In bankruptcy, debts originating from fines or penalties in criminal cases are generally not dischargeable.  A 2014 ruling by the 8th Circuit Bankruptcy Appellate Panel (B.A.P.) has restated this point. The case in question was Behrens v. United States (In Re Behrens, No. 13-6052, 2014 Bankr. LEXIS 565, Feb. 12, 2014).

In Behrens, the debtor had a pre-existing lien against the debtor that was in the nature of criminal restitution. The debtor, Bryan S. Behrens, had been convicted of securities fraud in 2011; part of his restitution was approximately $6.8 million owed to United States. Behrens had entered a consent judgment against himself with the SEC.

However, this was not the end of the matter. Behrens filed for bankruptcy protection and sought to have the bankruptcy court prevent the United States from collecting its 2011 restitution judgment. According to the debtor, this attempt to collect a pre-existing debt was a violation of the automatic stay. But Behrens did not stop there. He also initiated an adversary proceeding against the United States, in which he sought to avoid the $6.8 million restitution judgment.

He was unsuccessful. The bankruptcy court dismissed Behrens’s complaint under Fed.R.Civ.P. 12(b) for his failure to state a claim upon which relief could be granted, concluding “[Behrens’s] complaint seeks to collaterally attack the validity of a pre-petition judgment entered by the United States District Court. [Behrens] may not use a bankruptcy adversary proceeding to collaterally attack a pre-petition judgment.”

Behrens timely appealed the bankruptcy court’s order, raising several issues, all of which related to his claim that the criminal judgment was invalid because the government allegedly failed to obtain the district court’s permission before commencing the criminal case against him. The B.A.P. had this to say about the legal merits of the case:

The bankruptcy court correctly dismissed Behrens’s adversary complaint. If he has “a valid and compelling argument” challenging the validity of the criminal judgment from which the restitution debt and attendant lien arose, Behrens will need to make that argument to the district court that entered the judgment. Mitrano v. United States (In re Mitrano), 468 B.R. 795 (E.D. Va. 2012).

 

Any lien held by the United States arose from the criminal judgment, and Congress has specifically given criminal judgments, including restitution awards and attendant liens, special protection from discharge in bankruptcy. See, e.g., 11 U.S.C. § 523(a)(13) and 18 U.S.C. §§ 3613(e), 3663, 3663A, and 3664.

 

Behrens did not challenge the validity, priority, or extent of the government’s lien on any grounds other than his contention that the government’s criminal action violated the district court’s stay of actions and proceedings against him. He thus failed to present any issues the bankruptcy court could appropriately decide.

 

Finally, Behrens did not specifically identify or quantify under 11 U.S.C. § 362(k) any damages arising from the government’s alleged violation of the automatic stay for the bankruptcy court to consider. Any alleged damages to which Behrens alluded in his complaint arose only from his criminal conviction and the alleged violation of the district court’s stay.

The bankruptcy court dismissed his adversary action, and when he appealed it, the 8th Circuit B.A.P. affirmed the dismissal. The B.A.P. noted that criminal restitution judgments are granted special protections in bankruptcy proceedings. Further, Behrens did not challenge the extent, priority, or validity of the lien (leaving open the question that, had he done so, there may have been legitimate issues he could have raised). The B.A.P. viewed Behrens’s adversary as little more than a disguised attack on the criminal judgment itself.

BUT YOU STILL HAVE OPTIONS

What do we conclude from all of this?

For one thing, it reminds us of the fact that fines and restitution arising from criminal cases are afforded special protections in bankruptcy.  However, even if such cases, there are still things that debtors can do who may be facing large fines and penalties from old criminal convictions. Under the right circumstances, such liens might be able to be avoided or challenged in adversary proceedings where a court looks into the validity, extent, and priority of such a lien. Behrens, unfortunately, did none of these things.

Most people who have fines and restitution from criminal cases owe amounts that are nowhere near as much as Behrens owed.  In those situations, it is often possible to use Chapter 13 or Chapter 11 to work out favorable repayment terms with governmental entities, or even lump-sum settlements.  Depending on the circumstances, this also might be able to be done at reduced interest or zero interest.

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