The State Bar of California v. Findley

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	No. 04-41110 TT
Chapter 7
JOHN WILLIAM FINDLEY, III,
Debtor.
___________________________/
THE STATE BAR OF CALIFORNIA, 	A.P. No. 06-4180 AT
Plaintiff,
vs.
JOHN WILLIAM FINDLEY,III,
Defendant.
___________________________/
MEMORANDUM OF DECISION
In 	this 	adversary 	proceeding, 	plaintiff 	The 	State 	Bar 	of
California 	(the 	“State 	Bar”) 	seeks 	a 	determination 	that 	its 	pre-
petition 	claim 	against 	defendant 	John 	William 	Findley, 	III 	(the
“Debtor”) 	is 	nondischargeable 	pursuant 	to 	11 	U.S.C. 	§ 	523(a)(7).
After the Debtor moved unsuccessfully for judgment on the pleadings,
the 	State 	Bar 	moved 	for 	summary 	judgment 	in 	its 	favor. 	The 	Debtor
opposed the motion, and the motion was argued to the Court. 	Having
Signed: April 25, 2007
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
April 25, 2007
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 06-04180 Doc# 56 Filed: 04/25/07 Entered: 04/25/07 10:34:34 Page 1 of 9

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considered 	the 	arguments 	of 	the 	parties 	and 	the 	underlying 	facts,
which are essentially undisputed, the Court concludes that the motion
should 	be 	granted. 	The 	reasons 	for 	the 	Court’s 	decision 	are 	set
forth below.
SUMMARY OF UNDISPUTED FACTS
The 	Debtor 	is 	a 	California 	attorney. 	In 	2003, 	the 	State 	Bar
investigated a complaint about the Debtor made by one of the Debtor’s
former clients. 	Based on that investigation, the State Bar charged
the Debtor with violating various sections of the California Rules of
Professional 	Conduct 	and 	the 	California 	Business 	and 	Professions
Code. 	The 	hearing 	officer 	assigned 	to 	the 	matter 	recommended 	that
the 	Debtor 	be 	suspended 	from 	the 	practice 	of 	law 	for 	one 	year 	and
that he serve two years on probation after that.
On March 2, 2004, the Debtor filed a voluntary petition seeking
relief 	under 	chapter 	7 	of 	the 	Bankruptcy 	Code. 	He 	received 	a
discharge on June 9, 2004.
On 	June 	15, 	2005, 	the 	State 	Bar 	Review 	Department 	issued 	an
Opinion on Review, adopting, with minor modifications, the findings
and 	disciplinary 	actions 	recommended 	by 	the 	hearing 	officer. 	On
August 	24, 	2005, 	the 	State 	Bar 	issued 	a 	Certificate 	of 	Costs,
directing 	the 	Debtor 	to 	pay 	the 	State 	Bar 	the 	costs 	of 	the
disciplinary 	proceeding 	in 	the 	amount 	of 	$14,054.94 	(the 	“Cost
Award”). 	The 	Cost 	Award 	was 	issued 	pursuant 	to 	Cal. 	Bus. 	& 	Prof.
Code 	§ 	6086.10, 	which 	requires 	the 	State 	Bar, 	absent 	proof 	of
hardship, to require an attorney subjected to discipline to pay the
costs 	of 	the 	action. 	On 	November 	16, 	2005, 	the 	California 	Supreme
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Court 	denied 	the 	Debtor’s 	petition 	to 	review 	the 	Opinion 	on 	Review
and the Cost Award, thereby adopting the opinion and the award.
Thereafter, 	the 	Debtor 	moved 	to 	reopen 	his 	bankruptcy 	case.
When 	the 	case 	was 	reopened, 	the 	State 	Bar 	filed 	this 	adversary
proceeding, 	seeking 	a 	declaration 	that 	the 	Cost 	Award 	was
nondischargeable pursuant to 11 U.S.C. § 523(a)(7).
DISCUSSION
Section 523(a)(7) provides, in pertinent part, that a chapter 7
discharge does not discharge an individual debtor from a debt:
(7) 	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,...
...
(B) imposed with respect to a transaction or
event 	that 	occurred 	before 	three 	years 	before
the date of the filing of the petition.
11 U.S.C. § 523(a)(7)[emphasis added]. 	The Debtor contends that the
Cost Award is not entitled to be excepted from his discharge because
it represents compensation for the State Bar’s actual pecuniary loss.
In 	support 	of 	this 	contention, 	the 	Debtor 	cites 	In 	re 	Taggart, 	249
F.3d 987 (9 th Cir. 2001).
In 	Taggart, 	as 	here, 	an 	attorney 	disciplined 	by 	the 	State 	Bar
was ordered to pay the costs of the disciplinary proceeding pursuant
to Cal. Bus. & Prof. Code § 6086.10. 	Thereafter, the attorney filed
for bankruptcy and received a discharge. 	An adversary proceeding was
commenced 	to 	determine 	whether 	the 	debtor’s 	liability 	for 	the 	cost
award was excepted from the debtor’s discharge pursuant to 11 U.S.C.
