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In re Johnson-Allen

filed: March 28, 1989.

IN RE LORRAINE JOHNSON-ALLEN; COMMONWEALTH OF PENNSYLVANIA DEPARTMENT OF PUBLIC WELFARE
v.
LORRAINE JOHNSON-ALLEN; IN RE RUBY STEFFLER A/K/A INGRID J. STEFFLER; COMMONWEALTH OF PENNSYLVANIA DEPARTMENT OF PUBLIC WELFARE V. RUBY STEFFLER A/K/A INGRID J. STEFFLER, LORRAINE JOHNSON-ALLEN AND RUBY STEFFLER, APPELLANTS; IN RE EDWARD AND DEBORA DAVENPORT; EDWARD AND DEBORA DAVENPORT V. COMMONWEALTH OF PENNSYLVANIA, DEPARTMENT OF PUBLIC WELFARE AND COURT OF COMMON PLEAS OF BUCKS COUNTY, AND EDWARD SPARKMAN, TRUSTEE, EDWARD AND DEBORA DAVENPORT, APPELLANTS



Appeal from the United States District Court for the Eastern District of Pennsylvania, Civil No. 87-1032. Appeal from the United States District Court for the Eastern District of Pennsylvania, Civil No. 88-3177.

Gibbons, Chief Judge, Hutchinson and Rosenn, Circuit Judges.

Author: Rosenn

Opinion OF THE COURT

ROSENN, Circuit Judge.

These consolidated appeals raise an important issue, particularly for governmental agencies engaged in public assistance, of whether criminal restitution imposed as a penalty for welfare fraud constitutes a debt dischargeable under Chapter 13 of the Bankruptcy Code, 11 U.S.C.A. § 1301, et seq. (West 1979 & Supp. 1988). The bankruptcy court, in two separate opinions, held that restitution obligations constitute dischargeable debts under Chapter 13. Appellees, the Pennsylvania Department of Public Welfare (DPW) and the Court of Common Pleas of Buck County, Adult Probation and Parole Department, (collectively, the State), appealed, and the United States District Court for the Eastern District of Pennsylvania reversed. Debtors appealed to this court.*fn1 We reverse the judgments of the district court.

I.

The facts in these cases are not in material dispute. On September 17, 1985, the Davenports entered guilty pleas to the crime of welfare fraud in Bucks County, Pennsylvania Common Pleas Court. Each was sentenced to one year probation and was ordered to make criminal restitution payments of $208 per month, beginning in December 1986, until a total of $2,072.40 had been remitted. Payments were to be sent to the County Probation Department which, in turn, was to forward them to the DPW.

On May 25, 1987, the Davenports filed a voluntary petition under Chapter 13 of the Bankruptcy Code. The criminal restitution obligation, listed as an unsecured debt payable to the DPW, was to receive treatment equal to other unsecured creditors under the plan. When the Davenports failed to make restitution payments as originally ordered, the Probation Department commenced violation of probation proceedings. The Davenports notified the Probation Department on July 20, 1987, of the pending bankruptcy proceeding, and requested withdrawal of the probation violation charges. When the Probation Department refused to withdraw the charges, the Davenports commenced an adversary action in the bankruptcy court seeking a declaration as to the dischargeability of the criminal restitution obligation.

On October 20, 1987, the bankruptcy court confirmed the Davenports' Chapter 13 plan without objection from any creditor and with the express approval of the standing Chapter 13 trustee. On October 19, 1987, the Probation Department proceeded with a violation of probation hearing in Bucks County. The Common Pleas Court denied the motion to revoke probation, declaring that the restitution order "still stands."

