Costs of Attorney Disciplinary Proceeding Not Dischargeable

Posted by NCBRC - March 1, 2022

An order by the state that a lawyer pay the costs of the regulatory authority’s action against him for professional misconduct was penal rather than compensatory for purposes of nondischargeability. Osicka v. Office of Lawyer Reg., No. 21-1556 (7th Cir. Feb. 7, 2022).

The chapter 7 debtor, a Wisconsin lawyer, was subjected to disciplinary proceedings before the Wisconsin Office of Lawyer Regulation for misconduct in the handling of one of his client’s cases. The referee recommended temporary suspension of his law license, full restitution in the amount of $150, and the costs of the disciplinary proceedings. In re Disciplinary Proceedings Against Osicka, 765 N.W.2d 775 (Wis. 2009). The debtor appealed to the Wisconsin Supreme Court which reduced the suspension to a public reprimand and upheld but the reduced the order for costs to $12,500.64.

After the debtor obtained his bankruptcy discharge, the OLR continued to pursue him for the costs. He moved to reopen his bankruptcy and filed an adversary complaint against the OLR. The bankruptcy court found the debt was a “penalty” which was excepted from discharge under section 523(a)(7) and granted summary judgment in favor of the OLR. The district court affirmed.

On appeal, the Seventh Circuit interpreted section 523(a)(7) which excepts from discharge a debt that “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, other than a [particular] tax penalty.” The debtor argued that the exception to discharge was inapplicable because the order for costs was compensation rather than a fine, penalty or forfeiture.

The court disagreed. In the absence of statutory definition of “fine, penalty or forfeiture,” the court looked to the ordinary meanings of the terms. It found that the costs were not a “forfeiture,” as that typically involves an offender’s return of ill-gotten gains, and in this case, the costs were not in recompense for the underlying misconduct with respect to his clients. The court therefore moved on to determine whether they were a “fine” or “penalty.” Observing that fines and penalties are similar, the court noted that typically courts have not equated “fines” and “costs.” Therefore, it went on to address whether the cost order could be considered a “penalty.” According to Black’s Law Dictionary, a penalty is a “[p]unishment imposed on a wrongdoer” that can take the form of a “sum of money exacted as punishment for either a wrong to the state or a civil wrong.”

While the Wisconsin Supreme Court may order costs in various proceedings, attorney misconduct proceedings are unique in that the order must be based on a finding of misconduct. The amount of the costs may be based on the degree of attorney culpability. In this case, the referee found several aggravating circumstances including his failure to cooperate with the investigation, lack of responsibility or remorse, and the existence of a similar previous disciplinary action.

The court rejected the debtor’s argument that the fact that the cost order was based on the actual cost of the disciplinary proceeding made it compensatory rather than penal. The court found that because disciplinary proceedings are an ongoing function of the OLR covered by its operating budget, use of those funds to conduct disciplinary proceedings did not result in actual pecuniary loss.

The court found support in Kelly v. Robinson, 479 U.S. 36 (1986), which held that section 523(a)(7) is intended to further the state’s interest in “rehabilitation and punishment.” In Pennsylvania Department of Public Welfare v. Davenport, 495 U.S. 552 (1990), the Court clarified that section 523(a)(7) exempts from discharge “both civil and criminal fines.” Furthermore, the court in In re Zarzynski, 771 F.2d 304, 306 (7th Cir. 1985), noted that criminal expense orders are not intended to make the government “whole” or create a debtor-creditor relationship, but are used as a method of punishment. The court found “no contradiction between punishing attorney misconduct and measuring that punishment based on the government’s expenses.”

The court affirmed.

Osicka 7th Cir Feb 2022


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