that’s–

Walter W. Cohen:

That’s the case.

Antonin Scalia:

–what our statutes happen to be written in.

May I ask on the… on your view under… in Pennsylvania.

Supposing you have the same judgment you’ve got here and you call it criminal restitution and the person who owes the money dies.

Would you be able to recover from… and say there’s plenty of money in the estate… could you recover on the claim from the estate?

From the decedent’s estate?

Walter W. Cohen:

I don’t think so, Your Honor.

Byron R. White:

You don’t think you could?

Walter W. Cohen:

Because–

Byron R. White:

If you went in and said this is a debt–

Walter W. Cohen:

–I think it is a–

Byron R. White:

–that’s owed?

Walter W. Cohen:

–it is a sentence to the… to the individual.

It is not a debt that would be owed from the estate.

If it were a civil judgment, then that would be different.

Walter W. Cohen:

Now, there is some case law to the contrary on that.

John Paul Stevens:

Is there any case law supporting your position?

Walter W. Cohen:

No, Your Honor.

Not that I am aware of.

John Paul Stevens:

But there is some to the contrary.

Is there case law to the contrary in Pennsylvania?

Walter W. Cohen:

No.

In Kelly v. Robinson this Court… Justice Powell, in fact, writing for the majority quoted Justice Powell writing for the descent in TVA v. Hill, the Snaildarter case, and he said… this was in the majority opinion… that if Congress had intended to discharge state criminal sentences, we can be certain that there would have been hearings, testimony, and debate concerning consequences so likely to arouse public outrage.

In other congressional acts, such as the Victim and Witness Protection Act of 1982, Congress very clearly intended to highlight restitution as a criminal sanction.

In the Financial Institutions Reform, Recovery and Enforcement Act of 1989, Congress showed its intent again that restitution be a sanction in the savings and loan scandals.

In the automatic stay provision which is where the… during the course of the debate on the automatic stay, where the Congress indicated that the bankruptcy laws… and they didn’t just the automatic stay provision, they said the bankruptcy laws are not intended to be a haven for criminal offenders.

And that section… it would be contradictory to then allow an offender to escape a sentence if in fact there is an exception to a stay to allow criminal proceedings to commence or to continue.

In the preferential transfer provisions, which weighed transfers for the benefit of a creditor on account of a debt owed within 90 days… in that situation, under the ruling of the Third Circuit, the criminal restitution order is a debt and the Department of Public Welfare here is a creditor, the Department would have to pay back the money.

They would have to refund the restitution payments made under the state court judge’s order.

John Paul Stevens:

xxx preferences?

Walter W. Cohen:

Because it would be within the 90-day period and a preference, a debt, would have to be paid back.

So, the issue of federalism… the issue of the–

Antonin Scalia:

Excise me.

But would that also be the case… it doesn’t make any difference whether this is a restitution order or just a plain… plain fine?

Suppose it was just a… just a fine.

It doesn’t go ultimately to the victim at all?

It just goes into the state treasury?

Walter W. Cohen:

–I think, Your Honor, that that is different because a restitution order… well, I guess a fine would still be a sentence.

So I suppose that would be correct.

It would be the same.

A restitution order being a sentence, the fine being the sentence.

But the greater concern here–

Antonin Scalia:

But my… my point is a fine would also be voidable you would say if we accept the–

Walter W. Cohen:

–If you accept the position of the Third Circuit.

So what the–

William H. Rehnquist:

–Because there is no contemporary consideration paid for each of the installments, is that why it is voidable?

Walter W. Cohen:

–No, because under what Justice Scalia would be saying–

William H. Rehnquist:

Well, I can ask him in conference.

Walter W. Cohen:

–it was a debt.

William H. Rehnquist:

I’m asking you now.

[Laughter]

Walter W. Cohen:

It was… it is a debt.

That would be why.

William H. Rehnquist:

Well, but it’s not all debts that are preferences.

I mean if a payment is made on a debt within 90 days, the reason it’s a preference is because there’s nothing exchanged for the time.

It’s a pre-existing debt.

Isn’t that the reason?

