F OR P UBLICATION



### UNIT E D ST AT E S CO URT O F APPE AL S FO R T H E NINT H CIRCUIT

I N R E M A R I L Y N S. S C H E E R , Debtor
,

M A R I L Y N S. S C H E E R , Appellant
,

v

.

T H E S T A T E B A R O F C A L I F O R N I A ; L U I S J

. R O D R

I G U E Z , individually

and in his official capacity

as President of the B oard of Trustees of the State B ar of California; J O S E P H D U N N , individually and in his official capacity as Ex ecutive Director of the State B ar of California; J O A N N R E M K E , in her official capacity

as Presiding J udg e of the State B ar of California; K E

N N E T H E. B A C O N , individually and in his official capacity as Presiding Arbitrator of the State B ar of California, A ppellees. N o. 14-56622

D.C. No. 2:14-cv-04829- J F W

OPI NI ON

A ppeal from the United States District Court for the Central District of California J ohn F . W a lter, District J udg e, PresidingI N R E S C H E E R 2

Arg ued and Submitted F ebruary 1 1, 2016—Pasadena, California

F iled April 14, 2016

B efore: Marsha S. B erz on and J o h n B . Owens, Circuit J u d g es and Alg enon L . Marbley
, * District J udg e

.

Opinion by

J udg e Owens

SUMMARY * *

Bankruptcy

The panel reversed the district court’s affirmance o f t he bankruptcy court’s decision that a suspended attorne y ’s de b t was nondischarg e able in bankruptcy under 11 U .S.C. § 523(a)(7).

T h e state bar suspended the attorney for failure to pay a d e b t under a

n arbitration award concerning improperl y collected client fees. She soug ht reinstatement o f h e r law license under 11 U

. S

. C. § 525(a), which prohibits the
g overnment f

rom revoking or refusing t o r enew a license “solely because” an individual has not paid a d eb t that is discharg eable in bankruptcy

.

* T h e H o n o r ab le A lg en o n L

. Marb ley
, District J u d g e f or th e U .S. District Co u

rt f o r th e So u th ern District o f Oh i o , sittin g b y

d esig n atio n

.

** T h is su m m ary co n stitu

t es n o p ar t o f t h e o p in io n o f th e co u rt. It h as b een p rep ared b y

co u rt staf

f f o r th e co n v en i en ce o f

th e read er.I N R E S C H E E R 3

The panel held that the debt did not f all within the scope of § 523(a)(7), which ex cepts from b a n kruptcy d ischarg e a d e bt that “is f

or a fine, penalty
, or forfeiture pay a ble to a n d for the bene f

i t o f a g overnmental unit, and is not compensation for actual pecuniary loss.” T h e panel remanded the case to the district court.

COUNSEL

Marily n S. Scheer (arg

ued), Woodland H ills, California, pro se Appellant.

Michael von L oewenfeldt ( a rg ued), Kerr & W ag staffe L L P, San F rancisco, California; Ke v in W

. Coleman and Todd B

. Holvick, S c hnader Harrison Seg al & L e wis L L P, San F rancisco, California, for Appellees.I N R E S C H E E R 4

OP INION

OW ENS, Circuit J udg e:

P ro se appellant Marily n Scheer, an attorney w i t h a suspended California law license, contends that the d i s trict
court erred when i t held that her debt to a former client was nondischarg eable u nder 11 U.S.C. § 523(a)( 7 )

. W e ag r ee with Scheer t h a t t h is particular ty p e of debt does not fall within the scope of section 5 23(a)(7), so we reverse the district court and remand for further proceeding s.

I. BACK G R OUND

A. The Client Dispute and State Bar P r oceedings

I n September 2010, a client named Clark retained Scheer
to help modify his home mortg ag e loan, and paid her $5500 before any modification occurred. Clar k t hen fired Scheer and soug ht return of the $ 5500 under California’s mandatory
attorne y f

e e a rbitration prog ram. I n Aug ust 2011, the arbitrator c o n cluded that althoug h Scheer performed competently
, she v iolated California Civil Code Section 2944.7(a) by receiving advanced fees for residential mortg ag e modification s ervices. Althoug h the a rbitrator believed that Scheer’s violations were n either w i llful nor malicious, he concluded that Cal i f

o rnia law required a full refund of the improperly coll e cted fees and the arbitration filing fee o f $275, for a total of $5775.

Scheer made a few p a y m ents ag a inst the arbitration award, but claimed a l a c k o f fu n ds and failed to pay the outstanding b alance. At Clark’s request, the Presiding Arbitrator broug ht an action ag ainst Scheer in state bar courtI N R E S C H E E R 5

for f ailure to pay the award. I n F ebru a ry 2 0 1 3
, the state bar

c o u r t found that she could p ay the award and had failed t o propose a satisfactory p ay ment plan, so it plac e d h e r on involuntary inactive enrollment status. This o rder suspended S cheer’s rig ht to p ractice law until (1) she p aid bac k t h e remaining portion of Clark’s funds, and (2) the court g ranted

a motion to termi n a t e her inactive enrollment. Scheer unsuccessfully soug ht relief from the State B a r Court Review Department and the California Supreme Court.

