Jаmes Towers took advantage of people in financial distress. Through his firm Update Financial Services Corp. Towers charged a fee for new financing that would stave off impending foreclosures on home mortgages. Towers promised the homeowners that part of the application fee, and all funds that the homeowners had been required to put into an escrow account, would be returned if refinancing could not be arranged. But he did not keep that promise, and the State of Illinois alleged in an action commenced in 1986 under the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/1 to 505/12, that he never intended to honor his word. Towers defaulted in the state proceeding and did not appear for a prove-up of damages; the state court found in 1991 that Towers had defrauded his customers and imposed a civil рenalty of $50,000, ordered Towers to reimburse the state for investigative costs of $50,000, and directed him to pay about $210,000 as restitution. The order included a list of Tower’s customers with amounts due to each.
Towers has had financial problems of his own. He filed a petition in bankruptcy and in 1987 recеived a discharge under Chapter 7. In 1995 Towers filed a second Chapter 7 petition and received a second discharge. But Illinois asked the bankruptcy court to declare that neither discharge reheves Towers of his obligation to repay his victims in the refinancing scheme. The stаtutory exception to discharge for money obtained by fraud, see 11 U.S.C. § 523(a)(2)(A), offers no benefit to Illinois because § 523(c) requires claims based on § 523(a)(2) to be made in the bankruptcy itself, which was not done. See also Fed. R. Bankr.P. 4007(e) (when § 523(c) applies, creditors who want an exceрtion to discharge must present their claims no later than 60 days after the first creditors’ meeting). Likewise the state forfeited any argument that the debt stemmed from “larceny” and therefore was nondischargeable under § 523(a)(4). But § 523(a)(7) precludes discharge of fines, penalties, and forfeitures. Clаims based on this exception may be raised “at any time.” Fed. R. Bankr. P. 4007(b). Debts covered by this subsection thus pass through bankruptcy unaffected; the creditor may disregard the proceedings and enforce its rights later, as Illinois has sought to do. But to prevail under § 523(a)(7) the creditor must show that the debt is “a finе, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss”. Bankruptcy Judge Ginsberg concluded that the $50,000 civil penalty is not dischargeable under this language, but that the $50,000 debt for investigative costs has beеn discharged. These conclusions are no longer in controversy. What remains to be determined is the status of the $210,000 in restitution to the victims of Towers’ scam.
Judge Ginsberg recognized that
Kelly v. Robinson,
The bankruptcy judge’s unstated premise must have been that different parts of the Bankruptcy Code do not address the same subject (or the same economic transactions), so that if a given subsection does not protect a creditor from discharge, then no other subsection does so. That’s an implausible view of the legislative process. Different provisions added at different times may intersect, and courts endeаvor to prevent overlap from causing accidental destruction. Section 523(a)(13) makes double sure that restitution awarded as part of a federal criminal judgment cannot be discharged in bankruptcy but does not imply, for example, that civil fraud judgments that
might
have been made the object of criminal restitution, but weren’t, now may be discharged despite § 523(a)(2)(A). And if § 523(a)(13) does not alter the scope of the fraud exception to discharge, or the larceny exception in § 523(a)(4), it does not contract the scope of § 523(a)(7) either. Congress had good reason to put restitution in federal criminal cases beyond the scope of debate by adding § 523(a)(13). The principal interpretive tool used in
Kelly
— the proposition that courts are “reluctant to interpret federal bankruptcy statutes to remit state criminal judgments” (
After concluding that § 523(a)(13) does not affeсt the interpretation of § 523(a)(7), the district court had to determine whether the restitution order meets the criteria of § 523(a)(7).
Kelly
dealt with a criminal restitution order, and as we have mentioned its animating concern was limited to criminal cases. Nonetheless,
Pennsylvania Department of Public Welfare v. Davenport,
To see whether this is sound, we must work through the language of § 523(a)(7). There are three requirements. The debt must reflect:
• “a fine, penalty, or forfeiture”
*955 • “payable to and for the benefit of a governmental unit”
• that is “not compensation for actual pecuniary loss”
It is easy enough to call restitution under the Illinois Consumer Fraud and Deceptive Business Practices Act “a fine, penalty, or forfeiture”. The state enforces its laws for the benefit of all citizens, not just the victims of a given flimflam. The $50,000 penalty unquestionably satisfies § 523(a)(7); if instead of ordering restitution the state court had selected a “penalty” of $260,000 (the harm caused by the wrongful acts, plus an additional fine), this larger sum also would have been covered. Breaking an exaction into components does not make it less a fine, penalty, or forfeiture.
As for the third requirement, restitution is “compensation for actual pecuniary loss” from the perspеctive of the victim, who is made whole by the award. But, as
Kelly
observed, restitution usually is not compensation for
the government’s
pecuniary loss. Governments seek restitution to promote law enforcement by deterrence as well as by compensation, and Illinois was not a victim of Towers’ fraud except to the extent criminal activity induced the state to expend part of its law-enforcement budget. The bankruptcy judge concluded that the $50,000 earmarked to reimburse Illinois for the costs of investigation and prosecution is excluded by this language and therefore dischargeable (but see
In re Zarzynski,
But the final requirement — that the amount be “payable to
and for the benefit of
a governmental unit” — is not so readily satisfied. The state court’s order directs Towers to pay the $210,000
to
the Attorney General of Illinois, but
for the benefit of
the victims of his fraud. In
Kelly
the governmental unit kept the restitution, for the state was itself the victim (the crime was welfare fraud). In
ccmv
the Department of Housing and Urban Development collected the restitution and, the fourth circuit stressed, was not under any legal obligation to distribute the money to persons harmed by the defendant’s acts.
