In the United States Bankruptcy Court

for the Northern District of Iowa

PATRICIA D. DEVINE Bankruptcy No. L-91-01462W
Debtor(s). Chapter 7

Patricia D. Devine Adversary No. L-91-0226W

Ruling Re: Summary Judgment

The matter before the Court is the summary judgment motion of the defendant/creditor, United States of America ("USA"), which defendant/creditor Iowa Department of Public Safety Division of Narcotics Enforcement ("Iowa Narcotics Division" or "IND") joins. The USA and IND seek summary judgment on the complaint of plaintiff/debtor, Patricia Devine ("Devine") under 11 U.S.C. § 523(c).(1) Devine's complaint seeks to determine the dischargeability of her debt arising under her criminal plea agreement to repay "drug buy money." This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I). The following opinion denies the motion for summary judgment.

Procedural Background and Undisputed Facts

The parties agree to the following statement of the factual background giving rise to this case and this motion for summary judgment:

1. Devine's debt to the defendants, USA and IND, arises out of a criminal prosecution in the United States District Court for the Northern District of Iowa.

2. On August 4, 1988, Devine entered into a plea agreement with the United States Attorney's Office for the Northern District of Iowa. Devine agreed to plead guilty to one count of conspiracy to distribute and possess with the intent to distribute methamphetamine.

3. The debt arises under a clause of the plea agreement which states:

You [Devine] agree to make restitution for the amount of "buy money" expended by the state or federal government to purchase narcotics from you. This amount is $5,450. Complete restitution shall be made prior to the time of sentencing herein unless a different deadline is agreed to by the United States Attorney's office.

(Plea Agreement 9; Attached as Exhibit A to Complaint).

4. The United States District Court, Judge Hansen, accepted the plea agreement at a guilty plea and sentencing hearing September 11, 1989. Judge Hansen stated, however, that he was imposing no fine and that he had no authority to impose criminal restitution in Devine's case. Judge Hansen specifically stated:

I have no authority to impose restitution as a part of a criminal sentence in Title 21 cases for the reason that I'm not placing Miss Devine on any sort of probation or supervised release where I can make it a condition of these two things; however, I think it important that she undertakes attempts to make what reasonable payments she can upon her restitution while she is confined and while she's upon any parole that the Parole Commission may extend to her.

(Partial Transcript of Hearing: The Sentencing Portion, Pg.20; USA's Exhibit 2 attached in support of Motion for Summary Judgment). Hence, Judge Hansen did not include a condition of restitution in either the sentence or criminal judgment.

5. Devine has paid only $460.00 of the $5,450.00 amount called for by the plea agreement.

The parties, however, do not agree on the nature and amount of the debt which remains to be paid. The USA takes the position that the restitution was a part of Devine's punishment for engaging in drug activity. After subtracting the $460.00 of payments she has made from the $5,450.00 in the plea agreement, they argue Devine still owes a nondischargeable debt of $4,990.00. The USA already had initiated collection efforts on the $4,990.00 prior to the bankruptcy filing.

Devine indicates that the restitution was compensatory for actual loss she caused to the government. Devine states in her affidavit supporting her resistance to the summary judgment motion that she was informed by Special Agent Englehardt that she was joint and severally liable for the $5,450.00 debt, but would only be required to pay the amount constituting the portion of the buy money she actually put in her pocket. She asserts that she and the Special Agent figured out that she actually received $460.00 and that would be the amount she had to pay. She has paid the $460.00 and contends that she owes nothing more. She asserts that one or possibly two other persons are jointly and severally liable for the remaining portion of the $5,450.00.

Discussion and Conclusions of Law

The Court is treating the USA's motion, joined by IND, and Devine's resistance to that motion as cross-motions for summary judgment.(2) The Eighth Circuit Court of Appeals recently set forth the standards for summary judgment motions as follows:

Under Rule 56(c) summary judgment is appropriate where "there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law."

