Opinion
No. 95-CV-4725(FB)
April 29, 1998
Before: BLOCK, United States District Judge.
MEMORANDUM AND ORDER
Debtor-appellant Bernard M. Gelb ("Gelb") appeals from an order of the bankruptcy court (Duberstein, Ch. J.), dated October 10, 1995, which, for the reasons set forth in a decision dated September 18, 1995, denied Gelb's motion for summary judgment and granted a motion for partial summary judgment filed by the United States of America ("the Government"). The sole issue on this appeal is whether the bankruptcy judge erred as a matter of law in determining that a restitution order that was included as part of Gelb's federal criminal sentence was non-dischargeable in his chapter 7 proceeding. For the reasons set forth below, the order of the bankruptcy court is affirmed.
The decision of the bankruptcy court is reported at 187 B.R. 87 (E.D.N.Y. 1995).
BACKGROUND
The facts underlying this appeal are largely undisputed. Gelb, as president of EDP Computer Systems, Inc., a Queens-based mass mailing and bill-collection agency, used various schemes, including postage meter tampering and bribery of postal employees, to avoid paying postage on millions of pieces of mail for a period of approximately ten years. On October 20, 1988, a jury in the United States District Court for the Eastern District of New York convicted Gelb of one count of violating the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962, one count of mail fraud, 18 U.S.C. § 1341, 50 counts of bribery, 18 U.S.C. § 201(b)(1)(C), and three counts of tax fraud, 26 U.S.C. § 7206(1). His conviction resulted in a sentence of 13 years imprisonment, $101,000 in fines, and issuance of an order of restitution in the amount of $5 million. The restitution order was issued pursuant to the Victim and Witness Protection Act, 18 U.S.C. § 3663(a)(1), which provides, in pertinent part, that "the court, when sentencing a defendant . . . may order, in addition to or in lieu of any other penalty authorized by law, that the defendant make restitution to any victim of such offense. . . ." On August 1, 1989, the Second Circuit affirmed Gelb's convictions, see United States v. Gelb, 881 F.2d 1155,cert. denied, 493 U.S. 994, 107 L.Ed.2d 541, 110 S.Ct. 544 (1989), and on September 3, 1992, the Second Circuit affirmed the order of restitution. United States v. Gelb, 978 F.2d 705 (2d Cir. 1992), cert. denied, 507 U.S. 960, 122 L.Ed.2d 759, 113 S.Ct. 1383 (1993).
On April 9, 1992, Gelb filed a petition for relief under chapter 7 of the Bankruptcy Code with the United States District Court for the Western District of Pennsylvania. On July 21, 1992, the Government commenced an adversary proceeding in order to obtain a judgment declaring that the $ 5 million restitution order was non-dischargeable. Venue was transferred to the Eastern District of New York. In December 1993, Gelb moved for summary judgment seeking a declaration that the restitution order was a dischargeable debt. The Government opposed Gelb's motion and cross moved for a judgment that the restitution order was non-dischargeable. On September 18, 1995, Chief Bankruptcy Judge Conrad B. Duberstein issued a decision granting the Government's motion for summary judgment, and denying Gelb's motion. Gelb appeals from Chief Judge Duberstein's October 10, 1995 order entered pursuant to that decision.
DISCUSSION
The Court reviews the bankruptcy court's conclusions of law de novo.See In re Lehal Realty Assocs., 101 F.3d 272, 276 (2d Cir. 1996). The single issue presented on this appeal is whether the $ 5 million restitution order is non-dischargeable pursuant to 11 U.S.C. § 523(a)(7). This section excepts from discharge any debt "to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss. . . ." Gelb argues on this appeal that the restitution order was intended to compensate the United States Postal Service ("Postal Service") for its actual pecuniary loss, and therefore does not fall within the ambit of this section.
As the bankruptcy judge noted, @ 523(a) was amended by the Violent Crime Control and Law Enforcement Act of 1994, Public Law Number 103-22, to add @ 523(a)(13), which specifically excepts from discharge "any payment of an order of restitution under title 18, United States Code." However, since this provision is not retroactive, it does not resolve the issues raised by Gelb's appeal.
