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The district court affirmed, and so did the Fifth Circuit in a per curiam, nonprecedential opinion on January 30.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.
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.