Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_23-cv-01231/USCOURTS-caed-2_23-cv-01231-3/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:1334 Bankruptcy Appeal

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UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF CALIFORNIA

In Re ERNESTO PATACSIL, et al.,

Debtors.

District Case No. 2:23-cv-01231-DJC

Bankr. Case No. 20-23457-A-7

Bankr. Adversary Case No. 20-02167-A

ORDER 

JOSEPH CABARDO, et al.,

Appellants,

v.

ERNESTO PATACSIL, et al.,

Appellees.

This appeal asks whether the bankruptcy court in Appellant’s adversary 

proceeding was correct in holding that only 75% of the California Private Attorneys 

General Act (“PAGA”) penalties awarded in Appellants’ district court case against 

Appellees were non-dischargeable under 11 U.S.C. § 523(a)(7). Section 523(a)(7)

states that bankruptcy courts may not discharge non-compensatory penalties payable 

to and for the benefit of a governmental unit. The bankruptcy court held that 75% of 

the PAGA penalties, or the portion of the penalties statutorily payable to the State of 

California, were non-dischargeable under section 523(a)(7), while the remaining 25%, 

or the portion statutorily payable to aggrieved employees, were not. However, 

Appellants argue that 100% of the PAGA penalties, as well as their attorneys’ fees, are 

Case 2:23-cv-01231-DJC Document 25 Filed 12/16/24 Page 1 of 15
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non-dischargeable under section 523(a)(7) as they are payable in their entirety to the 

State as the real party in interest in the action. 

The Court concludes that, under the plain meaning of section 523(a)(7), while

the 25% of the PAGA penalties awarded to the aggrieved employees are a penalty 

and are for the benefit of a governmental unit, they are not payable to a governmental 

unit and are therefore subject to discharge. Thus, the Court will affirm the bankruptcy 

court’s order and will remand this matter to the bankruptcy court for further 

proceedings consistent with this order. 

FACTUAL AND PROCEDURAL BACKGROUND

Appellants are former employees of Appellees, who owned and ran nursing 

homes for the disabled. (Appellants’ Br. (ECF No. 14) at 14.) Appellants filed suit 

against Appellees on June 26, 2012, in the Eastern District of California, bringing

claims under the Fair Labor Standards Act, 29 U.S.C. §§ 201–219; California Labor 

Code, Cal. Lab. Code §§ 200–1197; California Unfair Competition Law, Cal. Bus. & 

Prof. Code §§ 17200–17209; and PAGA, Cal. Lab. Code § 2699 et seq. (Id. at 9; 

Appellants’ R., Volume 2 (ECF No. 15-2), at 306.

1

) The matter went to trial on February 

3, 2020, and on March 6, 2020, the jury returned a verdict for Appellants on all causes 

of action, awarding them damages. (Appellants’ Br. at 9.) The district court awarded

Appellants $893,815.62 in damages and $1,077,218.62 in attorneys’ fees. 

(Appellants’ R., Volume 2, at 305–312.) Of the damages awarded, $79,524.53 were 

PAGA penalties awarded to Appellants and the State of California. (Id. at 315.) 

On July 14, 2020, Appellees filed for Chapter 7 bankruptcy. (Appellants’ Br. at 

10.) Appellants subsequently filed a bankruptcy adversary proceeding seeking a 

determination of the dischargeability2 of their damages and attorneys’ fees recovered

1 Citations to Appellants’ Record refer to the page number in the Excerpts of Record, not original page 

numbers.

2 A discharge in bankruptcy releases a debtor from personal liability with respect to any discharged 

debt by voiding any past or future judgments on the debt and enjoining creditors from attempting to 

collect or to recover the debt. See Tenn. Student Assistance Corp. v. Hood, 541 U.S. 440, 447 (2004).

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in the district court case. (Id. at 11.) Appellants argued that the PAGA penalties and 

accompanying attorneys’ fees were non-dischargeable under 11 U.S.C. § 523(a)(7). 

(Id.) The bankruptcy court, however, held that only 75% of the PAGA penalties, the 

portion earmarked for the State of California, were non-dischargeable under 

section 523(a)(7). (Id. at 13.) The court also held that attorneys’ fees awarded under 

PAGA were not excepted from discharge. (Id.)

