Discipline Costs Discharged In Bankruptcy

The United States Court of Appeals for the Ninth Circuit has held that debts relating to an attorney’s discipline proceedings are discharged in bankruptcy

A discharge in bankruptcy is often described as a financial fresh start. Seeking his own fresh start, Terry Wike, a Nevada attorney, filed for chapter 7 bankruptcy to discharge his debts, including a debt he owed to the State Bar of Nevada for costs and fees assessed when he was twice suspended from practicing law in Nevada. After the bankruptcy was completed, Wike petitioned for reinstatement of his license. Although the State Bar provisionally reinstated Wike, it claimed that his debt had not been discharged and conditioned his full reinstatement on repayment of the costs and fees stemming from his prior suspensions.

The question we consider is whether that debt was exempt from discharge, as urged by the State Bar, because it was “for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and [wa]s not compensation for actual pecuniary loss.” 11 U.S.C. § 523(a)(7). Frustrated by the Bar’s position, Wike filed a motion for sanctions in the bankruptcy court. The bankruptcy court agreed with the Bar’s position and denied the motion. The Bankruptcy Appellate Panel (“BAP”), however, reversed the bankruptcy court and held that the debt was not exempt from discharge.

We affirm the BAP and conclude that the debt was not exempt from discharge because the money Wike owed to the State Bar was for compensation allocable to the cost of his attorney discipline hearings and not for a fine or penalty. Because the parties agree that the disposition of Wike’s sanctions motion turns solely on dischargeability under § 523(a)(7), we remand for the bankruptcy court to grant Wike’s motion against the State Bar.

Discharge

We now turn to the specifics of Wike’s debt and the Nevada attorney discipline scheme. Upon reviewing the Nevada Supreme Court’s precedents and Nevada Supreme Court Rules 120 and 102, we conclude that Wike’s debt for the costs imposed on him under Rule 120 was not exempt from discharge.

To begin with, all of the fees and costs imposed under Nevada Supreme Court Rule 120 must be “allocable to the proceeding.” See NEV. SUP. CT. R. 120(1), (3). And while Rule 120 sets varying minimum “administrative costs” depending on the sanction imposed on the disciplined attorney, these costs are also deemed to be “allocable to the proceeding.” Id. 120(3). Nevada law therefore expressly construes Rule 120’s fees and costs as being “commensurate” with the costs of disciplinary proceedings. See Albert-Sheridan, 960 F.3d at 1194. On its own, that construction is a very strong indication that Wike’s debt is for compensation for actual pecuniary loss. See Kassas, 49 F.4th at 1164–66; Taggart, 249 F.3d at 992, 994.

Remand

Because this appeal arises from Wike’s motion for sanctions against the State Bar under 11 U.S.C. § 525(a), the remaining question is whether, as the BAP held, we should remand this matter to the bankruptcy court to resolve any remaining issues concerning the motion. We see no reason to do so.

Section 525(a) provides in relevant part that “a governmental unit may not deny, revoke, suspend, or refuse to renew a license . . . to . . . a person that is or has been a debtor under this title . . . solely because such . . . debtor . . . has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act.” 11 U.S.C. § 525(a) (emphasis added). The BAP held that remand was appropriate for the bankruptcy court to determine “[i]f there are other reasons preventing [Wike] from full reinstatement—such as failure to comply with the [Nevada Supreme Court’s] mentorship and accounting requirements.” But on appeal, the Nevada State Bar “stipulate[d] to the fact [that Wike] has completed all conditions of reinstatement except for payment of his disciplinary fees” and that “[t]he only condition outstanding for [Wike] is payment of the disciplinary costs.” Given this stipulation, there is no need for the bankruptcy court to consider any other arguments under § 525(a). We remand with instructions for the bankruptcy court to grant Wike’s motion for sanctions against the State Bar of Nevada.

(Mike Frisch)