Bankruptcy

Criminal Restitution is a Bankruptcy Preference

By Kent Anderson, Oregon Bankruptcy Attorney

A criminal restitution payment can be a bankruptcy preference says the 9th Circuit. If paid within 90 days of a bankruptcy filing, a criminal restitution payment can be recovered by the trustee for the bankruptcy estate. In State Compensation Insurance Fund v. Zamora a three judge panel of the 9th Circuit Court of Appeals ruled that criminal restitution, though non-dischargeable in bankruptcy, has no special protection from recovery by the trustee as a preferential payment under 11 USC §547.

The Court of Appeals decision upheld the bankruptcy court and district court when it permitted trustee, Nancy Zamora, to reclaim a $101,531 restitution payment made by Jeffrey and Faye Silverman to the State Compensation Insurance Fund after they were convicted of insurance fraud. The court ordered restitution was part of the sentence imposed after a plea bargain by the Silvermans. When they filed bankruptcy the month following their payment, trustee Zamora demanded repayment from the state fund.

The State Compensation Insurance Fund relied on the 1986 US Supreme Court holding in Kelly v. Robinson, 479 U.S. 36, to support its argument that the resitution payment was not a preference. The Supreme Court opinion held that criminal restitution was not dischargeable under 11 USC §523(a)(7) despite the absence of express language in the statute. The three judge panel was unconvinced by this argument and was unwilling to expand §547 to exclude restitution from its coverage.

The Supreme Court in Kelly gave two primary reasons for inclusion of criminal restitution in the statute prohibiting certain crime related debt from discharge. First, criminal restitution had historically been held by courts to be non-dischargeable. Second, the discharge of criminal restitution payment requirements in bankruptcy would interfere with state court criminal sentencing. The 9th Circuit Court found that neither of these two reasons applied to the treatment of a restitution payment as a preference.

Both the Silvermans and the State Compensation Insurance Fund lose in this situation.  The fund must pay the money over to the trustee.  However, the fund may look again to the Silvermans for payment.  Their debt to the fund is again unpaid and will remain non-dischargeable in their bankruptcy.

Full post as published by Bankruptcy Law Network on August 17, 2010 (boomark / email).