Fraser Trebilcock attorneys Gary Rogers and Ryan Kauffman have successfully prosecuted a bankruptcy appeal to the United States District Court for the Easter District of Michigan. Signifying the importance of the issue to the State of Michigan, Michigan's Solicitor General filed an amicus brief in support of the Firm's client's position.
The litigation stemmed from a road rage incident in Midland County resulting in personal injury that the Firm's clients insured. The Firm's client paid medical and work loss benefits to its insured. The driver that caused the injury was charged criminally and was convicted of misdemeanor assault and battery. Pursuant to the Michigan Constitution and the Michigan Crime Victims Rights Act ("CVRA"), M.C.L. 780.766(2), the criminal Defendant was ordered to pay full restitution to the county clerk, who in turn would pay restitution to the victim and her insurance carrier (the Firm's client).
The criminal Defendant then filed Chapter 7 Bankruptcy in the Eastern District of Michigan, and received a discharge of his debts on September 9, 2013. Thereafter, a dispute arose over whether the criminal Defendant's state-court criminal restitution obligation had been discharged or whether it was a nondischargeable obligation under 11 U.S.C. 523(a)(7). To resolve the question, the Bankruptcy Court directed that an adversarial action be commenced. After hearing a motion for summary judgment, the Bankruptcy Court concluded that the criminal Defendant's restitution order did not meet the requirements of 11 U.S.C. 523(a)(7), and was therefore dischargeable.
The Firm's client then initiated its appeal to the District Court. The District Court (J. Ludington) adopted the position advocated by the Firm's client and concluded that according to the United States Supreme Court, in Kelly v. Robinson, Kelly v. Robinson, 479 U.S. 36 (1986), the case presented an issue of federalism – namely whether the language Congress chose for 11 U.S.C. § 523(a)(7) preserved the states’ right to determine the penal consequence of violating state criminal law. The District Court ultimately held that because the Supreme Court has decided that the principle of federalism must be respected, and that state-ordered criminal restitution meets the exception provided by Congress in § 523(a)(7), reversal of the Bankruptcy Court's decision to the contrary was required.
Although the Kelly was decided in 1986, the precise issue of whether or not § 523(a)(7) excepted state-court criminal restitution orders from discharge had not been decided in the Sixth Circuit or in the Eastern District of Michigan. A number of courts in other districts and circuits had decided the issue and similar issues. Some of those courts distinguished Kelly based on different facts, such as where the restitution order was civil or where the restitution order arose out of a federal conviction. Only one case had previously addressed the issue in Bankruptcy Court for the Eastern District of Michigan, In that case, In re Reyes, 496 B.R. 449 (Bankr. E.D. Mich. 2013) (J. Shapero), the Bankruptcy Court held that the Sixth Circuit had interpreted Kelly in a manner that suggested that § 523(a)(7) did not exempt state-court criminal restitution orders from discharge. The Bankruptcy Court in our case followed Reyes.
On appeal, Fraser Trebilcock attorneys Gary Rogers and Ryan Kauffman successfully argued that both the Firm's client's case and Reyes were wrongly decided and that the Sixth Circuit did not interpret Kelly in a manner that permitted the discharge of state-court restitution orders. In adopting our client's position, the District Court clarified the law as it should be applied in the Eastern District of Michigan. At this point, criminal restitution orders may not be discharged in Chapter 7 bankruptcy.