Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-14-56622/USCOURTS-ca9-14-56622-0/pdf.json

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

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FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

IN RE MARILYN S. SCHEER,

Debtor,

MARILYN S. SCHEER,

Appellant,

v.

THE STATE BAR OF CALIFORNIA;

LUIS J. RODRIGUEZ, individually and

in his official capacity as President

of the Board of Trustees of the State

Bar of California; JOSEPH DUNN,

individually and in his official

capacity as Executive Director of the

State Bar of California; JOANN

REMKE, in her official capacity as

Presiding Judge of the State Bar of

California; KENNETH E. BACON,

individually and in his official

capacity as Presiding Arbitrator of

the State Bar of California,

Appellees.

No. 14-56622

D.C. No.

2:14-cv-04829-

JFW

OPINION

Appeal from the United States District Court

for the Central District of California

John F. Walter, District Judge, Presiding

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2 IN RE SCHEER

Argued and Submitted

February 11, 2016—Pasadena, California

Filed April 14, 2016

Before: Marsha S. Berzon and John B. Owens, Circuit

Judges and Algenon L. Marbley,

*

 District Judge.

Opinion by Judge Owens

SUMMARY**

Bankruptcy

The panel reversed the district court’s affirmance of the

bankruptcy court’s decision that a suspended attorney’s

debt was nondischargeable in bankruptcy under 11 U.S.C.

§ 523(a)(7).

The state bar suspended the attorney for failure to pay a

debt under an arbitration award concerning improperly

collected client fees. She sought reinstatement of her law

license under 11 U.S.C. § 525(a), which prohibits the

government from revoking or refusing to renew a license

“solely because” an individual has not paid a debt that is

dischargeable in bankruptcy.

* The Honorable Algenon L. Marbley, District Judge for the U.S.

District Court for the Southern District of Ohio, sitting by designation.

** This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

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IN RE SCHEER 3

The panel held that the debt did not fall within the scope

of § 523(a)(7), which excepts from bankruptcy discharge a

debt that “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.” The panel

remanded the case to the district court.

COUNSEL

Marilyn S. Scheer (argued), Woodland Hills, California, pro

se Appellant.

Michael von Loewenfeldt (argued), Kerr & Wagstaffe LLP,

San Francisco, California; Kevin W. Coleman and Todd B.

Holvick, Schnader Harrison Segal & Lewis LLP, San

Francisco, California, for Appellees.

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4 IN RE SCHEER

OPINION

OWENS, Circuit Judge:

Pro se appellant Marilyn Scheer, an attorney with a

suspended California law license, contends that the district

court erred when it held that her debt to a former client was

nondischargeable under 11 U.S.C. § 523(a)(7). We agree

with Scheer that this particular type of debt does not fall

within the scope of section 523(a)(7), so we reverse the

district court and remand for further proceedings.

I. BACKGROUND

A. The Client Dispute and State Bar Proceedings

In September 2010, a client named Clark retained Scheer

to help modify his home mortgage loan, and paid her $5500

before any modification occurred. Clark then fired Scheer

and sought return of the $5500 under California’s mandatory

attorney fee arbitration program. In August 2011, the

arbitrator concluded that although Scheer performed

competently, she violated California Civil Code Section

2944.7(a) byreceivingadvanced fees for residential mortgage

modification services. Although the arbitrator believed that

Scheer’s violations were neither willful nor malicious, he

concluded that California law required a full refund of the

improperly collected fees and the arbitration filing fee of

$275, for a total of $5775.

Scheer made a few payments against the arbitration

award, but claimed a lack of funds and failed to pay the

outstanding balance. At Clark’s request, the Presiding

Arbitrator brought an action against Scheer in state bar court

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IN RE SCHEER 5

for failure to pay the award. In February 2013, the state bar

court found that she could pay the award and had failed to

propose a satisfactory payment plan, so it placed her on

involuntary inactive enrollment status. This order suspended

Scheer’s right to practice law until (1) she paid back the

remaining portion of Clark’s funds, and (2) the court granted

a motion to terminate her inactive enrollment. Scheer

unsuccessfully sought relief from the State Bar Court Review

Department and the California Supreme Court.

B. Bankruptcy and District Court Proceedings

In July 2013, Scheer filed for Chapter 7 bankruptcy,

naming both Clark and the State Bar as creditors. Although

notified, neither the State Bar nor Clark objected to the debt

being discharged.1 Scheer then demanded reinstatement of

her law license under 11 U.S.C. § 525(a), which prohibits the

government from revoking or refusing to renew a license

“solely because” an individual has not paid a debt that is

dischargeable or was discharged in bankruptcy. After the

State Bar ignored her demand, she filed suit in the

Bankruptcy Court against the State Bar and certain bar

officials (individually and in their official capacities), arguing

that her suspension violated sections 525(a) and 362. The

bankruptcy court (and later the district court) rejected that

argument, reasoning that the debt was nondischargeable

under section 523(a)(7). Scheer then appealed to our court.