Following trial on the issue of dischargeability, the bankruptcy court held that the restitution obligation was dischargeable under Chapter 13. In re Davenport, 83 B.R. 309 (Bankr. E.D. Pa. 1988). On appeal, the district court reversed, holding that the restitution obligation was not a debt as defined by the Bankruptcy Code, and that a discharge would violate principles of federalism as enunciated in Younger v. Harris, 401 U.S. 37, 27 L. Ed. 2d 669, 91 S. Ct. 746 (1971). Davenport v. Pennsylvania, 89 B.R. 428 (E.D. Pa. 1988). On July 8, 1988, after successfully completing their Chapter 13 plan, the bankruptcy court discharged the Davenports under Chapter 13, 11 U.S.C.A. § 1328(a).

In a separate prosecution, Lorraine Johnson-Allen pleaded guilty in a state court to four counts of welfare fraud on June 18, 1985. The court subsequently sentenced her to probation and ordered restitution of $6,300 which was to be paid in ten dollar monthly installments. Johnson-Allen continued payments until she filed her bankruptcy petition under Chapter 13 on March 14, 1986. Like the Davenports' plan, Johnson-Allen's Chapter 13 plan listed the DPW as an unsecured creditor and provided for payments to be paid to the DPW in amounts equal to all other general unsecured creditors. Johnson-Allen advised the DPW and the Philadelphia County Probation Department of the filing, stating that she believed, on advice of counsel, that the filing stayed collection of the restitution obligation and that the obligation would be discharged upon completion of the plan payments. On advice from the Probation Department that the payments were not stayed, Johnson-Allen resumed payments pending disposition of this proceeding. On February 11, 1987, no objections having been filed, the bankruptcy court confirmed Johnson-Allen's plan. No one appealed from the confirmation of the plan.

In a third prosection in a state court, Ruby Steffler also pleaded guilty to welfare fraud on January 17, 1984. The court placed her on probation and ordered her to make restitution in the amount of $5,506.64, in payments of twenty dollars per month. Steffler also filed a bankruptcy petition under Chapter 13, listing the DPW as an unsecured creditor and accorded the DPW treatment equal to that of the other unsecured creditors. Shortly after filing, she informed the County Probation Department that she would cease restitution payments. However, upon institution of violation of probation proceedings, Steffler resumed her payments. On May 15, 1987, the bankruptcy court confirmed, without objection, her Chapter 13 plan, and no creditor appealed from the confirmation order.

The bankruptcy court consolidated the Steffler and Johnson-Allen proceedings. The court granted summary judgment for both debtors, holding that the restitution obligations were dischargeable under Chapter 13. In re Johnson-Allen, 69 B.R. 461 (Bankr. E.D. Pa. 1987). On appeal, the district court reversed, again holding that discharge would interfere with the well-established principles of comity and federalism stated in Younger. Pennsylvania Dept. of Public Welfare v. Johnson-Allen, 88 B.R. 659 (E.D. Pa. 1988).

II.

The threshold issue in this case is whether the dischargeability issue is ripe for determination. If a debtor completes payments under the Chapter 13 plan, discharge of debts is controlled by 11 U.S.C.A. § 1328(a). As discussed infra at Section III B, such discharge would encompass restitution obligations. However, if the debtor fails to complete payments, section 1328(b) controls which would preclude discharge of the restitution order. See Kelly v. Robinson, 479 U.S. 36, 53, 93 L. Ed. 2d 216, 107 S. Ct. 353 (1986). The Court of Appeals for the Ninth Circuit recently held under similar facts that the dischargeability issue is not ripe for resolution until the plan has been concluded and it is known which discharge provision will apply. In re Heincy, 858 F.2d 548, 550 (9th Cir. 1988); see also In re Carroll, 61 B.R. 178, 179 (Bankr. D. Ore. 1986).

We adopt the reasoning of the Ninth Circuit. Because neither Steffler nor Johnson-Allen has completed the Chapter 13 plan, the issue of dischargeability is not ripe, and we will therefore reverse and remand to the district court with directions to dismiss their appeals without prejudice for lack of an appealable order. However, because the Davenports have completed payments under their Chapter 13 plan and have received a discharge of their debts under 11 U.S.C.A. § 1328(a), the dischargeability issue ...


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