Summary of a Recent
Judicial
Development in
Bankruptcy
Criminal Restitution Payments May Be Credited
Towards a Debtor's Obligations
Walt McCarterNational AgLaw Center Research Associate
Summary of Decision
In In re Durler, No. 03-16992-12, 2007 Bankr. LEXIS 395 (Bankr. D. Kan. Fed. 2, 2007), the United States Bankruptcy Court for the District of Kansas held that criminal restitution payments, ordered post-petition, may be credited towards a debtor's obligations pursuant to § 1229(a)(3) since it is a "payment of [a] claim other than under the plan."
Background
Debtors filed their Chapter 12 petition in December 2003, and First National Bank was their principal creditor. Id. at *2. Earlier that year, the one of the Debtors had sold cattle in which the Bank had a security interest and used the proceeds to pay debts other than those owed to the Bank. Id. He was also accused of impairing the Bank's security interests in certain crops that year. Id. Charges were filed against the Debtor in December 2004, alleging six counts of impairing security interests held by the bank. Id. at *6. The Debtors' plan was confirmed in March 2005, which called for payment to the Bank on three separate claims with the unsecured amount to be paid pro rata from dispensable funds remaining over a period not to exceed three years. Id. at *4-5. Then in July 2006, the Debtor pleaded no contest to, and was convicted of, three counts of impairing the Bank's security interest. Id. at *6. He paid $10,000 restitution to the bank and was placed on probation. Id. The Debtors subsequently failed to make their plan payments in August 2006. Id. They then filed a motion to have the $10,000 restitution paid to the bank credited toward their August payment, and to extend the time for paying the remainder of the 2006 obligations, and the Bank objected. Id. at *7.
Arguments
The Debtors argued that § 1229(a)(3) of the Bankruptcy Code, equitable principles, and K.S.A. 60-4304(b) all required that the restitution be credited towards their August 2006 payment. Id. at *8.
The Bank argued that the restitution debt was a separate obligation, distinct from those the Debtors were to pay under their plan, that it was a nondischargeable obligation, and that the Debtors should not be allowed to amend their plan to take into account an obligation they should have known might be imposed in the criminal case that had been filed before their plan was confirmed. Id.
Analysis and Holdings
The issue before the court was whether the restitution paid in the state criminal case should be credited towards the Debtor's plan payments. Id. Section 1229(a)(3) of the Bankruptcy Code authorizes the modification of a confirmed plan to alter the distribution to a creditor whose claim is provided for by the plan "to the extent necessary to take account of any payment of such claim other than under the plan." Id. at *9. The court concluded that because the Debtors' plan had already been confirmed at the time of the ordered restitution, making the restitution a "payment of such claim other than under the plan," § 1229(a)(3) could be applied to alter the plan payment distributions. Id. at *9-10. Furthermore, Kansas statutes provide that "[a] judgment of restitution will not bar any subsequent civil remedy or recovery, but the amount of any restitution paid shall be set off against any subsequent civil recovery." Id. at *11. Therefore, the court reasoned that the criminal restitution was not "separate and distinct" from civil liability as the Bank claimed, but rather that they were "so related that any restitution the convicted criminal pays must be credited against his civil liability for the criminal act." Id. at *12. The court conceded that the restitution was a nondischargeable obligation, but noted that that was not an issue here as it had already been paid in full. Id. Thus the court held that pursuant to § 1229(a)(3), the Debtors were allowed to credit their restitution payment against their obligations to the Bank. Id. at *14.
The case was decided on February 2, 2007.