Court Opinion

ID: 9953756
Source: CourtListenerOpinion
Date Created: 2024-03-22 20:01:43.04295+00
Date Added: 2024-06-11T08:04:48.418900
License: Public Domain

FILED
                                                                                     MAR 22 2024
                            NOT FOR PUBLICATION                                 SUSAN M. SPRAUL, CLERK
                                                                                   U.S. BKCY. APP. PANEL
                                                                                   OF THE NINTH CIRCUIT
           UNITED STATES BANKRUPTCY APPELLATE PANEL
                     OF THE NINTH CIRCUIT

 In re:                                               BAP No. CC-23-1159-GCF
 MARILYN S. SCHEER,
               Debtor.                                Bk. No. 1:13-bk-14649-VK

 MARILYN S. SCHEER,                                   Adv. No. 1:23-ap-01016-VK
                  Appellant,
 v.                                                   MEMORANDUM*
 THE STATE BAR OF CALIFORNIA, a
 public corporation,
                  Appellee.

               Appeal from the United States Bankruptcy Court
                      for the Central District of California
               Victoria S. Kaufman, Bankruptcy Judge, Presiding

Before: GAN, CORBIT, and FARIS, Bankruptcy Judges.

                                  INTRODUCTION

       Chapter 7 debtor Marilyn S. Scheer (“Debtor”) filed an adversary

complaint against The State Bar of California1 (“State Bar”), alleging

       *
         This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
       1 “The State Bar is a constitutional entity, placed within the judicial article of the

California Constitution.” In re Rose, 22 Cal. 4th 430, 438 (2000). It has been described as
“an administrative arm” of the California Supreme Court for the purpose of assisting in
admission and discipline of attorneys, but the California Supreme Court retains its
inherent judicial authority to disbar or suspend attorneys. Id. (citations omitted). For a
violations of § 525 2 and § 524(a). After Debtor received her discharge, the

California Supreme Court entered two orders (the “Disciplinary Orders”)

suspending Debtor’s license to practice law and requiring her to pay

restitution to several clients, pay statutory costs to the State Bar, and

perform other non-monetary actions as conditions to reinstatement.

Although the restitution obligations were discharged in Debtor’s chapter 7

bankruptcy case under the holding of Kassas v. State Bar of California, 49

F.4th 1158 (9th Cir. 2022), the State Bar refused to reinstate Debtor’s license

until she satisfied the other requirements of the Disciplinary Orders.

       Debtor did not allege that she paid the costs of enforcement, which

the bankruptcy court noted were nondischargeable, or that she satisfied the

other conditions for reinstatement. Thus, the bankruptcy court granted the

State Bar’s motion to dismiss under Civil Rule 12(b)(6), made applicable by

Rule 7012.

       Debtor argues that none of the reinstatement conditions are valid

because both Disciplinary Orders are void ab initio. Debtor misconstrues

the law, and she does not demonstrate reversible error by the bankruptcy

court. We AFFIRM.

description of the state bar disciplinary process, see In re Rose, 22 Cal. 4th at 438-41.
       2 Unless specified otherwise, all chapter and section references are to the

Bankruptcy Code, 11 U.S.C. §§ 101–1532, all “Rule” references are to the Federal Rules
of Bankruptcy Procedure, and all “Civil Rule” references are to the Federal Rules of
Civil Procedure.
                                             2
                                        FACTS 3

A.    Debtor’s disciplinary hearings

      Debtor is an attorney who was licensed in California since 1987.

Between October 2009 and January 2010, Debtor provided legal services in

loan modification cases involving clients in California and twelve other

states. She was not licensed to practice law in the twelve other states.

      In May 2012, the State Bar Office of Chief Trial Counsel filed a notice

of disciplinary charges against Debtor asserting that she: (1) committed

unauthorized practice of law in the cases with clients outside of California;

and (2) violated California consumer protection laws by collecting fees

from clients prior to fully performing the loan modification work. Debtor

admitted many of the underlying factual allegations but denied culpability.