Appellants moved to appeal that order and were granted leave to appeal by 

this Court. (ECF Nos. 4, 17.) Appellants argue that the bankruptcy court erred in 

concluding only 75% of the penalties awarded under PAGA fall within the discharge 

exception set forth in 11 U.S.C. § 523(a)(7) and that attorneys’ fees awarded under

PAGA do not fall within that exception. (Appellants’ Br. at 14–15.)

The Court held argument on August 8, 2024, with Caroline Hill appearing for 

Appellants, and Charles Hastings and Natali Ron appearing for Appellees. The Court 

took the matter under submission.

UNDERSTANDING THE CALIFORNIA PRIVATE ATTORNEY GENERAL’S ACT

The California legislature enacted PAGA over 20 years ago because it was in 

the public interest to allow aggrieved employees,3 acting as private attorneys general, 

to recover civil penalties for Labor Code violations “with the understanding that labor 

law enforcement agencies were to retain primacy over private enforcement efforts.” 

Baumann v. Chase Inv. Servs. Corp., 747 F.3d 1117, 1121 (9th Cir. 2014) (quoting Arias 

v. Superior Ct., 46 Cal. 4th 969, 980 (2009)). PAGA addressed two core problems that 

hampered the prosecution of labor act violations. Iskanian v. CLS Transp. L.A., LLC, 59 

Cal. 4th 348, 379 (2014). First, district attorneys were reluctant to prosecute labor law 

violations because they were considered low priorities. Id. Second, there was a 

shortage of government resources that could not keep pace with the sprawling and 

often “underground” economy. Id. The legislature’s solution was to “deputize and 

3 An aggrieved employee is any person who was employed by the alleged violator and against whom 

one or more of the alleged violations was committed. Lab. Code § 2699(c)(1).

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incentivize employees uniquely positioned to detect and prosecute [] violations . . . .”

Id. at 390. 

PAGA allows aggrieved employees to sue an employer personally and on 

behalf of other current or former employees to recover civil penalties for Labor Code 

violations if the California Labor and Workforce Development Agency (“LWDA”) 

declines to investigate or prosecute alleged labor law violations. Baumann, 747 F.3d 

at 1121; see also Lab. Code § 2699(a). The LWDA keeps 75% of any penalties 

imposed leaving the remaining 25% for aggrieved employees. Arias, 46 Cal. 4th at

980–81. Aggrieved employees who prevail in a PAGA action are also entitled to 

recover reasonable attorneys’ fees and costs. Lab. Code § 2699(k)(1).

The California Supreme Court describes PAGA as a “procedural statute” which 

allows aggrieved employees to recover civil penalties “that otherwise would be 

sought by state labor law enforcement agencies.” Amalgamated Transit Union, Local 

1756, AFL-CIO v. Superior Ct., 46 Cal. 4th 993, 1003 (2009). In bringing a PAGA 

action, “the aggrieved employee acts as the proxy or agent of state labor law 

enforcement agencies, representing the same legal right and interest as those 

agencies, in a proceeding that is designed to protect the public, not to benefit private 

parties.” Id. PAGA plaintiffs do not have property rights in their cases and cannot 

assign their interests in them. Id. Rather, the State of California is considered the real 

party in interest. Kim v. Reins Int’l Cal., Inc., 9 Cal. 5th 73, 81 (2020).

JURISDICTION

District courts have jurisdiction to hear appeals “from final judgments, orders, 

and decrees . . . of bankruptcy judges . . . .” 28 U.S.C. § 158(a). District courts also 

have appellate jurisdiction to consider a bankruptcy court’s interlocutory orders and 

decrees if the district court has granted leave to appeal. Id. That said, such appeals 

“shall be heard by a judge panel of the bankruptcy appellate panel” unless “any other 

party elects . . . to have such appeal heard by the district court.” Id. § 158(c)(1)(B). The

Court has jurisdiction to hear this appeal of the bankruptcy court’s interlocutory order

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because the Court has granted leave to appeal and Appellants have elected to have 

the appeal heard in this Court. 