 

1

 Unlike certain debts that fall under § 523(a)(2), (4), or (6), a creditor

is not required to object in bankruptcy court to preserve the right to

payment of a nondischargeable debt under § 523(a)(7). See § 523(c)(1);

4 Collier on Bankruptcy ¶¶ 523.02–03, 523.29 (Alan N. Resnick &Henry

J. Sommer eds., 16th ed.).

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6 IN RE SCHEER

II. STANDARD OF REVIEW

We review de novo a district court’s decision on an

appeal from a bankruptcy court. Barrientos v. Wells Fargo

Bank, N.A., 633 F.3d 1186, 1188 (9th Cir. 2011). Because a

fundamental policy of the Bankruptcy Code is 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).

III. ANALYSIS

Under the usual canons of statutory interpretation, this

would be an easy case. Section 523(a)(7) provides in relevant

part that a debt is excepted from discharge in bankruptcy “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.”

On its face, section 523(a)(7) does not apply to Scheer’s

debt, as it is neither “a fine, penalty, or forfeiture” nor

“payable to and for the benefit of a governmental unit.” 

Rather, it is an arbitration award for a debt between two

private parties, payable to one of them—the familiar chicken

piccata of the bankruptcy petition buffet. Ordinarily, that

would be the end of the story.

Yet Kelly v. Robinson, 479 U.S. 36 (1986), complicates

our inquiry. The Supreme Court in Kelly addressed whether

restitution obligations, imposed as conditions of probation in

state criminal proceedings, were dischargeable. While

acknowledging that the “‘starting point in every case

involving construction of a statute is the language itself,’” the

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IN RE SCHEER 7

Court then pivoted and reasoned that it must interpret the

language of 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.” Id. at 43–44 (quoting in part Blue

Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 756 (1975)

(Powell, J., concurring)).

With the “deep conviction that federal bankruptcy courts

should not invalidate the results of state criminal

proceedings” in mind, the Court then addressed whether the

state court criminal restitution was in fact nondischargeable

under section 523(a)(7). Id. at 47. The Court reasoned that

permitting discharge “would hamper the flexibility of state

criminal judges in choosing the combination of

imprisonment, fines, and restitution most likely to further the

rehabilitative and deterrent goals of state criminal justice

systems,” and that it was unlikely that Congress “would limit

the rehabilitative and deterrent options available to state

criminal judges.” Id. at 49. While restitution resembled a

judgment “for the benefit of” the victim, the Court concluded

that the overall role of restitution in “the State’s interests in

rehabilitation and punishment, rather than the victim’s desire

for compensation,” meant that the criminal restitution

actually operated “for the benefit of” the state as far as

section 523(a)(7) was concerned. Id. at 52–53. The Court

concluded: “The sentence following a criminal conviction

necessarily considers the penal and rehabilitative interests of

the State. Those interests are sufficient to place restitution

orders within the meaning of § 523(a)(7).” Id. at 53.

The Court’s approach in Kelly—to untether statutory

interpretation from the statutory language—has gone the way

of NutraSweet and other relics of the 1980s and led to

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8 IN RE SCHEER

considerable confusion among federal courts and practitioners

about section 523(a)(7)’s scope. For example, some courts

have held that civil restitution payable to the government and

then distributed to fraud victims is dischargeable. See, e.g.,

In re Towers, 162 F.3d 952, 956 (7th Cir. 1998); Hawaii v.

Parsons (In re Parsons), 505 B.R. 540, 544 (Bankr. D. Haw.

2014), recons. denied, No. 09-02937, 2014 WL 1329541

(Bankr. D. Haw. Mar. 19, 2014). And some courts treat Rule

11 sanctions and a default judgment from a legal malpractice

action payable to a private litigant the same way. See Hughes

v. Sanders, 469 F.3d 475, 476–79 (6th Cir. 2006); Wash v.

Moebius (In re Wood), 167 B.R. 83, 88–89 (Bankr. W.D.

Tex. 1994). But other courts hold that the costs of an attorney

disciplinary proceeding, payable to the government, are

nondischargeable, as are funds owed to the State Bar’s Client

Security Fund. See Disciplinary Bd. of the Supreme Court of

Pa. v. Feingold (In re Feingold), 730 F.3d 1268, 1274–76

(11th Cir. 2013); State Bar of Cal. v. Findley (In re Findley),

593 F.3d 1048, 1054 (9th Cir. 2010); Richmond v. N.H.

Supreme Court Comm. on Prof’l Conduct, 542 F.3d 913, 920

(1st Cir. 2008); In re Phillips, No. CV 09-2138 AHM,

2010 WL 4916633 at *5 (C.D. Cal. Dec. 1, 2010). And while

Kelly holds that state criminal restitution is nondischargeable,

a fellow appellate court holds that federal criminal restitution

is dischargeable. Rashid v. Powel (In re Rashid), 210 F.3d

201, 208 (3d Cir. 2000). It is fair to say that the “I know it

when I see it approach” of Kelly has led to predictably

unpredictable results.

To answer the question in this case, we look to Findley,

our court’s latest attempt to apply Kelly to debts incurred by

an attorney. In Findley, the state bar court initiated

disciplinary proceedings against Findley. 593 F.3d at 1049. 