Illinois contends that it, like thе Department of Housing and Urban Development in ccmv, has no obligation to pass the money through to the victims. Perhaps this would be so under a beady-eyed reading of the restitution order; the judge did not state in so many words that the Attorney General must redistribute to the victims whatever can be squeezеd out of Towers. No one doubts, however, that the Attorney General mil distribute the money to the victims; its brief informs us that “the State intends to forward restitution payments to the victims if it succeeds in collecting from Towers” and that “the State is receiving no pecuniary benefit” from this activity. Payment is not wholly grаtuitous, either. Section 8 of the state law provides in part:
Any person who has suffered damages as a result of the use or employment of any unlawful practices and submits proof to the satisfaction of the court that he has in fact been damaged, may participate with general creditors in the distribution of the assets to the extent he has sustained out-of-pocket losses. In the case of a partnership or business entity, the receiver shall settle the estate and distribute the assets under the direction of the court.
815 ILCS 505/8. Although the Attorney General may respоnd that he was not formally appointed as the receiver of Update Financial Services Corp., this language makes it clear that a person who collects money designed to make victims whole must use that money to make them whole “under the direction of the court”; hе cannot divert it to other good ends. The state court’s restitution order, which lists victims by name and amount of loss, is the sort of “direction” that leads to a distribution. Surely the Attorney General of Illinois can’t disburse state funds to victims of fraud without legal authorization. The only possible authority to pay *956 money to Towers’ victims come from the combination of § 8 and the state court’s order; neither suggests that distribution is elective on the Attorney General’s part.
Perhaps one could reply that the state’s benefit need not be pecuniary. Deterrence of fraud is a benefit to all of the state’s citizens. If restitution adds to the punch of the criminal law, then so much the better. Some language in Kelly suggests this possibility. But the context in which “benefit” appears — “payable to and for the benefit of a governmental unit” — implies that the “benefit” in question is the benefit of the money that is “payable to” the governmental unit. In Kelly the governmеnt received and kept the money; not so here. Citizenry at large may get the benefit of deterrence, but neither the people of Illinois nor any governmental unit receives a financial benefit from the restitution that Towers has been directed to pay, and the “governmental unit” does not receive any benefit from general deterrence either. Although potential victims gain from improved deterrence, governmental bodies experience the process as a cost — not only the outlay needed to achieve deterrence but also the pоssibility that, if the level of crime falls, then the budget of those governmental units devoted to crime suppression may decline.
If there were no way to protect the deterrence effects of restitution except by hammering away at “for the benefit of’ until it fit the mold, then a court might be tempted. But it is not necessary. Section 523(a)(2) prevents the discharge of debts attributable to fraud (as Towers’ debts were); § 527(a)(4) exempts debts that stem from embezzlement or larceny; § 523(a)(6) exempts debts that stem from “willful and malicious injury by-the debtor to another entity or to the property of another entity”. These three exemptions cover the gamut of crimes. The only reason Illinois (and Towers’ victims) cannot take advantage of these exclusions from discharge is that they snoozed through his bankruptcies. 11 U.S.C. § 523(c). Instead of asking the bankruptcy court in 1987 to rule that Towers’ obligations tо his victims could not be discharged under § 523(a)(2)(A), the state asked only that the bankruptcy court lift the automatic stay so that it could pursue its action in state court. That request was unnecessary; state law-enforcement actions are outside the scope of the stay to begin with. 11 U.S.C. § 362(b)(4). Our point is not that Illinois was required to make an argument under § 523(a)(2)(A) in 1987; it is, rather, that the state took its chances by neglecting the proceeding. We do not have to give an acontextual reading to “benefit” in § 523(a)(7) in order to protect victims of fraud; the only real interest that supports the state’s prоposed reading of “benefit” is the interest in deferring litigation about dischargeability until after the conclusion of the state-court proceeding. But that’s not a weighty intei-est; to the contrary, by enacting § 523(c) Congress made it clear that the fraud exception to discharge should be litigated in the bankruptcy case. To read “benefit” in § 523(a)(7) the way Illinois prefers would be to undermine the public interest in having claims wrapped up as part of the original bankruptcy case. An approach that simultaneously tortures the language of § 523(a)(7) and undermines the function of § 523(c), in оrder to protect a creditor that did not take advantage of its opportunities in the original bankruptcy proceeding, has little to recommend it.
Civil restitution under the Illinois Consumer Fraud and Deceptive Business Practices Act is payable to, but not for the benefit of, the Attorney General of Illinois. It is therefore not protected from discharge by 11 U.S.C. § 523(a)(7).
Reversed.