Opinion
Case No. 98-17599, Adversary No. 99-91029
January 28, 2000.
Richard Croak Associates Richard Croak, Esq., Attorney for Debtor/Plaintiff.
ALBANY COUNTY ATTORNEY'S OFFICE, Michael C. Lynch, Esq.
William McCarthy, Chapter 7 Trustee.
MEMORANDUM-DECISION AND ORDER
This is a summary judgment motion to determine the dischargeability of a confession of judgment resulting from a restitution order. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I).
FACTS
Based upon the pleadings before it, this court finds the following facts:
(1) The Plaintiff/Debtor, Yvette Pickett (hereinafter "Debtor") was convicted of Grand Larceny in the 3rd degree in violation of New York Penal Law § 155.35, for wrongly receiving welfare benefits.
(2) As a result of this conviction, the Debtor was sentenced to five years probation.
(3) As a condition of probation, the Debtor was ordered to pay $44,242.17 in restitution to the Department of Social Services (hereinafter "Creditor"). This restitution was payable in installment amounts of $200.00 for 57 months with a balloon payment of $32,842.17 to be paid by October 15, 1997.
Both the New York State Department of Social Services and the Albany County Department of Social Services are named defendants in this matter. However, Albany County Department of Social Services is the only defendant that has provided an answer.
(4) The Debtor made the monthly restitution payments from January 1993 until October 1997, but she never made the balloon payment. On October 27, 1997, the Department of Probation advised the criminal court that the Debtor had violated this condition of probation.
(5) An arrest warrant was issued for the Debtor; she was arrested and a public defender was assigned. After a hearing, she signed a confession for the balance remaining on the restitution order.
(6) On November 20, 1998, the Debtor filed a voluntary Chapter 7 petition. The first meeting of the creditors was scheduled for December 17, 1998, and the last day to file an objection to discharge was February 16, 1999. The Creditor did not file any objection to discharge.
(7) On January 20, 1999, the Debtor filed an adversary proceeding seeking a declaratory judgment to determine the dischargeability of the confession of judgment.
(8) The Creditor timely filed an answer. This answer contained a counterclaim requesting that this court find the debt nondischargeable.
(9) The Debtor did not respond to this counterclaim.
(10) On or about June 30, 1999, the Creditor moved this court for an order dismissing the complaint and determining that the restitution claim was nondischargeable pursuant to 11 U.S.C. § 523 (a) (2), (a)(4), (a)(7)(B) or (a)(18). The motion also requested that this court find the Debtor in default for not responding to the counterclaim.
(11) The Debtor opposed the motion and moved to dismiss the Creditor's counterclaim or, in the alternative to permit a late answer. The Debtor also requested summary judgment in her favor.
ARGUMENTS
The Debtor makes several procedural claims in opposition to the Creditor's moving papers. The Debtor first advances that the last date for filing an objection to dischargeability was February 16, 1999. The Creditor made no objection nor did it notify the Debtor of an objection until February 19, 1999. (Debtor's Response ¶¶ 1-3.)
The Debtor also points out that the answer does not designate that it contains a counterclaim. The Debtor's attorney contends that the Debtor's failure to respond to the counterclaim should be excused because the counterclaim was not distinguished and that she should be allowed an opportunity to respond to it. The Debtor's attorney further argues that the counterclaim is time-barred because it is not a compulsory counterclaim.(Debtor's Response ¶ 5.)
The thrust of the Creditor's argument is that its claim is a nondischargeable debt that has resulted from a sentence imposed as part of a state criminal justice proceeding.
I. EXTENSION OF TIME
The Debtor first requests that this court extend the time for her to answer the counterclaim. This court has the power to extend the time to answer a counterclaim pursuant to Federal Rule of Bankruptcy 9006(b). Ordinarily, if cause is demonstrated, this court will extend debtor's time to answer. However, the Debtor has also requested that summary judgment be considered and both parties agree that the issue is the dischargeability of this debt.
Federal Rule of Bankruptcy Procedure 9006 states, in part:
(b)ENLARGEMENT,
(1) IN GENERAL. Except as provided in paragraphs (2) and (3) of this subdivision, when an act is required or allowed to be done at or within a specified period by these rules or by a notice given thereunder or by order of court, the court for cause shown may at any time in its discretion . . .
(2) on motion made after the expiration of the specified period permit the act to be done where the failure to act was a result of excusable neglect. See Fed.R.Bankr.P. 9006(b).