Walter W. Cohen:

That’s correct and it’s money that otherwise should be available to all of the creditors in the context of the bankruptcy proceeding.

I’m sorry, I thought Justice Scalia was not focused on the preferential transfer provision, but on the underlying issue before the Court.

The whole question of the role of the federal government vis-a-vis role of the state government, the issues raised by this Court in Younger v. Harris lead to an infringement on the sovereignty of the states if the federal court can determine that a criminal court judge cannot take into consideration all of the factors, all of the sanction alternatives that are left available to the court in a criminal sentence and decide what is the most appropriate sentence to rehabilitate, to protect the people and to punish the offender.

William H. Rehnquist:

As a matter of fact, Mr. Cohen, in Pennsylvania is restitution often imposed as the only criminal sanction or is it usually accompanied by a fine or a… or a criminal sentence?

Walter W. Cohen:

In this case, for example, Your Honor, it was a condition of probation imposed along with court costs so that court costs were separate from the restitution order which was a condition of the probation sentence of one year.

But it can be imposed in a variety of different ways.

It was, as I mentioned, 5,000 times it was imposed as a sentence or as a condition of probation, but in many of those instance it was a–

William H. Rehnquist:

Do you think if… if the Third Circuit view prevails, the Pennsylvania criminal court would have difficulty revoking probation for failure to pay the restitution?

Walter W. Cohen:

–It would have difficulty.

I think that they could still do that, but the problem would be they could only do that once there was a determination at the time that the court was proceeding to the probation hearing that the person had the ability to pay.

Now in the discussion… in the oral argument–

William H. Rehnquist:

Well, why… why would ability to pay be critical in deciding whether or not because the… it’s dischargeable in bankruptcy, you could nonetheless revoke probation for failure to pay it?

Walter W. Cohen:

–Because you can’t… under Bearden v. Georgia, state court or federal court cannot revoke probation without making that determination of the ability of the defendant–

William H. Rehnquist:

Well, okay.

But that’s a totally different line of cases from… from the bankruptcy aspect.

Walter W. Cohen:

–That’s correct.

William H. Rehnquist:

Well, supposing there was a determination that the defendant did have the ability to pay, but nonetheless the Third Circuit’s view is upheld here and we say this is a debt dischargeable in bankruptcy.

Do you think the Pennsylvania criminal court could revoke probation for failure to pay it?

Walter W. Cohen:

No, I don’t think under those circumstances.

Anthony M. Kennedy:

Can you–

Walter W. Cohen:

But I think that what that then does in the future is set up a system where people convicted of welfare fraud would go to prison.

Anthony M. Kennedy:

–Well, why is that if… if the defendant wishes to avoid incarceration and he can come up with the money to pay, he just pays it despite the fact there’s been a discharge.

Walter W. Cohen:

I thought the–

Anthony M. Kennedy:

He has his choice.

He goes to jail or he pays.

But if it is–

Walter W. Cohen:

–If he wants to rely on the discharge, he goes to jail.

Even under that circumstance, Justice Kennedy, I think then we create a system that does not give the proper balance between what the bankruptcy court can do and what the criminal court trial judge can do.

So I think that judges will, faced with a decision by this Court upholding the Third Circuit, they will sentence people initially to prison.

And the whole restitution process, the whole victim’s rights movement that has grown so strongly in the ’80s as a part of the criminal justice system, will take a large step backwards.

Byron R. White:

–If this restitution order is considered a debt, do you lose?

Walter W. Cohen:

We lose this case.

Byron R. White:

There is no way of saying that the… that the restitution order is not dischargeable under the provisions of the Code?

Walter W. Cohen:

No, not at all, because the 523(a)(7) applies to Chapter 7 but not to Chapter 13 bankruptcies under Section 1328(a).

So we have to rise or fall on the question of whether a restitution order is a sentence or is a debt.

Byron R. White:

But by the same token then you say you shouldn’t use (a)(7) to show that this is a debt because this–

Walter W. Cohen:

I… I would say that.

Yes, Your Honor.

And may I reserve the remainder of my time?

William H. Rehnquist:

–Yes, you may, Mr. Cohen.

Mr. Searles.

David A. Searles:

Thank you, Mr. Chief Justice.

