In re: Michael Bruce Stone

FILED
SEP 05 2018
NOT FOR PUBLICATION
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. NV-17-1156-TaLB
MICHAEL BRUCE STONE, Bk. No. 2:12-bk-17527-MKN
Debtor. Adv. No. 2:16-ap-01081-MKN
MICHAEL BRUCE STONE,
Appellant,
v. MEMORANDUM*
STATE BAR OF CALIFORNIA; STATE BAR
COURT OF CALIFORNIA; SUPREME COURT OF
CALIFORNIA,
Appellees.
Argued and Submitted on July 27, 2018
at Las Vegas, NV
Filed – September 5, 2018
* This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
Appeal from the United States Bankruptcy Court
for the District of Nevada
Honorable Mike K. Nakagawa, Bankruptcy Judge, Presiding
Appearances: Appellant Michael Bruce Stone argued pro se; Marc
Aaron Shapp of the Office of General Counsel, State Bar
of California, argued for appellees the State Bar of
California and the State Bar Court of California; Thomas
D. Dillard, Jr. of Olson, Cannon, Gormley, Angulo &
Stoberski on brief for appellee the Supreme Court of
California.
Before: Taylor, Lafferty, and Brand, Bankruptcy Judges.
INTRODUCTION
Michael Stone practiced law in California for several decades. At
some point, he ran into financial trouble, filed bankruptcy, and received a
chapter 71 discharge. But both before his bankruptcy and after, he also
faced disciplinary action by the State Bar. The charges were numerous and
the path to resolution was long, but, among other things, he stipulated to
return unearned fees to clients. The Supreme Court of California then
1
Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101–1532 and all “Civil Rule” references are to the
Federal Rules of Civil Procedure.
2
entered judgment consistent with the stipulation and required him to file a
compliance statement evidencing timely refund of the unearned fees with
the State Bar.
Stone eventually refunded all the unearned fees, but he did not do so
timely. And, as a result, he did not timely file the appropriate compliance
statement. So the State Bar brought new disciplinary charges; the State Bar
Court recommended discipline that included a two-year actual suspension;
the State Bar Court Review Department agreed and forwarded a
recommendation to the Supreme Court of California.
In the meantime, the Ninth Circuit issued an opinion discussing the
dischargeability, under § 523(a)(7), of debts attorneys owe their clients on
account of fee disputes. On Stone’s read, the decision meant that the
unearned fees he refunded were discharged and, as a result, that he was
suspended for failure to pay discharged debts in violation of § 525(a). He
notified the California Supreme Court of both his position and the Ninth
Circuit’s decision, but it nevertheless suspended him from the practice of
law.
Stone then filed an adversary complaint and alleged that the
suspension contravened § 525(a). The bankruptcy court disagreed: because
Stone’s complaint alleged that he was suspended for two reasons (failure to
timely file a certificate and failure to timely refund the unearned fees) it
found no violation of § 525(a). It also concluded that it lacked jurisdiction
3
over part of Stone’s complaint.
The bankruptcy court was correct in both respects. Under § 525(a),
the failure to pay a discharged debt must be the sole reason for the
suspension; here nonpayment was not the sole reason for the suspension.
And the Rooker–Feldman doctrine barred review to the full extent requested
by Debtor’s complaint. Accordingly, we AFFIRM.
FACTS
Stone was admitted to the California Bar in 1992. He apparently
practiced law without incident for some time.
The initial disciplinary proceedings and the chapter 7 case. In 2011,
Stone stipulated to findings of misconduct concerning five client matters.
In April, he stipulated to findings of misconduct in three client matters,
including improper withdrawal from employment and failure to return
unearned fees and to pay court-ordered sanctions. He agreed to a private
reproval with conditions for one year, including payment of $3,651.50 in
restitution. In November, he stipulated to findings of misconduct in two
other client matters. The stipulation acknowledged further improper
withdrawal from employment and failure to return deposits held in trust,
failure to provide an accounting, and failure to return an unearned fee.
This time, he agreed to a public reproval with conditions for two years that
included mandatory fee arbitration with clients.
In 2012, Stone filed a pro se chapter 7 petition. The chapter 7 trustee
4
issued a report of no distribution, and Stone received a discharge.
