Four circuits now agree: The costs of a lawyer’s disciplinary proceedings are nondischargeable debts under Section 523(a)(7).
Joining the First, Ninth and Eleventh Circuits, the Seventh Circuit ruled on February 7 that a lawyer needed to pay $12,500 in costs to have his law license reinstated.
The Wisconsin Supreme Court had issued a public reprimand for negligence, not intentional wrongdoing. He was also ordered to pay $150 in restitution and $12,500 in costs. When the lawyer failed to pay the costs, the bar association suspended his license.
The lawyer closed his practice and filed a chapter 7 petition, where he received a general discharge. Later, the lawyer applied for his license to be reinstated, but the bar association refused because he had not paid the costs.
The lawyer reopened his bankruptcy and filed an adversary proceeding to declare that the costs had been discharged. The state disciplinary authority opposed, raising Section 523(a)(7) in defense.
Under Sections 523(a)(7) and (c)(1), a debt is automatically excepted from discharge 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, other than a [particular] tax penalty.”
Bankruptcy Judge Catherine J. Furay ruled on summary judgment that the costs were not discharged, and the district court affirmed in Osicka v. Office of Lawyer Regulation, 20-478, 2021 BL 106667 (W.D. Wis. Mar. 24, 2021). To read ABI’s report, click here.
The lawyer appealed again, either trying to save $12,500 or persuade the Seventh Circuit to halt the expansion of Kelly v. Robinson, 479 U.S. 36 (1986), to another circuit. In Kelly, 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.
Circuit Judge Michael Y. Scudder, Jr. affirmed in a 12-page opinion. His hands were tied to a degree by In re Zarzynski, 771 F.2d 304 (7th Cir. 1985), where the Seventh Circuit decided that the costs of a criminal prosecution were nondischargeable.
Judge Scudder began by parsing the meaning of “fine, penalty, or forfeiture,” words not defined in the statute. He found it “difficult . . . to believe that the term ‘forfeiture’ encompasses the cost order entered by the Wisconsin Supreme Court.” He stopped short of defining “a fine” because “it is plain the cost order is a ‘penalty’ within the meaning of § 523(a)(7).”
Citing Black’s Law Dictionary, Judge Scudder said that a “penalty is a [p]unishment imposed on a wrongdoer ‘that can take the form of a sum of money exacted as punishment for either a wrong to the state or a civil wrong.’” He went on to say that the state’s disciplinary code “unambiguously singles out attorney discipline as a penal endeavor.” Kelly, he said, makes a broad exception to dischargeability for penal sanctions.
In cases after Kelly, Judge Scudder said that the Supreme Court had subsumed civil fines into the exception from dischargeability.
In what may seem a stretch for some readers, Judge Scudder went on to rule that the costs were not compensation for “actual pecuniary loss.” He defined the term to mean:
the disappearance or diminution of something having monetary value resulting from the real and substantial destruction of property, which usually occurs in an unexpected or relatively unpredictable way and often because of another’s misconduct.
Affirming the lower courts, Judge Scudder ended his opinion by noting the three circuits that reached the same result. To read ABI’s report on the most recent opinion, Albert-Sheridan v. State Bar of California (In re Albert-Sheridan), 960 F.3d 1188 (9th Cir. June 10, 2020), click here.
Four circuits now agree: The costs of a lawyer’s disciplinary proceedings are nondischargeable debts under Section 523(a)(7).
Joining the First, Ninth and Eleventh Circuits, the Seventh Circuit ruled on February 7 that a lawyer needed to pay $12,500 in costs to have his law license reinstated.
The Wisconsin Supreme Court had issued a public reprimand for negligence, not intentional wrongdoing. He was also ordered to pay $150 in restitution and $12,500 in costs. When the lawyer failed to pay the costs, the bar association suspended his license.
The lawyer closed his practice and filed a chapter 7 petition, where he received a general discharge. Later, the lawyer applied for his license to be reinstated, but the bar association refused because he had not paid the costs.
The lawyer reopened his bankruptcy and filed an adversary proceeding to declare that the costs had been discharged. The state disciplinary authority opposed, raising Section 523(a)(7) in defense.