Tag Archives: 11 usc 727(b)

Avoiding Professional Discipline through Bankruptcy

Most debts are discharged in bankruptcy—but not all. In In re Albert-Sheridan, the Ninth Circuit addressed the issue of whether a cost assessment in disciplinary proceedings against a lawyer can be discharged.

The Ninth Circuit says “no.”

Lenore L. Albert-Sheridan was a lawyer in California specializing in consumer advocacy. She got into trouble with the California bar in 2015, and the state bar ordered her license suspended for 30 days in 2016. The suspension order conditioned her reinstatement on the payment of $18,714 to the state bar in ” ‘reasonable costs’ for the disciplinary proceedings under California Business and Professions Code § 6086.10(b)(3).” (Slip Op. at 6.) The order was affirmed on appeal and the suspension went into effect in December 2017.

Ms. Albert filed for bankruptcy in February 2018. Two months into it, she filed an adversary complaint against the state bar to determine whether the cost award in the suspension order would be discharged in her bankruptcy. The bankruptcy court found in favor of the state bar and held the cost award to be non-dischargeable. The bankruptcy appellate panel and the Ninth Circuit both affirmed.

In a chapter 7 bankruptcy, the basic rule of dischargeability is that all of a debtor’s prepetition debts will be discharged in bankruptcy, unless they fit into one of the exceptions in section 523. 11 U.S.C. § 727(b). Among other things, section 523 provides:

A discharge under section 727 . . . of this title does not discharge an individual debtor from any debt . . . 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, other than a tax penalty . . . .

11 U.S.C. § 523(a)(7).

There are three elements to non-dischargeability under section 523(a)(7):

  1. the debt is a fine, penalty, or forfeiture,
  2. that is payable to and for the benefit of a governmental unit, and
  3. that does not constitute compensation for actual pecuniary costs.

(Slip Op. at 10.)

Section 6086.10(a) of the California Business and Professions Code requires that “Any order . . . imposing discipline . . . shall include a direction that the licensee shall pay costs.” Subsection (b) provides how to calcalute the costs:

(b) The costs required to be imposed pursuant to this section include all of the following:
(1) The actual expense incurred by the State Bar for the original and copies of any reporter’s transcript of the State Bar proceedings, and any fee paid for the services of the reporter.
(2) All expenses paid by the State Bar which would qualify as taxable costs recoverable in civil proceedings.
(3) The charges determined by the State Bar to be “reasonable costs” of investigation, hearing, and review. These amounts shall serve to defray the costs, other than fees for the services of attorneys or experts, of the State Bar in the preparation or hearing of disciplinary proceedings, and costs incurred in the administrative processing of the disciplinary proceeding and in the administration of the Client Security Fund.

Cal. Bus. & Prof. Code § 6086.10(b) (boldface added).

Your humble writer suggests that the cost award under section 6086.10(b) is tied to costs and expenses actually incurred by the state bar, and therefore should “constitute compensation for actual pecuniary loss.” That would seem to pull the cost award outside the scope of section 523(a)(7), rendering the cost award dischargeable in bankruptcy.

But case law said otherwise. The Ninth Circuit addressed this question head-on in 2010 in In re Findley, 593 F.3d 1048 (9th Cir. 2010). There, the court looked at the cost award in light of section 6086.10(e), which explains that “costs imposed pursuant to this section are penalties . . . to promote rehabilitation and to protect the public.” Cal. Bus. & Prof. Code § 6086.10(e). Apparently, calling a cost award a penalty does the trick: “we conclude that [subsection (e) is] sufficient to render attorney discipline costs imposed by the California State Bar Court non-dischargeable in bankruptcy pursuant to 11 U.S.C. § 523(a)(7).” Findley, 593 F.3d at 1054.

According to Judge Bumatay, “Findley stands on all fours with this case.” (Slip Op. at 9.) The cost award was non-dischargeable in Findley, so it is non-dischargeable in the case at bar.

The Fifth Circuit says “maybe.”

Things are not so simple in the Fifth Circuit: “Even where a debt bears a label that fits within § 523(a)(7)’s definition of dischargeable debts, we have looked to the nature and purpose of the debt and declined to declare it nondischargeable.” In re Schaffer, 515 F.3d 424, 428 (5th Cir. 2008).

In Schaffer, the Louisiana State Board of Dentistry disciplined a practicing dentist by revoking his license and ordering him to pay “all costs of the Committee Proceedings including, but not limited to, stenographer fees, attorneys’ fees, investigative fees and expenses, and witness fees and expenses and the per diem and expenses of the Committee members.” Schaffer, 515 F.3d at 426. The order also provided that the Board would not consider any re-applications by him untli he had paid the costs, with interest. Five years later, he filed for bankruptcy, and the board brought an adversary proceeding to have the cost award declared non-dischargeable.

The bankruptcy court and the district court held in favor of the Board, but the Fifth Circuit reversed. First, the cost award was not a “fine, penalty, or forfeiture.” The statute authorizing the cost award had authorized both fines and cost awards. It stands to reason, then, that a cost award is not a fine. Second, the language of the statute and the order made clear that the cost award “assessed costs to repay some of the Board’s expenses incurred in the proceeding.” Schaffer, 515 F.3d at 433–34. Therefore, the cost award constituted compensation for actual pecuniary losses.

In the Fifth Circuit, at least, a cost award assessed as part of professional disciplinary proceedings may be discharged in the right circumstances.