Once the motion for summary judgment is made and supported, it places an affirmative burden on the nonmoving party to go beyond the pleadings and "by affidavit or otherwise" designate "specific facts showing that there is a genuine issue for trial." Robinson v. Monaghan, 864 F.2d at 624 (quoting Fed.R.Civ.P. 56(e)); Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S. Ct. 2548, 2553 (1986). In designating specific facts, "the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment" because Rule 56(c) requires "that there be no genuine issue of material fact." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S. Ct. 2505, 2510 (1986) (emphasis in original). In order to determine which facts are material, courts should look to the substantive law in a dispute and identify the facts which are critical to the outcome. Anderson v. Liberty Lobby, 477 U.S. at 248, 106 S. Ct. at 2510. A dispute about a material fact is genuine if the evidence is such that a reasonable trier of fact could return a decision in favor of the party opposing summary judgment. Id. In performing the genuineness inquiry, trial courts should believe the evidence of the party opposing summary judgment and all justifiable inferences should be drawn in that party's favor. Id. at 255, 106 S. Ct. at 2513. A court is not "to weigh the evidence and determine the truth of the matter but [instead should) determine whether there is a genuine issue for trial." Id. at 249, 106 S. Ct. at 2511.

When a party opposing summary judgment fails its burden, summary judgment "may and should be granted" if the moving party otherwise satisfies the Rule 56(c) requirements. Celotex, 477 U.S. at 323, 106 S. Ct. at 2553. Summary judgment is not to be construed as a "disfavored procedural short-cut" but should be interpreted to accomplish its purpose of isolating and disposing of factually unsupported claims and defenses. Celotex, 477 U.S. at 327, 106 S. Ct. at 2555. Yet, the Supreme Court also notes that trial courts should act with great caution and may deny summary judgment when it believes "the better course is to proceed to a full trial." Anderson v. Liberty Lobby, 477 U.S. at 255, 106 S. Ct. at 2513.

Commercial Union Insurance v. Schmidt and Koland, 91-2706, slip op. at 3-4 (8th Cir. June 18, 1992). Here, the USA and IND argue that under § 523(a)(7) they are entitled to summary judgment on Devine's complaint to determine the dischargeability of the debt. Devine contends that this debt does not fall under § 523(a)(7) and that she is entitled to summary judgment. The substantive law that determines the material facts in this case, therefore, is 523(a)(7).

Section 523(a)(7) states that a debt is not dischargeable "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." The United States Supreme Court interpreted § 523(a)(7) in Kelly v. Robinson, 479 U.S. 36, 107 S. Ct. 353 (1986). The Supreme Court found that § 523(a)(7) "creates a broad exception (to discharge] for all penal sanctions, whether they be denominated fines, penalties, or forfeitures." 479 U.S. at 51, 107 S. Ct. at 362. The Supreme Court went on to observe that "Congress included two qualifying phrases; the fines must be both 'to and for the benefit of a governmental unit' and not 'compensation for actual pecuniary loss.'" Id.

Based on the Supreme Court's observations, and the language of the statute itself, this Court finds that to be nondischargeable under § 523(a)(7) the debt must satisfy three elements: (1) the debt must be for a fine, penalty, or forfeiture, which includes court ordered criminal restitution and all other penal sanctions; (2) the fine must be payable "to and for the benefit of a governmental unit"; and (3) the fine must not be "compensation for actual pecuniary loss." Tennessee v. Hollis, 810 F.2d 106, 108 (6th Cir. 1987) (citing Kelly). All three of these elements must be satisfied for a debt to be nondischargeable under § 523(a)(7). Each of these elements identifies the material facts for the purposes of this case and this summary judgment motion. The Court must note that there is no factual or legal dispute that the second element is satisfied.

The first element of § 523(a)(7) requires that the debt be a fine, penalty, or forfeiture. In Kelly, the Supreme Court found that the first element of § 523(a)(7) encompassed court ordered criminal restitution and all other penal sanctions whether denominated as fines, penalties, or forfeitures. 479 U.S. at 51, 107 S. Ct. at 362. The parties agree that the restitution obligation here arises from a criminal plea agreement and that the restitution was not ordered by the district court either in the sentence or in the criminal judgment. The question presented then does not raise a dispute of material fact. Rather, the question presented is whether, as a matter of law, the restitution obligation in the criminal plea agreement is a fine, penalty, forfeiture, or other penal sanction which falls under § 523(a)(7).

