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

Decision Date14 June 2021
Docket NumberCase No.: 2:19-bk-24457-ER,Adv. No.: 2:21-ap-01021-ER
Citation631 B.R. 469
Parties IN RE: Anthony Joseph KASSAS, Debtor. Anthony Joseph Kassas, Plaintiff, v. The State Bar of California, Defendant.
CourtU.S. Bankruptcy Court — Central District of California

Suzanne C. Grandt, State Bar of California, San Francisco, CA, for Defendant.

M. Jonathan Hayes, Resnik Hayes Moradi LLP, Encino, CA, for Plaintiff.


Ernest M. Robles, United States Bankruptcy Judge

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. 1

The Court finds that the 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.2

I. Facts3

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 also victims 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 $2,090,096.32.4

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 in Client Security Fund debt, the $61,112.27 in disciplinary costs, and the $201,706 in restitution obligations ordered by the California Supreme Court were discharged in his bankruptcy.

The State Bar concedes, and the Court agrees, that the $201,706 in restitution payments has been discharged.5 Kassas acknowledges that under State Bar of Cal. v. Findley (In re Findley) , 593 F.3d 1048, 1054 (9th Cir. 2010), the Court is required to find that the $61,112.27 in disciplinary costs has not been discharged.6 Therefore, the dispute before this Court is limited to the dischargeability of the $2,090,096.32 in Client Security Fund debt.

The outcome hinges on the proper characterization of this Client Security Fund debt. According to the State Bar, the debt is a fine, penalty, or forfeiture payable to a governmental unit (the State Bar) that is not compensation for actual pecuniary loss. The State Bar's theory is that the debt's primary purpose is to punish Kassas by forcing him to confront, in concrete terms, the magnitude of the harm caused by his actions. Kassas disputes this characterization. He argues that because his reimbursement obligation is calculated by the amount paid to his victims, the State Bar is acting as a conduit to reimburse third parties for actual pecuniary loss.

II. Discussion
A. Kassas's Client Security Fund Indebtedness is Non-Dischargeable

"A Chapter 7 bankruptcy discharge releases the debtor from personal liability for her pre-bankruptcy debts." Boeing North American, Inc. v. Ybarra (In re Ybarra) , 424 F.3d 1018, 1022 (9th Cir. 2005). Section 523 of the Bankruptcy Code enumerates nineteen categories of debts that are not covered by the discharge. One of the exceptions provides that debt is non-dischargeable "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." § 523(a)(7).

The Ninth Circuit has not determined whether debt owed to the Client Security Fund is non-dischargeable under § 523(a)(7). See Albert-Sheridan v. State Bar of California (In re Albert-Sheridan) , 960 F.3d 1188, 1194 n. 5 (9th Cir. 2020) (stating that the issue of the dischargeability of reimbursements to the Client Security Fund was not before the court).

The Client Security Fund was established "to relieve or mitigate pecuniary losses caused by the dishonest conduct of licensees of the State Bar...." Cal. Bus. & Prof. Code § 6140.5(a). Any attorney "whose actions have caused the payment of funds to an applicant from the Client Security Fund shall owe those funds to the State Bar and reimburse the Client Security Fund for all moneys paid out as a result of the [attorney's] conduct with interest, in addition to the payment of the assessment for the procedural costs of processing the claim." Id. at § 6140.5(c). The State Bar is permitted to "collect any money paid out by the Client Security Fund ... through any means provided by law." Id.

Funds are distributed from the Client Security Fund pursuant to rules promulgated by a Client Security Fund Commission (the "Commission") created by the Board of Trustees of the State Bar (such rules, the "CSF Rules"). "To qualify for reimbursement, an applicant must establish a loss of money or property that was received by an active attorney who was acting as an attorney or in a fiduciary capacity customary to the practice of law...." CSF Rule 3.430(A). The loss must have been caused by "dishonest conduct," defined as (1) the "theft or embezzlement of money," (2) the "[f]ailure to refund unearned fees received in advance for services when the attorney performed an insignificant portion of the services or none at all," (3) the borrowing of money "from a client without the intention or reasonable ability ... of repaying it," (4) the obtaining of money or property "from a client for an investment that was not in fact made," or (5) "[a]n act of intentional dishonesty or deceit that proximately leads to the loss of money or property." CSF Rules 3.430–3.431.

