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In re Thompson

August 11, 2005


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.

The opinion of the court was delivered by: Smith, Circuit Judge.


Argued on June 30, 2005

Before: NYGAARD, SMITH, and FISHER, Circuit Judges


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).*fn1 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 "§ 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.


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 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.*fn2 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 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.*fn3


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.*fn4 Thompson 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 ยง 727 discharge, ...

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