Kassas v. State Bar of Cal. (In re Kassas)

• Decision Date: 15 June 2021
• Docket Number: Case No.: 2:19-bk-24457-ER,Adv. No.: 2:21-ap-01021-ER
• Court: U.S. Bankruptcy Court — Central District of California
• Parties: In re: Anthony Joseph Kassas, Debtor. Anthony Joseph Kassas, Plaintiff, v. The State Bar of California, Defendant.

In re: Anthony Joseph Kassas, Debtor.Anthony Joseph Kassas, Plaintiff, v. The State Bar of California, Defendant.

Case No.: 2:19-bk-24457-ER

Adv. No.: 2:21-ap-01021-ER

UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA LOS ANGELES DIVISION

June 15, 2021

MEMORANDUM REGARDING CERTIFICATION FOR DIRECT APPEAL TO NINTH CIRCUIT COURT OF APPEALS OF JUDGMENT OF NON-DISCHARGEABILITY

[RELATES TO DOC. NOS. 41-42]

Date: May 19, 2021

Time: 11:00 a.m.

Location: Ctrm. 1568

Roybal Federal Building

255 East Temple Street

Los Angeles, CA 90012

I. Introduction

Concurrently with the issuance of this Memorandum Regarding Certification for Direct Appeal to Ninth Circuit Court of Appeals of Judgment of Non-Dischargeability (the "Certification Memorandum"), the Court has entered a Memorandum of Decision Finding that Indebtedness Owed to the Client Security Fund of the State Bar of California is Non-Dischargeable in Bankruptcy [Doc. No. 41] (the "Memorandum"), a corresponding Judgment of Non-Dischargeability [Doc. No. 42] (the "Judgment"), and an Order Certifying Direct Appeal to the Ninth Circuit Court of Appeals of Judgment of Non-Dischargeability (the "Certification Order"). For the reasons set forth in this Certification Memorandum—which is the document required by Bankruptcy Rules 8006(b) and (e)(1)¹—the Court, on its own motion, certifies a direct appeal of the Judgment to the Ninth Circuit Court of Appeals (the "Ninth Circuit").

Bankruptcy Rule 8006(e)(1) requires that when making a certification on its own motion, the Court provide in a memorandum accompanying that certification the information required by Bankruptcy Rule 8006(f)(2)(A)-(D). That subdivision provides that a certification shall include the following information:

A) the facts necessary to understand the question presented;

B) the question itself;

C) the relief sought;

D) the reasons why the direct appeal should be allowed, including why a circumstance specified in 28 U.S.C. § 158(d)(2)(A)(i)-(iii) applies; and

E) a copy of the judgment, order, or decree and any related opinion or memorandum.

Bankruptcy Rule 8006(f)(2)(A)-(E).

A copy of the Judgment is attached hereto as Exhibit A, and a copy of the Memorandum containing the reasons for entry of the Judgment is attached hereto as Exhibit B. The facts necessary to understand the question presented, the question itself, the relief sought, and the reasons why the appeal should be allowed follow.

II. Facts Necessary to Understand the Question Presented

On December 11, 2019, Anthony Joseph Kassas ("Kassas") filed a voluntary Chapter 7 petition. On March 16, 2020, Kassas received a discharge.

Kassas was disbarred from the practice of law on January 15, 2014. Kassas owes the State Bar of California (the "State Bar") in excess of $2,090,096.32 as a result of payments made by the State Bar's Client Security Fund (the "CSF") to victims of Kassas's misconduct as an attorney (such debt, the "CSF Debt").

In the Judgment and Memorandum, the Court found that the CSF Debt is non-dischargeable pursuant to 11 U.S.C. § 523(a)(7).

III. Question Presented

Is indebtedness arising from a disbarred attorney's obligation to reimburse the State Bar for payments made by the CSF to victims of that attorney's misconduct while practicing law non-dischargeable under 11 U.S.C. § 523(a)(7)?

IV. Relief Sought

Kassas will seek reversal of the Judgment's finding that the CSF Debt is non-dischargeable pursuant to 11 U.S.C. § 523(a)(7). The State Bar will seek affirmance of that finding.

V. Reasons Why Direct Appeal Should Be Allowed

In certifying a direct appeal on its own motion, the Court is directed to state whether any of the circumstances set forth in 28 U.S.C. § 158(d)(2)(A)(i)-(iii) exist. Section 158(d)(2)(A)(i) provides that a direct appeal may be warranted if the judgment "involves a matter of public importance" or if the judgment "involves a question of law as to which there is no controlling decision of the court of appeals for the circuit."

Both circumstances apply here. The Ninth Circuit has not determined whether obligations owed to the Client Security Fund are dischargeable in bankruptcy. See Albert-Sheridan v. State Bar of California (In re Albert-Sheridan), 960 F.3d 1188, 1194 n. 5 (9th Cir. 2020), cert. denied sub nom. Albert-Sheridan v. State Bar of California, 141 S. Ct. 1090, 208 L. Ed. 2d 542 (2021), and cert. denied sub nom. State Bar of California v. Albert-Sheridan, 141 S. Ct. 1124, 208 L. Ed. 2d 563 (2021) ("The California Supreme Court alternatively ordered Albert to reimburse the State Bar's Client Security Fund, 'to the extent of any payment from the Fund to the payees, in accordance with section 6140.5.' In re Albert on Discipline, 2017 Cal. LEXIS 9745, at *1. The State Bar established a Client Security Fund to relieve or mitigate pecuniary losses caused by an attorney's dishonest conduct. Cal. Bus. & Prof. Code § 6140.5(a). Some courts have considered reimbursements to the Client Security Fund to be payable to the government. See In re Phillips, 2010 WL 4916633, at *5 (C.D. Cal. Dec. 1, 2010); Brookman v. State Bar, 46 Cal.3d 1004, 251 Cal.Rptr. 495, 760 P.2d 1023 (1988). Nevertheless, the record does not show that any Client Security Fund payments were disbursed to Orange Park Boulevard in this case. Accordingly, that issue is not before us.").