B. Bankruptcy and District Court P roceedings

I n J uly 2 013, Scheer filed for Chapter 7 bankrupt c y , naming both Clark and the State B ar a s creditors. Althoug h notified, neither the State B ar nor Clark objected to the d ebt being discharg ed. 1 Scheer then demanded reinstat ement o f her law license under 11 U.S.C. § 5 25(a), which prohibits the
g overnment f

rom revoking or refusing t o r enew a license “solely because” an individual has not p a i d a debt that is discharg eable or was d ischarg ed in bank r u p t c y

. A fter the S tate B ar ig nored her d emand, she filed suit in t h e B ankruptcy Cou r t a g ainst the State B ar a nd certain bar officials (individually and in their official capacities), arg uing that her suspension violated sections 525(a) and 362. The bankruptcy co u r t ( and later the district court) rejected that
arg ument, reasoning that the debt was nond i s c harg eable under section 523(a)(7). Scheer then appealed to our court.

1 Un lik e certain d eb ts th at f all u n d er § 5 23 (a)(2 ), (4 ), o r (6 ), a cred ito r is n o t req u ired to ob

j ect in b an k

ru p t c y c o u rt to p reserv e th e rig h t to p ay m en t o f a n o n d isch arg eab le d eb t u n d er § 5 2 3(a)(7 ). S ee § 5 23 (c)(1 ); 4 Co llier o n Ba n kru

p tcy ¶ ¶ 5 2 3 .0 2

– 03
, 5 2 3 .2 9 (A lan N. Resn ick & Hen ry J . So m m er ed s ., 1 6 th

ed .).I N R E S C H E E R 6

II. STANDARD OF REVIEW

W e review d e novo a d i s t rict court’s decision on an

a p p eal f rom a bankruptcy court. Barrientos v. W e lls F a r g o Bank, N.A

. , 633 F .3d 1186, 1 188 (9th Cir. 2011). B ecause a fundamenta l p olicy of the B ankruptcy Code is to afford debtors a fresh start, “ex ce p t i o ns to discharg e should be strictly construed ag ainst an objecting c reditor a nd in favor o f the debtor.” Snoke v. Riso ( In re Riso)
, 978 F .2d 1151, 1154 (9th Cir. 1992).

III. ANALYSIS

Under the usual c a

nons o f statutory interpretation, this would be an e asy case. Section 523(a)(7) provides in relevant part that a debt is ex cepted from discharg e in bankruptcy “to the ex tent such debt is f or a fine, penal t y , o r forfeiture
p a y able to and for the benefit of a g overnmental u nit, and is not compensation for actual pecuniary loss.”

On its face, section 523(a)(7) d oes not apply to Scheer’s debt, as it is neither “a fine, penalty
, or forfeiture” nor

“ p ay able to and for the benefit of a g overnmental u n i t

. ” Rather, it is an arbitration award for a de b t b e t w e en two private p arties, pay a

ble to one o f them—the familiar chicken piccata o f t h e b a nkruptcy petition buffet. Ordinarily
, that would be the end of the story

.

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

our inquiry

. T he Supreme Court in Kelly addressed whether restitution oblig ations, imposed as conditions of probation in
state criminal proceeding s, we r e discharg eable. W hile acknowledg ing that th e “‘starting point in every case involving c onstruction of a statute is the lang uag e itself,’” theI N R E S C H E E R 7

C o u rt t hen pivoted and reasoned that it must interpret th e lang uag e of 5 2 3 (a ) ( 7) “in lig ht of the history of bankruptcy
court deference to cri m i nal judg ments and in lig ht of the interests of the States in unfettered a dministration of their criminal justice sy stems.” Id. at 43–44 (quoting in part Blue Chip Stamps v. Manor Drug S tores , 421 U.S. 723, 756 (1975) (Powell, J

. , concurring )).

W ith the “deep conviction that federal bankruptcy courts should n o t i n validate the results of state criminal proceeding s” in mind, the Court then addressed whether the
state court c riminal r estitution was in fa c t n ondischarg eable under section 5 23(a)(7). Id. at 47. The Court reasoned that
p e r mitting discharg e “would hamper the flex ibility of sta t e

c r i m i n a l j u d ge s i n ch o o s i n g t h e c o m b i n a t i o n o f imprisonment, fines, a

n d restitution most likely to further the

r ehabilitative and d eterrent g oals of state criminal just i c e sy stems,” and that it was u nlikely that Cong ress “would limit the r ehabilitative and deterrent o ptions a vailable to state criminal judg es.” I

d. at 49. W hile resti t u t i o n resembled a judg ment “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 tha t the criminal restitution actually operated “for the b enefi t o f ” the state a s far a s section 523(a)(7) w as concerned. I d

. at 52–53. The Court conclud e d : “The sentence following a criminal conviction necessarily considers the penal and rehabilitative interests o f the State. Those interests a re sufficient to place restitution orders within the meaning of § 523(a)(7).” Id. at 53.