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§ 	523(a)(7). 	The 	Taggart 	court 	held 	that 	the 	cost 	award 	had 	been
discharged.
The 	Taggart 	court 	based 	this 	conclusion 	primarily 	on 	a
comparison of Bus. & Prof. Code § 6086.10, as in effect at the time,
with 	§ 	6086.13. 	Section 	6086.13 	refers 	to 	the 	an 	attorney 	may 	be
required to pay when the attorney is suspended, disbarred, or resigns
while a disciplinary action is pending as a 	monetary sanction. 	By
contrast, § 6086.10 refers to the amount the attorney is ordered to
pay 	as 	an 	award 	of 	costs. 	The 	Taggart 	court 	also 	found 	it
significant that the § 6086.10 cost award was mandatory, absent proof
of hardship, whereas the § 6086.13 sanction award was discretionary.
The 	Taggart 	court 	also 	noted 	that 	§ 	6086.10(d) 	permits 	an
exonerated attorney to reimbursement for his payment of a cost award.
It likened this provision to Cal. Civ. Proc. Code §§ 1032(a)(4),(b),
which 	permit 	the 	prevailing 	party 	in 	a 	civil 	action 	to 	recover 	its
litigation 	costs 	from 	the 	other 	party 	where 	the 	other 	party 	has
engaged 	in 	bad 	faith 	tactics. 	Taggart, 	249 	F.3d 	at 	992-3, 	n6.
Finally, 	the 	Taggart 	court 	cited 	language 	from 	the 	legislative
history of § 6085.13, noting the need for a provision authorizing the
imposition 	of 	fines 	as 	opposed 	to 	mere 	cost 	reimbursement. 	Id. 	at
993. 	Based on these indicia, the Taggart court concluded that it was
the intent of the California legislature, in enacting § 6086.10, to
require the disciplined attorney to reimburse the State Bar for its
actual pecuniary loss rather than to impose a sanction.
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In 	2003, 	the 	California 	Legislature 	amended 	Cal. 	Bus. 	& 	Prof.
Code § 6086.10, among other things, by adding a new subsection (e) as
follows:
In 	addition 	to 	other 	monetary 	sanctions 	as 	may
be 	ordered 	by 	the 	Supreme 	Court 	pursuant 	to
Section 6086.13, costs imposed pursuant to this
section 	are 	penalties, 	payable 	to 	and 	for 	the
benefit of the State Bar of California, a public
corporation 	created 	pursuant 	to 	Article 	VI 	of
the 	California 	Constitution, 	to 	promote
rehabilitation and to protect the public. 	This
subdivision is declaratory of existing law.
Cal. 	Bus. 	& 	Prof. 	Code 	§ 	6086.10(e). 	The 	State 	Bar 	contends 	that
this amendment was made to statutorily overrule Taggart. 	In support
of this contention, the State Bar filed the Declaration of Lawrence
Doyle 	(“Doyle” 	and 	the 	“Doyle 	Declaration”) 	and 	a 	Request 	for
Judicial Notice (the “RJN”) attached to which, among other things, is
a copy of the Enrolled Bill AB 1708 (the “Enrolled Bill”).
In 	the 	Doyle 	Declaration, 	Doyle 	states 	that, 	as 	Chief
Legislative 	Counsel 	for 	the 	State 	Bar, 	in 	2003, 	he 	drafted 	several
amendments to AB 1708, a bill authored by the Assembly Committee on
Judiciary 	and 	sponsored 	by 	the 	State 	Bar. 	He 	states 	that 	those
amendments were incorporated into the bill that was ultimately signed
into 	law 	on 	September 	8, 	2003. 	He 	states 	that 	§ 	6086.10(e) 	was
drafted 	in 	response 	to 	Taggart, 	“to 	expressly 	clarify 	and 	re-state
the 	intent 	of 	[the] 	California 	Legislature 	that 	disciplinary 	costs
are 	monetary 	sanctions 	and 	are 	part 	of 	the 	punishment 	imposed 	on
California 	lawwyers 	for 	professional 	misconduct....” 	Doyle
Declaration, p.2, para. 4.
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1The Debtor also makes a half-hearted challenge to the
constitutionality of the California attorney disciplinary scheme.
He devotes less than one full page of his nine page brief to this
endeavor and cites no authority for his contentions. 	The Court
6
The Enrolled Bill does not make reference to Taggart. 	However,
in the Background section, it states that “one of...[the substantive
amendments] would clarify that orders to pay disciplinary costs, like
the 	costs 	of 	prosecution 	imposed 	on 	criminal 	defendants, 	would 	be
analogous 	to 	fines 	and 	not 	dischargeable 	in 	bankruptcy.” 	Enrolled
Bill, 	p.3, 	Background, 	para. 	2; 	see 	Kelly 	v. 	Robinson, 	479 	U.S. 	36
(1986)(restitution 	order 	imposed 	as 	part 	of 	criminal 	sentence 	was
penalty 	and 	thus 	excepted 	from 	bankruptcy 	discharge 	pursuant 	to 	11
U.S.C. § 523(a)(7).
