Three circuits have now held that the federal government can collect criminal restitution despite the automatic stay.
Previously, the Sixth Circuit held that the Mandatory Victims Restitution Act, adopted in 1996, provides an exception to the automatic stay. The Second Circuit has held that the exception for criminal proceedings in Section 362(b)(1) permits the collection of restitution.
In an opinion on July 7, the Ninth Circuit followed the Sixth and upheld the two lower courts that had invoked the MVRA.
The case involved a woman convicted of embezzlement and theft of union assets. She agreed to pay a fine of almost $200,000 in criminal restitution. After serving her prison sentence, she filed a chapter 13 petition 12 years after the conviction. After filing and before she confirmed a plan, the government garnished her wages to collect some of the restitution fine.
After confirmation, the woman moved to have the government held in contempt for violating the automatic stay. Upheld by the Ninth Circuit Bankruptcy Appellate Panel, the bankruptcy court found no stay violation.
In an opinion by Circuit Judge Mary M. Schroeder, the Ninth Circuit held that the “plain language” of the MVRA contains an exception to the automatic stay. That statute, 18 U.S.C. § 3613(a), provides that the government “may enforce a judgment imposing a fine . . . . Notwithstanding any other Federal law . . . , a judgment imposing a fine may be enforced against all property or rights of the person fined.”
The debtor argued that the MVRA’s “notwithstanding” provision only applies to laws determining what property is available for collection. Judge Schroeder disagreed, citing the Bankruptcy Code’s legislative history and saying that the “automatic stay should not be ‘a haven for criminal offenders.’”
Finding no violation of the automatic stay, Judge Schroeder said the case presented “an excellent example of how the MVRA operates.” The MVRA, she said, “is expressly directed toward preserving the government’s post-judgment ability to collect restitution.”
Daniel L. Geyser, counsel for the debtor, told ABI that the opinion “makes chapter 13 virtually impossible for any debtor owing a substantial restitution award ̶ nothing stops the government (a general, nonpriority, unsecured creditor) from jumping before everyone else and depleting the entirety of a debtor’s assets.” Geyser, from Stris & Maher LLP in Los Angeles, said in an email that he “likely” will file a petition for rehearing en banc.
The case is important not only because it clarifies an exception to the automatic stay. It can also make a difference in the distribution of proceeds among crime victims, decreasing the distribution to some and increasing it to others.
In the liquidation of Bernard L. Madoff Investment Securities LLC under the Securities Investor Protection Act, which incorporates much of the Bankruptcy Code, the Second Circuit held that victims have allowed claims as customers and are entitled to distributions from the trustee’s collections only if they are “net losers” — that is, only if they took less out of the Ponzi scheme than they invested. “Net winners,” those who actually make a profit from investing in the fraud, don’t have allowable customer claims, the Second Circuit said.
However, some recoveries from Madoff’s fraud have gone to the government in restitution, not to the trustee under SIPA. From restitution funds, the government evidently will make distributions both to net winners and net losers, thus diminishing the distribution that net losers would receive if the Bankruptcy Code and SIPA governed.
Indeed, the government apparently will distribute some of the Madoff restitution funds to entities that do not to have claims against the Madoff estate, thus further reducing the distribution to victims with claims in the SIPA proceeding.
In addition, administrative costs are deducted from collections of restitution before distribution to crime victims. In a case like Madoff under SIPA, the Securities Investor Protection Corp. pays administrative costs, thus not diminishing the recoveries by victims of the fraud.