William H. Rehnquist:

Mr. Searles, if the Third Circuit view is upheld here, do you think that a Pennsylvania criminal court could revoke this particular Respondents’ probation for failure to make the restitution payment?

David A. Searles:

Your Honor, I think it depends whether the restitution order is an independent component of the criminal sentence or whether it’s a condition of probation.

In this case it was originally a condition of probation, but the probation has expired.

All that remains is the order to pay restitution.

And if the criminal court were to try to compel payment of the restitution after discharge, I think that would be inappropriate under Section 524, under the statutory injunction against collecting discharged debts.

If there were still a condition of probation and the restitution had been discharged, then I think the answer would depend on state law, which is could the state court judge modify or revoke probation when the original conditions of probation have proved impossible or infeasible.

William H. Rehnquist:

But you wouldn’t see the federal Bankruptcy Code as a bar to revocation of probation in the latter situation.

David A. Searles:

It would be a bar insofar as in an attempt to collect money that had been discharged… a debt that had been discharged.

But I think the answer would be up to the state courts to determine on a case-to-case basis which is, depending on state law, having to do with an original condition of probation having become infeasible.

What does that leave the state court judge to do?

Antonin Scalia:

I’m… I’m not sure I understand your answer because the first part sort of read out the last part.

You’d… you’d say it would be… it would not be permissible under the bankruptcy law insofar as it’s an attempt to collect a debt.

But it is an attempt to collect a debt.

The state court says, I don’t care if it’s been discharged, you either pay it up or your probation is revoked.

David A. Searles:

I think what–

Antonin Scalia:

Do you consider that an attempt to collect a debt?

That’s… that’s what we’re asking.

Can a state court say either pay up or your probation is revoked?

David A. Searles:

–I think that–

Antonin Scalia:

If state law provides that, is it allowable under federal law?

David A. Searles:

–I think that 524 would bar that.

Antonin Scalia:

Okay.

David A. Searles:

That’s… court… the Congress’ statutory injunction against collection of a discharged debt.

But I think what the defendant in that case would do would be to go to state court, present his thorough law defense.

As the Third Circuit has held in the Davis case, we can presume that state courts are going to uphold federal law defenses and let the state court decide that based on state law.

William H. Rehnquist:

Well, but are… you know, the last clause is almost meaningless so far as I can tell.

If federal law prevents the revocation of probation after the debt has been discharged in bankruptcy, why say let state courts decide according to state law?

It’s being controlled by federal law, isn’t it?

David A. Searles:

That would be the defense, that federal law precludes collection of the debt.

William H. Rehnquist:

Well, does the state court have any option if the federal defense is a good one?

You don’t just say, well, let them decide it for themselves.

I mean, they have to give controlling federal law the nod don’t they?

David A. Searles:

I believe that’s true.

John Paul Stevens:

Mr. Searles, before you get into your argument, could you help me out on one… this is not a bankruptcy, this is a Chapter 13, isn’t it?

David A. Searles:

Yes, it is.

John Paul Stevens:

It reads more like a reorganization.

David A. Searles:

Yes.

John Paul Stevens:

Now, what is the difference between the… your client’s obligation under the plan of… whatever the plan he had was, and his obligation had there been no plan?

He did have an obligation to pay it even under the plan, didn’t he?

David A. Searles:

Yes.

John Paul Stevens:

Yeah, well, what–

David A. Searles:

What a debtor in a Chapter 13 does is… is sets forth what his disposable income is and proposes that be paid to the trustee on a periodic basis and the trustee takes that money and pays it to the various creditors who have filed claims.

John Paul Stevens:

–Well, why d… why doesn’t the state get paid in full in this case?

David A. Searles:

They did not file a claim.

John Paul Stevens:

But if they had filed a claim, wouldn’t they have been paid in full?

David A. Searles:

They would not have been paid in full.

They would have been paid to the extent that the debtor could afford it–

John Paul Stevens:

I see.

David A. Searles:

–based on the bankruptcy judge’s determination of what he could afford.

John Paul Stevens:

But if, for example, this was the only debt he had… or assuming its a debt for… I don’t suppose they would approve of the plan if… if it was just a means to get rid of this one obligation, would they?

