Friday, April 15, 2016
Mandatory Fee Arbitration Debt Held Dischargeable in Bankruptcy
By a MetNews Staff Writer
A mandatory fee arbitration award under the State Bar Act is dischargeable in bankruptcy, the Ninth U.S. Circuit Court of Appeals ruled yesterday.
The court said a bankruptcy judge and a district judge erred in denying suspended Woodland Hills attorney Marilyn Scheer a discharge of a $5,775 arbitration award in favor of a former client. Scheer was placed on involuntary inactive status in 2013 for failing to pay the award and was subsequently suspended in connection with other matters.
The lower courts had held the award nondischargeable under 11 U.S.C. §523(a)(7), which provides, among other things, that a debt is excepted from discharge “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.”
Judge John B. Owens, writing yesterday for the panel, agreed with Scheer that the arbitration award “does not fall within the scope of section 523(a)(7).”
The debt, he said, is “between two private parties, payable to one of them—the familiar chicken piccata of the bankruptcy petition buffet.”
He distinguished Kelly v. Robinson, 479 U.S. 36 (1986), which held that court-ordered restitution in a criminal case is non-dischargeable.
The arbitration award, he emphasized, was not the result of a disciplinary proceeding.
“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.”
The opinion was joined by Judge Marsha Berzon and Judge Algenon L. Marbley, visiting from the U.S. District Court for the Southern District of Ohio.
The same three judges last week rejected claims by Scheer, who argued her own cases before the panel, that State Bar disciplinary procedures, including the adjudicatory role of the State Bar’s administrative review tribunal and the lack of mandatory review in the state Supreme Court, violate constitutional due process.
Scheer is a 1979 graduate of Drake University Law School in Iowa, and was admitted to practice in that state that year. She was admitted in California in 1987.
She practiced bankruptcy law at one time, later shifting to real estate and lending law at a large firm where she was laid off in 2009, the State Bar Court explained in its opinion suspending her two years ago. Scheer started her own practice, Marilyn Scheer Law Group PC, in August 2009.
The arbitration matter, and the discipline cases, all stem from loan-modification matters. The State Bar Court Review Department found that Scheer had handled such matters in states where she is not licensed to practice and violated a state statute prohibiting lawyers from charging fees for such work before a modification is completed.
The case is In re Scheer, 14-56222.
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