Appendix A – The
Bankruptcy Brief
In re Onken, SC S57801
The Bankruptcy Issue
In
spring of 1990, Mr. Onken filed bankruptcy listing as creditors commercial
lenders, holders of student loans, the Oregon State Bar, an ex-employer, and
three potential malpractice claimants.
After contested case proceedings with the Bar, the ex-employer and the
holders of student loans all the listed debts were discharged. He had no employment income that year and
would not again earn a paycheck until the summer of 1992. When he was readmitted to the Bar in 1993 no
questions were raised about the bankruptcy, the discharge, or repayment of any
of the debts. As of the filing of this
application for reinstatement, none of the discharged debts have been
repaid.
One
of the issues raised by the Bar in its statement of objections is to what
extent Mr. Onken has paid restitution to those injured by his misconduct as a
lawyer. In doing so they raise the
issue of whether there are issues of morality and character surrounding the decade-old
bankruptcy that preclude him from being readmitted. To a certain extent this comes down to whether some or all of the
discharged debts can be labeled “moral obligations” or “restitution” and thus
be exempt from the nondiscrimination provisions of the bankruptcy code.
In
Perez v. Campbell,
402 U.S. 637, 91 S.Ct 1704, 1971 U.S. Lexis 127 (1971) the court held
unconstitutional an Arizona statute denying driving privileges to a party with
an unpaid judgment arising out of a traffic accident even if the judgment had
been discharged in bankruptcy. In that
case the Arizona law, like Oregon’s attorney discipline scheme, had been
definitively construed as existing solely for the protection of the public and
not for the punishment of judgment debtors.
The question was whether the statute conflicted with the Bankruptcy Act
that is similarly clear in providing debtors a new opportunity in life and a
clear field for future effort. The
court proceeded to examine the effect of the act -- not the stated
purpose. The court stated, ”We can no
longer adhere to the aberrational doctrine of Kessler and Reitz that state law
may frustrate the operation of federal law as long as the state legislature in
passing its law had some purpose in mind other than one of frustration.”
In 1978 the Perez
decision was ratified by congress and codified at 11 USC § 525
(a) ... a governmental unit may
not deny, revoke, suspend, or refuse to renew a license, permit, charter,
franchise, or other similar grant to, condition such a grant to, discriminate
with respect to such a grant against, deny employment to, terminate the
employment of, or discriminate with respect to employment against, a person
that is or has been a debtor under this title [11 USCS §§ 101 et seq.] or a
bankrupt or a debtor under the Bankruptcy Act or another person with whom such
bankrupt or debtor has been associated, solely because such bankrupt or debtor
is or has been a debtor under this title [11 USCS §§ 101 et seq.] or a bankrupt
or debtor under the Bankruptcy Act, has been insolvent before the commencement
of the case under this title [11 USCS §§ 101 et seq.], or during the case but
before the debtor is granted or denied a discharge, or has not paid a debt that
is dischargeable in the case under this title [11 USCS §§ 101 et seq.] or that
was discharged under the Bankruptcy Act.
Section 525(a) essentially
prohibits the type of discrimination referred to in the subsection if the
discriminatory act is taken because of one of three triggering events. These
three events can be (1) use of the bankruptcy process, (2) the debtor's
insolvency, or (3) failure to pay a dischargeable obligation. In the instant case we face those issues
surrounding failure to pay dischargeable obligations.
Perez reflects
conventional morality and an ancient social sensibility that the obligations of
creditors and debtors are intimately related.
Thus, Deuteronomy (15:1) provides that debts be forgiven every seven
years and provides sanctions for those who would try and evade the debt relief
provisions (15:9). Mathew entreats God to forgive us our debts, as we also have
forgiven our debtors (6:12). The Koran
advises creditors to forgive debtors who cannot pay and prohibits the charging
of interest. A basic assumption in Judeo-Christian morality is that we all fall
short -- thus forgiveness is both our need and our obligation. No person may claim morality solely due to
paying his debts, but must also be willing to forgive the debts owed him. In the modern world of commerce, government
and large financial institutions forgiveness of the personal Biblical kind is
impractical. Instead our legislative
bodies provide the rules for the collection and forgiveness of debt. Individual
Bar members are entitled to advocate a moral system that contrasts with the
legislative scheme: one in which
creditors have the higher moral ground and debtors are not forgiven. They cannot, however, according to federal
law impose that moral vision upon the admission process for the practice of law
nor can they build a separate morality for lawyers that eliminates the right to
seek debt relief.