While Kelly found that court ordered criminal restitution is a penal sanction that falls under § 523(a)(7), that analysis does not apply to this case because the restitution here was not court ordered. As the Eleventh Circuit has observed in dicta, the holding in Kelly is "irrelevant in a case where the payment in question is not part of the criminal sentence." Reynolds v. Dixie Nissan (In re Car Renovations), 946 F.2d 780, 783 (11th Cir. 1991). The Car Renovations case went on to emphasize, a number of times, that the Kelly analysis applied only to cases where the restitution order was made a part of the criminal sentence or criminal judgment. See Id.

This Court agrees with the Eleventh Circuit's analysis in car Renovations that the Kelly decision limits its reach to cases where the restitution order is made a part of the criminal sentence or criminal judgment. See Kelly, 479 U.S. 36, 107 S. Ct. 353 (repeatedly noting that it was discussing only cases where the restitution was made apart of the criminal sentence or criminal judgment). In this case, the district court specifically declined to impose the restitution in the plea agreement as a part of the criminal sentence or criminal judgment. The district court found it had no authority to impose the restitution as a part of the criminal sanction. The district court, however, did state that defendant should continue to try to pay the restitution, but the district court did not impose restitution as a condition of sentence or make it a part of the criminal judgment. Based on the district court's ruling, this court concludes that the restitution was not part of the criminal sentence or judgment and is not subject to the Kelly analysis.

This Court also must note that the clause of the plea agreement providing for the restitution, itself suggests that it was not intended to be a criminal sanction imposed as part of the sentence or judgment. The clause states that Devine was to pay the restitution for the buy-money in full prior to the time of the plea and sentencing hearing. This suggests that the payment was not a part of the criminal penalty to be adjudicated or imposed by the district court. Instead, it was part of the bargained for exchange in the plea agreement and was to be completed in full prior to any action by the court.

The fact that the restitution is not contained in a criminal order, however, does not mean it falls outside 523(a)(7). As the USA has pointed out, the Kelly case states that 523(a)(7) "[o]n creates a broad exception for all penal sanctions, its face, . . . creates a broad exception for all penal sanctions, whether they be denominated fines, penalties, or forfeitures." 479 U.S. at 51, 107 S. Ct. at 362 (emphasis added). The term "penal" is broader than the term "criminal" because "penal" refers to "any punishment or penalty and relates to acts which are not necessarily delineated as criminal." Black's Law Dictionary, 1019 (5th Ed. 1979). Penal action, in a broad sense, encompasses criminal punishment, but penal action also traditionally refers to civil actions where "a wrongdoer is subject to a fine or penalty payable to the aggrieved party." Id. Hence, the phase "all penal sanctions" includes civil fines and penalties.

Many other courts have recognized that § 523(a)(7) applies to civil penalties, fines, and forfeitures. See, e.g., U.S. v. Lueking, 125 B.R. 513 (E.D. Tenn. 1990); In re Tapper, 123 B.R. 594 (Bankr. N.D. Ill. 1991); In re Poule, 91 B.R. 83 (9th Cir. BAP 1988). This court finds that the restitution Devine agreed to pay by signing the plea agreement constitutes a civil fine or penalty under § 523(a)(7). Generally, plea agreements are treated like contracts. See Santabello v. New York, 404 U.S. 257 (1971); U.S. v. Oleson, 920 F.2d 538 (8th Cir. 1990). Here, Devine voluntarily entered into this contractual obligation agreeing to pay back a part of the costs of the criminal investigation and arrest denominated as "buy money" under the plea in exchange for the government's agreement to reduce changes. The plea agreement thus essentially assessed one cost of the government's investigation, the drug-buy money used by the government agents, against Devine as a civil penalty or fine.

