Ruling Allows Bankruptcy Filing to Avoid Restitution

The government’s effort to recover money lost in the savings and loan scandal suffered a setback Tuesday as the Supreme Court ruled that convicted criminals may avoid paying restitution to their victims by filing for bankruptcy.

The 7-2 ruling also is a blow to the “victim’s rights” movement. In recent years, courts have been given new authority to order criminals to pay crime victims for their losses and injuries. In many instances of fraud or other financial crimes, judges have ordered criminals to pay fines and repay the stolen money rather than go to prison.

Last year, Congress gave the Justice Department an extra $75 million to pursue fraud investigations in the savings and loan scandal and told prosecutors to seek court orders demanding that former thrift officials repay at least part of the money they fraudulently squandered.

Now, such court orders are in jeopardy.

With some evident reluctance, the high court concluded Tuesday that the federal bankruptcy law gives any “debtor,” including a convicted criminal, the right to “a discharge of all debts.” Since Chapter 13 of the Bankruptcy Code includes no exceptions, the court said it could not create one for criminal restitution orders.

Only Justices Harry A. Blackmun and Sandra Day O’Connor dissented, contending that Congress did not mean to cover criminal restitution orders when it wrote the bankruptcy laws.

“This means that criminals everywhere can get rid of restitution orders or criminal fines by declaring bankruptcy,” said Richard A. Samp of the Washington Legal Foundation, which filed a court brief on behalf of several victim’s rights groups.

The case (Pennsylvania vs. Davenport, 89-156) was brought by Pennsylvania officials seeking to recover $4,145 from a couple who pleaded guilty to welfare fraud, but filed for bankruptcy before paying back the money.

As a result of Tuesday’s ruling, judges may be forced to send more white collar criminals to prison because they cannot be sure that a restitution order will be honored, Samp said. He also urged Congress to rewrite the bankruptcy code to reverse the ruling.

Last year, the Justice Department told the court that 7,350 investigations were under way involving possible criminal fraud in the banking and S&L; industries. “In many instances, the defendants are white-collar defendants who, though insolvent at the conclusion of their criminal proceedings, have prospects for substantial future income,” it said in a brief to the court.

Therefore, judges should be permitted to order such criminals to repay their debts to the taxpayers over many years.

Under Tuesday’s ruling, a former thrift official who is convicted of fraud may be sent to prison. But if he is then bankrupt, he may not be forced to repay the government in the future for the losses he caused.

The federal bailout of the S&L; industry is expected to cost taxpayers as much as $325 billion.

In other actions, the court:

--Ruled that a person once convicted of drunken driving may not be prosecuted later for a homicide that resulted from the same car accident. The “double jeopardy” clause of the Fifth Amendment says that a person may not “be twice put in jeopardy of life or limb . . . for the same offense.”

In this case (Grady vs. Corbin, 89-474), local prosecutors in Upstate New York allowed Thomas Corbin to plead guilty to drunken driving and driving on the wrong side of the road. But other prosecutors in the same office decided later to charge him with homicide in the death of a motorist. But on a 5-4 vote, the court said this amounted to a second prosecution for the same offense and was therefore unconstitutional.

--Let stand an $800,000 judgment against two Ku Klux Klan groups for a violent attack on civil rights marchers in Forsythe County, Ga., in 1987 (Stephens vs. McKinney, 89-1558).