The 2013 disciplinary proceedings. In 2013, Stone faced new
disciplinary charges. He admitted culpability and stipulated that he failed
to comply with the reproval conditions in his earlier disciplinary cases in
multiple respects. More specifically, he did not submit quarterly reports to
the probation department and failed to prove that he: attended trust
accounting school and ethics school and passed the relevant tests; paid
restitution or complied with fee arbitration conditions; and passed the
MPRE. At this point, he agreed to a two-year stayed suspension and two
years of probation with conditions, which included that he serve a 90-day
suspension until he provided restitution and complied with California Rule
of Court 9.20 (“Rule 9.20”). Stone and the State Bar negotiated and agreed
upon the stipulation—as Stone put it in his amended complaint, they
agreed “especially on the subject of restitution to [sic] as a condition of
probation.”
In August 2013, the Supreme Court of California entered a judgment
consistent with the stipulation. The judgment ordered Stone to comply
with Rule 9.20, make restitution or reimburse the State Bar’s Client Security
Fund for two creditors, refund all unearned fees, and file a declaration
saying he had done so. The judgment stated: “Failure to do so may result in
disbarment or suspension.”
5
Stone’s non-compliance with the judgment and the resulting
disciplinary proceeding. Stone’s compliance with the judgment was less
than exact.
The declaration was due on October 31, 2013. But on that date he was
“unable to file a truthful declaration that he had paid the debts . . . .”
Nevertheless, he filed a declaration. It was rejected. He later filed a second
and third declaration, but both were rejected.
At some point between October 31, 2013 and February 20, 2014, Stone
paid his stipulated obligations in full and with interest. So from Stone’s
perspective, he had “satisfactorily completed two years probation, and
complied with the express restitutionary conditions of probation by
paying” the two creditors “within the probationary period.”
Despite this “compliance,” on February 21, 2014, the State Bar
initiated disciplinary charges against Stone. The disciplinary charges
“alleg[ed] that [Stone] violated Cal. Rule of Court 9.20(c) by failing to
‘refund all unearned fees’ and to also file a declaration that he had done so,
all by October 31, 2013.”
These new disciplinary proceedings “resulted in findings that [Stone]
was culpable for violating Cal. Rule of Court 9.20(c) and imposing discipline
on [Stone] including, inter alia, a two-year actual suspension from the
practice of law.”
More particularly, the State Bar Court “found that [Stone] violated
6
Rule 9.20(c) by not timely refunding all unearned fees and by not then
certifying that he had done so.” It recommended that Stone’s law license be
suspended for two additional years.
The State Court Review Department affirmed. Stone “did not choose
to seek discretionary review of the decision of the State Bar Court Review
Department.” According to Stone, the case “would have ended there” but
for a Ninth Circuit opinion.
That opinion is Scheer v. State Bar (In re Scheer), 819 F.3d 1206 (9th Cir.
2016). Before In re Scheer, according to Stone, “both [Stone] and [the] State
Bar reasonably believed and assumed that debts owed by attorneys to
clients for unearned fees were nondischargeable, or that the discharge of
such debts did not impair the ability of [the] State Bar to impose
disciplinary sanctions against attorneys for not paying them.” But, on
Stone’s read, the Ninth Circuit’s In re Scheer decision made his suspension
inappropriate because it held “that debts owed by attorneys to clients for
unpaid fees are dischargeable in bankruptcy. . . .”
Shortly thereafter, Stone sought a stay with the California Supreme
Court so “he could request that the matter be remanded to the State Bar for
further proceedings consistent with Scheer.” But in June 2016 and as alleged
in Stone’s amended complaint, the California Supreme Court denied
Stone’s request for a stay, “ratified the findings of the State Bar Court[,]”
and “ordered, inter alia, that [Stone] be suspended from practicing law for
7
at least two years.”
Debtor files an adversary complaint. Having not prevailed at the
California Supreme Court, Stone reopened his bankruptcy case and filed an
adversary complaint against the State Bar of California, the State Bar Court
of California (with the State Bar, the “State Bar Entities”), and the Supreme
Court of California. He later amended the complaint.
The amended complaint does not identify any specific claims for
relief. But it asserts that the California Supreme Court’s suspension of his
law license violated § 525(a). He alleges that this is so because: “[t]here
exists no substantive distinction between failing to pay a debt and failing to
make a declaration that the debt was paid.” As a result, he alleges, the
disciplinary charges were “based solely upon failure to pay debts that were
previously discharged . . . .”
