State Compensation Insurance Fund (SCIF) is asking the U.S. Supreme Court to clarify rules for collecting on criminal restitution awards when the issue becomes entangled in a bankruptcy court proceeding. SCIF won a $100,000 restitution award in a California workers’ comp fraud case but could lose it if a bankruptcy court decision allowing the trustee to claw back the funds is allowed to stand. So far it stands.
SCIF argues in SCIF v. Zamora that allowing the restitution to be diverted to pay the defendant’s civil liabilities undercuts society’s interest in having the threat of restitution be a deterrent to criminal behavior. It also hinders its and other carriers’ ability to recoup what they lost when a fraud case is uncovered. But a district court, and later the Ninth Circuit, ruled against the carrier, saying bankruptcy rules are the law of the land.
Criminal Restitution Same as Civil Debt
The case dates back to 2005 when Jeffrey and Faye Silverman were indicted for insurance fraud. As part of a plea agreement, Jeffrey Silverman was sentenced to probation, community service and a restitution payment of $101,531 to SCIF. That check was delivered in March 2005, but the following month the Silvermans filed a Chapter 7 bankruptcy proceeding. Then four months after the criminal case against Mr. Silverman was closed, the trustee filed an adversary proceeding in April 2007 against SCIF to recover the restitution payment.
The bankruptcy court determined that a criminal restitution award is the same as a debt and that the payment was made to benefit SCIF and thus the trustee was allowed to recover the funds under the preference statute. That statute allows a trustee to recover certain payments made by the creditor within 90 days of the bankruptcy filing that could benefit one creditor to the detriment of the other creditors. In the Silvermans’ case, the restitution payment was made just 42 days before the bankruptcy filing.
SCIF took the case to the district court and then the Ninth Circuit but was unsuccessful. In asking the Supreme Court to hear the case, SCIF argues that there are important questions of federalism at stake that the Supreme Court has not resolved. In its earlier ruling in Kelly v. Robinson. the court held that a defendant couldn’t discharge a criminal restitution award through Chapter 7 bankruptcy because it would amount to federal interference in a state’s administration of its criminal laws.
But SCIF argues the Kelly opinion fails to address the related question of whether restitution payments already made can be recouped by the trustee. It says that doing so is tantamount to allowing the Silvermans to avoid the restitution payment.
“Thus, if the criminal defendant makes his restitution payment and his record is expunged before the restitution payment is avoided by the bankruptcy court, then the order expunging the conviction may very well preclude any efforts at enforcing the restitution obligation,” SCIF argued in its petition to the Supreme Court. “Indeed, that is the situation in this case...If the preference statute applies in this circumstance, Mr. Silverman will be able to re-allocate the restitution payment to the bankruptcy estate in order to pay civil creditors, and may not then have to repay the restitution because, under the expungement order, he has been released from all ‘penalties and disabilities’ resulting from the conviction.”
District attorneys are watching the case but say it’s too early to quantify what impact it may have on prosecutions and/or their ability to settle cases if SCIF does not win. But they concede that it creates the potential for someone to game the system by paying restitution up front and then following up with a bankruptcy filing within that 90-day window.
“Usually we tend to go easier on somebody who is paying restitution up front because that does show remorse. So when someone is able to put a large sum of money toward restitution, they may be able to get a more lenient consideration in disposing the case…because we don’t have to worry about trying to collect it down the road,” says Ed Dang, deputy district attorney with the Contra Costa County DA’s office and supervising attorney for the workers’ comp fraud unit. “But now if the victim is forced to return that money because the defendant filed for bankruptcy, it kind of undermines our original intent and the reason why we gave leniency now falls away because the victim has not been made whole and we may no longer be able to collect any monies from the defendant through the criminal courts.”
The Supreme Court has not yet decided if it will take the case. A brief in opposition to the petition is due later this month. For a copy of SCIF’s petition, click here.
(Filed by Brad Cain in San Francisco)