Costs of a Disciplinary Proceeding Held Nondischargeable Under Section 523(a)(7)

Even though measured by the expenses incurred by the state disciplinary authorities, a district judge in Wisconsin sided with the Ninth Circuit and held that costs assessed against the lawyer were not discharged in the lawyer’s bankruptcy.

The lawyer had been given a reprimand years earlier in a disciplinary proceeding. The lawyer was ordered to pay some $12,500 for the costs incurred by the disciplinary authorities.

The lawyer did not pay. Instead, he stopped practicing. Later, he filed a chapter 7 petition and received a general discharge.

Attempting to reinstate his license, the lawyer initiated an adversary proceeding seeking a declaration that the costs had been discharged in his bankruptcy. In a 19-page opinion, Bankruptcy Judge Catherine J. Furay decided that the costs were not discharged.

The lawyer appealed and lost in a March 24 opinion by Chief District Judge James D. Peterson of Madison, Wis.

The outcome was governed by Section 523(a)(7), which provides that a debt is not discharged if it is “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.]

Although the Seventh Circuit has no precedent exactly on point, Judge Peterson’s hands were tied by In re Zarzynski, 771 F.2d 304 (7th Cir. 1985). There, the Seventh Circuit decided that the costs of a criminal prosecution were nondischargeable.

The Seventh Circuit perceived “no county pecuniary loss when the county functions as it should in the furtherance of its public responsibilities.” Id. at 306.

Judge Peterson found “numerous other cases” holding that disciplinary costs are nondischargeable under Section 523(a)(7). He cited the First, Ninth and Eleventh Circuits and five bankruptcy court decisions in the Seventh Circuit. The lawyer, Judge Peterson said, cited no cases in his favor “that remain good law.”

Judge Peterson upheld Judge Furay and ruled that the costs were not discharged. He reasoned that “the purpose of attorney discipline proceedings is to protect the public, not to create a debtor-creditor relationship, and costs are more appropriately viewed as part of the penalty rather than compensation for a loss.”

Observations

Law in the area is traceable to a 1986 Supreme Court decision, Kelly v. Robinson, 479 U.S. 36 (1986). There, the high court held that an obligation to repay wrongfully paid welfare benefits was nondischargeable because the primary purpose was rehabilitative and penal, not compensatory.

The Ninth Circuit has been at the forefront in criticizing Kelly for substituting the Supreme Court’s sensibilities for the language of Section 523(a)(7).

Last year, Ninth Circuit Judge Patrick J. Bumatay 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,” he said, “Kelly’s atextual interpretative method should not come back into fashion.” Albert-Sheridan v. State Bar of California (In re Albert-Sheridan), 960 F.3d 1188, 1195 (9th Cir. June 10, 2020). For ABI’s report, click here.

Nonetheless, the Ninth Circuit in Albert-Sheridan reaffirmed its 2010 precedent, In re Findley, 593 F.3d 1048 (9th Cir. 2010), by holding that disciplinary costs are not discharged.

Someday, a circuit court or the Supreme Court should tell us why and when the words “actual pecuniary loss” can be ignored.