The Court’s approach in Kelly —to unteth er statutory interpretation f

rom the statutory lang uag e —has g one the way of NutraSweet a

nd other relics of the 1980s an d led toI N R E S C H E E R 8

c o n s i d e r a b l e c o n f u s i on among federal courts and p ractition e r s

a b o u t section 523(a)(7)’s scope. F o r ex ample, some cour t s have held that c ivil restitution p ay able to the g overnment a nd then distributed to fraud victims is discharg eable

. S ee, e.g. , In re Towers
, 162 F

. 3d 952, 9 5 6 ( 7th Cir. 1998); Hawa ii v

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

. Haw. 2014), recons. denied
, N o. 09-02937, 2014 W L 1329541 (B ankr. D. Haw. Mar. 1 9, 2 014). And some courts treat Rule 11 sanctions and a default judg ment from a leg al malpractice action p ay able to a private litig ant the same way

. See Hughes

v. Sanders
, 469 F .3d 475, 476– 7 9 ( 6th Cir. 2006); W ash v

. Moebius (

I n re W ood)
, 167 B .R. 83, 88–89 (B a n kr. W .D. Tex

. 1994). B ut other courts hold that the costs of an attorney disciplinary proc e e d i ng , p ay able to the g overnment, a re nondischarg eable, as are f unds owed to the State B ar’s Client Security F und. See Disciplinary Bd. of the Supreme Court of Pa. v

. Feingold (

In re Feingold)
, 7 3 0 F.3d 1268, 1274–76 (11th Cir. 2013); State Bar of Cal. v. Findley ( In re Findley)
, 5 9 3 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
, N o

. C V 09-2138 AHM, 2010 W L 4916633 at *5 ( C.D. Cal. Dec. 1, 2010). And while Kelly holds that state criminal restitution is nondischarg eable,

a fellow appellate court holds that federal criminal restitution is discharg eable. Rashi d v. Powel ( In re Rashid)
, 210 F .3d 2 0 1
, 2 0 8 ( 3 d Cir. 2 000). I t is fair to say that the “I know i t when I see it approach” of K e l l y h as led to predictably unpredictable results.

To answer the qu e s t i o n in this case, we look to Findley
, our court’s latest attempt to apply Kelly to debts incurred by

a n attorney

. I n Findley
, the state bar court initia t e d disciplinary p r oceeding s ag ainst F ind l e y

. 593 F .3d at 1049. I n addition to a suspension and probationary period, the StateI N R E S C H E E R 9

B ar assessed a $14,054 fee for the cost of those proceeding s. Id. at 1049–50. F ind l ey , l i ke Scheer, refused to pay the award, which blo c k e d h is reinstatement. Id. at 1050. F indley
, like Scheer, then declared bankruptcy a nd demanded reinstatement. Id

. The State B ar then filed suit in bankruptcy court, arg uing that the $ 14,054 fee was nondischarg eable. Id

.

W e sided with the State B a r. W h ile the parties in Findley
agr e ed that the costs were “pay a ble to and for the b enefit o f

a g overnmental unit,” they d isag reed o v er whether they constituted a fine or penalty
, o r compensation for actual pecunia r y loss. Id

. W e reviewed California law, which

ex p ressly p rovided that the costs were intended to “promote rehabilitati o n a nd to protect the public,” rather than compensate someone, so they were nondischarg eable under section 523(a)(7). I

d. a t 1052–54 (quoting Cal. B u s. & Prof. Code § 6086.10(e)).

W h en viewed throug h the Findley lens, our answer to the question b efore us is clear. F o r Scheer, there w er e n o costs

or fees assessed for disciplinary r easons. 2 Rather, the debt at is s ue 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 mig ht, we cannot stretch th e lang uag e o f section 523(a)(7) to c over the fee dispute at issue here, even