      After a trial, the State Bar Court Hearing Department found Debtor

culpable of misconduct in thirty-two loan modification cases, and it issued

a decision in February 2013 recommending a three-year suspension, with

execution stayed, and four years of probation. It recommended probation

conditions including: (1) suspension from the practice of law for a

minimum of the first two years of probation; and (2) reinstatement after

payment of restitution, payment of costs pursuant to California Business

      3
         We exercise our discretion to take judicial notice of documents electronically
filed in Debtor’s proceeding and the main bankruptcy case. See Atwood v. Chase
Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).
                                            3
and Professions Code § 6086.10,4 and additional ethics and professional

responsibility training.

       The State Bar Review Department, after conducting an independent

review, determined that Debtor committed unauthorized practice of law in

thirty cases outside of California and violated state law in the four

California cases. The Review Department recommended a three-year

period of stayed suspension, with three years of probation conditioned

on a minimum two-year suspension with reinstatement after payment of

approximately $120,000 in restitution, completion of probation

requirements, ethics training, and payment of statutory costs.5 In July 2014,

the California Supreme Court denied Debtor’s request for review and

entered an order adopting the recommendations of the State Bar Court

Review Department.

       In July 2013, the State Bar Office of Chief Trial Counsel filed a second

notice of disciplinary charges alleging that Debtor committed unauthorized

practice of law in three additional cases with clients outside of California.

       4
         The statute provides that any order imposing discipline on an attorney shall
include an award of costs. The award of “costs” includes expenses typically defined as
taxable costs in civil litigation, but also includes charges determined by the State Bar to
be “reasonable costs” of investigation, hearing, and review. Cal. Bus. & Prof. Code
§ 6086.10(b). The statute specifically provides that “costs imposed pursuant to this
section are penalties, payable to and for the benefit of the State Bar of California . . . to
promote rehabilitation and to protect the public.” Cal. Bus. & Prof. Code § 6086.10(e).
       5 The State Bar Court entered a certificate of costs, pursuant to Cal. Bus. & Prof.

Code § 6086.10(b), which totaled $49,469.50. The California Supreme Court
subsequently granted partial relief from the cost award by reducing it to $20,005 and
permitting Debtor to pay the reduced amount in ten equal annual installments.
                                              4
In April 2015, the State Bar Office of Chief Trial Counsel filed a third notice

of disciplinary charges against Debtor for unauthorized practice of law

with one additional out-of-state client.

      The State Bar Hearing Department found Debtor culpable as charged

in both additional matters, but it recommended no additional discipline

because the conduct occurred during the same period as the misconduct in

the first action. The State Bar Review Department then conducted a

consolidated review and found Debtor culpable of unauthorized practice of

law and collecting illegal fees. Because Debtor refused to acknowledge her

misconduct or refund the illegal fees she collected, the Review Department

recommended a new period of stayed suspension and probation, requiring

a minimum two-year suspension with reinstatement conditioned on

payment of approximately $18,000 in restitution, completion of probation

requirements, additional ethics and professional responsibility training,

and payment of costs. 6 The California Supreme Court denied review, and

in March 2017, it entered an order adopting the Review Department’s

recommendations.

B.    The bankruptcy and adversary proceeding

      In July 2013, Debtor filed a chapter 7 petition. She scheduled over 850

unsecured claims, the vast majority of which were clients or former clients

with disputed claims of unknown value against her law firm. Debtor also

      6
       The State Bar Court entered a certificate of costs for the second and third
proceedings in the amount of $20,699.
                                            5
scheduled a disputed unsecured claim in favor of the State Bar for an

unknown amount. Debtor received her discharge, and her case was closed

in November 2013.