In 	response, 	the 	Debtor 	contends 	that 	Taggart 	was 	correctly
decided and is still controlling law. 	He asserts that, even assuming
the amendment to § 6086.10, adding new subsection (e), was intended
to 	statutorily 	reverse 	Taggart, 	its 	language 	was 	insufficient 	to
accomplish 	that 	purpose. 	He 	concedes 	that 	§ 	6086.10(e) 	makes 	it
clear that the cost award mandated under § 6086.10(a) is intended to
serve as a penalty. 	However, he argues that this only addresses one
of 	the 	two 	requirements 	for 	nondischargeability 	under 	11 	U.S.C. 	§
523(a)(7). 	According 	to 	the 	Debtor, 	to 	be 	excepted 	from 	the
discharge 	pursuant 	to 	§ 	523(a)(7), 	the 	cost 	award 	must 	also 	not 	be
compensation for actual pecuniary loss. 	In other words, he assumes
that 	an 	award 	may 	be 	both 	a 	penalty 	and 	compensation 	for 	actual
pecuniary 	loss 	rather 	than 	those 	two 	criteria 	being 	mutually
exclusive. 1
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26 declines to address a constitutional challenge raised in such a
cursory fashion.
7
The 	Court 	is 	not 	persuaded. 	His 	argument 	fails 	even 	if 	he
correctly 	assumes 	that 	a 	cost 	award 	can 	be 	both 	a 	penalty 	and
intended as compensation for actual pecuniary loss. 	In construing a
statute, one must attempt to give meaning to all of its terms. 	The
Debtor’s 	construction 	ignores 	the 	final 	portion 	of 	§ 	6086.10(e):
i.e., 	stating 	that 	the 	purpose 	of 	the 	award 	is 	“to 	promote
rehabilitation and to protect the public.” 	This statement of purpose
undercuts the Debtor’s contention that the purpose of the award is to
compensate the State Bar for its actual pecuniary loss.
Moreover, 	the 	Court 	does 	not 	read 	11 	U.S.C. 	§ 	523(a)(7) 	to
require 	proof 	of 	two 	elements: 	(1) 	that 	the 	monetary 	award 	is 	a
penalty and (2) that the monetary award is not intended to compensate
for 	actual 	pecuniary 	loss. 	Rather, 	the 	Court 	reads 	11 	U.S.C. 	§
523(a)(7) as creating two mutually exclusive categories of monetary
awards: i.e., (1) penalties and (2) awards intended to compensate for
actual 	pecuniary 	loss. 	Moreover, 	this 	is 	how 	the 	Taggart 	court
appears 	to 	have 	read 	§ 	523(a)(7). 	See 	Taggart, 	249 	F.3d 	at 	989
(“Because 	we 	conclude 	that, 	in 	California, 	such 	costs 	are
compensation to the State Bar for ‘actual pecuniary loss’ rather than
‘fine[s], penalt[ies], or forfeiture[s],’ we reverse the decision of
the 	Bankruptcy 	Appellate 	Panel 	and 	remand 	with 	instruction 	to
discharge the appellant’s debt to the State Bar.”)(Emphasis added.)
Summary 	judgment 	is 	appropriate 	when 	there 	are 	no 	disputed
issues of material fact. 	Fed. R. Civ. Proc. 56(c), made applicable
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to 	this 	proceeding 	by 	Fed. 	R. 	Bankr. 	Proc. 	7056. 	The 	only 	dispute
presented 	here 	is 	how 	11 	U.S.C. 	§ 	523(a)(7) 	and 	Cal. 	Bus. 	& 	Prof.
Code 	§ 	6086.10(a) 	and 	(e) 	should 	be 	construed. 	The 	proper
construction of a statute is a question of law. 	Johnson Industrial
Sales, 	Inc. 	v. 	Strema 	Sales 	Corp., 	2007 	WL 	786793, 	*2 	(March 	16,
2007). 	Because the Court construes the amended version of § 6086.10
to 	statutorily 	reverse 	Taggart 	and 	to 	clarify 	that 	the 	cost 	award
mandated 	by 	§ 	6086.10(a) 	is 	intended 	as 	a 	penalty 	and 	not 	as
compensation 	for 	actual 	pecuniary 	loss, 	the 	Court 	will 	grant 	the
State Bar’s motion for summary judgment.
CONCLUSION
The 	State 	Bar 	is 	entitled 	to 	summary 	judgment, 	declaring 	the
Cost Award excepted from the Debtor’s bankruptcy discharge pursuant
to 	11 	U.S.C. 	§ 	523(a)(7). 	The 	2003 	amendment 	to 	Cal. 	Bus. 	& 	Prof.
Code 	§ 	6086.10 	statutorily 	reversed 	Taggart, 	which 	would 	otherwise
compel the Court to conclude that the Cost Award had been discharged.
Counsel 	for 	the 	State 	Bar 	is 	directed 	to 	submit 	a 	proposed 	form 	of
order and judgment in accordance with this decision.
END OF DOCUMENT
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COURT SERVICE LIST
John William Findley, III
167 Cleopatra
Pleasant Hill, CA 94523
Kevin W. Coleman
Schnader Harrison Segal and Lewis LLP
One Montgomery St. #2200
San Francisco, CA 94104
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