Court Opinion

ID: 3194210
Source: CourtListenerOpinion
Date Created: 2016-04-14 17:01:10.785118+00
Date Added: 2024-06-11T14:36:18.367484
License: Public Domain

FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

IN RE MARILYN S. SCHEER,                  No. 14-56622
                              Debtor,
                                             D.C. No.
                                          2:14-cv-04829-
MARILYN S. SCHEER,                             JFW
                            Appellant,

                  v.                        OPINION

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.

      Appeal from the United States District Court
         for the Central District of California
       John F. Walter, District Judge, Presiding
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.
                        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.
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) by receiving advanced 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
                             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.).
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
                         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
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
                             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”).
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 pre-
Bankruptcy Code practices that “reflected policy
considerations of great longevity and importance”).

    “States traditionally have 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 attorney-
client 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
                            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.”).