      In May 2023, Debtor reopened her case and filed the present

adversary complaint. She alleged that the State Bar violated the discharge

injunction by pursuing and obtaining a “lien or charge” against her law

license in the form of a mandatory payment obligation. Debtor contended

that both Disciplinary Orders violated § 524(a) and were thus void and

entirely unenforceable. She further asserted that the State Bar violated the

anti-discrimination provision of § 525(a) by refusing to reinstate her license

to practice law.

      In response, the State Bar filed a motion to dismiss. It argued that

Debtor failed to allege any actions by the State Bar to collect, recover or

offset a discharged debt. It maintained that attorney discipline proceedings

do not violate the automatic stay under Wade v. State Bar of Arizona (In re

Wade), 948 F.2d 1122 (9th Cir. 1991), and continuation of such proceedings

does not violate the discharge injunction. The State Bar argued the

Disciplinary Orders were not rendered void merely because they contained

dischargeable payment conditions. It asserted that the discharge injunction

prevents enforcement of Debtor’s personal liability, but it does not cancel

Debtor’s legal obligations under the orders. The State Bar maintained that,

prior to the Ninth Circuit’s decision in Kassas, it had a reasonable basis to

believe that the restitution obligations were not discharged, and

                                       6
consequently, Debtor could not establish a basis for sanctions. Finally, it

argued that Debtor failed to state a claim for violation of § 525 because she

made no allegation that the State Bar refused to reinstate her license solely

because she did not pay a discharged debt. The State Bar noted that Debtor

admitted she did not pay the court-ordered costs, which were

nondischargeable, and she did not allege that she satisfied all other

conditions of reinstatement under the Disciplinary Orders.

      Debtor opposed the motion and argued that because both

Disciplinary Orders required Debtor to pay restitution, which was

discharged, they were void ab initio. She claimed that the mandatory

payment conditions constituted a “lien” on her law license in violation of

§ 524(a)(2). Unlike the automatic stay, Debtor asserted that the discharge

injunction contains no exception for attorney disciplinary actions. She

argued that cost awards connected with the pursuit of dischargeable debt

necessarily violate the discharge injunction. Debtor clarified that she was

not seeking compensation for any efforts to collect restitution prior to the

Kassas decision, and instead was challenging the State Bar’s post-Kassas

conduct in refusing to reinstate her license without payment of the cost

awards.7

      7 In February 2023, Debtor filed a motion in the State Bar Court for relief from the
cost awards. She argued that the California Supreme Court orders violated the
discharge injunction and were thus void and unenforceable. The State Bar opposed her
requested relief, and the State Bar Court denied her motion.
                                            7
      In reply, the State Bar contended that the Disciplinary Orders were

premised on Debtor’s ethical violations, and it did not assert any charges

based on any debt owed by Debtor. It argued that the obligations imposed

by the California Supreme Court did not create a lien because Debtor’s bar

license has no resale value, cannot be transferred, and is not “owned” by

the licensee. The State Bar asserted that the Disciplinary Orders remained

valid, and although California law permitted the State Bar to obtain a

money judgment based on the orders, it had not done so.

C.    The bankruptcy court’s decision

      After a hearing, the bankruptcy court granted the State Bar’s motion

to dismiss, with leave to amend. The court held that Debtor did not state a

claim for violation of the discharge injunction because: (1) the discharge

injunction prevents collection or enforcement of discharged restitution

obligations, but it did not void the liability imposed under the Disciplinary

Orders or affect the nondischargeable cost awards or other nonmonetary

conditions; and (2) the State Bar Court proceedings concerned Debtor’s

culpability for ethical violations and did not constitute enjoined collection

activity. The court reasoned that because Debtor did not pay the costs or

satisfy the nonmonetary conditions under the Disciplinary Orders, the

State Bar had at least a fair ground of doubt that refusal to reinstate

Debtor’s license would constitute a violation of the discharge injunction.

Finally, the bankruptcy court held that Debtor did not state a claim for

violation of § 525(a) because the State Bar could permissibly refuse to

                                       8
reinstate Debtor’s license until she paid the nondischargeable cost awards

and satisfied the nonmonetary obligations of the Disciplinary Orders.