Dischargeability of this debt is governed by 11 U.S.C. § 523(a)(7). Since this section is not subject to time restrictions that encumber other subsections of § 523, and because the Debtor has moved this court for a summary judgment determination, this court has the ability to decide the issues on the submitted papers.
The Creditor had also relied upon 11 U.S.C. § 523(a)(2), (a)(4), or (a)(18). However, pursuant to Federal Rule of Bankruptcy Procedure 4007, to utilize sections (a)(2) and (a)(4) the Creditor would have had to object to discharge prior to February 16, 1999. The Creditor did not do so therefore, the Creditor is time barred from these sections. In addition, because this court can decide the issue pursuant to 11 U.S.C. § 523(a)(7), this court does not decide the 11 U.S.C. § 523(a)(18) question of dischargeability.
See n. 3.
II. COUNTERCLAIM
The Debtor further argues that the counterclaim is time-barred. She alleges that the issue of whether the debt is dischargeable is not a compulsory counterclaim and cannot be considered by this court. This court disagrees.
CORE PROCEEDING
The Bankruptcy Code delineates the jurisdiction of the bankruptcy courts. 28 U.S.C. § 157 states, in part: "(b)(1) Bankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11." This section further elaborates:
"(2) Core proceedings include, but are not limited to — (I) determinations as to the dischargeability of particular debts."
The Debtor initiated this adversary proceeding by filing a complaint, requesting that this court determine the dischargeability of this claim. The Creditor's motion requests an order dismissing the complaint and determining that its claim is nondischargeable. The issue in this case plainly encompasses dischargeability of a debt and by the plain language of the statute this court has core matter jurisdiction.
Other courts have consistently held that a counterclaim requesting the determination of the dischargability of a debt is a core proceeding. See Kinney v. Higher Educ. Assistance Found., 114 B.R. 670 (D. Neb. 1990); Aerni v. Columbus Fed. Sav., 86 B.R. 203 (D. Neb. 1988); Midwest Mutual Ins. Co. v. Shapiro, 22 B.R. 685 (E.D. Penn. 1982). This court determines that it has jurisdiction to decide this matter pursuant to this statute and these cases.
ANCILLARY JURISDICTION
Had this court determined that the dischargeability of this debt was not a core proceeding, this court would still have ancillary jurisdiction. Federal Rule of Civil Procedure 13 applies to adversary proceedings in the Bankruptcy Court through Federal Rule of Bankruptcy Procedure 7013. This bankruptcy rule states, "A pleading shall state as a counterclaim any claim which . . . the pleader has against any opposing party, if it arises out of the transaction or occurrence that is the subject matter of the opposing party's claim . . ." Fed.R.Bankr.P. 7013.
A detailed analysis of this rule was conducted in Aerni v. Columbus Fed. Sav., 86 B.R. 203 (Bankr. D. Neb. 1988). The issue in Aerni encompassed the dischargeability of student loans. The debtor had initiated an adversary proceeding to determine the dischargeability of certain student loans and the creditor answered the complaint and filed a counterclaim requesting that the court find the loans nondischargeable. The debtor objected, arguing that the court lacked jurisdiction to entertain the counterclaim.
As in the present case, the Aerni court found an independent jurisdictional basis for the claim. Further, the Aerni court indicated that if an independent basis had not been found, the court would still be empowered to hear this claim under its ancillary jurisdiction.
The Aerni court stated:
The purpose of Fed.R.Civ.P. 13(a) dealing with the compulsory counterclaims is to require that transactionally related claims be asserted in a single lawsuit. Rule 13 prevents an unnecessary multiplicity of litigation, and promotes the prompt resolution of all disputes involving common matters.
(citations omitted.) The underlying controversy involved in this lawsuit is whether the Debtor is obligated to pay the student loans. The Debtor claims that she is not obligated to pay, and the Creditor claims that the Debtor is obligated to pay. Both claims arise from the same, identical transactions — the execution of the promissory notes. Id. at 205.
The Aerni court then went on to discuss the four factors that should be analyzed to determine if a counterclaim is compulsory, including: (1) Whether the issues of law and fact raised by the claim and counterclaim are largely the same; (2) Whether the counterclaim arises from the same transaction or occurrence; (3) Whether substantially the same evidence will support or refute the plaintiff's claim as well as the defendant's counterclaim; and (4) Whether the claim and counterclaim are logically related. Id. at 206 citing Cochrane v. Iowa Beef Processors, Inc., 596 F.2d 254 (8th Cir. 1979). Applying these four factors, the Aerni court found that the defendant's counterclaim was compulsory.