The
Oregon Court has only obliquely referred to Perez and 11 USC § 525(a)
but has recognized the policies on which it is based. Thus, in In re Taylor, 293 Or
285, 647 P2d 462 (1982) the court noted that the filing of bankruptcy standing
alone is not a factor to be considered in determining moral fitness. Similarly in In re Scallon, 327 Or 32, 956 P2d 982n (1997) the court declined to hold that a
bankruptcy in the history of an applicant for admission to the bar is
disqualifying even when it appears the financial difficulties that led to the
bankruptcy were the fault of the applicant.
While
the filing of bankruptcy and failing to pay discharged debts cannot be ground
for denying one a license to practice law, nothing in federal law prohibits a
disciplinary tribunal or court from examining the circumstances surrounding a
bankruptcy filing in an evaluation of an applicants general moral fitness. In re Taylor, 293 Or at 294 n.4. Thus, when applicants have manipulated the
bankruptcy law in highly technical ways to avoid payment of debts that might
have been easily paid, courts have been willing to find the applicant sufficiently
lacking in character to be denied admission to the Bar.
In
Taylor, the Oregon court quoted with approval In re Gahan, 279 NW2d
826, 831 (Minn 1979) to the effect that applicants who default on serious
financial obligations such as student loans are lacking in good moral character
if the default is neglectful, irresponsible and cannot be excused by compelling
hardship. In Gahan, as in
several other cases, the applicant filed for bankruptcy and discharged student
loans within a few months of graduating from law school and at a time when the
applicant’s future actually looked financially promising. The Gahan court
was careful to point out, however, that it was the default rather than the
discharge or failure to repay that formed the basis for their decisions. The court wrote wrote,
Consistent with Gahan's Federal bankruptcy rights, we expressly state that our decision is in no way influenced by any assessment of Gahan's motivation in seeking bankruptcy. Nor are we interested in whether Gahan has any present willingness or ability to reaffirm the debts. We have based our decision solely on the circumstances surrounding Gahan's default on the student loans and the resulting failure to satisfy this important obligation. Gahan's subsequent conduct of obtaining discharge in bankruptcy and release from the default is of no concern to us.
Similarly, in Florida Bd of Bar Examiners re
GWL, 364 So2d 454 (Fla 1978) the court faced an applicant who filed for
bankruptcy to discharge student loans three days before he graduated from law
school and long before any significant debts became due. Over dissents that worried about
constitutionality, the court held that the applicant’s calculated avoidance of
debt during a brief period in which he was technically bankrupt demonstrated
sufficient lack of moral character to deny him admittance. In Florida Bd of Bar Examiners re
Groot, 365 So2d 164 (Fla 1978) the same court, however, allowed the
admission of an applicant who had discharged loans in bankruptcy soon after
graduation from law school and just a week before he accepted a job as
legislative assistant. In Groot the court held that “the mere fact
that debts are incurred beyond a debtor's present capacity to repay them is
not, without more, an indication of immorality,” and explained that the
expenses incident to being the single father of two children were sufficient
justification for bankruptcy relief.
And in Florida Bd of Bar Examiners re SMD,
609 So. 2d 1309 (Fla. 1992) the court allowed admission of an applicant who
filed bankruptcy in her last semester of law school to discharge about $25,000
in credit card debt noting that the vast majority of the credit card charges
were to maintain herself while going to school.
What is consistent throughout these cases is that the analysis
goes to the circumstances surrounding the default, not the discharge. Defaults when there is no need to do so or
default and discharge immediately before a predictable financial upturn suggest
and immoral manipulation of legal process.