The prayer requests a wide range of relief. It seeks: first, declaratory
relief that his 2012 bankruptcy case discharged three debts; second, an
order requiring the Supreme Court of California and the California State
Bar Court to “dismiss, expunge, and vacate” the State Bar disciplinary
proceedings; and finally, a laundry list of other relief, including alteration
of his disciplinary records and damages.
The State Bar Entities moved to dismiss; the California Supreme
Court joined. The bankruptcy court issued a twelve-page memorandum
decision granting the motion to dismiss without leave to amend under
8
Civil Rule 12(b)(1) and (b)(6). It later entered a separate judgment of
dismissal. Stone timely appealed.
JURISDICTION
Subject to the discussion below, the bankruptcy court had jurisdiction
under 28 U.S.C. §§ 1334 and 157(b)(2)(A). We have jurisdiction under
28 U.S.C. § 158.
ISSUES
Did the bankruptcy court err in dismissing the adversary complaint
under Civil Rule 12(b)(1) and (b)(6)?
Did the bankruptcy court abuse its discretion in dismissing the
adversary complaint without leave to amend?
STANDARD OF REVIEW
We review de novo the dismissal of an adversary proceeding under
Civil Rule 12(b)(1) and (b)(6). See Naruto v. Slater, 888 F.3d 418, 421 (9th Cir.
2018). We review dismissal without leave to amend for abuse of discretion.
Telesaurus VPC, LLC v. Power, 623 F.3d 998, 1003 (9th Cir. 2010).
A bankruptcy court abuses its discretion if it applies the wrong legal
standard, misapplies the correct legal standard, or makes factual findings
that are illogical, implausible, or without support in inferences that may be
drawn from the facts in the record. See TrafficSchool.com, Inc. v. Edriver Inc.,
653 F.3d 820, 832 (9th Cir. 2011) (citing United States v. Hinkson, 585 F.3d
1247, 1262 (9th Cir. 2009) (en banc)). And we may affirm on any basis in the
9
record. Bill v. Brewer, 799 F.3d 1295, 1299 (9th Cir. 2015).
DISCUSSION
“It is well established that the purpose of State Bar proceedings is not
punitive but protective of the public, thereby preserving its confidence in
the legal profession.” Bach v. State Bar, 43 Cal. 3d 848, 856–57 (1987)
(quoting Warner v. State Bar, 34 Cal. 3d 36, 43 (1983)). And this case
squarely addresses issues essential to public confidence; it involves
California Rule of Court 9.20, which imposes duties on disbarred, resigned,
or suspended attorneys.
Rule 9.20(a) states that the California Supreme Court may include in
a disbarment or suspension order a direction that the lawyer must refund
unearned fees within time limits prescribed by the Supreme Court. Cal.
Rule of Court 9.20(a). And Rule 9.20(c) directs attorneys to provide proof of
compliance:
Within such time as the order may prescribe after the effective
date of the member’s disbarment, suspension, or resignation,
the member must file with the Clerk of the State Bar Court an
affidavit showing that he or she has fully complied with those
provisions of the order entered under this rule.
Cal. Rule of Court 9.20(c). So we begin with an acknowledgment that a
lawyer may be required to make payment to a client even if the client has
not liquidated the matter to judgment. And we observe that requiring that
the client be made whole is consistent with establishing public confidence
10
in the legal profession.
A. Stone’s amended complaint must state a claim upon which relief
may be granted.
Civil Rule 12(b)(1). When reviewing a Civil Rule 12(b)(1)2
motion to dismiss for lack of jurisdiction, including one based on
Rooker–Feldman, “we take the allegations in the plaintiff’s complaint as
true.” Wolfe v. Strankman, 392 F.3d 358, 362 (9th Cir. 2004).
Civil Rule 12(b)(6). A motion to dismiss under Civil Rule
12(b)(6)3 challenges the sufficiency of the allegations set forth in the
complaint and “may be based on either a ‘lack of a cognizable legal theory’
or ‘the absence of sufficient facts alleged under a cognizable legal theory.’ ”
Johnson v. Riverside Healthcare Sys., 534 F.3d 1116, 1121 (9th Cir. 2008)
(citation omitted). The factual allegations in the complaint must state a
claim for relief that is facially plausible. Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009); see also Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007).4
Thus, based on the Iqbal/Twombly rubric, the bankruptcy court must
2
Civil Rule 12(b)(1) is applied in adversary proceedings by Federal Rule of
Bankruptcy Procedure 7012(b).
