Criminal defendants facing onerous restitution obligations as part of their sentence might contemplate a bankruptcy filing, in the hope of staving off the restitution obligation. In a case of first impression, the Second Circuit recently considered whether the Bankruptcy Code’s automatic stay provision halts a defendant’s obligation to pay restitution and firmly closed the door on that potential gambit.

Defendant Philip Colasuonno was convicted in the S.D.N.Y. of conspiracy and substantive bank fraud charges, as well as tax offenses, stemming from a conviction at trial and a separate plea of guilty to an additional Information. Colasuonno faced an advisory Sentencing Guidelines range of 46 to 57 months’ imprisonment, but the sentencing judge departed downwards due to the defendant’s health problems; he was sentencing to one day in jail, followed by various terms of supervised release or probation on several charges. The court imposed as a special condition the payment of restitution to the IRS in the amount of $781,467, the amount by which Colasuonno had underpaid payroll taxes.

For a year after sentencing in 2007, Colasuonno ignored his restitution obligation. Hauled back to court on a violation of probation petition, he finally began to make small payments in 2009. Then, in July 2009, Colasuonno and his wife filed a Chapter 7 bankruptcy petition in the United States Bankruptcy Court, without notice to either the District Court or the Probation Department. After a few additional small payments, Colasuonno stopped paying restitution altogether on the ground that the automatic stay effected by the filing of the bankruptcy petition forestalled any payment obligation. He was again brought before the court on a violation of probation action.

Finding that Colasuonno had violated his original sentence of probation by failing to pay the court-ordered restitution, the District Court resentenced him to four months’ imprisonment and again ordered him to pay restitution.

Colasuonno then appealed his amended sentence to the Second Circuit, claiming that the automatic stay provision of the United States Bankruptcy Code, 11 U.S.C. § 362(a), temporarily halted his obligation to pay restitution and barred the District Court from revoking his probation for nonpayment. The Second Circuit was unpersuaded by the automatic stay argument. In United States v. Colasuonno, 697 F.3d 164 (2d Cir. 2012), the appeals court concluded that court-ordered conditions of a criminal sentence, such as restitution imposed as a condition of probation, and proceedings related to those court-ordered conditions, constitute a continuation of a criminal action. Therefore, these court-ordered conditions and the related proceedings fall within an express exception to the automatic stay imposed in bankruptcy, and the automatic stay does not provide temporary relief for criminal defendants from the operation of those proceedings.

Under 11 U.S.C. § 362(a), the filing of a bankruptcy petition automatically operates as a stay of the commencement or continuation of a judicial, administrative, or other action or proceeding against the debtor, of the enforcement of a judgment obtained before the commencement of the bankruptcy case, and of any act to collect a claim against the debtor that arose before the commencement of the case. However, the reach of the automatic stay established under 11 U.S.C. § 362(a) is restricted by 11 U.S.C. § 362(b), which provides that the filing of a bankruptcy petition does not operate as a stay of the commencement or continuation of a criminal action or proceeding against the debtor.

The Second Circuit concluded that, for purposes of 11 U.S.C. § 362(b)(1), the criminal action against Colasuonno did not end when the judgment of conviction became final. Rather, the proceedings to enforce the conditions of his probationary sentence constituted the continuation of a criminal action or proceeding against the debtor and thus fell within the specific exception to the automatic stay codified in 11 U.S.C. § 362(b)(1).

Relying on the legislative history of 11 U.S.C. § 362(b)(1), the Second Circuit held that “bankruptcy laws are not a haven for criminal offenders, but are designed to give relief from financial over-extension.” The court indicated that, in accordance with this legislative history, its holding was necessary to prevent criminal defendants from using the bankruptcy laws to shield themselves from punishment. The Second Circuit warned: “A failure to recognize enforcement of the conditions of a probationary sentence or proceedings to address violations of probation as a ‘continuation’ of the criminal action that resulted in such a sentence would allow the bankruptcy laws to become a haven for criminal offenders, allowing them to interrupt, if not completely frustrate, their criminal punishment.”