The Ninth Circuit and its Bankruptcy Appellate Panel have been at the forefront in criticizing Kelly v. Robinson, where the Supreme Court arguably departed from the language of the statute to achieve a socially desirable result. A panel of the Ninth Circuit appears to be urging a disbarred lawyer to file a motion for rehearing en banc where the appeals court could limit Kelly strictly to its facts and overturn Ninth Circuit precedent based on Kelly.
Kelly and its progeny interpret Section 523(a)(7), which 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.]
The Supreme court held in Kelly that criminal restitution was nondischargeable under Section 523(a)(7), even though it was payable to the victim of the crime, because (1) the victim had no control over the decision to award restitution or the amount of the award, and (2) the decision to impose restitution turned on the penal goals of the state, not the victim’s injuries. Kelly v. Robinson, 479 U.S. 36 (1986). The high court based the decision on its “deep conviction that federal bankruptcy courts should not invalidate the results of state criminal proceedings.” Id. at 47.
In June 2020, Ninth Circuit Judge Patrick J. Bumatay upheld the nondischargeability of the costs of a lawyer’s disciplinary proceeding but reversed the BAP by holding that discovery sanctions were dischargeable. The appeals court also ruled that the state bar could condition reinstatement on payment of the nondischargeable debt.
In his opinion, Judge Bumatay said, “Like other relics of the 1980s, such as big hair, jam shorts, and acid-wash jeans, Kelly’s atextual interpretative method should not come back into fashion.” In re Albert-Sheridan, 960 F.3d 1188, 1195 (9th Cir. 2020). To read ABI’s report on Albert-Sheridan, click here.
Before Albert-Sheridan went to the circuit, the BAP said in footnote seven that “Kelly seems to have been expanded to the point where the requirement that the fine or penalty must be payable ‘to and for the benefit of a governmental unit’ has been read out of the statute.” However, the appellate panel noted that Congress amended the Bankruptcy Code 33 times after Kelly but never legislatively overruled the Supreme Court’s interpretation of Section 523(a)(7). Albert-Sheridan v. Golden (In re Albert-Sheridan), 18-1222, 2019 BL 131713, 2019 Bankr. Lexis 1187, 2019 WL 1594012 (B.A.P. 9th Cir. Dec. 18, 2019). To read ABI’s report on the BAP opinion, click here.
The New Case
The opportunity for the Ninth Circuit to assess Kelly anew arose once again in the aftermath of attorney disciplinary proceedings.
A lawyer evidently had misappropriated clients’ funds. The disciplinary tribunal in California disbarred the lawyer and directed him to pay about $200,000 in restitution to 56 clients, along with some $61,000 as costs of the disciplinary proceeding. In addition, the tribunal directed the lawyer to reimburse the state bar’s client security fund for almost $1.4 million that it paid to 305 other clients.
The lawyer filed a chapter 7 petition and received a general discharge. The lawyer filed a complaint in bankruptcy court contending that all of his debts arising from the disciplinary proceedings were discharged under Section 523(a)(7).
The bankruptcy court held that the $200,000 was discharged because restitution was not payable to a governmental unit.
Interpolating Kelly, the bankruptcy court decided that the $1.4 million was nondischargeable as a penalty imposed to further the state’s interest in rehabilitating miscreant attorneys. Similarly, the bankruptcy court ruled that the $61,000 was not dischargeable under In re Findley, 593 F.3d 1048 (9th Cir. 2010).
Findley is now in the Ninth Circuit’s crosshairs. Here’s how Findley came about.
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 abandoned Taggart and held in Findley that disciplinary costs were nondischargeable because they were no longer compensation for pecuniary loss.
In the case involving the dischargeability of the $61,000, $200,000 and $1.4 million, the bankruptcy court certified a direct appeal to the circuit. The Ninth Circuit accepted the appeal without an interim stop in district court or the BAP.
Reimbursement Is Dischargeable
On appeal, the state bar did not challenge the ruling that the $200,000 awarded to the former clients was dischargeable. In his August 1 opinion, Circuit Judge Jay S. Bybee was charged with ruling on the dischargeability of the $61,000 in costs and the $1.4 million in reimbursement to the bar fund.
Regarding reimbursement of the $1.4 million, Judge Bybee framed the issue under Section 523(a)(7) as whether the debt was a “fine, penalty, or forfeiture” and not “compensation for actual pecuniary loss.”
Reciting the history of Taggart and Findley, Judge Bybee said that the costs of a disciplinary proceeding are penal and rehabilitative and thus nondischargeable.
With the principles of Findley in mind, Judge Bybee analyzed the dischargeability of reimbursing the bar fund for the $1.4 million it paid to the lawyer’s former clients. He trotted out several provisions in California law saying that reimbursement was designed to address pecuniary loss. “Considering the totality of the [reimbursement] program,” he held that “any reimbursement to the [fund] is payable to and for the benefit of the State bar and is compensation for the [fund’s] actual pecuniary loss, . . . even if reimbursement serves some penal or rehabilitative purpose.”
Arguably narrowing Findley, Judge Bybee said that his conclusion was “controlled by § 523(a)(7).” He reversed the bankruptcy court by holding that the obligation to reimburse the bar fund was dischargeable.
Costs Are Not Dischargeable
In less than one page, Judge Bybee dealt with the dischargeability of the $61,000 in costs for the disciplinary proceeding. The lawyer conceded that the bankruptcy court was bound by Findley.
Tersely, Judge Bybee upheld the ruling of nondischargeability by saying, “We are bound by our decision in In re Findley.”
Seeming to invite a petition for rehearing en banc, Judge Bybee said, “If [the lawyer] wishes to pursue this issue, he must do so through a petition for rehearing en banc.”
The Ninth Circuit and its Bankruptcy Appellate Panel have been at the forefront in criticizing Kelly v. Robinson, where the Supreme Court arguably departed from the language of the statute to achieve a socially desirable result. A panel of the Ninth Circuit appears to be urging a disbarred lawyer to file a motion for rehearing en banc where the appeals court could limit Kelly strictly to its facts and overturn Ninth Circuit precedent based on Kelly.
Kelly and its progeny interpret Section 523(a)(7), which 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.]