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Schnader Delivers Significant Victory for the State Bar of California

02/01/2010

Schnader attorneys scored a significant victory for their client, the State Bar of California, in a matter that was on appeal before the United States Court of Appeals for the Ninth Circuit. In a decision that was handed down on February 1, 2010, the Court held that attorney disciplinary costs imposed under California law are not dischargeable under the Bankruptcy Code. In so doing, the Court reversed the decision of the Ninth Circuit Bankruptcy Appellate Panel (BAP) and reinstated the Bankruptcy Court’s grant of summary judgment for the State Bar.

The case – In re: John William Findley, III, Debtor, No. 08-60024 (9th Cir. Feb. 1, 2010) – was the result of an assessment of costs against Mr. Findley stemming from a disciplinary proceeding brought against him by the State Bar. The California Business and Professions Code mandates such an assessment when an attorney has been disciplined, absent proof of hardship, and requires the payment of attorney disciplinary costs as a prerequisite to reinstatement. While his case was pending before the Review Department, Mr. Findley filed for Chapter 7 bankruptcy and ultimately received discharge of his debts. Asserting that his bankruptcy discharge excused payment, Findley declined to pay the disciplinary cost award and sought reinstatement to the practice of law. The State Bar subsequently brought this action against Mr. Findley in Bankruptcy Court, seeking a determination that the disciplinary cost award was a penalty, not mere compensation for the cost of the disciplinary proceeding, and therefore excepted from discharge. It did so in order to prevent disciplined attorneys from using a bankruptcy discharge to side-step a condition California law placed on his ability to be reinstated to the practice of law (i.e., payment of the costs).

In a prior decision, In re Taggart, 249 F.3d 987 (9th Cir. 2001), the Ninth Circuit had held that a disciplined attorney could discharge an award of costs because such costs were compensatory in nature and did not further the penal or rehabilitative goals of the State. Subsequently, in 2003 the California Legislature amended the Business & Professions Code to clarify that it intended an award of costs to be a penalty imposed to protect the public and promote the disciplined attorney’s rehabilitation – but it did not change any other aspects of the statute concerning how costs were calculated. Although the Bankruptcy Court concluded that Taggart was not controlling in light of the 2003 amendments and so ruled in favor of the State Bar, the BAP reversed and held that the costs were dischargeable. The BAP agreed that the 2003 amendments eroded some of Taggart’s reasoning, but it nevertheless felt compelled to follow Taggart because the 2003 amendments did not change the mechanism by which costs are calculated, and a recent Ninth Circuit case, Gadda v. State Bar, 511 F.3d 933 (9th Cir. 2007), suggested that the Ninth Circuit continued to view cost awards as not penal in nature despite the 2003 amendments. Schnader appealed to the Ninth Circuit, which held that amendments to the relevant portions of the Business and Professions Code in 2003 brought attorney discipline costs imposed by the California Supreme Court within the exception to discharge for fines and penalties. In doing so, the Court noted that the amendments clarified the Legislature’s intent that attorney disciplinary costs should serve penal and rehabilitative ends, and that this intent ultimately controlled whether or not the costs were dischargeable. It also agreed with the State Bar that the costs could serve a penal function, even though the amount charged varied with the length of the proceeding and was measured to some extent by actual expenditures incurred by the State Bar to prosecute the disciplinary proceeding.

The Schnader team included Kevin Coleman, Nancy Winkelman, Judge Timothy Lewis, Bruce Merenstein, Nilam Sanghvi and Melissa Lor.