In addition to a suspension and probationary period, the State

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IN RE SCHEER 9

Bar assessed a $14,054 fee for the cost of those proceedings. 

Id. at 1049–50. Findley, like Scheer, refused to pay the

award, which blocked his reinstatement. Id. at 1050. 

Findley, like Scheer, then declared bankruptcy and demanded

reinstatement. Id. The State Bar then filed suit in bankruptcy

court, arguing that the $14,054 fee was nondischargeable. Id.

We sided with the State Bar. While the parties in Findley

agreed that the costs were “payable to and for the benefit of

a governmental unit,” they disagreed over whether they

constituted a fine or penalty, or compensation for actual

pecuniary loss. Id. We reviewed California law, which

expressly provided that the costs were intended to “promote

rehabilitation and to protect the public,” rather than

compensate someone, so they were nondischargeable under

section 523(a)(7). Id. at 1052–54 (quoting Cal. Bus. & Prof.

Code § 6086.10(e)).

When viewed through the Findley lens, our answer to the

question before us is clear. For Scheer, there were no costs

or fees assessed for disciplinary reasons.2 Rather, the debt at

issue was effectively the amount that Scheer improperly

received from a client, but did not pay back. At its core, the

$5775 is not a fine or penalty, but compensation for actual

loss. Try as we might, we cannot stretch the language of

section 523(a)(7) to cover the fee dispute at issue here, even

2 While the underlying arbitration award includes reimbursement of the

$275 arbitration filing fee paid by Clark in addition to the $5500 that he

paid Scheer for legal services, this filing fee does not affect the question

of whether the § 523(a)(7) exception applies to Scheer’s debt. Scheer was

suspended for the wrongful non-payment of the arbitration award, without

inquiry as to why it was imposed or how it was calculated. See generally

Cal. Bus. & Prof. Code § 6203(a) (providing that in a fee arbitration “the

filing fee paid may be allocated between the parties by the arbitrators”).

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10 IN RE SCHEER

though we may disapprove of Scheer’s conduct. The

concerns permitting flexibility in Kelly are absent here. See

United States v. Ron Pair Enters., Inc., 489 U.S. 235, 244–45

(1989) (emphasizing how Kelly’s deviation from the statutory

language “had been animated” by the unique concerns of

state criminal proceedings and informed by related preBankruptcy Code practices that “reflected policy

considerations of great longevity and importance”).

“States traditionallyhave exercised extensive control over

the professional conduct of attorneys,” Middlesex Cty. Ethics

Comm. v. Garden State Bar Ass’n, 457 U.S. 423, 434 (1982);

see also Findley, 593 F.3d at 1053, and the State Bar

contends that ruling in Scheer’s favor undermines its power

to regulate lawyers who violate state law. We of course agree

that the State Bar must keep a close eye on attorneys and

sanction those who misbehave. But the debt in this case was

purely compensatory—an arbitration fee award between

Scheer and her former client. It was not disciplinary. To

categorize the fee dispute in this case as nondischargeable

simply because the State expresses a strong regulatory

interest in a particular industry would render any attorneyclient fee dispute nondischargeable. Moreover, the State’s

logic would extend to fee disputes in any closely regulated

industry—doctors, dentists, chiropractors, barbers,

locksmiths, real estate agents, acupuncturists, tattoo artists,

and so on. We require clearer language in section 523(a)(7)

before we can endorse such an incremental yet horizonless

approach—otherwise, we will end up boiling a frog that

Congress never intended to leave the lily pad.

Consistent with Kelly, Findley, and the statute’s plain

language, we hold that the debt at issue in this case was

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IN RE SCHEER 11

dischargeable, and does not qualify under section 523(a)(7)’s

nondischargeability exception.3

IV. CONCLUSION

Scheer’s performance as an attorney leaves much to be

desired, and it is unsettling that she can use bankruptcy to

avoid refunding her client’s improperly collected fees. But

our moral take on Scheer’s conduct does not control—the

statutory language and policies underlying section 523(a)(7)

do. And under the current state of the law, the debt to her

client does not fall within the section 523(a)(7)

nondischargeability exception.4

REVERSED AND REMANDED.

3

In light of our holding, we remand to the district court to determine

whether Scheer has stated a claim that defendants violated sections 525(a)

and 362. We leave it to the district court to decide whether it will take

judicial notice of separate State Bar disciplinary proceedings against

Scheer. As we do not reach the question of whether Scheer’s claims

survive the State Bar’s motion to dismiss, we deny without prejudice the

State Bar’s request for judicial notice of those proceedings.

4 The Eleventh Amendment does not bar us from determining that

Scheer’s debt was discharged. See Cent. Virginia Cmty. Coll. v. Katz,

546 U.S. 356, 373–78 (2006) (“In ratifying the Bankruptcy Clause, the

States acquiesced in a subordination of whatever sovereign immunity they

might otherwise have asserted in proceedings necessary to effectuate the

in rem jurisdiction of the bankruptcy courts.”).

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