However, defaults occurring in circumstances traditionally associated
with financial hardship have not been held to be indicators of immorality even
if the financial hardship was brought about by the foolishness of the debtor.
In
order for default and discharge to be indicators of immorality the immoral acts
should be reasonably related in time to the application for bar admission. Two important cases involving the same
applicant in different states address this issue.
In
Florida Board of Bar Examiners
re Kwasnik, 508 So2d 338 (Fla 1987) the applicant had killed a man in a
drunk driving incident. A civil
judgment in a wrongful death action in the sum of $200,000 was entered against
him in 1974. He declared bankruptcy and
discharged the debt in 1980. In 1987
his application to join the Florida bar reached that state’s highest
court. The examining board found that
although Kwasnik and his wife had a combined income of $90,000 and equity in a
home of over $225,000, he had made no voluntary efforts to pay the
judgment. The Florida court wrote,
The question here is whether following bankruptcy he should be
refused admission for not having made any effort to provide assistance to the
family of the decedent, even though he was not legally obligated to do so.
Given the fact that our bankruptcy laws are designed to provide a fresh start
for those who are overburdened with debt, we cannot say that the subsequent
failure to make payments on the discharged debts may be considered as a basis
to deny admission to the practice of law. We recognize that Kwasnik may have
continuing moral obligations to the family of the man he negligently killed,
but to permit such considerations in a petition for admission to the Bar would
require the making of such subtle distinctions that no satisfactory rule could
be devised.
Mr Kwasnik subsequently applied for
membership in the California Bar and faced the same problem. In Kwasnik v. State Bar of California,
791 P2d 319 (Cal 1990) the California court faced the issue whether failure to
pay “moral” obligations, as opposed to legal debts, could be the basis for
denying an applicant admission to the bar.
The court acknowledged that the Bar would violate the 11 USC § 525 if
its sole reason for denying admission were the “moral” obligation to the family
of the man he killed. Turning to the
circumstances surrounding the debt and discharge the court wrote,
In the case before this
disciplinary board the Bankruptcy took place in the winter of 1990 and the
defaults somewhat earlier. That winter
was also the beginning of more than two years of unemployment and
alcoholism. There was no financial
upturn just around the corner nor were there significant income or assets that
might have been used to pay the discharged debts. Whatever state of mind or
moral condition existed at the time of the defaults and discharge is now far in
the past.
An
exception to the non-discrimination provisions of 11 USC § 525 is for the
payment of restitution. Restitution,
however, is more than an unpaid debt.
It is an obligation imposed by a governmental entity as part of a
rehabilitative program. Although nonpayment of restitution can be grounds for
denial of a license to practice law, only certain kinds of debts qualify for
the exemption from 525(a).
The
Bankruptcy Code, 11 USC § 523(a) preserves from discharge restitution
obligations that are for the benefit of a governmental unit and are not
compensation for actual pecuniary loss.
The Court held in Kelly v. Robinson, 479 U.S. 36, 107 S.Ct. 353
(1986) that restitution obligations in state criminal proceedings are not
discharged because they serve the state’s interest in rehabilitation and
punishment rather than the victim’s desires for compensation. Failure to pay restitution has been held by
various courts to be grounds for denying a bar application.
The
basic law of attorneys, restitution and bankruptcy comes from the disciplinary
process. In Brookman v. State Bar of
California, 46 Cal3d 1004; 760 P2d 1023 (1988) the plaintiff disputed a
condition of discipline requiring that he repay the Client Security Fund close
to $50,000 to cover an amount paid by the fund to a former client. The attorney objected on the grounds that
the underlying debt to the client had been discharged in bankruptcy. The court held that restitution was proper,
especially since payments to the Client Security Fund were clearly for the
benefit of the public at large and not for the underlying victim in the
case.
