Reversing the Bankruptcy Appellate Panel, the Ninth Circuit inveighed against an expansive reading of Kelly v. Robinson, 479 U.S. 36 (1986), where the Supreme Court arguably departed from the language of the statute to achieve a socially desirable result.
In Kelly, the Supreme Court held that criminal restitution is nondischargeable under Section 523(a)(7) even though it was payable to the victim of the crime, because (1) the victim has no control over the decision to award restitution or the amount of the award, and (2) the decision to impose restitution turns on the penal goals of the state, not the victim’s injuries.
The language of Section 523(a)(7) is different, however. It provides that a debt is nondischargeable “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 . . . .” [Emphasis added.]
Even though restitution was not payable to the government, and even though restitution was compensation for loss, the high court concluded in Kelly that the debt was nondischargeable based on its “deep conviction that federal bankruptcy courts should not invalidate the results of state criminal proceedings.” Id. at 47.
The Feisty California Consumer Advocate
A lawyer made her living forestalling foreclosure for her clients. In one litigation, the state court imposed about $7,000 in discovery sanctions on her for failing to respond to discovery requests. The lawyer did not pay the sanctions owing to her adversary.
About three years later, the state bar association began a disciplinary investigation. The lawyer refused to produce requested documents and to answer questions. The following year, the bar opened disciplinary proceedings where she was charged with failing to cooperate in the investigation and disobeying the court order to pay discovery sanctions.
Ultimately upheld in the California Supreme Court, the lawyer was suspended for 30 days. Her reinstatement was predicated upon her paying the discovery sanction and costs of the disciplinary proceeding totaling about $19,000.
Rather than pay, the lawyer filed a chapter 13 petition that was converted to chapter 7. She filed a complaint seeking a declaration that the $7,000 and $19,000 debts were dischargeable under Section 523(a)(7). She also charged that failure to reinstate her license was discrimination in violation of Section 525(a).
The bankruptcy court ruled that both debts were nondischargeable and dismissed the claim under Section 525(a).
The BAP affirmed, relying on Kelly in large part. Albert-Sheridan v. State Bar of California (In re Albert-Sheridan), 18-1222, 2019 WL 1594012 (B.A.P. 9th Cir. April 11, 2019). To read ABI’s report on the BAP opinion, click here.
In an opinion on June 10, Circuit Judge Patrick J. Bumatay upheld the nondischargeability of the costs of the disciplinary proceeding but reversed the BAP by holding that the discovery sanctions were dischargeable. The appeals court also ruled that the state bar could condition reinstatement on payment of the nondischargeable debt.
The Circuit Sticks by Findley and Avoids Kelly
The lawyer asked the appeals court to overrule In re Findley, 593 F.3d 1048 (9th Cir. 2010), Ninth Circuit precedent holding that the costs of a disciplinary proceeding are nondischargeable. Judge Bumatay declined the invitation, saying it was a “nonstarter” because Findley was “binding precedent on this question” and “stands on all fours with this case.”
Originally, the Ninth Circuit had held in State Bar of California v. Taggart (In re Taggart), 249 F.3d 987 (9th Cir. 2001), that the costs of a disciplinary proceeding were dischargeable under Section 523(a)(7) because the costs were compensation for pecuniary loss.
In response, the California legislature amended the disciplinary statute to provide that the costs imposed on an attorney are “penalties” imposed “to promote rehabilitation and to protect the public.”
Given the amended statute, the Ninth Circuit held in Findley that disciplinary costs were nondischargeable because they were no longer compensation for pecuniary loss.
Judge Bumatay therefore upheld the BAP and ruled that the $19,000 was nondischargeable.
The Circuit Criticizes Kelly
The discovery sanctions were another subject. Critically, the sanctions were not payable to the government and thus fell outside of Section 523(a)(7). Judge Bumatay explained how the BAP erred in ruling otherwise.
The BAP acknowledged that California courts have held that discovery sanctions are not punitive. Still, the BAP interpreted “Kelly and its progeny” to mean that discovery sanctions were “transformed into a primarily punitive sanction” when they were “ordered to be paid by the [California] supreme court as part of a disciplinary proceeding.”
Even though the lawyer was to pay discovery sanctions to her adversary as a condition to reinstatement of her license, the BAP held that the award was “punitive and rehabilitative” and therefore nondischargeable.
In substance, Judge Bumatay said it was wrong for the BAP to rely on Kelly in a case not involving criminal restitution. He said that Kelly was based on the Supreme Court’s “deep conviction” rather than the statutory language.
“Like other relics of the 1980s, such as big hair, jam shorts, and acid-wash jeans,” Judge Bumatay said that “Kelly’s atextual interpretative method should not come back into fashion.” Therefore, he said, Kelly “does not alter the outcome required by the text of § 523(a)(7) in this case.”
Judge Bumatay reversed the BAP as to the $7,000 in discovery sanctions. He held them to be dischargeable as compensation to “a private party for the costs of litigating civil discovery motions for its own benefit. Nothing in these circumstances would cause us to depart from the plain language of the Code.”
Judge Bumatay upheld dismissal of the lawyer’s claim of discrimination under Section 525(a). The section bars the government from denying a license “solely because” someone is or has been bankrupt or because the debtor “has not paid a debt that is dischargeable . . . .”
The “inverse is also true,” Judge Bumatay said. The government may deny a license if the debt is nondischargeable. Consequently, he held that “the State Bar is within its right to condition reinstatement on the payment of that debt.”
Reversing the Bankruptcy Appellate Panel, the Ninth Circuit inveighed against an expansive reading of Kelly v. Robinson, 479 U.S. 36 (1986), where the Supreme Court arguably departed from the language of the statute to achieve a socially desirable result.
In Kelly, the Supreme Court held that criminal restitution is nondischargeable under Section 523(a)(7) even though it was payable to the victim of the crime, because (1) the victim has no control over the decision to award restitution or the amount of the award, and (2) the decision to impose restitution turns on the penal goals of the state, not the victim’s injuries.
The language of Section 523(a)(7) is different, however. It provides that a debt is nondischargeable “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 . . . .” [Emphasis added.]
Even though restitution was not payable to the government, and even though restitution was compensation for loss, the high court concluded in Kelly that the debt was nondischargeable based on its “deep conviction that federal bankruptcy courts should not invalidate the results of state criminal proceedings.” Id. at 47.