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Criminal Restitution

Imagine that two people decide to join forces in a business venture. Person A, who owns a small construction firm, will join Person B, who is a wealthy investor, in trying to obtain exclusive construction contracts with various municipalities around Northern California. Both sides view this business venture as mutually beneficial. Person A will be able to dramatically expand his business and will get exclusive contracts that will always be considered “safe” (government contracts). Person B gains because he does not have to invest in starting a construction company, he can use his long-standing ties with government officials for his own benefit, and will be able to call the shots because B is the one with the money and connections, not A.

Initially, everything goes well. B uses his connections to land various government construction contracts around Northern California. A does not have to focus on the business aspect of his company; instead, he is able to focus on expanding his workforce and equipment stock. A continues with his business while money and projects consistently come in. B continues to meet with powerbrokers to make deals, landing contract after contract without concern about the inner workings of the construction company. In fact, B never goes to a construction site; that area is entirely under A’s control.

While things are going well, B wants to get more aggressive. He calls A, who goes to B’s office. in B’s office, B commends A for doing a great job and compliments him for being a great partner. However, B says that these government contracts are good but there is more out there. B wants to get private companies as clients, who would likely pay more. If things do not work out, A could always go back to government contracts.

A agrees. While business has been good, it can be even better. A and B devise a plan to gain exclusive contracts to build strip malls, large restaurant chains, or other similar large scale construction projects. B will continue to use his connections, this time both for the private contracts and for local governmental permits and the like.

B immediately starts working on this plan. He reaches out to contacts in the private sector who have connections with large chains that are looking to expand. At first, he gets nowhere. While large private restaurant chains are looking to build, they continually ignore this company that only has small projects or government projects. The chains want a large construction company that has a track record.

B calls A to discuss his frustration. A decides that they should take a slightly different approach. Unlike other construction companies, their company has seen regular cash flow. They should use that cash to bribe government officials and corporate executives give them the contract.

After this, B reaches out again to his contacts. Once he makes contacts with the chains, B offers them bribes. At the same time, B bribes some government officials. This allows their construction company to land exclusive large-scale contracts that will pay significantly more.

An excited A and B begin their construction jobs. At first, all goes well. They build a number of restaurants in Northern California for one chain. The restaurants are a big hit.

Things start going awry. The construction company starts on a second project. There are many issues with the construction. There are delays, worker strikes, personal injury claims, and bond issues. The chain inspects the premises and refuses to pay. This project causes major deficits, compelling the construction company to file for bankruptcy. In the aftermath of the bankruptcy filing, the authorities discover that A and B bribed executives and officials to gain those contracts.

A and B head to criminal trials for bribery. A and B are found guilty of bribery and are sentenced to jail. A receiver takes control of the construction projects. A and B are required to pay criminal restitution of $10 million and are joint and severably liable (i.e. the damaged parties can collect the entire sum from one party; that party can then get his share from the other party).

At the same time, A’s life falls apart. His wife of 20 years divorces him and gets everything. B is left in jail with no money and a $10 million criminal restitution charge.

Legal Discussion

A believes that upon his release from prison, the damaged parties will go after B for the full $10 million because A has nothing and B has deep pockets. When that happens, B will go after A and secure a judgment for $5 million, A’s half. When that happens, A plans on filing for Chapter 7 bankruptcy and avoid paying.

The Bankruptcy Code in section §523(a)(7) provides that a discharge does not apply to any debt “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.” This includes criminal restitution, which is not dischargeable. However, because B would pay the criminal restitution in its entirety and his pursuit of A would not be criminal restitution per se, can A discharge that debt through bankruptcy? Or does the source of the obligation, criminal restitution, matter? It is unclear.

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