Kassas v. State Bar of Cal.

“[A]n individual debtor [is not discharged] from any debt—to the extent such debt is for a fine, penalty, or forfeiture . . . and is not compensation for actual pecuniary loss.” 11 U.S.C. §523(a)(7).

Kassas was disbarred and ordered to pay restitution to 56 former clients who were harmed by his misconduct. After filing for Chapter 7 bankruptcy, Kassas petitioned for declaratory relief showing that all debts to the State Bar were discharged. The bankruptcy court found that money owed to the Client Security Fund (CSF) was non-dischargeable, and the Circuit Court granted permission to appeal. On appeal, the State Bar argued that money owed to CSF was non-dischargeable due to its penal and rehabilitative purposes. “[A]n individual debtor [is not discharged] from any debt—to the extent such debt is for a fine, penalty, or forfeiture . . . and is not compensation for actual pecuniary loss.” 11 U.S.C. §523(a)(7). The Court reasoned that pursuant to CSF’s organic statute, the State Bar was subrogated to the rights of Kassas’ former clients. In addition, the Court reasoned that CSF payments to victims of attorney misconduct were compensatory damages and limited to “actual pecuniary loss.” The Court concluded that reimbursement to CSF for payments to victims of Kassas’ misconduct were dischargeable as compensation. The Court reversed the judgment of the bankruptcy court on this issue, but affirmed its judgment that Kassas’ disciplinary costs were not discharged.