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Ninth Circuit:
Disbarred Lawyer’s $2 Million Debt to State Bar Wiped Out
Sums Owed Based on Payments to Victims From Client Security Fund Are Dischargeable in Bankruptcy
By a MetNews Staff Writer
The State Bar of California is not entitled to recover from a disbarred lawyer whose debts have been discharged in bankruptcy any part of the more than $2 million it has paid out to his victims, the Ninth U.S. Circuit Court of Appeals held yesterday in a case of first impression.
Senior Circuit Judge Jay S. Bybee wrote for a three-judge panel in reversing a June 14, 2021 determination by Bankruptcy Judge Ernest M. Robles of the Central District of California that Chapter 7 debtor Anthony J. Kassas remains liable for moneys paid from the State Bar’s Client Security Fund (“CSF”). Recompense was disbursed to 356 claimants who were hoodwinked into thinking that in exchange for fees, Kassas would save their homes from foreclosure through a loan modification.
He was one of five lawyers against whom the State Bar pursued discipline after it and the Office of Attorney General cracked down on those preying upon homeowners with false promises. His Costa Mesa office was raided and shut down in September 2011 by 19 Department of Justice agents and 42 agents from the State Bar and other agencies.
In disbarring Kassas in 2014, the California Supreme Court ordered restitution of $201,706, plus 10 percent annual interest, to 56 victims who were identified to that point, and the costs of discipline incurred by the State Bar, which came to $61,122.27. Kassas did not pay up.
Debt Mounts
More victims came forth. Of the 356 former clients of Kassas who sought moneys from the CSF, 51 were persons who were among the 56 identified by the Supreme Court in its restitution order.
Sums paid from the CSF—typically between $3,000 and $6,000 per victim—amounted to $1,367,978.12, but with interest and fees, the debt swelled to $2,090,096.32.
In the Bankruptcy Court, the State Bar did not dispute the dischargeablity, under Ninth Circuit precedent, of the $61,122.27 cost award, and agreed that the restitution award to the 56 victims was also wiped out. However, asserting its right to subrogation from wayward lawyers under Business & Professions Code §6140.5(a) as to the moneys paid from the CSF, it contended that there was no discharge of that debt, citing Bankruptcy Code §523(a)(7).
That section provides that there is no discharge in bankruptcy of a debt based on “a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss.”
Supreme Court Opinion
Siding with the State Bar, Robles relied upon the California Supreme Court’s 1988 decision in Brookman v. State Bar. A “By the Court” opinion in that case says that “restitution as a condition of probation is appropriate for purposes of rehabilitation in this case.”
Robles ruled:
“The debt owed by Kassas to the Client Security Fund is a penalty imposed in furtherance of the State’s interest in punishing and rehabilitating errant attorneys, rather than compensation for actual pecuniary loss.”
Accordingly, he reasoned, the debt was non-dischargeable.
However, he certified a direct appeal to the Ninth Circuit, rather than the appeal going to the Bankruptcy Appeals Panel or the District Court, pursuant to 28 U.S.C. §158(d)(2)(A)(i) which permits such certification where a judgment “involves a matter of public importance” or “involves a question of law as to which there is no controlling decision of the court of appeals for the circuit.”
He said: “Both circumstances apply here.”
Bybee’s Opinion
Bybee, in his opinion reversing the judgment, set forth:
“We do not need to reach the question whether the California Supreme Court’s order that Kassas repay the CSF is a fine or penalty, because we conclude that the restitution payments at issue here are ‘compensation for actual pecuniary loss.’…[A]t every step of the CSF process, the State Bar is focused on compensating victims for their actual pecuniary losses or seeking compensation for the CSF’s actual payments.”
He said that “even if reimbursement serves some penal or rehabilitative purpose, we conclude that any reimbursement to the CSF is payable to and for the benefit of the State bar and is compensation for the CSF’s actual pecuniary loss.” In a discussion not reflecting that of the 356 claimants compensated from the CSF, 51 were among the 56 named in the Supreme Court’s restitution order, Bybee commented: “There is a certain symmetry in our conclusion. The State Bar did not object to the bankruptcy court’s conclusion that the reimbursement Kassas owed 56 of his former clients was subject to discharge….The State Bar only objected to discharge of Kassas’s debt to the CSF, which reimbursed an additional 305 of Kassas’s clients….Our conclusion means that any debt that Kassas owes his clients and is obligated to pay either (1) directly to them or (2) to the CSF because the CSF has made payments to his clients is subject to discharge in bankruptcy. In other words, the dischargeablity of Kassas’s debt does not turn on whether the CSF decides to step in to compensate his former clients and then seek subrogation against him. Were we to conclude otherwise, Kassas could obtain a discharge for debts he owed directly to 56 of his clients but not for debts owed to the 305 of his clients compensated by the CSF.”
The case is Kassas v. State Bar of California, 21-55900.
Copyright 2022, Metropolitan News Company