Ruling on a case of first impression, Bankruptcy Judge Thomas P. Agresti of Erie, Pa., concluded that a payment in criminal restitution is ordinarily immune from recovery as a preference. Judge Agresti jumped over several hurdles to rule that the payment was nonetheless recoverable under the atypical facts of the case.
The manager of a business embezzled almost $500,000 from his employer. The fraud discovered, the man promised prosecutors he would make full restitution to the company. While a plea agreement was being drafted, he paid $100,000 to his former employer. It turned out that the $100,000 came from two loans that he fraudulently obtained from a bank.
About six weeks after filing bankruptcy, the man waived the indictment and pleaded guilty. Five months later, the district judge accepted the plea agreement and sentenced him to two years of incarceration. The sentence also required him to make full restitution to the company, less any amount already paid.
Before sentencing, the trustee announced his intention to recover the $100,000 as a preference. Told about the trustee’s plans, the sentencing judge shot from the hip and guessed that the payment couldn’t or shouldn’t be recovered. Judge Agresti therefore faced the unenviable task of deciding whether the Article III judge was right or wrong, given that the payment clearly would be recoverable as a preference were it not part of a commitment to pay restitution. The former employer was also asserting a new value defense.
Judge Agresti said that the case involved a collision between the preference power, under Section 547, and the Mandatory Victims Restitution Act, adopted in 1996. The MVRA, he explained, removed judicial discretion and requires payment of restitution to all victims, regardless of the criminal defendant’s financial circumstances. The defendant’s ability to repay is only considered in deciding how quickly restitution must be paid.
Significantly, 18 U.S.C. § 3613(a) says that a judgment imposing a fine can be enforced against all “property or rights” of the criminal defendant, “[n]otwithstanding any other Federal law.” Two courts of appeals, Judge Agresti said, have interpreted Section 3613(a) to mean that bankruptcy’s automatic stay does not preclude payment of restitution. To read ABI’s discussion of the Ninth Circuit’s Partida decision from July, click here.
Judge Agresti said that no court has ruled on whether Section 3613 similarly bars preference recovery of a restitution payment. He said that the rationale from automatic stay cases “would also appear to apply” and render restitutions immune from the preference power.
Still, the case was atypical because the restitution payment came before sentencing and the entry of judgment. The general rule, he just announced, did not apply because it was “premised on the existence of ‘judgment imposing a fine.’” Because there was no judgment imposing the fine until months after bankruptcy, Judge Agresti concluded that the safe harbor in Section 3613 did not apply.
Raising another issue of first impression, the government argued there was a lien under Section 3613(c) that would allow taking back the $100,000 after recovery by the trustee. Judge Agresti rejected the theory because the statutory lien only reaches property of the criminal defendant, not property of the estate that the preference recovery would become. For the same reason, the government’s lien would not attach to the $100,000 held by the company before the preference recovery.
The former employer raised a new value defense under Section 547(c)(1), contending that the embezzler-defendant got new value in the form of a shorter prison sentence in exchange for the payment.
Turning to the statute, Judge Agresti said that “new value” under Section 547(a)(2) “means money or money’s worth . . . .” The statute’s use of the word “means” rather than “includes” indicates that the list of money equivalents in (a)(2) is exclusive. Consequently, the payment brought nothing of value back into the estate, making the new value theory inapplicable.
Furthermore, the exchange must be “substantially contemporaneous.” The delay of more than 100 days between the payment and the preliminary acceptance of the plea was not “substantially contemporaneous,” Judge Agresti said.
Judge Agresti apologized to the former employer for having to return the $100,000 and for feeling “victimized a second time.” The judge softened the blow by pointing out that the company would recover some of the payment through its unsecured claim. In addition, he said the restitution claim would not be discharged.
Judge Agresti also said that the former employer should consider that it only received the $100,000 because the criminal defendant had defrauded the bank that made the loan.