ISSUES ON APPEAL

1. Whether the bankruptcy court erred in concluding that only 75% of the civil 

penalties awarded under PAGA fall within the exception to discharge set forth in 11 

U.S.C. § 523(a)(7); and

2. Whether the bankruptcy court erred in concluding that attorneys’ fees 

awarded under PAGA fall outside the exception to discharge set forth in 11 U.S.C. 

§ 523(a)(7).

STANDARD OF REVIEW

On appeal, a district court may “affirm, modify, or reverse a bankruptcy judge’s 

judgment, order or decree or remand with instructions for further proceedings.” 

Cesar v. Charter Adjustments Corp., 519 B.R. 792, 795 (E.D. Cal. 2014). Legal 

conclusions are reviewed de novo, while factual determinations are reviewed under a 

“clearly erroneous” standard. Murray v. Bammer (In re Bammer), 131 F.3d 788, 792 

(9th Cir. 1997) (en banc). 

ANALYSIS

I. Appellants’ Article III Standing

Appellees argue Appellants lack standing to pursue this appeal. (See

Appellees’ Br. (ECF No. 20) at 12.) The Court disagrees. Article III standing requires 

that a plaintiff has “(1) suffered an injury in fact, (2) that is fairly traceable to the 

challenged conduct of the defendant, and (3) that is likely to be redressed by a 

favorable judicial decision.” Spokeo, Inc. v. Robins, 578 U.S. 330, 338 (2016). Qui tam

actions, which permit private plaintiffs to sue in the government’s name for a violation 

of a public right, are traditionally a “well-established exception” to the traditional 

Article III analysis because it is the government’s injury that confers standing upon the 

private person. Magadia v. Wal-Mart Assocs., Inc., 999 F.3d 668, 674 (9th Cir. 2021). 

PAGA is a type of qui tam action. Iskanian, 59 Cal. 4th at 360. That said, the Ninth 

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Circuit has held that PAGA plaintiffs must demonstrate traditional Article III standing

because PAGA’s features “depart from the traditional criteria of qui tam statutes.” 

Magadia, 999 F.3d at 675–78. Thus, Appellants are subject to Article III’s 

requirements.

“In the context of an appeal from a bankruptcy court order, appellants must 

demonstrate injury in fact by showing . . . that the order appealed must have 

detrimentally impaired their rights or increased their economic burdens.” Greenfield 

v. Greenfield Sheley (In re Greenfield), No. ID-21-1150-SFB, 2022 WL 1115412, at *3

(9th Cir. B.A.P. Apr. 14, 2022). Appellants have shown such an injury because, under 

the bankruptcy court’s current order, they and other aggrieved employees will not 

recover any PAGA penalties. Further, Appellants’ injury is traceable to the bankruptcy 

court’s ruling because that ruling limits their recovery. Finally, Appellants’ injury is 

likely to be redressed by a favorable judicial decision should this Court reverse the 

bankruptcy court’s ruling because Appellants and other aggrieved employees will

recover PAGA penalties. 

Thus, Appellants have established Article III standing.

II. Only 75% of the Civil Penalties Awarded under PAGA are NonDischargeable under 11 U.S.C. § 523(a)(7)

Appellants argue all of their PAGA penalties are non-dischargeable in 

bankruptcy because the penalties are non-compensatory and are payable to and for 

the benefit of a governmental unit under 11 U.S.C. § 523(a)(7). (Appellants’ Br. at 15–

28.) In relevant part, section 523 provides:

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 

1328(b) of this title does not discharge an individual debtor 

from any debt . . . 

(7) 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 . . . .

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11 U.S.C. § 523(a)(7). Courts have understood section 523(a)(7) to encompass three 

elements each of which must be satisfied before a debt is considered nondischargeable. The non-dischargeable debt “must (1) be a fine, penalty, or forfeiture; 

(2) be payable to and for the benefit of a governmental unit; and (3) not constitute 

compensation for actual pecuniary costs.” Albert-Sheridan v. State Bar of Cal. (In re 

Albert-Sheridan), 960 F.3d 1188, 1193 (9th Cir. 2020). Because the Bankruptcy Code 

is intended to afford debtors a fresh start, “exceptions to discharge should be strictly 

construed against an objecting creditor and in favor of the debtor.” Snoke v. Riso (In 

re Riso), 978 F.2d 1151, 1154 (9th Cir. 1992).