It would either be a bankruptcy case or nothing, wouldn’t it?

David A. Searles:

Well, I think bankruptcy courts have… have the power to dismiss bankruptcies or deny confirmation of bankruptcy plans if they feel, based on all the circumstances that exist–

John Paul Stevens:

Isn’t there a good faith requirement?

David A. Searles:

–that it’s not a proper–

John Paul Stevens:

Isn’t there a good faith requirement?

David A. Searles:

–that doesn’t meet the good faith requirement.

The state didn’t even come to court to object on that ground or any other ground.

If they–

Byron R. White:

What percentage of payment did this plan call for?

David A. Searles:

–This called for a very low percentage.

I’m not sure exactly what it was.

Byron R. White:

10 percent?

David A. Searles:

It may have been lower than 10 percent.

Byron R. White:

I see.

David A. Searles:

The Davenport’s only income was Social Security disability benefits.

After all their expenses they had left over a very small amount and that’s what was proposed to pay into the plan.

John Paul Stevens:

Well, if his… if his filings were correct… I’m sorry I shouldn’t… if his filings were correct, he really wouldn’t have been able to pay this money anyway then, would he?

David A. Searles:

After the bankruptcy?

John Paul Stevens:

On the schedule.

David A. Searles:

After the bankruptcy, he would not have been able to pay.

John Paul Stevens:

Yeah.

David A. Searles:

In fact, that’s what happened.

During the bankruptcy when there was motion to revoke probation, the Davenports voluntarily went back to state court.

We did not try to restrain the state court from proceeding, and the Davenports appeared and they testified about their inability to pay, and the state court judge found that there was inability to pay, denied the motion to revoke probation, and the probationary period expired.

There was… there was no interference with the state court system here.

But their main intention–

Antonin Scalia:

Can you… can you explain to me why… why you… you say that 523(a)(7) does mean when it says fine, penalty or forfeiture… under your theory it means both civil and criminal.

Right?

David A. Searles:

–That’s correct.

Antonin Scalia:

Why… why… why did Congress not apply that to Chapter 13?

Just an accident or what?

David A. Searles:

I think it has to do with the purposes of Chapter 13, which is, instead of liquidating your property and distributing the non-exempt assets to your creditors, which is what you do in 7, a 13 is a means to keep property and pay your creditors to the extent that you are able to.

So it’s a broader discharge in a Chapter 13 because the result in most cases is going to be that all the debtor’s disposable income is going to committed to the plan and paid to the creditors.

And to the extent that the creditors don’t get 100 percent, well, Congress has made a decision that debts are not going to hang over the debtors head ad infinitum and at that point they receive a discharge.

So what Congress has done is provide for a broader discharge in some Chapter 13 cases, the ones that are completed under 1328(a), and provide for a discharge of all debts listed with two exceptions.

One of them being long-term debts and the other being alimony and support.

But all the 5… the other 523(a) exceptions in Chapter 7 were not… were specifically not incorporated into 1328(a).

Byron R. White:

Criminal fines would be discharged?

David A. Searles:

That’s correct.

William H. Rehnquist:

What are… what are the advantages for a debtor of taking Chapter 7 over Chapter 13?

David A. Searles:

A debtor who perhaps didn’t have… couldn’t meet the eligibility requirements of Chapter 13, who didn’t have regular income, or who had more debts than he can have under Chapter 13, might be forced to liquidate rather than to reorganize.

William H. Rehnquist:

But I take it the requirement for regular income is not terribly demanding under Chapter 13, if Social Security alone is enough.

David A. Searles:

It has to be regular.

But it also has to be enough to pay the claims that are filed in accordance with the priority scheme set up by the… by the court.

William H. Rehnquist:

But it would be enough… I take it it was deemed enough in this case to pay 10 percent?

David A. Searles:

It was deemed enough… I’m not sure what the percentage was, but yes, it was deemed enough.

David A. Searles:

The trustee reviewed the plan, recommended confirmation of the court, and the court confirmed.

No creditor came into court to object and both the Petitioners in this case had prior notice of the bankruptcy well before the confirmation deadline for objecting.

