Debt Attorney Owed to State Bar Can’t Be Wiped Out in Bankruptcy

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By Diane Davis

A former attorney can’t wipe out in bankruptcy debt he owes to the Virginia State Bar for violating the ethical rules of conduct, the U.S. Bankruptcy Court for the Western District of Virginia held ( Virginia ex rel. Va. State Bar v. Young (In re Young) , 2017 BL 306003, Bankr. W.D. Va., No. 16-60353, 8/30/17 ).

The Virginia State Bar is entitled to a judgment in its favor as a matter of law, Judge Paul M. Black wrote Aug. 30.

Although the Fourth Circuit hasn’t yet addressed whether a debt owed to a client protection fund can be discharged in bankruptcy, other jurisdictions find that the debt is nondischargeable, the court said.

The key is whether the Virginia State Bar, through the client protection fund, aimed at penalizing the debtor, the court said. Protecting the public is the primary goal of the VSB, not just compensating the victims, the court said.

Rickey Gene Young was a practicing attorney until his license was revoked in 2003 for failing to reimburse clients for funds paid and entrusted for attorney’s fees not yet earned.

Later, Young petitioned to be reinstated but his petition was denied because he owed the client protection fund $10,972.

When Young filed Chapter 7, the VSB argued that the debt wasn’t dischargeable, or couldn’t be wiped out, under Bankruptcy Code Section 523(a)(7) because the debt is a “fine [or] penalty ... payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss.”

Attorney disciplinary proceedings have been compared to criminal proceedings in which criminal restitution can’t be discharged in bankruptcy, the court said.

The fund is a penalty and not compensation for an actual monetary loss, the court said. The payment of the debt is a protective measure to ensure the attorney has complied with the requirements to show that he is fit to resume the practice of law, the court said.

The debt to the VSB isn’t just to compensate the fund for costs but as a consequence to Young for violating ethical rules of conduct while he was a licensed attorney, the court said.

Robert B. McEntee, Jr., Office of the Attorney General, Commonwealth of Virginia, Richmond, Va., represented VSB; Rickey Gene Young represented himself; and Chapter 7 Trustee Steven L. Higgs, Steven L. Higgs, P.C., Roanoke, Va., represented himself.

To contact the reporter on this story: Diane Davis in Washington at DDavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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