3
Civil Rule 12(b)(6) is applied in adversary proceedings by Federal Rule of
Bankruptcy Procedure 7012(b).
4
In his opening appellate brief, Stone cites Conley v. Gibson, 355 U.S. 41, 78 (1957)
and its “no set of facts” test as the relevant Civil Rule 12(b)(6) standard. But the
Supreme Court abrogated Conley’s “no set of facts” language in Bell Atlantic Corporation
v. Twombly. 550 U.S. at 560–63.
11
first identify bare assertions that “do nothing more than state a legal
conclusion—even if that conclusion is cast in the form of a factual
allegation[,]” and discount them from an assumption of truth. Moss v. U.S.
Secret Serv., 572 F.3d 962, 969 (9th Cir. 2009). Then, if there remain
well-pleaded factual allegations, the bankruptcy court should assume their
truth and determine whether the allegations “and reasonable inferences
from that content” give rise to a plausible claim for relief. Id.“[D]etermining whether a complaint states a plausible claim is context
specific, requiring the reviewing court to draw on its experience and
common sense.” Ashcroft, 556 U.S. at 679.
Considering extrinsic materials. Generally, courts “may not
consider material outside the pleadings when assessing the sufficiency of a
complaint” under Civil Rule 12(b)(6). Khoja v. Orexigen Therapeutics, Inc., ---
F.3d ---, No. 16-56069, 2018 WL 3826298, at *5 (9th Cir. Aug. 13, 2018). There
are, however, “two exceptions to this rule: the incorporation-by-reference
doctrine, and judicial notice under Federal Rule of Evidence 201.” Id. at *6.
Each theory allows a court to consider material outside a complaint, but
“each does so for different reasons and in different ways.” Id.“[I]ncorporation-by-reference is a judicially created doctrine that
treats certain documents as though they are part of the complaint itself.” Id.
at *9. It “prevents plaintiffs from selecting only portions of documents that
support their claims, while omitting portions of those very documents that
12
weaken—or doom—their claims.” Id. Although the mere mention of a
document does not incorporate it, a “defendant may seek to incorporate a
document into the complaint if the plaintiff refers extensively to the
document or the document forms the basis of the plaintiff’s claim.” Id.(internal quotation marks omitted). In contrast to judicial notice, a “court
‘may assume [an incorporated document’s] contents are true for purposes
of a motion to dismiss under [Civil] Rule 12(b)(6).’ ” Id. at *10 (quoting
Marder v. Lopez, 450 F.3d 445, 448 (9th Cir. 2006)).5 But see id. (“While this is
generally true, it is improper to assume the truth of an incorporated
document if such assumptions only serve to dispute facts stated in a well-
pleaded complaint.”).
Here, the State Bar Entities provided the bankruptcy court with
copies of documents from the various disciplinary proceedings
and—conflating the two exceptions—asked it to take judicial notice of them
because they were referred to in the complaint. The bankruptcy court said
it could consider them but found it unnecessary to do so. Stone argues on
appeal that we should not review the materials.
5
Cf. Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001) (“[A] court may
consider material which is properly submitted as part of the complaint on a motion to
dismiss without converting the motion to dismiss into a motion for summary judgment.
If the documents are not physically attached to the complaint, they may be considered if
the documents’ ‘authenticity . . . is not contested’ and ‘the plaintiff’s complaint
necessarily relies’ on them.” (some internal quotation marks omitted) (citations omitted)
(quoting Parrino v. FHP, Inc., 146 F.3d 699, 706–07 (9th Cir. 1998))).
13
We disagree with Stone. The disciplinary proceedings form the basis
of Stone’s complaint. And the complaint refers extensively to the 2014
proceedings—the trial court’s decision, the review department’s decision,
Stone’s request for a stay, and the Supreme Court of California’s judgment.
Nor does Stone contest the documents’ authenticity. Finally, in his
complaint, Stone explicitly states that he chose to not seek discretionary
review of the State Bar Court Review Department’s decision. Admittedly,
however, the documents are not the basis for our affirmance; review
merely underscores the appropriateness of our decision.