2 W h ile th e u

n d erly in g arb itratio n aw ard in clu d es reim b u rsem en t o f th e $ 2 7 5 arb i t

ratio n f ilin g f ee paid b y Clark

in ad d itio n

to th e $ 5 5 0 0 th at h e p aid Sch eer f

o r leg al serv ices, th is f

i lin g f ee d o es n o t af

f ect th e q u estio n

o f w h eth er th e § 5 2 3 (a)(7 ) ex cep tio n ap p lies to Sch eer’ s d eb t. Sch eer w as

su sp en d ed f

o r th e w ro n g f u l n o n

- pay

m en t of th e arb itratio n aw ard
, w ith o u t in q u iry as t o w

h y it w as im

p o sed o r h o w it w as calcu lated

. S ee g en era l ly Cal. B u s. & Pro f

. Co d e § 6 20 3 (a) (p ro v id in g t h at in a f ee arb itratio n “ th e f ilin g f ee p aid m ay

b e allo cated b etw een th e p arties b y th e arb itrato rs”).I N R E S C H E E R 10

thoug h we may dis a p p r o ve of Scheer’s conduct. The

concerns permitting flex ibilit y i n Kelly are absent here. See United S tates v. Ron Pair Enters., I nc. , 4 8 9 U.S. 2 3 5, 244–45 (1989) (emphasiz ing how Kelly ’s deviation from the statutory lang uag e “had been animated” by the unique concerns o f
state criminal proceeding s and i nformed b y related preB a n k r u p t c y C o d e p r a c t i c e s t h a t “ r e f l e c t e d p o l i c y considerations of g reat long evity and importance”).

“States tr a d i t i o n a l l y have e x ercised ex tensive control over the professional conduct o f attorney s,” Middlesex Cty. Ethics Comm. v. Garden State Bar Ass’n
, 457 U.S. 423, 434 ( 1 982);

see also Findley
, 593 F .3d at 1053, and the State B ar contends that ruling in Scheer’s favor undermines its power to reg u late lawy ers who violate state law. W e of course ag r ee that the State B ar must keep a clos e e y e on attorney s a nd sanction those who misbehave. B u t the debt in this case was purely compensatory

—an arbitration f

ee a ward b etween Scheer and her former client. I t was not d i s c i p l inary

. T o categ oriz e the fee dispute in this case a s nondischarg eable simply b e c ause the State ex presses a strong reg ulatory interest in a particular industr y would render a ny attorney

client fee dispute nondischarge able. Moreover, the State’s log ic would ex tend to fee disputes in any c losely r eg ulated i n d u s t r y

— d o c t o r s , d e n t i s t s , c h i r o p r a c t o r s , b a r b e r s , locksmiths, real estate ag ents, acupuncturists, tattoo artists, and so on. W e require clearer lang uag e in section 523(a)(7) before we can endorse such an incremental y et h o r iz onless approach— o t h erwise, we will end up boiling a frog that Cong r ess never intended to leave the lily pad.

C onsistent with Kelly
, Findley
, and the statute’s pl a i n l a ng uag e, we hold that the debt at issue in this cas e w a sI N R E S C H E E R 11

discharg eable, and does not qualify under section 5 23(a)(7)’s nondischarg eability

ex ception. 3

IV. CONCLUSION

Scheer’s performance as an attorney leaves m u c h to be desired, and it is unsettling that she can use b a n k r u p tcy to avoid refunding her c lient’s improperly collected fees. B ut

our moral take o n Scheer’s conduct does not con t ro l —the statutory lang uag e and policies underly ing section 523(a)(7) do. A nd under the current state of the law, the debt to her client does not fall within the s e c tion 523(a)(7) nondischarg eability

ex ception. 4

REVERSED AND REMANDED.

3 In lig h t o f ou r h o ld i n g , w e rem an d to th e d istrict co u rt t o d e t e r m i n e

w h eth er Sch eer h as stated a claim th at d ef en dan ts v io lated sectio n s 52 5 (a)

an d 3 6 2

. We leav e it to th e d is t r i c t c o u rt t o d ecid e w h eth er i t w ill tak e j u d icial n o tice o f sep arate State B ar d iscip lin ary p ro ceed in g s a g ain st S c h e e r

. A s w e do n o t reach t h e q u estio n o f w

h eth er Sch eer’ s clai m s

su rv i v e th e State B ar’ s m o tio n to d ism iss, w e d en y w ith o u t p rej u dice th e State B ar’ s req u est f

o r j u d icial n o t ice o f

th o se p ro ceed in g s

.

4 T h e Elev en t

h A m en d m en t d oes n o t bar u s f ro m d eterm i n i n g th at Sch eer’ s d e b t w as disch arg ed

. S ee Cen t. Virg i n ia Cmty. Co ll. v. Ka tz , 5 4 6 U.S. 3 56
, 3 7 3

– 7 8 (2 0 0 6 ) (“ In ra t i f y in g th e B an k

ru p tcy Clau se, th e States acq u iesced in a su

b o rd in atio n o f w

h atev er so v ereig n im

m u n ity th ey

m ig h t o th erw ise h av e asserted in p ro ceed in g s n ecessary

to ef f ectu ate th e in rem j u risd ictio n

o f th e b an k ru p tcy co u rts.”).