A debtor has one bite at the apple to enforce discharge. Take your pick: state or federal court, but not both.
After discharge, state and federal courts have concurrent jurisdiction to decide whether a debt was discharged.
Allowing a state court to decide a discharge question is risky, for reasons shown in a Fifth Circuit opinion: If the state court is wrong, the bankruptcy court is stuck with the state court’s judgment and can’t right the wrong.
Criminal Restitution
The debtor evidently passed bad checks at casinos. A casino won a judgment for some $250,000 against the debtor well before he filed a chapter 7 petition. The state began a criminal prosecution two years after the debtor’s bankruptcy filing. Later, the debtor made a plea agreement.
More years after discharge, the state court convicted the debtor of a misdemeanor and obliged the debtor to pay restitution of about $220,000 to the casino with the judgement that had been discharged in bankruptcy.
When the casino moved in state court to enforce the restitution award, the debtor opposed by contending that the debt had been discharged.
The state court rejected the debtor’s affirmative discharge defense, relying on Kelly v. Robinson, 479 U.S. 36 (1986). In Kelly, the Supreme Court held that criminal restitution was nondischargeable under Section 523(a)(7), even though it was payable to the victim of the crime, because (1) the victim had no control over the decision to award restitution or the amount of the award, and (2) the decision to impose restitution turned on the penal goals of the state, not the victim’s injuries.
The debtor did not appeal the state court’s decision but instead reopened his bankruptcy case and sought a declaration that the debt had been discharged.
Sitting in Sherman, Texas, Bankruptcy Judge Brenda T. Rhoades reopened the case but denied the motion to declare the debt discharged, alluding to the Rooker-Feldman doctrine. Named for two Supreme Court decisions, Rooker-Feldman bars lower federal courts from engaging in appellate review of state court judgments for lack of subject matter jurisdiction.
The district court affirmed, and so did the Fifth Circuit in a per curiam, nonprecedential opinion on January 30.
Rooker-Feldman
The Fifth Circuit conducted de novo review of dismissal under Rooker-Feldman for lack of subject matter jurisdiction.
The appeals court said that the “case present[ed] the ‘paradigm’ Rooker-Feldman situation: the losing party in state court thereafter commenced a proceeding in federal court, complaining of injury by the state-court judgment and seeking review and rejection of it by the federal court.”
The debtor contended that Rooker-Feldman did not apply because the judgment was void under Section 524(a)(1), which “voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect to any debt discharged under section 727 . . . .”
“But, in this case,” the Fifth Circuit said, “the state court specifically determined that the restitution payable to [the casino] fell under § 523(a)(7) of the Bankruptcy Code, which excepts restitution orders from bankruptcy discharge orders.”
The circuit court rejected the contention, saying that the “‘void judgment’ argument challenges the merits of the state-court judgment, which we are precluded from reviewing.”
The appeals court affirmed denial of the debtor’s motion to enforce the discharge for lack of jurisdiction.
Opinion Link
Case Name
Gilani v. Wynn Las Vegas LLC (In re Gilani)
Case Citation
Gilani v. Wynn Las Vegas LLC (In re Gilani), 23-40477 (5th Cir. Jan. 30, 2024)
Case Type
Consumer
Alexa Summary
After discharge, state and federal courts have concurrent jurisdiction to decide whether a debt was discharged.
Allowing a state court to decide a discharge question is risky, for reasons shown in a Fifth Circuit opinion: If the state court is wrong, the bankruptcy court is stuck with the state court’s judgment and can’t right the wrong.
Judges
Here the Debtor did not
Here the Debtor did not appeal the State Court Judgment which was final.
Could have been a totally different outcome if Debtor had appealed.
Miller v. Dunn, 35 F.4th 1007 (5th Cir. 2022)
Before WIENER, GRAVES, and DUNCAN, Circuit Judges.
REVERSED and REMANDED. (June 2, 2022).
Bradley Miller filed the underlying suit in Federal Court against his ex-wife Virginia Talley Dunn, two state judges, and several others under 42 U.S.C. § 1983. The District Court sua sponte dismissed the case for lack of subject matter jurisdiction under the Rooker-Feldman doctrine, pointing to related state-court proceedings pending on appeal. Miller appealed. Although the District Court found support in a decades-old decision from the Fifth Circuit, see Hale v. Harney, 786 F.2d 688 (5th Cir. 1986), the Fifth Circuit here clarifies that that precedent has been unequivocally undermined by Supreme Court precedent clarifying the scope of Rooker-Feldman. See Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 284 (2005). Cognizant that uncertainty over Hale’s continuing viability has sown confusion in the Fifth Circuit, Court resolves that Hale is no longer good law and that Rooker-Feldman does not apply to the situation where a state case is pending on appeal when the Federal suit is filed. In doing so, the Court brings the Fifth Circuit into alignment with every other Circuit to address the question. Accordingly, the Court reverses the District Court’s judgment and remands for further proceedings.