Crime, punishment and paying restitution to victims

This article was published in the Chicago Daily Law Bulletin on May 20, 2015.

By Mark D. DeBofsky
Mark D. DeBofsky is a name partner of DeBofsky, Sherman & Casciari, PC. He handles civil and appellate litigation involving employee benefits, disability insurance and other insurance claims and coverage, and Social Security law. He can be reached at mdebofsky@debofsky.com.

A recent ruling by the 7th U.S. Circuit Court of Appeals addressed the interesting question of whether private disability benefits are exempt from garnishment sought to provide restitution to the victims of crimes committed by the insured.

The case of U.S. v. France, 782 F.3d 820 (7th Cir. April 7, 2015), involved Gary France, a dentist, who was convicted in 2002 of setting up a lucrative false billing scheme to bilk insurers of city of Chicago and Chicago Transit Authority employees. As part of his sentence, France was ordered to pay $800,000 in restitution to the victims of his scheme.

However, by 2014, he had repaid only $11,000 toward that amount. Consequently, the government sought to garnish a portion of private disability insurance payments that France was receiving as a result of injuries he sustained in a car accident. The government's request was based on the Mandatory Victims Restitution Act (MVDA), 18 U.S.C. Section 3613(a).

France challenged the garnishment request, claiming at least a partial exemption. And France's ex-wife also intervened to exempt the portion of the disability payments that she was receiving for child support. The district court rejected both challenges, and the appeals court affirmed.

The recitation of the underlying facts revealed that as France's scheme unraveled, he filed for bankruptcy but failed to disclose his disability payments in his petition.

In a later proceeding in California, the court resolved competing claims to the disability benefits between France, his ex-wife, sister and the bankruptcy trustee. However, it appeared from the record that the bankruptcy trustee was never notified of the restitution order, and the California court made no mention of it in its ruling.

Although the MVRA does not permit enforcement of a restitution judgment against all assets, the court rejected claims by France and his ex-wife that the disability payments were exempt, despite an exemption of such payments under state garnishment laws.

The court also rejected a recent 8th Circuit ruling that payments from private disability insurance constituted "earnings" under the federal Consumer Credit Protection Act and were thus exempt. U.S. v. Ashcraft, 732 F.3d 860 (8th Cir.2013).

The court examined the text of the MVRA and agreed with France that the law permits garnishment only as to disposable earnings. "Disposable earnings" is defined in the statute as "that part of the earnings of any individual remaining after the deduction from those earnings of any amounts required by law to be withheld." 15 U.S.C. Section 1672(b). And "earnings" is defined as "compensation paid or payable for personal services, whether denominated as wages, salary, commission, bonus or otherwise and includes periodic payments pursuant to a pension or retirement program." 15 U.S.C. Section 1672(a).

Those terms were interpreted in prior rulings to permit garnishment of no more than 25 percent of retirement benefits. But the court had not previously examined whether private disability payments fall within the "earnings" definition.

While the 8th Circuit ruled in Ashcraft that disability payments were earnings, the 7th Circuit deemed that court's analysis flawed and further noted that Ashcraft did not specifically address the MVRA.

The court reasoned that since the MVRA incorporated provisions from the Internal Revenue Code that exempted workers' compensation and veteran benefits but did not list other types of disability payments such as Social Security, which was explicitly omitted, the doctrine of expressio unius est exclusio alterius, justified "the inference that items not mentioned were excluded by deliberate choice, not inadvertence."

"Where Congress explicitly enumerates certain exceptions to a general prohibition," the court held, "additional exceptions are not to be implied, in the absence of evidence of a contrary legislative intent." (Citation omitted.)

The court also quickly disposed of an alternative argument that state garnishment exemption laws precluded enforcement of the judgment. The court found the MVRA did not permit application of state exemptions and distinguished a 9th Circuit case involving disability benefits on the ground that this matter involved a federal criminal restitution order and a garnishment under federal law.

The court also rejected the ex-wife's claim because the order that had granted her a share of the insurance proceeds was procured without the bankruptcy trustee's knowledge of the restitution order. A contrary result could have permitted the debtor to use such a mechanism to shield assets from restitution. The claim was also barred by the MVRA text, which supersedes other laws without bankruptcy exemption.

While the result reached here may appear harsh, France's failure to make any meaningful effort to pay restitution to the victims of his crimes is why the MVRA was written with such Draconian terms. France was clearly not destitute and had the means to repay his victims, yet even after his conviction, he engaged in ongoing fraudulent conduct by failing to disclose the restitution order to the bankruptcy trustee when the disability payments were allocated.

The potential for depriving an innocent child of support is raised in this ruling, but the court questioned the ex-wife's standing since France's children were no longer minors. And as the court noted, since the allocation of benefits was made without disclosure of the restitution order, the court's concern about shielding of assets was well-warranted.