The Court finds that only 75% of the PAGA penalties awarded here satisfy these 

elements, as only 75% of the penalties are payable to a governmental unit. Thus, the 

Court will affirm the bankruptcy court’s ruling as to the non-dischargeability of only 

75% of the PAGA penalties under section 523(a)(7).

A. PAGA Penalties are a “Fine, Penalty, or Forefeiture,” and Not 

“Compensation for Actual Pecuniary Loss” 

It is undisputed that PAGA penalties satisfy the first and third elements above. 

“PAGA plaintiffs are private attorneys general who, stepping into the shoes of the 

LWDA, bring claims on behalf of the state agency” and recover civil penalties on 

behalf of the LWDA. Baumann, 747 F.3d at 1123. PAGA’s penalties are calculated to 

punish employers for wrongdoing and deter violations. Adolph v. Uber Techs., Inc., 

14 Cal. 5th 1104, 1117 (2023). PAGA was not designed to compensate employees,

nor can the penalties recovered be considered “damages” in the compensatory 

sense. Id.; see also Arias, 46 Cal. 4th at 986. 

Thus, PAGA awards are penalties and not compensation for actual loss, a 

conclusion which the bankruptcy court shared. (See Appellants’ R., Volume 1 (ECF 

No. 15-1), at 19.)

////

////

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B. PAGA Penalties are “For the Benefit of,” but not “Payable to,” a 

“Governmental Unit”

The remaining question is whether all of the PAGA penalties can be considered 

“payable to and for the benefit of” the LWDA such that they are non-dischargeable. 

This question has not been resolved by the Ninth Circuit. Thus, this Court begins its 

analysis with the text of the statute. Duncan v. Walker, 533 U.S. 167, 172 (2001). We 

presume that Congress “says in a statute what it means and means in a statute what it 

says there.” Conn. Nat'l Bank v. Germain, 503 U.S. 249, 253–54 (1992). The plain 

meaning of a statute controls where that meaning is unambiguous. See Harris Tr. & 

Sav. Bank v. Salomon Smith Barney, Inc., 530 U.S. 238, 254 (2000). 

The Court finds that under the plain meaning of 11 U.S.C. § 523(a)(7), PAGA 

penalties are for the benefit of a governmental unit. The Bankruptcy Code defines a 

“governmental unit” as the:

United States; State; Commonwealth; District; Territory; 

municipality; foreign state; department, agency, or 

instrumentality of the United States (but not a United States 

trustee while serving as a trustee in a case under this title), a 

State, a Commonwealth, a District, a Territory, a municipality, 

or a foreign state; or other foreign or domestic government.

11 U.S.C. § 101(27). The LWDA meets this definition because it is an executive branch 

agency of the State of California. See Cal. Govt. Code §§ 15554–15562; see also 

Medina v. Poel, 523 B.R. 820, 826 (E.D. Cal. 2015). Courts have held that the context 

in which the word “benefit” appears, i.e., “payable to and for the benefit of a 

governmental unit,” implies that the benefit in question is the benefit of the money 

paid to the governmental unit. See, e.g., In re Towers, 162 F.3d 952, 954 (7th Cir. 

1998); Rashid v. Powell (In re Rashid), 210 F.3d 201, 208 (3d Cir. 2000). That is, the 

“word ‘payable’ clearly casts an economic light over the phrase that suggests that the 

benefit must be conferred from the monetary value of the debt to be paid by the 

defendant and not [] more abstract benefit[s] . . . .” In re Rashid, 210 F.3d at 208

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(holding restitution award was dischargeable because criminal deterrence did not 

qualify as a “benefit” under section 523(a)(7)). 

The Court finds that the penalties awarded under PAGA meet this requirement. 

First, PAGA provides that 75% of the penalties awarded in a PAGA action be 

distributed to the LWDA “for enforcement of labor laws . . . [and] education of 

employers and employees about their rights and responsibilities under this code, to 

be continuously appropriated to supplement and not supplant the funding to the 

agency for those purposes.” Lab. Code § 2699(m). This is clearly a case where the 

funds will “benefit” the LWDA. Second, as to the 25% of penalties distributed to 

aggrieved employees, the California Legislature enacted PAGA in recognition of the 

State’s inadequate resources to enforce its labor laws. Arias, 46 Cal. 4th at 980. PAGA 

allocates 25% of the civil penalties recovered to “aggrieved employees” to give 

individual employees an incentive to sue on the LWDA’s behalf, rather than to award

“victim-specific relief.” Whitworth v. SolarCity Corp., 336 F. Supp. 3d 1119, 1126 (N.D. 

