The Ninth Circuit wrote an opinion on April 14 indirectly saying that the Supreme Court should overrule Kelly v. Robinson, where the high court held in 1986 that criminal restitution imposed as a condition for probation is nondischargeable under Section 523(a)(7).
Writing for the appeals court, Circuit Judge John B. Owens said that Kelly “untether[ed] statutory interpretation from the statutory language.” That approach, he said, “has gone the way of NutraSweet and other relics of the 1980s and led to considerable confusion.” He then went on to cite circuit court decisions from around the country that distinguish Kelly to the vanishing point.
Section 523(a)(7) bars the discharge of “a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit” that is not compensation for “actual pecuniary loss.”
Although restitution in Kelly was payable to the victim of the crime and therefore seemingly outside of the boundaries of Section 523(a)(7), the Supreme Court nonetheless held that the debt was nondischargeable based on a “deep conviction” that bankruptcy courts should not invalidate state criminal proceedings.
The case before the Ninth Circuit involved a lawyer who violated state law by charging a client in advance for a mortgage modification. The client fired the lawyer and got an arbitration award requiring repayment of the entire fee. When the lawyer did not pay, the state bar suspended the lawyer’s license to practice until she repaid the fee.
Filing a chapter 7 petition, the lawyer sued the state bar in bankruptcy court under Section 525(a) for revoking a license “solely because” she had not paid a dischargeable debt. The bankruptcy court and the district court both held that the debt was nondischargeable.
On appeal, Judge Owens ruled that the fee was a dischargeable debt and reversed the lower courts. He relied in significant part on the Ninth Circuit’s 2010 decision in Findley, which held that the costs associated with state bar disciplinary proceedings are nondischargeable.
In the case on appeal, Judge Owens said, there were no costs payable to the state that were assessed for disciplinary proceedings, only a debt for receiving a fee improperly from a client. Furthermore, the debt was “compensation for actual loss,” not a fine or penalty.
If the debt were not dischargeable, Judge Owens said that fee disputes with other licensed professionals like doctors, dentists or barbers would lead to nondischargeable debts.