JACK B. SCHMETTERER, Bankruptcy Judge.
Richard Durbin and Michael Amigoni (collectively "Debtors") both filed petitions in bankruptcy under Chapter 11 of the Bankruptcy Code. Debtors have each proposed a Plan of reorganization under which certain restitution obligations ordered by the District Court in their respective criminal cases would be paid in full but over a period likely to exceed twelve years. They now seek approval of their respective Disclosure Statements in support of their filed Plans. For reasons set forth below, such approval is denied and their Plans are stricken.
The restitution obligations were imposed on Debtors as part of sentences following their convictions for mail and wire fraud. The impact of their Plans is to modify a condition of each Debtor's federal sentence and parole. That impact was revealed clearly in their respective Plans and in their Disclosure Statements. This court specifically requested that the parties, including the United States Attorney, address the issue of whether as a matter of law a debtor can affect and modify through his plan the payment of restitution ordered by a United States District Court in a criminal case. The parties have now fully briefed and argued this issue. This court concludes
The relevant underlying facts are undisputed. In 1988, Debtors were operating a business that was engaged in purchasing automobiles in Canada and importing them into the United States. The business struggled. In February 1988 a federal grand jury began investigating allegations that Debtors had misappropriated certain customer deposits and had used these funds to meet other business expenses.
On July 12, 1988 Debtors filed a voluntary petition in bankruptcy under Chapter 13 of the Bankruptcy Code. Debtors converted their petitions to proceedings under Chapter 11 on December 13, 1988.
On December 23, 1988 Debtors were arraigned on charges that they violated 18 U.S.C. § 1341. They subsequently plead guilty to "knowingly, willfully and unlawfully defrauding various customers of money and property by means of false and fraudulent pretenses." On February 7, 1989 Judge Nordberg sentenced Debtors to five years probation. Pursuant to this judgment, Debtors were required to "comply with general conditions of probation" and with the following three "special conditions": (1) pay restitution of approximately $104,000 to their defrauded customers; (2) spend 30 days in custody at the Metropolitan Correctional Center during the last month of probation (after a hearing to be conducted 45 days before the end of probation); and (3) perform 200 hours of community service. Debtors were made jointly and severally liable for the restitution amount. The district court stated that each debtor was required to "use [his] best efforts to pay restitution as directed by the United States Probation Office." Durbin & Amigoni Sentencing Transcript at 7.
Debtors have proposed essentially identical Plans for reorganization under Chapter 11. The Plans specifically state that "[s]ubject only to the express constraints in the Plan, the Debtor shall be entitled to manage his own affairs without further order of the court and shall hold all of his interests in property free and clear of all liens, claims and encumbrances of every kind except as otherwise provided in the Plan." Durbin Plan Art. IV, ¶ 1; Amigoni Plan Art. IV, ¶ 1 (emphasis added). Under each Plan the restitution obligations are segregated into a separate class, Class 4, and are to be paid in full over the course of the Plan. Under each Plan the debtor will contribute $250 per month for the first two years, but none of this money will go to the defrauded customers until after classes 1-3 have been paid in full.
Debtors propose to make these payments out of their salary and profits earned from their closely held corporation, Atlantic Luxury Rentals, Ltd., which is engaged in the rental of luxury automobiles. Even with the contemplated increase in payments, it would likely take more than 12 years to repay the Class 4 Creditors, assuming arguendo that the Plans are feasible.
Avram Freedberg, a defrauded customer and therefore a Class 4 Creditor, has objected to the Plan on the ground that the 12 year repayment period is "implicitly inconsistent" with the restitution order and the
This court has core jurisdiction over this issue under 28 U.S.C. § 157(b)(2)(L).
A federal District Court is authorized under 18 U.S.C. § 3663(a) to order a defendant convicted of certain federal offenses including wire or mail fraud, as part of his or her sentence, to "make restitution to any victim of such offense." The resulting obligation is enforceable by both the United States and the victim(s) of the defendants' misconduct. Id. at § 3663(h). When a defendant who is ordered to make restitution is also placed on probation, the terms imposed by the restitution order are conditions of probation. Id. at § 3663(g). The violation of these conditions can lead to revocation of probation and incarceration. Id.
The District Court is also authorized to order that restitution obligations be paid in installments and to specify the date by which payment(s) must be made, subject to the condition that the date of the final payment cannot be later than the end of the probation period. Id. at § 3663(f)(1) & (f)(2)(A). If that court does not otherwise provide, restitution must be made immediately. Id. at § 3663(f)(3).