They didn’t file proofs of claim and they did not object.

Our main contention is that it… restitution is a right to payment under the Code because there is a state court order requiring the Davenports to pay the money and the state order is pursuant to a state court statute mandating repayment in these kinds of cases.

The state court judge had no flexibility in imposing a sentence.

He had to order restitution in these kinds of cases and the restitution is enforceable through contempt proceedings or in some states, by civil actions.

And under any common sense reading of the term, the relationship between the parties here is one that created a right to payment on behalf of the petitioners.

Byron R. White:

When he… when the… the 13… Chapter 13 proceeding was filed, he did list his debt to the Department, didn’t he?

David A. Searles:

Yes, he did.

Byron R. White:

But the Department never filed a claim.

David A. Searles:

That’s correct.

Besides the definition of claim in Section 101, there are two other sections of the Code which treat restitution as a debt.

One is 523(a)(7), which refers to debts that are fines, penalties, and forfeitures, which represents Congress’ codification of the pre-Code judicial exception to dischargeability of criminal and civil penalties.

Congress has now upheld that those exception… Congress has… excuse me… written the law in a way that preserves those exception to discharge in Chapter 7, Chapter 12, some Chapter 11 and some Chapter 13 cases.

So the fact that they acted expressly to protect those debts in some cases but not others indicates that they did consider them debts.

And, as I said, that they incorporated those exceptions in 13 for some kinds of debts but not others, including fine, penalty and forfeiture, that also indicates that it was a debt.

Another section of the code, which is 726, provides for distribution of the property of the estate in payment of fines, penalties, and forfeitures.

The same phrase from 523(a)(7).

And also fines, penalties, and forfeitures was the title heading of a chapter in the crimes code at the time the Bankruptcy Code was enacted, which is another indication that Congress meant to include criminal penalties as well.

By providing for distribution on fines, penalties, and forfeitures, which wasn’t the case under the Act… because these kinds of claims were not allowable, were not entitled to share in the distribution of the estate… Congress has shown it’s intention that these are debts that should be paid.

And there’s very good reason for including them in distribution, because if they weren’t included, the entire estate could be liquidated and distributed without any payment to the restitution victim.

And this, we submit, would not make any sense because in some cases that distribution might represent the victim’s best chance of recovering any money.

William H. Rehnquist:

But… as between the pre-Code situation and the post-Code situation, the state and the restitution victim I take it would prefer the pre-Code situation were… it was not… it was not includible or allowable, but is also dischargeable.

You just didn’t touch it.

Isn’t that right?

David A. Searles:

That is right.

It would… it would pass through the bankruptcy and remain owing after the bankruptcy was over.

William H. Rehnquist:

Yeah.

David A. Searles:

But what Congress has said now is that these are claims that are to be paid through the distribution of the bankruptcy estate.

William H. Rehnquist:

Yeah, you may well be right as to that’s what Congress has said.

William H. Rehnquist:

But certainly it’s not any advantage to the potential recipient of restitution to have had that done.

David A. Searles:

Well, but this time… this time they get paid to the extent that there is an estate that has assets in it.

William H. Rehnquist:

Which would be in this particular case 10 percent?

David A. Searles:

Or–

William H. Rehnquist:

Less?

David A. Searles:

–Whatever it was.

But Congress has made a decision that they should get… they should share equally in the estate with other creditors.

William H. Rehnquist:

Yes.

And that may well be Congress’ decision.

My only point is it should not be painted as a benefit to the recipient of restitution as opposed to the pre-Code situation.

David A. Searles:

Well, I think it represents Congress’ intent that all creditors share equally.

Just because you have a restitution order shouldn’t give you preferential treatment over other possible victims of crimes or serious torts who have not obtained restitution orders.

If fines and penalties were not included in distribution, this would set up a conflict between the federal courts and the state courts over the administration of the debtor’s assets.

And by giving bankruptcy court sole jurisdiction over the debtor’s estate in Section 1334(d) of Title 28 Congress has expressed its intention that it’s the federal… for the bankruptcy court, a single forum, that administers the debtor’s affairs.