Normally,
malpractice claims are not misconduct and do not raise restitution issues. In In re Borowski, 216
B.R. 922 (1998) the debtor attorney discharged in bankruptcy a mediation award
arising from a malpractice claim. In a
related disciplinary hearing the malpractice creditor objected to a proposed
settlement on the grounds that it did not include payment of the discharged
dept as a condition of Borowski’s continued practice of law. Borowski filed a motion asserting that the
creditor’s efforts to have the debt revived as a restitution order was an
effort to collect a debt and thereby violated the permanent injunction created
by discharge in bankruptcy. The Bankruptcy court noted that not only would an
order by the disciplinary board to pay the discharged malpractice debt violate
525(a) but that efforts by a creditor to make repayment a condition of
practicing law violated the permanent injunction.
In
Colorado v.
Huntzinger, 967 P2d 160 (Colo 1998) a malpractice creditor once again
attempted to have a discharged malpractice judgment revived as a restitution
order. The Colorado court found that
while an associated contempt order was connected to both misconduct and
rehabilitation the malpractice claim was not.
Thus, it could not be imposed upon the bankrupt as restitution. And in In re Schwenke 849 P2d
573 (Utah 1993) the court refused to find that a pre-existing restitution order
could survive bankruptcy where it arose from malpractice rather than
misappropriation.
In
readmission cases there is no formal restitution order because during the
period of disbarment the applicant was not subject to the jurisdiction of the
bar. The rule in such cases seems to be
that an applicant must show that he or she paid restitution in instances where
the bar might have ordered restitution.
Thus, even for an applicant seeking readmission, restitution is not an
obligation owed to all creditors, but instead only to those creditors who were
victims of the applicants intentional misconduct or dishonesty.
` In Hippard v. State
Bar of California, 49 Cal3d 1084, 782 P2d 1140 (1989) an applicant for
readmission had discharged in bankruptcy a wide variety of debts to clients and
the Client Security Fund. His
misconduct included several instances of borrowing money from clients without
sufficient disclosure and two instances of misappropriation. The hearings panel found that the applicant
had made no effort to repay funds he had received from clients. Citing Brookman,
the court held that in evaluating an applicant for readmission the court may
consider efforts towards restitution as an indicator of rehabilitation. The court stated that “The weight that
should be attached to whether restitution has been undertaken in whole or in
part is dependent upon the applicant's ability to restore the misappropriated
funds as well as the attitude expressed regarding the matter.” The focus of Hippard, however, is solely on funds obtained from clients through
misconduct. It is not authority for the
idea that all debts become the subject of restitution merely because they were
incurred by an applicant to the bar.
The
Washington Court faced the issue of restitution and disbarred lawyers in In re Batali, 657 P2d 775
(Wash 1983). In Batali the applicant had been disbarred in 1975 for
misappropriating client funds, acts which resulted in five counts of grand
larceny and one count of forgery. He
entered guilty pleas to all six counts and was sentenced to prison. In 1982, Mr. And Mrs. Batali filed for
bankruptcy and, because no creditors objected, many of the debts attributable
to misappropriation were discharged. Shortly, thereafter Mr. Batali reaffirmed
those debts and made arrangements for repayment. The Board of Governors recommended Mr. Batali for reinstatement
subject to his completing the plan for restitution and his ultimate repayment
of the IRS some $40,000 in unpaid taxes. The Court disagreed, holding that
requiring the applicant to pay the IRS would violate 525(a). Restitution was appropriate where the debts
were attributable to misappropriation of client funds, but it is not a vehicle
whereby general creditors such as the IRS can circumvent the non-discrimination
provisions of the Bankruptcy Code. Mr.
Batali was readmitted without a requirement that he pay back taxes.
The
Oregon court faced questions of bankruptcy, restitution and readmission in In re Graham, 299 Or 511, 703 P2d 970
(1985). Graham had been disbarred after
writing bad checks, borrowing money from clients, transferring property to
frustrate judgment creditors, overreaching with an elderly client, and several
instances of misappropriation of client funds.
Litigation against him by clients resulted in his confessing judgment at
least three times. In 1977, Graham filed bankruptcy and discharged some or all
of the obligations owed to his former clients.