In the present case, the Debtor's complaint requests a determination as to the dischargeability of a confession of judgment. The Creditor's claim requests a determination on the very same issue. The issues of law and fact raised by the claim and counterclaim are largely the same; the claim and counterclaim arise from the same transaction, the confession of judgment that resulted from the restitution order; the evidence with respect to refuting and supporting the claim is the same; and the claims are obviously logically related. Relying on these factors, this court finds that the Creditor's counterclaim is compulsory and this court has ancillary jurisdiction.
III. DISCHARGEABILITY
Having established that the Creditor's counterclaim is within the jurisdiction of this court, the question now becomes whether the debt is dischargeable. The Debtor has offered law supporting the contention that the debt is dischargeable. Unfortunately, the law supplied by the Debtor is inapplicable because the cases supplied dealt with Chapter 13 rather than Chapter 7. More importantly, the law provided by the Debtor pre-dates the Supreme Court's ruling in Kelly v. Robinson, 479 U.S. 36 (1986), the case that this court relies upon in determining that this debt is nondischargeable.
In Kelly, the debtor pled guilty in a Connecticut court to a larceny charge for the wrongful receipt of welfare benefits. She was sentenced to prison but the sentence was suspended and the debtor was placed on probation. A condition of probation was that the debtor pay court ordered restitution payments. The debtor filed a Chapter 7 petition and listed the obligation as a debt. The Connecticut agencies made no objection nor filed any proof of claim, although these agencies were notified of the petition. The debtor was granted a discharge and ceased payments to the probation office. The probation office notified the debtor that they believed the debt was nondischargeable. The debtor initiated an adversary proceeding to resolve the issue.
The Bankruptcy Court found that the debt was nondischargeable pursuant to § 527(a)(7). When the Supreme Court decided the matter, it held that a restitution order, issued as part of the state criminal justice proceeding, is nondischargeable. The Court began its analysis by looking at the purpose of restitution in a state criminal justice proceeding. It reasoned that restitution may appear to be fashioned to compensate a victim, however, it also noted that the victim has no recourse if the restitution amount is not paid. Furthermore, the probation unit and not the victim is responsible for advising the court if a violation has occurred. From this, the Supreme Court determined that restitution in a criminal proceeding was designed for the benefit of society and not the individual victims. The Court stated:
Because criminal proceedings focus on the State's interests in rehabilitation and punishment, rather than the victim's desire for compensation, we conclude that restitution orders imposed in such proceedings operate `for the benefit of' the State. Similarly, they are not assessed `for . . . . compensation' of the victim. The sentence following a criminal conviction necessarily considers the penal and rehabilitative interests of the State. Those interests are sufficient to place restitution orders within the meaning of § 523(a)(7).
Id. at 52.
The Supreme Court went on to hold that the restitution order was not dischargeable and that § 523(a)(7) preserves from discharge any condition a state criminal court imposes on a criminal sentence. Id. (emphasis added.)
The Supreme Court's decision in Kelly controls and has been consistently echoed. In United States of America v. Gelb, 1998 WL 221366 (E.D.N.Y.), the plaintiff/debtor was convicted of a multitude of charges involving mail tampering and the debtor was ordered to pay $5,000,000.00 in restitution. The debtor filed a Chapter 7 petition and the debtor moved for summary judgment, seeking a declaration that the debt was dischargeable. The government opposed the motion and moved for a summary judgment declaring that the debt was nondischargeable. Chief Bankruptcy Judge Conrad B. Duberstein granted the government's motion for summary judgment. Relying upon Kelly, the District Court affirmed.
In State of New York v. Sokol, 170 B.R. 556 (Bankr. S.D.N.Y. 1994), the State of New York commenced an adversary proceeding to determine the dischargeability of a debt arising out of a restitution judgment imposed upon a debtor for a conviction of grand larceny. The bankruptcy court held that the restitution judgment was nondischargeable as a matter of law. Id. (emphasis added.)
This court is mindful that the restitution order in this case was converted into a confession of judgment. The Debtor argues that because of this conversion the debt should be dischargeable. However, this court chooses to raise substance above form. The undisputed facts indicate that the confession of judgment arose and can be traced back to the restitution order. The restitution order and the subsequent confession of judgment were indubitably placed upon the Debtor as a condition imposed by a state criminal court. Therefore, as dictated by Kelly, this court finds the debt nondischargeable.
It is so ORDERED.