Cal. Aug. 21, 2018); Iskanian, 59 Cal. 4th at 387–88. Although 25% of PAGA penalties 

are recovered by aggrieved employees rather than the LWDA, this incentive benefits 

the LWDA by decreasing its enforcement costs while expanding its enforcement 

powers. Thus, the Court finds that the PAGA penalties awarded benefit the LWDA.

At the same time, the Court agrees with the bankruptcy court that only 75% of 

the PAGA penalties, the portion recovered by the LWDA, can be considered “payable 

to” a governmental unit. In so concluding, the bankruptcy court analyzed circuit 

precedent and found that courts consistently apply the “payable to” analysis to the 

end recipient of a debt when considering whether that debt is dischargeable under

section 523(a)(7). (Appellants’ R., Volume 1, at 20–24.) Applying that test, the 

bankruptcy court concluded that 75% of Appellants’ PAGA penalties were nondischargeable under section 532(a)(7) because that 75% would be paid to the LWDA, 

a governmental unit. (Id. at 24.) As for the remaining penalties, the bankruptcy court

noted that “[f]ew, if any, cases directly have considered the amount of a civil penalty 

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that may be excepted from discharge under [section] 523(a)(7) when a qui tam relator 

and a governmental unit split the amount awarded.” (Id. at 25.) However, the 

bankruptcy court found “long-standing case law in other contexts restricts the fines, 

penalties and forfeitures excepted from discharge to the amount that the 

governmental unit retains.” (Id. at 25–26 (collecting cases).) Thus, the bankruptcy 

court concluded that only the portion of PAGA penalties allocated to the LWDA were

non-dischargeable under section 523(a)(7). (Id. at 26.)

The Court agrees with the bankruptcy court’s reasoning. Labor Code section 

2699 provides that PAGA penalties be distributed “[75] percent to the Labor and 

Workforce Development Agency for enforcement of labor laws, including the 

administration of this part, and for education of employers and employees about their 

rights and responsibilities under this code, to be continuously appropriated to 

supplement and not supplant the funding to the agency for those purposes; and [25]

percent to the aggrieved employees.”

4

 Lab. Code § 2699(m). Thus, under California 

law, 25% of PAGA penalties are paid to aggrieved employees, who are private parties. 

In other words, the State has statutorily relinquished their claim to 25% of the PAGA 

penalties. Appellants need not pay any portion of that 25% to the State, nor does the 

State have any ability to recover those funds. 

By contrast, in In re Stevens v. Commercial Collection Services (In re Stevens), 

cited by Appellants, the court held that unpaid traffic fines were non-dischargeable 

under section 523(a)(7) even though they were being collected by a private debt 

collector because the private debt collector was acting purely on the county’s behalf. 

184 B.R. 584, 586 (Bankr. W.D. Wash. 1995). As the court reasoned, “pursuant to its 

contract with the [c]ounty, the defendant is the [c]ounty’s agent for purposes of 

collection, and the [c]ounty receives 100% of sums the defendant collects.” Id. Thus, 

4 This amount has recently been adjusted such that the LWDA now recovers 65% of the penalties, while 

aggrieved employees recover 35%. See Lab. Code § 2699(m).

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the court found that the unpaid traffic fines were both payable to and for the benefit of 

the county because the debt would ultimately be remitted to the county. Id.

On the other hand, in In re Dickerson, another case referenced by Appellants, 

the court held that unpaid fines associated with criminal charges were dischargeable 

when a collection agency had been assigned to collect that debt by the county

because the county would not receive the funds. 510 B.R. 289, 292, 299–300 (Bankr. 