      Debtor appealed, and after we questioned the finality of the

bankruptcy court’s order for purposes of appeal, Debtor obtained an

amended order dismissing the complaint without leave to amend.

                               JURISDICTION

      The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and

157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158.

                                    ISSUE

      Did the bankruptcy court err by granting the State Bar’s motion to

dismiss?

                         STANDARD OF REVIEW

      “We review de novo the [trial] court’s grant of a motion to dismiss

under [Civil] Rule 12(b)(6), accepting all factual allegations in the

complaint as true and construing them in the light most favorable to the

nonmoving party.” Narayanan v. Brit. Airways, 747 F.3d 1125, 1127 (9th Cir.

2014) (citing Newdow v. Lefevre, 598 F.3d 638, 642 (9th Cir. 2010)). Under de

novo review we “consider a matter anew, as if no decision had been made

previously.” Francis v. Wallace (In re Francis), 505 B.R. 914, 917 (9th Cir. BAP

2014).

                                       9
                                 DISCUSSION

A.    Legal standards governing the motion to dismiss

      Civil Rule 12(b)(6), made applicable by Rule 7012, provides that

dismissal is appropriate if the complaint fails to allege “enough facts to

state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly,

550 U.S. 544, 570 (2007). In assessing the adequacy of the complaint, the

court must accept as true all allegations and construe them in the light

most favorable to the plaintiff. See Cousins v. Lockyer, 568 F.3d 1063, 1067

(9th Cir. 2009).

      Consequently, “for a complaint to survive a motion to dismiss, the

non-conclusory factual content, and reasonable inferences from that

content, must be plausibly suggestive of a claim entitling the plaintiff to

relief.” Moss v. U.S. Secret Serv., 572 F.3d 962, 969 (9th Cir. 2009) (quotation

marks omitted). A motion to dismiss “may be based on either a ‘lack of a

cognizable legal theory’ or ‘the absence of sufficient facts alleged under a

cognizable legal theory.’” Johnson v. Riverside Healthcare Sys., LP, 534 F.3d

1116, 1121 (9th Cir. 2008) (quoting Balistreri v. Pacifica Police Dep’t, 901 F.2d

696, 699 (9th Cir. 1990)).

B.    The bankruptcy court did not err by dismissing the complaint.

      Pursuant to § 524(a), a bankruptcy discharge “voids any judgment at

any time obtained, to the extent that such judgment is a determination of

the personal liability of the debtor” with respect to a discharged debt, and

“operates as an injunction against the commencement or continuation of an

                                        10
action, the employment of process, or an act, to collect, recover or offset

any such debt as a personal liability of the debtor, whether or not discharge

of such debt is waived[.]”

      A bankruptcy court may hold a creditor in contempt for a violation of

the discharge injunction only if “there is no objectively reasonable basis for

concluding that the creditor’s conduct might be lawful under the discharge

order.” Taggart v. Lorenzen, 139 S.Ct. 1795, 1801 (2019). To prevail on a claim

for a violation of § 524(a), a movant must show that the alleged contemnor:

“(1) knew the discharge injunction applied; and (2) intended the actions

that violated the injunction.” Mellem v. Mellem (In re Mellem), 625 B.R. 172,

178 (9th Cir. BAP 2021) (citations omitted), aff’d, No. 21-60020, 2021 WL

5542226 (9th Cir. Nov. 26, 2021).

      Debtor does not state a claim for violation of the discharge injunction.

She does not allege the State Bar attempted to collect the restitution

awards, which were discharged. Instead, she argues that the State Bar

sought and obtained mandatory payment conditions, which Debtor

contends operate as a lien on her law license. She maintains the

Disciplinary Orders are entirely void, including the cost awards and

nonmonetary conditions, and thus, the State Bar’s refusal to reinstate her

license violates the discharge injunction.

                                      11
      1.    The State Bar did not violate the discharge injunction by
            participating in the disciplinary actions.

