Hughes v. Sanders ( 2006 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 06a0420p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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Plaintiff-Appellant, -
RANDOLPH HUGHES,
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No. 05-3945
v.
,
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NEIL SANDERS, II, -
Defendant-Appellee. -
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Appeal from the United States District Court
for the Southern District of Ohio at Columbus.
No. 04-00744—Algenon L. Marbley, District Judge.
Argued: June 23, 2006
Decided and Filed: November 13, 2006
Before: BOGGS, Chief Judge; BATCHELDER, Circuit Judge; BELL, Chief District Judge.*
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COUNSEL
ARGUED: Teresa L. Cunningham, Florence, Kentucky, for Appellant. Neil H. Sanders, Santa
Barbara, California, for Appellee. ON BRIEF: Teresa L. Cunningham, Florence, Kentucky, for
Appellant. Neil H. Sanders, Santa Barbara, California, for Appellee.
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OPINION
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ALICE M. BATCHELDER, Circuit Judge. The appellant, Randolph Hughes, challenges the
district court’s ruling that the appellee’s debt to Hughes does not come within the categories of
nondischargeable debt under 11 U.S.C. § 523(a)(7). We affirm the judgment of the district court.
The facts of the case are not in dispute. The appellee, Sanders, represented Hughes in an
employment action against Ford Motor Company. Hughes later sued Sanders for malpractice.
During the course of the malpractice action, Sanders violated a number of court orders, including
discovery orders and an order to appear. Eventually, the district court entered a default judgment
as to liability, pursuant to Federal Rule of Civil Procedure 37(b)(2), stating:
*
The Honorable Robert Holmes Bell, Chief United States District Judge for the Western District of Michigan,
sitting by designation.
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No. 05-3945 Hughes v. Sanders Page 2
Defendant’s conduct is willful and wanton and constitutes a complete disregard for
the Court and for the obligations his status as a party to this lawsuit and as an
attorney place upon him. There is no evidence of excusable and justifiable neglect
here, but there is continuing evidence of a pattern of bad faith on behalf of
Defendant. He has abused the judicial process.
Hughes v. Sanders, No. 204CV744, 2005 WL 1490534, at *1 (S.D. Ohio June 23, 2005) (citing
Hughes I Contempt Order (Jan. 7, 2004)). The district court then scheduled a hearing on damages,
at which Sanders failed to appear. After taking evidence, the court entered judgment against Sanders
in the amount of $894,316.81, representing wages and interest claimed in the underlying Ford
Motor Company case; $143,602.25 for attorney’s fees, costs, and interest in that case; and
$25,873.95 for attorney’s fees, costs and interest in the malpractice case.
In 2004, Sanders filed for bankruptcy under Chapter 7 and listed Hughes as one of his
creditors. Hughes then brought this action, seeking a declaration that the judgment is a
nondischargeable debt under 11 U.S.C. § 523(a)(7). Sanders filed a motion to dismiss Hughes’s
complaint pursuant to Federal Rule of Civil Procedure 12(b)(6), and the district court reluctantly
granted the motion, concluding that the judgment, although of a punitive nature, did not meet the
statutory requirements that it be payable to a governmental unit and that it be non-compensatory.
Because we believe that the district court’s understanding and application of the statute are correct,
we – equally reluctantly – affirm the court’s holding.
We review de novo dismissals under Rule 12(b)(6). Columbia Natural Res., Inc. v. Tatum,
58 F.3d 1101, 1109 (6th Cir. 1995). A complaint must contain “more than the bare assertion of legal
conclusions,” and it must contain “‘either direct or inferential allegations respecting all the material
elements to sustain a recovery under some viable legal theory.’” Id. (quoting In re DeLorean Motor
Co., 191 F.2d 1236, 1240 (6th Cir. 1993)). A motion to dismiss should not be granted “unless it
appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would
entitle him to relief.” Conley v. Gibson, 355 U.S. 41, 45-46 (1957).
Hughes has not pled – nor could he plead – facts upon which he could prevail under 11
U.S.C. § 523(a)(7). That statute provides in pertinent part:
Exceptions to discharge
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title
does not discharge an individual debtor from any debt –
...
(7) to the extent such debt is for a fine, penalty, or forfeiture payable to and for the
benefit of a governmental unit, and is not compensation for actual pecuniary loss,
other than a tax penalty – . . . .
11 U.S.C. § 523(a)(7). The parties do not dispute that the default judgment was punitive in nature.
In order for Hughes to prevail here, therefore, we must determine whether the judgment set out in
the complaint is “payable to and for the benefit of a governmental unit” and whether it is
compensation for actual pecuniary loss. The answers to those questions are clear. The judgment
is payable to Hughes, who is not a governmental unit, and it is in an amount calculated to
compensate Hughes for the damage he incurred as a result of Sanders’s malpractice.
Hughes urges us to find this debt nondischargeable by extending the Supreme Court’s
decision in Kelly v. Robinson, 479 U.S. 36, 53 (1986), which held that criminal restitution to be paid
to the Connecticut Office of Adult Probation was nondischargeable under 11 U.S.C. § 523(a)(7)
because it was primarily punitive in nature despite its compensatory aspect. The Court reasoned that
its holding was warranted in light of the strong interest of the states in ensuring criminal justice. Id.