The Commission has discretion "to deny or limit reimbursement" to applicants, and "[n]o person or entity has a right to reimbursement" from the Client Security Fund. CSF Rule 3.430(D); see also People v. Hume , 196 Cal. App. 4th 990, 999, 126 Cal. Rptr. 3d 824, 830 (2011) ("By statute and rule, all [Client Security Fund] payments made by the State Bar are entirely discretionary."). For example, reimbursement may be limited where an "applicant failed to act reasonably to protect against the loss, considering the circumstances of the transaction, the past dealings with the attorney, and differences in their education and business sophistication." CSF Rule 3.435.

Once an application for reimbursement is received, counsel for the Client Security Fund conducts an investigation and submits a Tentative Decision to the Commission. The Tentative Decision is served on the attorney and the applicant, each of whom have thirty days to file objections thereto. CSF Rule 3.443(B). Any objections are considered by the Commission, which has the ability to conduct hearings and receive evidence. CSF Rule 3.441(C). After considering objections, the Commission issues a Final Decision. Either the applicant or the attorney may seek review of the Commission's Final Decision in the California Superior Court, pursuant to Cal. Civ. Proc. Code § 1094.5 and CSF Rule 3.450. The maximum allowable payment per applicant is $100,000. CSF Rule 3.434(A).

Here, the State Bar made reimbursement payments in the aggregate amount of $1,367,978.12 to 356 of Kassas's victims. The highest payment made to a single victim was $14,125; the lowest payment made was $958.33. The typical victim received a payment of between $3,000 to $6,000.

In Kelly v. Robinson , the Supreme Court held that restitution imposed in connection with a criminal conviction is non-dischargeable under § 523(a)(7). 479 U.S. 36, 107 S.Ct. 353, 93 L.Ed.2d 216 (1986). In reaching this conclusion, the court emphasized that the overriding purpose of criminal restitution is to benefit society by rehabilitating offenders:

The criminal justice system is not operated primarily for the benefit of victims, but for the benefit of society as a whole. Thus, it is concerned not only with punishing the offender, but also with rehabilitating him. Although restitution does resemble a judgment "for the benefit of" the victim, the context in which it is imposed undermines that conclusion. The victim has no control over the amount of restitution awarded or over the decision to award restitution. Moreover, the decision to impose restitution generally does not turn on the victim's injury, but on the penal goals of the State and the situation of the defendant....
Because criminal proceedings focus on the State's interests in rehabilitation and punishment, rather than the victim's desire for compensation, we conclude that restitution orders imposed in such proceedings operate "for the benefit of" the State. Similarly, they are not assessed "for ... compensation" of the victim. The sentence following a criminal conviction necessarily

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2 cases
  • Kassas v. State Bar of Cal.
    • United States
    • U.S. Court of Appeals — Ninth Circuit
    • August 1, 2022
    ...and ... not compensation for actual pecuniary loss." The bankruptcy court granted summary judgment for the State Bar. In re Kassas , 631 B.R. 469 (Bankr. C.D. Cal. 2021). The court concluded that while the restitution payments were discharged, the disciplinary costs and reimbursements paid ......
  • Kassas v. State Bar of Cal.
    • United States
    • U.S. Court of Appeals — Ninth Circuit
    • August 1, 2022
    ...and . . . not compensation for actual pecuniary loss." The bankruptcy court granted summary judgment for the State Bar. In re Kassas, 631 B.R. 469 (Bankr. C.D. Cal. 2021). The court concluded that while the restitution payments discharged, the disciplinary costs and reimbursements paid from......

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