      In matters of attorney discipline, the State Bar operates as an

administrative arm of the California Supreme Court. In re Rose, 22 Cal. 4th

at 438. It initiates attorney disciplinary proceedings under statutory

authority, for the purposes of “protecting the public, the courts, and the

legal profession from unfit practitioners[,]” In re Young, 49 Cal. 3d 257, 266

(1989), and “the maintenance of high professional standards by attorneys

and the preservation of public confidence in the legal profession[,]”

Chadwick v. State Bar, 49 Cal. 3d 103,112 (1989). In short, the State Bar’s

participation in the disciplinary proceedings was not a continuation of an

action to recover a discharged debt as a personal liability of the Debtor—it

was an action to discipline an attorney for conduct deemed harmful to the

public.

      Debtor presumes that because the State Bar Court recommended

restitution as a condition of probation, the State Bar was obligated to cease

participation in the review process after Debtor’s discharge. But regardless

of the probation conditions ultimately imposed by the California Supreme

Court, the State Bar had an obligation to pursue disciplinary action against

Debtor, including recommending suspension of her license. See Cal. Bus. &

Prof. Code § 6001.1.

      We agree with the bankruptcy court that the payment obligations

imposed under the Disciplinary Orders do not constitute a “lien” on

                                       12
Debtor’s property. Debtor cites § 101(37), which defines “lien” as a “charge

against or interest in property to secure payment of a debt or performance

of an obligation,” and she cites Conway v. State Bar, 47 Cal. 3d 1107 (1989),

for the proposition that an attorney has a property interest in her license to

practice law. But Debtor does not explain how her payment obligations

under the Disciplinary Orders are “secured” by the suspension of her

license. Her law license is not transferable; it cannot be sold to satisfy her

payment obligations. And the Disciplinary Orders do not grant the State

Bar any interest in Debtor’s license. They merely impose payment

obligations against Debtor as conditions of reinstatement.

      More importantly, Debtor’s lien argument is irrelevant to the

analysis. The discharge injunction bars continuation of an action to recover

a discharged debt as a personal liability of the debtor, but since the State

Bar’s continued participation was disciplinary, and not an attempt to

recover a discharged debt, it is immaterial whether the cost awards

ultimately entered by the California Supreme Court are against Debtor or

her property.

      2.    The Disciplinary Orders are not void.

      The State Bar’s refusal to reinstate Debtor’s license is not a violation

of the discharge injunction because the Disciplinary Orders are not void ab

initio. Section 524(a)(1) provides that a judgment is void to the extent it is a

determination of the personal liability of a debtor with respect to

discharged debt. Thus, the Disciplinary Orders are void only to the extent

                                       13
they require Debtor to pay restitution which was discharged.8 The

remainder of the Disciplinary Orders, including the suspension and other

conditions of reinstatement, remain valid and enforceable.

       Debtor acknowledges that statutory cost awards issued as part of

California attorney disciplinary proceedings are nondischargeable under

§ 523(a)(7)9 and Ninth Circuit authority. See State Bar of Cal. v. Findley (In re

Findley), 593 F.3d 1048, 1054 (9th Cir. 2010) (holding that the express

statement in Cal. Bus. & Prof. Code § 6086.10(e) that disciplinary costs are

required to serve penal and rehabilitative ends 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).”); Kassas, 49

F.4th at 1164 (“such costs are nondischargeable in bankruptcy”); Albert-

Sheridan v. State Bar of Cal. (In re Albert-Sheridan), 960 F.3d 1188, 1192 (9th

Cir. 2020) (“Findley is binding precedent on [the nondischargeability of cost

awards under Cal. Bus. & Prof. Code § 6810], and we must follow it.”). But

she attempts to distinguish these cases by arguing that unlike the awards in

       8
         After the Ninth Circuit’s decision in Kassas, the State Bar obtained a standing
order from the California Supreme Court which authorized the State Bar, upon notice of
bankruptcy discharge, to consider disciplinary orders requiring restitution as a
condition of reinstatement, as amended to remove restitution conditions and to treat
such conditions as satisfied.
       9 Section 523(a)(7) makes nondischargeable “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 . . . .“
                                            14
those cases, the cost awards in the Disciplinary Orders were entered post-

petition.