No. 05-3945 Hughes v. Sanders Page 3
at 47 (“Our interpretation of the Code also must reflect . . . a deep conviction that federal bankruptcy
courts should not invalidate the results of state criminal proceedings.”). The Court concluded that
“[t]he sentence following a criminal conviction necessarily considers the penal and rehabilitative
interests of the State. Those interests are sufficient to place restitution orders within the meaning
of § 523(a)(7).” Id. at 53.
As Hughes has noted, some courts have applied Kelly to penalties that are not payable to a
governmental unit. See U.S. Dept. of Hous. & Urban Dev. v. Cost Control Mktg. & Sales Mgmt. of
Va., Inc., 64 F.3d 920, 928 (4th Cir. 1995) (“[S]o long as the government’s interest in enforcing a
debt is penal, it makes no difference that injured persons may thereby receive compensation for
pecuniary loss.”); In re Allison, 176 B.R. 60, 64 (Bankr. S.D. Fla. 1994) (when awarded to vindicate
the dignity of the court, “a fine or penalty need not be payable to a governmental entity in order to
be for the benefit of a governmental agency.”); In re Marini, 28 B.R. 262, 266 (Bankr. E.D.N.Y.
1983) (the fact that a contempt of court fine was owed directly to the plaintiff was not relevant to
dischargeability under 11 U.S.C. § 523(a)(7)); In re Winn, 92 B.R. 938, 940 (Bankr. M.D. Fla. 1988)
(daily contempt fine not payable to governmental unit was nondischargeable because it was
“imposed as a penalty to vindicate the dignity and authority of the court”).
Like the district court, we are not persuaded by the reasoning of these cases. First, the Kelly
Court did not address the statute’s requirement that the debt be payable to and for the benefit of a
governmental entity, because that requirement was clearly met: the debt was a criminal restitution
order, payable to the State Office of Adult Probation to recompense the defendant’s theft from the
State Department of Income Maintenance. The issue in Kelly was whether a criminal judgment
ordering restitution is noncompensatory, despite its having been “calculated by reference to the
amount of harm the offender has caused,” Kelly, 479 U.S. at 52, and is therefore not dischargeable
in bankruptcy. The Court concluded that criminal restitution, while for the benefit of the state, is
not for the principal benefit of the victim, and therefore falls within the meaning of “not
compensation for actual loss” in § 523(a)(7). Id. Second, the Kelly Court’s repeated rationale for
its determination that a criminal restitution judgment is not dischargeable is the importance of
shielding the states from federal interference with the states’ criminal justice systems. See id. at 44
(“Courts traditionally have been reluctant to interpret federal bankruptcy statutes to remit state
criminal judgments.”); id.at 47 (“Our interpretation of the Code also must reflect the basis for this
judicial exception, a deep conviction that federal bankruptcy courts should not invalidate the results
of state criminal proceedings.”). And finally, the plain and unambiguous language of the statute
requires that the “fine, penalty, or forfeiture [be] payable to and for the benefit of a governmental
unit.” 11 U.S.C. § 523(a)(7) (emphasis added).
We therefore hold that Kelly applies narrowly to criminal restitution payable to a
governmental unit. We are not alone in this view. See In re Rashid, 210 F.3d 201, 208 (3d Cir.
2000) (restitution paid directly to victims was not nondischargeable because it was not payable to
a governmental unit); In re Towers, 162 F.3d 952, 956 (7th Cir. 1998) (restitution paid to attorney
general for redistribution to victims was not nondischargeable because it was not payable to and for
the benefit of the state); In re Friedman, 253 B.R. 576, 578 (Bankr. S.D. Fla. 2000) (contempt
judgment payable to litigant rather than governmental unit was not excepted from discharge); In re
Wood, 167 B.R. 83, 88 (Bankr. W.D. Tex. 1994) (Rule 11 sanction payable to private litigant was
not excepted from discharge because it was not payable to a governmental unit); In re Strutz, 154
B.R. 508, 510 (Bankr. N.D. Ind. 1993) (“the language of the statute is unambiguous . . . a debt must
be payable to a governmental unit to be nondischargeable under § 523(a)(7).”).
Under the plain language of 11 U.S.C. § 523(a)(7), Hughes cannot prevail unless he can
show both that the penalty owed by Sanders is payable to and for the benefit of a governmental unit.
Here, he can show neither. It is undisputed that the penalty is payable to Hughes. And it is
undisputed that the judgment is for an amount calculated to compensate Hughes for damages,
No. 05-3945 Hughes v. Sanders Page 4
attorney’s fees and costs claimed in and arising out of the malpractice action. He therefore has not
stated and cannot state a claim for which relief can be granted.
We note that even if we were to accept Hughes’s contention that the judgment is payable “to
and for the benefit of a governmental unit,” Hughes cannot prevail. The final requirement under
11 U.S.C. § 523(a)(7) for excepting a debt from discharge is that the debt is “not compensation for
actual pecuniary loss.” In this case, the debt owed by Sanders was a default judgment in an amount
explicitly calculated to compensate Hughes for malpractice damages, litigation costs and attorney’s
fees. That the judgment is a default judgment entered by the district court in part as a sanction for
Sanders’s inexcusable and unprofessional conduct does not change the judgment’s compensatory
character. Accordingly, the default judgment against Sanders cannot be characterized as
nondischargeable under 11 U.S.C. § 523(a)(7).
For the foregoing reasons, we AFFIRM the judgment of the district court.