Responding to his application for readmission several years later, the
court stated that
[W]e agree with the Trial Panel
that applicant has not demonstrated his appreciation of the magnitude of misuse
of client's funds and property. In
order to demonstrate that, and as a prerequisite to rehabilitation, it is
necessary that applicant take steps to learn exactly what is owed, if anything,
to each of his former clients and to develop a plan to commence to repay those
obligations.
The court in Graham
does not explicitly address the extent to which the expectation of restitution
can be extended without violating 525(a), but it’s holding is consistent with
other states in that it connects restitution to instances arising from the
misuse of client property. The case implicitly
recognizes that the concept of restitution is not a freeway around the
anti-discrimination prohibitions in the bankruptcy code but a narrow path to be
used only in cases where the discharged debt is a direct result of lawyer
dishonesty.
The Moral
Issues in Mr. Onken’s Bankruptcy
Discovery
and preliminary negotiations suggest that there are only two conceivable claims
of immoral activity connected to Mr. Onken’s decade-old bankruptcy. One involves Mr. Melkonian, the Bar’s chief
witness in this matter, and the second involves Mr. Onken’s ex-wife. Mr. Melkonian maintained in the original
bankruptcy proceeding that Mr. Onken committed a fraud on the bankruptcy court
by stating that he owned his 1984 Toyota pick-up truck jointly with his wife
when in fact he was the sole registered owner.
Mr. Melkonian, after losing at the trial level in his efforts to collect
just over $500, appealed this and other issues to the Ninth Circuit Court of
Appeals. Although Mr. Onken did not
appear in the appellate proceeding, Mr. Melkonian lost on appeal as well. He had a full and fair opportunity to
litigate all issues connected to the debt. Mr. Onken ought not have to visit
the issue once again over a decade later.
The
second issue involves a debt to Mr. Onken’s previous wife. As part of Mr. Onken’s 1988 divorce a
stipulated judgement was entered against him for the sum of $6,000. In 1989 his ex-wife executed a satisfaction
of the judgement in exchange for an unsecured note for the same amount. The Bar suggests that Mr. Onken exercised
undue influence to effectuate this exchange.
However, the entire debt was discharged a few months later in the
bankruptcy court, a forum in which non-lien judgements and unsecured notes are
treated exactly the same. In fact, the
one judgement creditor in the case was treated neither better or nor
differently from any of the others and had his state court lien satisfied
without payment pursuant to ORS 18.420.
Mr. Onken received no financial advantage from the transaction with his
ex-wife. She suffered no detriment and
has never made a complaint. Considering
the age of the transaction and the fact that it had no ascertainable effect on
anybody, it is insufficient to support re-examination of the 1990 bankruptcy.
Conclusion
Every
established moral or ethical system at some point concerns itself with the
treatment of debtors. In law, the moral
precepts accepted by Americans on that issue are contained in the federal
bankruptcy code and the cases that arise from it. That body of law provides that a state may not deny a citizen a
license to practice law based upon either the filing of bankruptcy or the
failure to repay debts discharged in bankruptcy. Therefore a bankruptcy by an applicant to the bar is relevant in
only two circumstances: (1) when it
reveals unpaid obligations that can legally be treated as restitution and are
therefore exempt from normal discharge; and (2) when the bankruptcy was recent
and circumstances reveal that the defaults on the loans themselves were
unwarranted and manipulative of the legal system. In the instant case, Mr. Onken’s bankruptcy was filed well over
ten years ago in the midst of a two-year period of alcoholism and
unemployment. It was a straightforward
bankruptcy under circumstances common in the bankruptcy courts. He is fully entitled to the benefit of the
moral prohibitions against the abuse of debtors and the legal prohibitions
against discrimination provided by federal law. This panel finds it in the same position as the Minnesota Supreme
Court in In re Gahan, 279 NW2d
826, 831 (Minn 1979)(discussed above) in which it admitted forthrightly, “we
cannot declare bankruptcy a wrong when Federal law has declared it a
right.”