The distinction between civil and criminal fines and penalties makes a difference under § 523(a)(7) only when determining whether the third element is satisfied. The third element of § 523(a)(7) requires that the fine not be "compensation for actual pecuniary loss." In Kelly, the Supreme Court found that court ordered criminal restitution did not constitute compensation for actual pecuniary loss. The Supreme Court reasoned that when a court imposes restitution through the criminal justice system, the restitution is more in the nature of a penalty than as "compensation for actual loss." The Supreme Court also pointed out that under the particular facts in Kelly, the clause of the state statute under which the state court imposed restitution did not require that state court to impose restitution. Moreover, the Supreme Court found it significant that the statute applicable in Kelly provided "for a flexible remedy tailored to the defendants' situation." Id.

The Sixth Circuit applied the above Kelly rationale in determining whether a fine was compensation for pecuniary loss in the Hollis case. In Hollis, the question presented was whether court costs of the criminal action assessed against a criminal defendant were dischargeable under § 523(a)(7). Based on Kelly, the Hollis case found that the key factor for determining whether these costs assessed were compensation for the actual pecuniary loss to the state was whether the court assessed the costs against the debtor as part of the debtor's criminal sentence. 810 F.2d at 108. The Hollis court concluded that the criminal court made the cost assessment part of the sentence and that the assessment satisfied the third element of § 523(a)(7). Id.

The above rationale from Kelly, and applied in Hollis, does not apply with equal force in this case because the district court did not make Devine's restitution part of the criminal judgment. The restitution constitutes a civil obligation. The Supreme Court acknowledged that the analysis for determining whether a fine was "compensation for actual pecuniary loss" differs depending on whether the penalties are civil or criminal penalties. The Supreme Court observed that:

Unlike an obligation which arises out of a contractual, statutory or common law duty, here the (criminal restitution) obligation is rooted in the traditional responsibility of a state to protect its citizens by enforcing its criminal statutes and to rehabilitate an offender by imposing a criminal sanction for that purpose.

Kelly, 479 U.S. at 52; 107 S. Ct. at 362 (quoting Pellegrino v. Division of Criminal Justice (In re Pellegrino), 42 B.R. 129, 133 (Bankr. D. Conn. 1984)). This court already has found that the fine involved here arose from a contractual obligation, not a criminal sentence so the Supreme Court's own observation in Kelly dictates that the analysis not apply equally to civil fine or penalty cases.

Determining whether a civil penalty is compensation for actual pecuniary loss "turns on whether the penalty is imposed for compensatory reasons or to punish the wrongdoer. only if the penalty is imposed for punishment of the wrongdoer is the debt arising from the penalty nondischargeable under § 523(a)(7)." United States of America v. Stelweck (In re Stelweck), 86 B.R. 833, 851-52 (Bankr. E.D. Pa. 1988) (and cases cited therein). Under this standard, there is a genuine issue of material fact in this case. The parties do not provide any stipulation or indicate any type of agreement on whether this debt intended to be compensatory or as punishment.

The only factual record relating to this issue has not been sufficiently developed. The language of the plea indicates that the restitution was to repay drug buy money the government expended in the investigation and arrest stages of the criminal case. The USA asserts that the full $5,450.00 amount of restitution was for the purpose of punishing Devine for engaging in the drug activity. Devine contends that the clause intended only to be compensatory.

This Court concludes that the motion for summary judgment must be denied because there are genuine issues of material fact on the issues of the amount of debt and whether the restitution is for actual pecuniary loss. At trial, the parties can address the nature of the restitution agreement.


IT IS THEREFORE ORDERED that the motions for summary judgment are denied.

DONE AND ORDERED this 10th day of August, 1992.

Michael J. Melloy
Chief Bankruptcy Judge

1. All statutory references are to Title 11 of the United States Code, "the Bankruptcy Code," unless otherwise indicated.

2. See this Court's Order Re Motion for Summary Judgment, June 8, 1992, stating that "the Court construes the resistance filed by the plaintiff to be a cross motion for summary judgment." The Court also will also treat the cross motions as property resisted by each side.