      Debtor is correct that the Disciplinary Orders were entered post-

petition, but the cost awards are nevertheless prepetition debts. The Ninth

Circuit applies the “fair contemplation” test to determine whether a debt

arises pre- or post-petition. SNTL Corp. v. Ctr. Ins. Co. (In re SNTL Corp.),

571 F.3d 826, 839 (9th Cir. 2009). Under this test, “a claim arises when a

claimant can fairly or reasonably contemplate the claim’s existence even if

a cause of action has not yet accrued under nonbankruptcy law.” Id.

(citation omitted).

      Prior to the petition date, Debtor engaged in the conduct for which

she was disciplined, the State Bar initiated disciplinary proceedings, the

State Bar Court conducted a trial, and it issued a written disposition

recommending suspension conditioned on payment of restitution and

costs. Because California Business & Professions Code § 6086.10 requires

any order imposing discipline on an attorney to direct that attorney to pay

costs, the parties clearly contemplated an award of costs if the California

Supreme Court agreed with the recommendation. Because the cost awards

are mandatory regardless of whether restitution is also required as a

condition of reinstatement, they are not connected with pursuit of

discharged debt as Debtor argues.

      Furthermore, Debtor’s attempt to distinguish Kassas, Albert-Sheridan,

and Findley is absurd. She claims that the cost awards in those cases were

                                       15
entered prepetition, and thus, they involved only § 523(a)(7), not

§ 524(a)(2). But regardless of the timing of the cost awards here, they

cannot violate the discharge injunction because § 524(a) applies only to

discharged debts. See § 524(a)(1) (Discharge voids any judgment to the

extent it determines personal liability of the debtor “with respect to any

debt discharged under section 727 . . . .”); Lakhany v. Khan (In re Lakhany),

538 B.R. 555, 562 (9th Cir. BAP 2015) (“Nondischargeable debts are not

subject to the discharge injunction.” (citing Boeing N. Am., Inc. v. Ybarra (In

re Ybarra), 424 F.3d 1018, 1027 n.11 (9th Cir. 2005))).

      Because the cost awards are prepetition debts which were not

discharged under § 727, they are unaffected by the discharge injunction.

The Disciplinary Orders are void only to the extent they impose liability on

Debtor for discharged prepetition obligations; all other conditions of

reinstatement—including payment of statutory costs—remain valid and

enforceable. Consequently, the State Bar did not violate the discharge

injunction by continuing disciplinary proceedings, or by refusing to

reinstate Debtor’s law license until she satisfies the other conditions of

reinstatement.

      Finally, Debtor does not make any argument on appeal that the

bankruptcy court erred by dismissing her claim for violation of § 525, and

she has thus waived the issue. See Smith v. Marsh, 194 F.3d 1045, 1052 (9th

Cir. 1999). “Section 525(a) prohibits a governmental unit from denying,

revoking, suspending, or refusing to renew a debtor’s license solely

                                       16
because the debtor filed for bankruptcy or failed to pay a dischargeable

debt.” In re Albert-Sheridan, 960 F.3d at 1196 (cleaned up). But the

“government may take action that is otherwise forbidden when the debt in

question is . . . nondischargeable.” FCC v. NextWave Pers. Commc’ns Inc., 537

U.S. 293, 307 (2003). Because Debtor admits she has not paid the cost

awards, and she does not allege that she has performed the nonmonetary

conditions of reinstatement, she fails to state a claim for violation of § 525.

                               CONCLUSION

      Based on the foregoing, we AFFIRM the bankruptcy court’s order

granting the State Bar’s motion to dismiss the adversary complaint.

                                       17