Pretty fun reading (and thankfully the right result).
Sheer v. State Bar of California (In re Sheer), — F. 3d, —- (9th Cir. April, 2016)
Issue: Was a state bar judgment requiring the debtor to repay fees to a client a non-dischargeable debt under 523(a)(7)?
Holding: No. The debt “is not a fine or penalty, but compensation for actual loss.”
In this case, the state bar put an attorney on involuntary inactive status because the attorney did not pay an arbitrator’s award requiring her to return fees of $5,800 to a former client. The attorney filed chapter 7 and asked the bankruptcy court to order her reinstatement. The bankruptcy court refused saying the debt was non-dischargeable under section 523(a)(7) as a fine. It seems pretty obvious that it was not a fine and the 9th Circuit said so – thank you Judge Owens.
But it’s also pretty fun reading.
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 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)).
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 considerable confusion among federal courts and practitioners about section 523(a)(7)’s scope.
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.