William H. Rehnquist:

Was there a great deal of conflict during the 80 years of the previous regime, from 1898 to 1978?

David A. Searles:

I’m not aware of any cases discusses that, but it appears to me that there could have been conflict because the debtor’s estate was being distributed without the holder of the penalty or forfeiture claim getting any money–

Finally, if you look outside the bankruptcy law, at the Federal Crimes Code, there is a section in there that shows that Congress obviously intended criminal fines to be debts, which is Section 3613(f) of Title 18 which was amended in 1984 to make federal criminal fines nondischargeable in any bankruptcy.

There would be no point in Congress writing that exception unless they thought fines were debts in the first place.

And when Congress did take this step to accept federal criminal fines, it did not do so for state criminal fines.

The Petitioners throughout the case have raised policy concerns which they believe support the notion that restitution should not be considered a debt.

What they fail to focus on is that their concerns are already met and already addressed in Chapter 13.

Chapter 13 is basically a new system for consumer debt and it’s singular in its approach.

Unlike old Chapter 13, or Chapter 11, a debtor can now reorganize his affairs as long as he meets certain guidelines set forth in the Code.

He no longer needs affirmative voting approval from his creditors.

What Congress has done in Chapter 13 has been to balance the rights of the debtor and the creditors, and to establish guidelines that are designed to ensure that the creditors get fair and equal treatment.

They suggest that Chapter 13 can be used as a vehicle for criminals to escape the consequences of their act.

And this is simply not the case.

Many criminal defendants would not be eligible for Chapter 13.

There is a ceiling on the amount of debt you can have to be eligible.

And defendants who have been assessed large penalties for convictions for insider trading or toxic torts, or defrauding savings and loans, they will not be eligible to use Chapter 13.

Antonin Scalia:

What is the limit?

David A. Searles:

It’s $100,000 of unsecured debt.

Anyone penalized above that would not be eligible for Chapter 13.

In addition, a debtor must have regular income and the bankruptcy filing must be in good faith.

And bankruptcy courts have not hesitated to dismiss bankruptcies or deny confirmations of plans where they felt the circumstances warranted it.

Beyond the restrictions on debtors, Congress has given a number of rights to creditors to assure that they can demand and assure that a debtor cannot use a 13 to avoid debts which he can’t afford to pay.

The creditors can come into court, scrutinize the debtor’s income and expenses, demand that all disposable income is being paid into the plan.

They can demand to receive at least as much as they would receive in Chapter 7 liquidation, and they can object to confirmation if they feel that the plan isn’t paying them what they are entitled to.

In other words Chapter 13 has already provided Petitioners here with all–

Byron R. White:

I take it they’re not about to get paid what they are entitled to.

David A. Searles:

–They are not going to be paid… in this case, it depends–

Byron R. White:

They’re not being paid in full.

David A. Searles:

–Well, if they felt that was a valid objection, they could come to court and make it and it would be up to the judge to decide whether the plan comported with the code.

Byron R. White:

All you mean is that they are entitled to… they’re entitled to be paid whatever the plans calls them… calls for them to get paid.

David A. Searles:

Assuming the plan is a confirmable plan.

If there are problems with the plan, they are entitled to object and bring that to the attention to of the court.

The Petitioners in this case did not… chose not to exercise any of these rights that Congress has given them.

But if their argument is accepted and restitution is declared to be something other than a debt, the result is going to frustrate fundamental bankruptcy policy because it’s going to result in preferential treatment for some creditors over others.

Including, as I said before, perhaps other victims of crimes or serious torts who had not obtained restitution orders and who, in some people’s eyes, may have more sympathetic claims.

It would also result in a conflict between the state court system and the federal court or the administration of the debtor’s property where Congress has already expressed its intention that that property be administered through a single forum, which is the bankruptcy court.

Byron R. White:

Well, I take it… I take it there are quite a number of states filed in this case amicus who don’t think your position is very beneficial to them.

David A. Searles:

I think that results from their misunderstanding of the nature of Chapter 13.

Byron R. White:

You mean all these states, they don’t know a thing about bankruptcy?