The issue of the dischargeability of obligations owed to the Client Security Fund is a matter of public importance. Whether Client Security Fund obligations are dischargeable will affect the size of the Client Security Fund and its ability to compensate victims of attorney misconduct. The issue has arisen in at least two other cases in this district² and is likely to continue to arise.

Kassas also intends to appeal the Judgment's finding that debt arising from his obligation to reimburse the State Bar for the costs of his disciplinary proceeding is non-dischargeable. Kassas acknowledges that such debt is non-dischargeable under State Bar of Cal. v. Findley (In re Findley), 593 F.3d 1048, 1054 (9th Cir. 2010), but intends to seek reconsideration of Findley on appeal. Kassas's stated desire to overturn Findley played no part in the Court's decision to certify a direct appeal. The Court's certification decision is based solely on the issue of the non-dischargeability of the CSF Debt.

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Date: June 15, 2021

/s/_________

Ernest M. Robles

United States Bankruptcy Judge

Exhibit A—Judgment

JUDGMENT OF NON-DISCHARGEABILITY

[RELATES TO DOC. NO. 27]

For the reasons set forth in the concurrently-issued Memorandum of Decision Finding that Indebtedness Owed to the Client Security Fund of the State Bar of California is Non-Dischargeable in Bankruptcy, the Court HEREBY ENTERS JUDGMENT AS FOLLOWS:

1) Indebtedness owed by Anthony Joseph Kassas to the State Bar of California (the "State Bar") arising from Kassas's obligation to reimburse the State Bar for payments made bythe State Bar's Client Security Fund (the "CSF") to victims of Kassas's misconduct while practicing law³ is excepted from Kassas's discharge pursuant to 11 U.S.C. § 523(a)(7).

2) Indebtedness owed by Kassas to the State Bar for the costs of Kassas's disciplinary proceeding is excepted from Kassas's discharge pursuant to 11 U.S.C. § 523(a)(7).

3) Indebtedness of $201,706,00 plus interest arising from an order issued by the Supreme Court of California on January 15, 2014⁴ requiring Kassas to make restitution to 56 former clients has been discharged in Kassas's Chapter 7 bankruptcy.

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Date: June 14, 2021

/s/_________

Ernest M. Robles

United States Bankruptcy Judge

Exhibit B—Memorandum

FOR PUBLICATION

MEMORANDUM OF DECISION FINDING THAT INDEBTEDNESS OWED TO THE CLIENT SECURITY FUND OF THE STATE BAR OF CALIFORNIA IS NON-DISCHARGEABLE IN BANKRUPTCY

[RELATES TO DOC. NO. 27]

At issue is whether debt in excess of $2 million owed by a disbarred attorney to the Client Security Fund of the State Bar of California is dischargeable in bankruptcy.⁵ The Court finds thatthe Client Security Fund debt is a fine payable to a governmental unit that is not compensation for actual pecuniary loss. Therefore, the debt is non-dischargeable under § 523(a)(7) of the Bankruptcy Code.⁶

I. Facts⁷

Anthony Joseph Kassas ("Kassas") was disbarred from the practice of law on January 15, 2014. Among other misconduct, Kassas advertised his legal services to financially distressed homeowners by sending them mailers falsely stating that Kassas had commenced litigation against various banks. After the homeowners advanced fees to Kassas of between $1,500 to $4,500 based upon promises that Kassas could assist them in obtaining loan modifications, Kassas failed to competently perform the promised legal services.

As part of his discipline, the California Supreme Court ordered Kassas to make restitution to 56 former clients, in the total amount of $201,706 plus interest. Kassas was also ordered to pay the State Bar $61,112.27 as reimbursement for the costs of his disciplinary proceeding.

Kassas failed to make restitution to any of his former clients. Of the 56 clients Kassas had been ordered to reimburse, 51 were subsequently reimbursed from the State Bar's Client Security Fund. The Client Security Fund also reimbursed an additional 305 applicants who were alsovictims of Kassas's misconduct as an attorney. As further discussed below, when the Client Security Fund makes payments to clients who were victims of an attorney's dishonest conduct, California law requires the attorney to reimburse the Client Security Fund for such payments, plus interest and processing costs. Aggregate payments made by the Client Security Fund to Kassas's victims amount to $1,367,978.12. Once interest of $669,751.20 and processing costs of $52,367.00 are added, Kassas owes the Client Security Fund $2,090,096.32.⁸

Kassas filed a voluntary Chapter 7 petition on December 11, 2019, and received a discharge on March 16, 2020. Kassas subsequently filed this action, which seeks a determination that the $2,090,096.32...