819 F.3d 1206
9th Cir.2016Background
- Marilyn Scheer, a California attorney with a suspended license, received $5,500 in advance fees from client Clark for mortgage-modification services; Clark sought return via California mandatory fee arbitration.
- An arbitrator found Scheer violated Cal. Civ. Code § 2944.7(a) and ordered refund of $5,500 plus a $275 filing fee (total $5,775); Scheer made partial payments but did not pay the balance.
- The State Bar’s Presiding Arbitrator sued Scheer in state bar court for failure to pay; the state bar court placed her on involuntary inactive enrollment (suspending her right to practice) until she repaid the award.
- Scheer filed Chapter 7 bankruptcy, listing Clark and the State Bar as creditors; neither objected to discharge in the bankruptcy case. She then sought reinstatement under 11 U.S.C. § 525(a).
- The bankruptcy and district courts held Scheer’s debt nondischargeable under 11 U.S.C. § 523(a)(7); Scheer appealed to the Ninth Circuit.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the arbitration refund ordered to Clark is nondischargeable under 11 U.S.C. § 523(a)(7) | Scheer: the debt is dischargeable because it is a private compensatory refund to a client, not a fine, penalty, or governmental-for-benefit payment | State Bar: the debt is nondischargeable under § 523(a)(7) because the State’s regulatory interest and the suspension make the obligation akin to governmental fines/penalties or disciplinary obligations | The Ninth Circuit held the debt is dischargeable; § 523(a)(7) does not apply to a private compensatory arbitration award like this one |
Key Cases Cited
- Kelly v. Robinson, 479 U.S. 36 (1986) (criminal restitution can be nondischargeable under § 523(a)(7) because it serves State penal/rehabilitative interests)
- State Bar of Cal. v. Findley (In re Findley), 593 F.3d 1048 (9th Cir. 2010) (attorney-discipline costs payable to state were nondischargeable under § 523(a)(7) where state law showed rehabilitative/ public-protection purpose)
- Barrientos v. Wells Fargo Bank, N.A., 633 F.3d 1186 (9th Cir. 2011) (standard of review: district court review of bankruptcy court decisions is de novo)
- Snoke v. Riso (In re Riso), 978 F.2d 1151 (9th Cir. 1992) (exceptions to discharge construed narrowly in favor of debtor)
- Cent. Virginia Cmty. Coll. v. Katz, 546 U.S. 356 (2006) (bankruptcy in rem jurisdiction can override state sovereign immunity in certain contexts)