David A. Searles:

They may know something, Your Honor, but I don’t believe they understand the purpose of Chapter 13, and the rights that they have in Chapter 13.

What the Petitioners have–

Byron R. White:

Well, I think that they… they must think that if their restitution order is not dischargeable, it can… it can be used to collect this money for over… for years.

David A. Searles:

–I think that’s what they… that’s true.

But I think what Congress has decided is that at some point your debts do not any long hang over your head.

And, to that extent, if there is a conflict between those two systems, that’s a result of what Congress has decided when they wrote Chapter 13.

And if Congress feels that’s wrong, that’s up to Congress to change.

William H. Rehnquist:

Yeah, but then the answer to Justice White’s question isn’t that the states are mistaken, but the states are not mistaken, but Congress has chosen to another concern rather than the one they have–

David A. Searles:

There are some cases where there is a conflict and that’s right, Congress has expressed its concern.

But there are many other cases which they failed to–

William H. Rehnquist:

–Well, it hasn’t just expressed its concern.

It’s laid down a rule of law.

David A. Searles:

–That’s correct.

Byron R. White:

Which the states don’t like very well.

David A. Searles:

But I think if the states understood the nature of Chapter 13 and their rights there to compel the debtor to pay as much as they can, the states wouldn’t object as vociferously.

Byron R. White:

You mean they’re going to be… they’re going to be… get as much as they can this way anyway.

David A. Searles:

In many Chapter 13s they would be paid as much as they would get absent the bankruptcy.

That’s correct, and they have the right to assure that that happens.

John Paul Stevens:

Yes, but there is a big difference it seems to me, because if in many of these cases the only substantial debt is the one for restitution or something like that,–

David A. Searles:

I’m not sure that that’s the case.

We had three companion… two companion cases to this one before the Third Circuit dismissed the other two and those bankruptcies were filed primarily by the debtors to cure the mortgage arrears on their homes.

The restitution debt was an incidental debt–

John Paul Stevens:

–I see.

David A. Searles:

–that was included in their… in their statement.

And many of the Chapter 13 consumer bankruptcies, if not most, have to deal with the debtor trying to keep a house or a car that they need to go to work so that they can continue to pay their debts.

John Paul Stevens:

I see.

And in those cases… if it… if it were, as I supposed, the main obligation was the restitution, then they simply wouldn’t get in bankruptcy court at all, is what would happen if the states win.

David A. Searles:

If the states went to court?

John Paul Stevens:

No, if the states win in this… in this case.

Then in cases where the main obligation of the… of the bankrupt or the debtor is the restitution obligation, there would be no point in going into bankruptcy court.

So you just wouldn’t have these bankruptcy proceedings.

David A. Searles:

That’s correct.

John Paul Stevens:

But you say that that really is not the fact.

That there’s lots of these in which there’s an ongoing obligation on a car or a house or something.

David A. Searles:

The vast majority of consumer Chapter 13 plans are designed to… to prevent foreclosure of homes primarily because it’s… it’s something that really wasn’t available prior to Chapter 13.

John Paul Stevens:

I see.

David A. Searles:

Because you stop foreclosure, pay the arrears at the rate that you can afford and then pick up your payments and life goes on.

Antonin Scalia:

Well, all the horrible results that you say would ensue if we agreed with the states that conflict between state collection and federal law.

Why don’t those same consequences arise under Chapter 7 and Chapter 11 anyway?

And is it… why would it be more horrible under Chapter 13?

David A. Searles:

Well, a Chapter 7 isn’t designed to help a debtor maintain his home.

Chapter 7 is–

Antonin Scalia:

Well, that may well be, but you’re still going to have conflict between the… between, you know, the federal policy and the–

David A. Searles:

–Well, in a Chapter 7, if there’s assets to be distributed, it’s going to be done through the bankruptcy court and the parties, such as Petitioners, who have claims for these kinds of obligations must share in the distribution.

Antonin Scalia:

–Yeah, but what does the state do?

The state says I… I want it all.

David A. Searles:

Absent the bankruptcy, in some cases the state may not be able to have it all.

Under Bearden and similar… similar law.

Byron R. White:

Well, the claims under 7 aren’t going to be dischargeable.