In resolving this issue, the leading case is Kelly v. Robinson, 479 U.S. 36, 93 L.Ed.2d 216, 107 S.Ct. 353 (1986). In Kelly, the Supreme Court held that a restitution order that was entered as part of a state court sentence was not dischargeable in chapter 7 proceedings. Although the Court's decision was based in part on "a deep conviction that federal bankruptcy courts should not invalidate the results of state criminal proceedings," id. at 47, a review of the Court's language clearly indicates that the decision did not rest solely on principles of comity and federalism. Rather, the Court looked specifically to both prongs of @ 523(a)(7) — the requirement that the penalty be for the benefit of a governmental unit and the requirement that the payment not represent compensation for actual pecuniary loss — and concluded that "neither of the qualifying clauses of @ 523(a)(7) allows the discharge of a criminal judgment that takes the form of restitution." Id. at 52. First, the Court noted that restitution benefits society as a whole:
Although restitution does resemble a judgment "for the benefit of" the victim, the context in which it is imposed undermines that conclusion. The victim has no control over the amount of restitution awarded or over the decision to award restitution. Moreover, the decision to impose restitution generally does not turn on the victim's injury, but on the penal goals of the State and the situation of the defendant. . . . 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."Id. at 52-53. Second, the Court determined that restitution orders are not assessed for the compensation of the victim:
Restitution is an effective rehabilitative penalty because it forces the defendant to confront, in concrete terms, the harm his actions have caused. Such a penalty will affect the defendant differently than a traditional fine, paid to the State as an abstract and impersonal entity, and often calculated without regard to the harm the defendant has caused. Similarly, the direct relation between the harm and the punishment gives restitution a more precise deterrent effect than a traditional fine.Id. at 49 n. 10. Although Kelly involved a state court restitution order, federal courts have consistently extended its rationale to restitution orders imposed as part of federal sentences. See, e.g., In re Soderling, 998 F.2d 730 (9th Cir. 1993); United States v. Vetter, 895 F.2d 456 (8th Cir. 1990); United States v. Caddell, 830 F.2d 36 (5th Cir. 1987); United States v. Prodan, 181 B.R. 279 (E.D.Va. 1995); In re Wright, 87 B.R. 1011 (D.S.D. 1988).
Gelb relies upon Pennsylvania Dep't of Public Welfare v. Davenport, 495 U.S. 552, 109 L.Ed.2d 588, 110 S.Ct. 2126 (1990), in support of his argument that the restitution order should be dischargeable. In Davenport, the United States Supreme Court held that a state restitution obligation was dischargeable under chapter 13. However, this case, unlike Davenport, arises under chapter 7 of the Bankruptcy Code. Indeed, in reaching its decision, the Supreme Court noted that chapter 13 discharge was broader than chapter 7 discharge and specifically indicated that its opinion in Davenport should not be read as a retreat from Kelly. 479 U.S. at 563. Moreover, Congress later overruled the Davenport holding by amending 11 U.S.C. § 1328(a) to provide that restitution orders that are included as part of criminal sentences are non-dischargeable. The legislative history of this provision is instructive: The amendment offered by Senator Grassley will have the combined effect of barring the use of chapter 13 by convicted criminals seeking to discharge court-ordered restitution payments, and of codifying Kelly v. Robinson, 479 U.S. 36, 93 L.Ed.2d 216, 107 S.Ct. 353 (1986), a decision of the Supreme Court holding that restitution obligations imposed by State courts as part of a criminal sentence cannot be discharged under chapter 7. Additionally, this amendment will have the effect of overruling the Supreme Court's recent decision in Pennsylvania Department of Public Welfare v. Davenport . . . which held that criminal restitution obligations are dischargeable debts under chapter 13. [The amendment] will promote the protection of crime and fraud victims, while preserving a judge's discretion to continue to order restitution as an alternative sentence to incarceration in criminal cases. S. Rep. 101-434, at 8, reprinted in 1990 U.S.C.C.A.N. 4065, 4071. Thus, Gelb's reliance upon a case that has been specifically criticized and overruled by Congress does not do much to advance his cause.
In light of the foregoing, the Court rejects Gelb's argument that the restitution order is non-dischargeable because it represents the precise amount lost by the Postal Service and is thus clearly compensatory. It is true that the amount of Gelb's restitution order was clearly based upon the loss sustained by the Postal Service; indeed, the Supreme Court noted in Kelly that a restitution award is usually calculated with regard to the amount of the victim's loss. Kelly, 479 U.S. at 49 n. 10. However, the Kelly Court also made it clear that orders of restitution primarily serve society's broader rehabilitative and penal goals and cannot be viewed narrowly as merely representing compensation to the victim. As the restitution order thus qualifies as "a fine, penalty or forfeiture payable to and for the benefit of a governmental unit . . . [that] is not compensation for actual pecuniary loss," it is not dischargeable in Gelb's chapter 7 proceeding.
Gelb's argument that the Government should be estopped from arguing that the restitution represents anything other than the Postal Service's actual pecuniary loss is utterly without merit. The Government's position is not that the $ 5 million figure does not roughly equal the amount of loss sustained by the Postal Service; rather, it contends that the restitution order was imposed to advance broader rehabilitative and penal goals and that it consequently falls squarely within the scope of @ 523(a)(7).
CONCLUSION
For the foregoing reasons, the order of the bankruptcy court is hereby affirmed.
SO ORDERED.