D. Idaho 2014). As the court explained, the debtors had already paid all but $150 of 

the criminal fines to the county well before the collection agency instituted the state 

court action against debtors. Id. at 300. Therefore, “most of what [the collection 

agency] was attempting to recover from [d]ebtors represented fees and statutory 

costs associated with the original fines, or in other words, amounts that would be paid 

to [the collection agency], not to the [c]ounty.” Id. at 301. As such, the collection 

agency was not seeking to recover from the debtors on the county’s behalf; rather, the 

collection agency was “asserting its own legal right to collect from them.” Id. at 299. 

Because the debt would not be remitted to the county, the court held that it was not a 

fine or penalty payable to and for the benefit of a governmental unit. Id. at 299–301.

As In re Stevens and In re Dickerson demonstrate, the end recipient of the debt 

dictates its dischargeability under section 523(a)(7). Here, much like In re Dickerson, 

25% of Appellants’ PAGA penalties have been collected and will be retained by 

private parties. Thus, under section 523(a)(7)’s plain terms, 25% of PAGA penalties 

are not “payable to” a governmental unit.

The sole exception to the end recipient rule appears to be Kelly v. Robinson, 

479 U.S. 36 (1986), in which the Supreme Court held that restitution ordered in a 

criminal case is a penalty payable to and for the benefit of a governmental unit even 

though restitution is often paid to the victims of crimes. Id. at 50–53. The Supreme 

Court reasoned that it must interpret the language of section 523(a)(7) “in light of the 

history of bankruptcy court deference to criminal judgments and in light of the 

interests of the States in unfettered administration of their criminal justice systems,” 

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ultimately finding that a “sentence following a criminal conviction necessarily 

considers the penal and rehabilitative interests of the State . . . [which] are sufficient to 

place restitution orders within the meaning of [section] 523(a)(7).” 479 U.S. at 43–44, 

53. 

The Ninth Circuit, however, has since cautioned against extending Kelly’s

approach beyond the criminal restitution context as it “untether[ed] statutory 

interpretation from the statutory language,” and “led to considerable confusion 

among federal courts and practitioners about section 523(a)(7)’s scope.” Scheer v. 

The State Bar of Cal. (In re Scheer), 819 F.3d 1206, 1210 (9th Cir. 2016). For example, 

in In re Albert-Sheridan, the Ninth Circuit considered whether discovery sanctions 

imposed on an attorney suspended for misconduct were dischargeable debts under 

section 523(a)(7). 960 F.3d at 1191–92. The court found that they were not, reasoning 

that the law governing discovery sanctions did not provide for the sanctions to be 

paid to the court or any other governmental entity, but to “anyone” incurring an 

expense as a result of discovery abuse. Id. at 1193. The attorney had been ordered to 

pay the sanctions to the plaintiff, a private party. Id. Thus, the discovery sanctions 

were not payable to a governmental unit. Id. 

The court addressed the Supreme Court’s decision in Kelly and found that it did 

not alter the court’s holding as Kelly was “animated by a ‘long history’ of judicial 

exceptions for criminal restitution payments in discharge statutes and a concern for 

‘disturb[ing] state criminal proceedings.’” Id. at 1195 (quoting State Comp. Ins. Fund 

v. Zamora (In re Silverman), 616 F.3d 1001, 1007 (9th Cir. 2010)). The court found that 

those rationales did not apply to the debt at hand, as the attorney’s debt 

compensated a private party for the costs of litigating civil discovery motions for its 

own benefit. Id. As the court explained, “[l]ike 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. Thus, we have sought to cabin Kelly's reach and refused to 

expand its rationale . . . .” Id. Kelly’s rationale is similarly inapplicable here, as this 

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case does not involve criminal restitution payments, and the Court sees no reason to 

extend Kelly’s atextual approach. 

In reaching this conclusion, the Court acknowledges its holding is in tension 

with the California Legislature’s goals in enacting PAGA. PAGA was enacted to

address the underenforcement of Labor Code violations by incentivizing aggrieved 

employees to bring employment actions in return for a share of the PAGA penalties. 