David A. Searles:

That’s correct.

They would pass… they would pass through.

Antonin Scalia:

Well, I know they would pass through.

But when the… what happens when the court is about to distribute all of this stuff to other people, the state is standing there saying what a minute, I… you know, I want a–

David A. Searles:

Well, in a Chapter 7, the state would get what it’s entitled to under the priority sections of the Code, but the debt would pass through–

Antonin Scalia:

–I see.

Okay.

David A. Searles:

–and the state would still have the ability to–

Antonin Scalia:

The priority section… the priority section does cover.

David A. Searles:

–Yes.

They… they’re included.

Antonin Scalia:

I see.

Okay.

David A. Searles:

They have 726(a)(4).

They have–

Antonin Scalia:

They’re approvable?

David A. Searles:

–Yes.

Antonin Scalia:

They’re approvable as debts?

David A. Searles:

Yes.

They’re allowable.

Antonin Scalia:

Allowable.

Yes.

David A. Searles:

Before they were not allowable.

They couldn’t share in the estate.

Antonin Scalia:

Yeah.

David A. Searles:

Now they can.

That’s correct.

And also throughout the case what Petitioners have argued is that how Chapter 13 unduly interferes with state court proceedings.

But as I was explaining before, the… that… the fallacy of that argument is proved by the facts of this case.

While the bankruptcy was pending, the state was free to file a motion to revoke probation, which they did.

There was not effort to restrain the state court from proceeding.

The Davenports voluntarily appeared there and testified on the issue, which was whether they had the ability to pay, whether they had violated probation.

The state court judge, completely unimpeded by the federal court, denied the motion to revoke probation, decided that the Davenports had done what they were suppose to have done under the law.

Probation expired.

The state judge’s power to rule is completely unaffected by the bankruptcy and in most cases, if the Third Circuit’s ruling is… is affirmed, that is not going… the result is not going to affect the powers of state court judges.

And the reason that there is no undue interference in state court proceedings is that the underlying goal of the 13 and the restitution is substantially similar, which is that the debtor pay the restitution order to the best of his ability.

That is what the Davenports intended to do through their bankruptcy and the state court judge found nothing to the contrary.

In conclusion, what I want to emphasize is that treating restitution as a debt is consistent with the plain language of the code and with federal bankruptcy policy that a debtor deal with all his legal obligations in one form and that the creditors receive equal treatment.

Congress has designed Chapter 13 in such a way that the legitimate rights of creditors are protected and they have the tools necessary to protect their interests if they choose to utilize them.

Although Petitioners expressed fear of interference in state court proceedings, that fear is just not justified.

To the extent that there is any tension between the two court systems, that arises from the Bankruptcy Clause in the Constitution as implemented by the Code.

If there is a difference balance to be struck, it’s up to the Legislature to decide that and not to the Judiciary.

We request that the decision below be affirmed.

Thank you.

William H. Rehnquist:

Thank you, Mr. Searles.

Mr. Cohen, you have three minutes remaining.

Walter W. Cohen:

Let me just call the Court’s attention to the Joint Appendix page 14a and 15a which sets forth the plan to indicate that the payment in this case was 1 percent to the creditors and not even 10 percent.

Thank you.

Sandra Day O’Connor:

Did the state file any claim here–

Walter W. Cohen:

No, Your Honor.

Sandra Day O’Connor:

–for the underlying obligation?

Walter W. Cohen:

No, the claim was listed in the plan, but the state… and I think that that indicates the state prosecutors have a order of a court and we believe it would be unseemly for the prosecutor to have to go in to enforce a criminal court judge’s sentence in bankruptcy court.

Byron R. White:

The debt is listed and if you’re right, your debt wouldn’t be dischargeable, but meanwhile you could get your 1 percent if you filed a claim.

Walter W. Cohen:

That’s only 1 percent, Your Honor, of a judge’s–

Byron R. White:

Well, it might be–

Walter W. Cohen:

–order on the–

Byron R. White:

–20 the next time.

Walter W. Cohen:

–of a commission of a crime.

William H. Rehnquist:

Thank you, Mr. Cohen.

The case is submitted.