As previously noted, the District Court ordered each Debtor, as a condition of his 5-year probation, to "use [his] best efforts to pay restitution as directed by the United States Probation Office." Durbin Sentencing Tr. at 7. Section 3663(f)(2)(A) clearly specifies that in these circumstances the maximum time period in which Debtors' restitution obligations can be repaid is 5 years, the length of the probation period.
Debtors seek to extend this time period greatly by including the restitution obligations in their Plans of reorganization and providing for repayment over a period that would likely exceed 12 years. Debtors therefore seek to utilize the bankruptcy laws to alter their federal sentences. The authority they rely on, however, does not support their position.
This court is authorized to confirm a plan of reorganization only if certain requirements enumerated in 11 U.S.C. § 1129(a) are met, including the requirement that "the plan complies with the applicable provisions of [title 11]." 11 U.S.C. § 1129(a)(1). As previously discussed, Debtors' Plans each specifically provide that "[s]ubject only to the express constraints in the Plan, the Debtor . . . shall hold all of his interests in property free and clear of all liens, claims and encumbrances of every kind except as otherwise provided in the Plan." Durbin Plan Art. IV, ¶ 1; Amigoni Plan Art. IV, ¶ 1. The clear intention of that provision is to restrict the ability of the United States and/or the victims of Debtors' fraud to collect the amounts due under the restitution order to the extended payment schedule set forth in the respective Plans. This Plan provision is inconsistent with the rights granted to a party holding a nondischargeable debt under Title 11, and therefore makes the proposed Plans unconfirmable under 11 U.S.C. § 1129(a)(1).
A confirmed plan generally binds any creditor regardless of whether the creditor's claim is impaired by the plan or whether the creditor accepted the plan. 11 U.S.C. § 1141(a). 2 Robert A. Ginsberg, Bankruptcy § 13.14[b] (2nd ed. 1989). Further, subject to certain exceptions, the confirmation of a plan "discharges the debtor from any debt that arose before the
Debtors have specifically conceded that their restitution obligations are not dischargeable under § 523(a)(7). Debtors' Br. at 4. See Kelly v. Robinson, 479 U.S. 36, 107 S.Ct. 353, 93 L.Ed.2d 216 (1986) (holding that restitution obligations imposed as a condition of probation by a state court are nondischargeable within § 523(a)(7)). Notwithstanding this concession, Debtors assert that the proposed Plans are confirmable. Their position is that even though the restitution obligations are not dischargeable, because the Plan provides for full payment of those obligations eventually, the Plans are lawful.
Debtors do not properly address the consequences that accompany the determination that a debt is nondischargeable. Although these consequences are not expressly set forth in the Bankruptcy Code, they are readily discernible by implication from 11 U.S.C. § 524 which specifically addresses the "effect of discharge":
The combined effect of 11 U.S.C. § 1141(d) and § 524 is to void, upon confirmation of the plan, all judgments related to a dischargeable debt and to enjoin future efforts to collect on the debt except as otherwise provided in the plan. See generally 1 Ginsberg, Bankruptcy § 3.07[b], 11.11. The clear implication is that debts determined not to be dischargeable are not voided upon confirmation, but rather continue to exist outside the plan. Id. at §§ 3.07[c], 11.06[a]. The party to whom such a debt is owed is entitled after confirmation to enforce his or her rights as they would exist outside of bankruptcy.
This analysis is consistent with In re Howell, 84 B.R. 834 (Bankr.M.D.Fla.1988), a precedent on point. In that case judgment had been entered in favor of debtors' bank, ruling that the sum owed the bank was nondischargeable under 11 U.S.C. § 523(a)(6).
The Howell court explained that under § 1141(a) of the Bankruptcy Code, those parties holding nondischargeable debts identified in § 1141(d)(2) "are expressly excepted from those persons who are bound by the provisions of a confirmed plan. . . . Accordingly, there can be no doubt that a creditor who has a debt excepted from discharge under § 523 cannot be bound by the provisions of a confirmed plan." Id. at 836 (emphasis added). The court concluded:
Id. at 837. See also In re Gurwitch, 794 F.2d 584 (11th Cir.1986) (nondischargeable tax claims are collectible outside the debtor's confirmed plan); In re Adelman, 90 B.R. 1012, 1018 (Bankr.S.D.1988) (following Howell and Gurwitch); In re Rideout, 86 B.R. 523, 529 (Bankr.N.D.Ohio 1988) (citing Howell and noting in dicta that "the holder of nondischargeable debt is not restricted from collecting the balance owed outside the plan.")