B. The bankruptcy court correctly dismissed the amended complaint.
It is unclear if the matter is moot. Mootness lurks in the
background of this case. As alleged, Stone is suspended from the practice
of law in California for two reasons: administratively, for failure to pay
child support; and also for disciplinary reasons. In his amended complaint,
Stone alleges that the disciplinary suspension contravenes § 525(a), but he
does not challenge the administrative suspension.
The amended complaint further alleges that in June 2016 the
California Supreme Court suspended Stone for “at least two years.” The
State Bar Entities represent in their answering brief on appeal that on
“June 8, 2016, the California Supreme Court entered an order suspending
Stone from the practice of law for two years.” State Bar Entities’ Br. at 5–6.
That time period expired on June 8, 2018.
14
Ordinarily, when a party challenges a time period that has expired,
we conclude that the challenge is moot because we cannot provide effective
relief. See Fernandez v. GE Capital Mortg. Servs. (In re Fernandez), 227 B.R.
174, 178 (9th Cir. BAP 1998).
So to the extent Stone challenges a now-expired two-year suspension,
we would lack any ability to give him effective relief; put differently, if the
only remaining impediment to Stone’s practicing law is the administrative
suspension, we cannot afford him relief.
That said, neither party quite captured the terms of the Supreme
Court of California’s judgment suspending Stone. The California Supreme
Court suspended Stone from the practice of law for three years but
immediately stayed execution of that suspension. It then placed him on
probation for three years subject to conditions: first, Stone “is suspended . . .
for a minimum of the first two years of probation, and he will remain
suspended until he provides proof to the State Bar Court of his
rehabilitation, fitness to practice and present learning and ability in the
general law[]”; second, Stone must comply with the State Bar Court Review
Department’s probation recommendations; and third, if Stone has
complied with all probation conditions, the period of stayed suspension
will be satisfied and the suspension terminated at the end of the probation
period.
In short, to the extent Stone alleges that his disciplinary suspension
15
contravened § 525(a) and seeks reinstatement of his license, his request
might be moot if he has already successfully completed probation. But he
was placed on probation for three years, not two, and the three-year time
period has not yet expired. At oral argument, neither party provided us
with adequate information about the status of Stone’s suspension; Stone
also asserted that his suspension has collateral consequences beyond just
his admission to the practice of law in California. Given this uncertainty
about whether the matter is moot and because we might be able to afford
effective relief, we proceed to the merits.
The Rooker-Feldman doctrine bars much of the requested
relief. The Rooker–Feldman doctrine “stands for the relatively
straightforward principle that federal district courts do not have
jurisdiction to hear de facto appeals from state court judgments.”
Carmona v. Carmona, 603 F.3d 1041, 1050 (9th Cir. 2010). “Stated simply, the
Rooker–Feldman doctrine bars suits ‘brought by state-court losers
complaining of injuries caused by state-court judgments rendered before
the district court proceedings commenced and inviting district court review
and rejection of those judgments.’ ” Id. (quoting Exxon Mobil Corp. v. Saudi
Basic Indust. Corp., 544 U.S. 280, 284 (2005)).
As the Ninth Circuit instructs, we distinguish suits that are de facto
appeals barred by Rooker–Feldman from suits barred by other preclusion
principles as follows:
16
A suit brought in federal district court is a “de facto appeal”
forbidden by Rooker–Feldman when a federal plaintiff asserts as
a legal wrong an allegedly erroneous decision by a state court,
and seeks relief from a state court judgment based on that
decision. In contrast, if a plaintiff asserts as a legal wrong an
allegedly illegal act or omission by an adverse party,
Rooker–Feldman does not bar jurisdiction.
Id. (internal quotation marks and citations omitted).
Here, the bankruptcy court held that the Rooker–Feldman doctrine
barred part of the requested relief:
[I]t is clear that any interference by this court with the
disciplinary determinations of the State Bar Court or the
Supreme Court runs afoul of the Rooker-Feldman Doctrine. As
previously discussed, the disciplinary proceeding was based on
two violations of [Rule] 9.20(c) and was not limited to
repayment of a discharged debt. While Debtor may believe that
his failure to comply with the timely reporting requirement was
excusable, the merits of his assertion was determined by the
State Bar Court and Supreme Court. By the prayer of the instant
Complaint, