Rochelle's Daily Wire

As a matter of first impression among the circuits regarding bankruptcy law, the Fourth Circuit decided that restitution as part of the sentence for commission of a crime is nondischargeable under Section 1328(a)(3), even though the state’s proof of claim referred to restitution of court-ordered fees and no conviction was ever entered.

Years before filing her chapter 13 petition, the debtor had been found guilty of welfare fraud in state court and was sentenced to three years of imprisonment. Under state law, the state court deferred the entry of conviction pending three years of probation.

The state court also ordered restitution, which was recorded as a civil judgment. Eventually, the state court expunged the debtor’s criminal record, but the restitution judgment remained.

After the debtor filed a chapter 13 petition, the state filed a $7,300 proof of claim for what the state characterized as “court-ordered fees.” The debtor did not object to the claim. The debtor completed her plan payments, paying the state about $800 in the process. She received a discharge.

After discharge, the state notified the debtor about her remaining restitution debt. The debtor reopened her chapter 13 case and filed an adversary proceeding seeking a declaration that the restitution debt had been discharged under Section 1328(a)(3). The subsection calls for discharge except “for restitution, or a criminal fine, included in a sentence on the debtor’s conviction of a crime.”

The bankruptcy court decided that the restitution debt had not been discharged, and the district court agreed. On a second appeal, Chief Circuit Judge Albert Diaz affirmed the lower courts.

What’s a ‘Conviction”?

The debtor contended that the lower courts erred, reasoning that restitution did not result from a “conviction” and was not included in a “sentence.”

In his June 28 opinion, Judge Diaz first analyzed “whether a probation-before-judgment disposition in Maryland state court constitutes a ‘conviction’ under § 1328(a)(3).”

The definition of “conviction” is a matter of federal law, Judge Diaz said, although the underlying crimes were state. He observed that none of the Courts of Appeals has defined the term in the bankruptcy context.

However, in Dickerson v. New Banner Inst., Inc., 460 U.S. 103, 114-15 (1983), Judge Diaz said that the Supreme Court “held that a state’s expungement of the defendant’s deferred judgment didn’t nullify his conviction for purposes of the statutes.” He said that his circuit and others “have applied Dickerson’s reasoning when defining ‘conviction’ in other federal statutes.”

Giving “conviction” a broad meaning devoid of technicalities, Judge Diaz held:

The term “conviction” as used in § 1328(a)(3) includes a determination of guilt — whether upon trial or guilty plea — followed by a sentence of probation, even without the formal entry of a conviction.

Next, Judge Diaz held that the debtor’s “‘probation before judgment’ adjudication is a ‘conviction’ under § 1328(a)(3),” even though state law did not classify probation before judgment as a conviction. He eschewed state definitions in the interest of “uniformity.”

Restitution Was Included in a ‘Sentence’

The debtor next argued that restitution was not included in a “sentence.”

Although the Bankruptcy Code does not define “sentence,” Judge Diaz said it was “clear that as used in § 1328(a)(3), ‘sentence’ means the consequences resulting from a determination of guilt.” He reasoned that a deferred judgment followed by probation was a “sentence” because probation was a “penal consequence.”

Judge Diaz held that restitution was included in the debtor’s sentence.

Restitution Wasn’t Civil

The debtor argued on appeal that the state’s proof of claim for court-ordered fees was a waiver of any claim for restitution. Judge Diaz said that the state’s attachment of the restitution order to the proof of claim cleared up any “ambiguity.”

Comparing Section 523(c)(1) to Section 1328(a)(3), Judge Diaz also said it was “clear that restitution debts are nondischargeable without any action by the creditor.” In fact, he said that “a restitution creditor isn’t even required to file a proof of claim to collect on the debt post-discharge.”

Judge Diaz upheld the district court’s affirmance that the remaining restitution was not discharged by the debtor’s chapter 13 plan.