However, as highlighted in Appellants’ briefing, this incentive may prove less

appetizing for hungry litigants if the portion of PAGA penalties they recover can be 

discharged in bankruptcy. (Appellants’ Br. at 32–33.) This ruling may also be in 

tension with the California Supreme Court’s view of PAGA. That court has consistently 

held that the State is the real party in interest in any PAGA action and that any 

penalties awarded are the legal property of the State. Amalgamated Transit Union, 46 

Cal. 4th at 1003; see also Turrieta v. Lyft, Inc., 69 Cal. App. 5th 955, 972 (2021) (an 

employee’s “ability to file PAGA claims on behalf of the state does not convert the 

state’s interest into their own or render them real parties in interest”). Under this 

precedent, Appellants argue that 100% of their PAGA penalties are payable to the 

State because the State is the true creditor of the penalties awarded. (Appellants’ Br. 

at 17–19.) 

Notwithstanding these considerations, the Court is bound by the plain 

language of section 523(a)(7) and must “presume that [the] legislature says in a statute 

what it means and means in a statute what it says there.” BedRoc Ltd. v. United States, 

541 U.S. 176, 183 (2004) (plurality opinion) (quoting Conn. Nat’l Bank, 503 U.S. 253-

54) (internal quotation marks omitted). The Court is also guided by the principle that 

bankruptcy is intended to afford debtors a fresh start and that, as a result, exceptions 

to discharge must be interpreted narrowly. Hawkins v. Franchise Tax Bd. of California, 

769 F.3d 662, 666 (9th Cir. 2014). Accordingly, the Court will affirm the bankruptcy 

court’s order and finds that only the 75% of the PAGA penalties payable to the LWDA

are non-dischargeable under 11 U.S.C. § 523(a)(7).

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III. Attorneys’ Fees Awarded under PAGA are Dischargeable 

Appellants argue their attorneys’ fees awarded under PAGA are also nondischargeable under 11 U.S.C. § 523(a)(7) because the PAGA statute’s purpose is 

punitive and employees who prevail in a PAGA action are entitled to attorneys’ fees as 

of right, thus the attorneys’ fees are part of the penal fine levied against an employer 

who violates the Labor Code. (Appellants’ Br. at 28–33.) Accordingly, Appellants 

contend the attorneys’ fees are non-compensatory penalties payable to and for the 

benefit of a governmental unit.

For the reasons stated above, the Court finds that the attorneys’ fees awarded 

here are not “payable to” a governmental unit under section 523(a)(7). The fees in 

question will not be recovered by the LWDA. Rather, they are payable to attorneys 

representing Appellants, who are private parties. Courts that have faced the question 

of whether an individual, rather than the government, may except attorneys’ fees from 

discharge under section 523(a)(7) have declined to do so. See, e.g., In re AlbertSheridan, 960 F.3d at 1193–96; cf. Searcy v. Ada County Prosecuting Attorney's Off. (In 

re Searcy), 463 B.R. 888 (9th Cir. B.A.P. 2012), aff’d, 561 F. App’x 644 (9th Cir. 2014)

(holding attorneys’ fees payable to the county’s attorneys for an inmate’s frivolous civil

action against it were non-dischargeable under section 523(a)(7)). Thus, the attorneys’ 

fees do not meet the “payable to” requirement of section 523(a)(7). 

The Court finds that Appellants’ attorneys’ fees do not fall within 11 U.S.C. 

523(a)(7)’s exception to discharge.

CONCLUSION

For the reasons set forth above, the Court hereby:

1. AFFIRMS the bankruptcy court’s June 9, 2023, order entered in 

Adversary Proceeding No. 20-02167-A;

2. HOLDS that 75% of the PAGA penalties awarded in Appellants’ district 

court case are non-dischargeable under 11 U.S.C. § 523(a)(7);

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3. HOLDS that the remaining 25% of the PAGA penalties awarded in

Appellants’ district court case are not excepted from discharge under 11 

U.S.C. § 523(a)(7);

4. HOLDS that Appellants’ attorneys’ fees are not excepted from discharge

under 11 U.S.C. § 523(a)(7);

5. REMANDS this matter to the bankruptcy court for further proceedings 

consistent with this order; and

6. DIRECTS the Clerk of Court to close this case. 

IT IS SO ORDERED.

Dated: December 13, 2024 

Hon. Daniel J. Calabretta

UNITED STATES DISTRICT JUDGE

DJC4 – Patacsil23cv1231.BankrAppeal

Case 2:23-cv-01231-DJC Document 25 Filed 12/16/24 Page 15 of 15