Debtors assert that Howell is distinguishable because there, unlike in these Debtors' Plans, the nondischargeable debts were not segregated as a special class. Debtors contend that when such debts are segregated, "section 1141 does not specifically preclude such a proposal." Debtors' Reply Br. at 3.
This argument misses the point. Section 1141(d) excludes debts enumerated under § 523(a) from discharge. Debtors concede that their restitution obligations are such debts. The authority cited above recognizes that parties to whom such debts are owed cannot have their rights under nonbankruptcy law restricted by a plan of reorganization. Accordingly, Debtors' proposed Plans are not confirmable because each Plan attempts to restrict the United States and the Class 4 Creditors to collection only as provided in the Plans. This would curb rights afforded these parties under the restitution order and 18 U.S.C. § 3663(h).
Debtors' broad public policy arguments in this context are unavailing. The importance of policy underlying the nondischargeability of an obligation imposed as part of a criminal sentence was recognized by the Supreme Court in Robinson. The Court observed that the Bankruptcy Code was enacted against the background of an established judicial exception to discharge for criminal sentences and that this exception reflected "a deep conviction that federal bankruptcy courts should not invalidate the results of state criminal proceedings." Robinson, 479 U.S. at 46-47, 107 S.Ct. at 360.
Debtors' final argument is that this court should defer discharge until after the completion of the proposed Plans and make discharge contingent on full payment to the Class 4 Creditors.
There is some authority supporting the position that a court in a Chapter 11 Bankruptcy proceeding can defer discharge until completion of the plan. See, e.g., In re C & P Gray Farms, Inc., 70 B.R. 704, 711 (Bankr.W.D.Mo.1987). Judge Ginsberg states in his treatise:
1 Ginsberg, Bankruptcy § 11.11[b] at 995, adopting by reference discussion in § 11.11[a] at 994.
Even assuming that bankruptcy courts have the power to defer discharge under Chapter 11 until completion of the plan payments, the standards for exercise of such authority are not clear. See, e.g., Gray Farms, 70 B.R. at 711 (stating that the reasons for deferring discharge was to avoid "confer[ring] upon the debtors an unmerited advantage whereby their simply offering, in the confirmed plan, to pay certain debts as they are compromised or extended
Accordingly, by separate orders in each case, the Disclosure Statements will be disapproved and the Plans stricken.
The Supreme Court in Kelly v. Robinson, 479 U.S. 36, 50, 107 S.Ct. 353, 361, 93 L.Ed.2d 216 (1986) stated that it had "serious doubts whether Congress intended to make criminal penalties `debts' within the meaning of § 101(4), but specifically left the issue open." (footnote omitted). Notwithstanding the Supreme Court's discussion, the Third Circuit recently held that restitution obligations were "debts" (and that such debts were dischargeable in Chapter 13). In re Johnson-Allen, 871 F.2d 421, 424-428 (3rd Cir.1989) (collecting cases) cert. granted sub. nom. Pennsylvania Dept. of Public Welfare v. Davenport, ___ U.S. ___, 110 S.Ct. 49, 107 L.Ed.2d 18 (1989). See also In re Robinson, 776 F.2d 30 (2nd Cir.1985) rev'd on other grounds sub nom. Kelly v. Robinson, 479 U.S. 36, 107 S.Ct. 353, 93 L.Ed.2d 216 (1986). The Third Circuit observed that "[t]he only limitation imposed by the language of the Bankruptcy Code is that the obligation must give rise to a `right to payment.'" 871 F.2d at 425.
One of the concerns at issue in both Kelly and Johnson-Allen was the inability of the victims under the applicable state law to independently enforce restitution obligations. In contrast to the state restitution laws at issue in Kelly and Johnson-Allen, the federal law specifically provides that "an order of restitution may be enforced . . . by a victim named in the order to receive restitution, in the same manner as a judgment in a civil action." 18 U.S.C. § 3663(h)(2). The argument that the restitution obligations involved in this case are "debts" is therefore stronger than the situations in Kelly and Johnson-Allen because the victims have a clearer "right to payment" (although it should be noted that the restitution order does not specifically enumerate each of the victims). It is, however, unnecessary to resolve this issue here because even if the restitution obligations are "debts," for reasons set forth below the Debtors' proposed Plans are not confirmable.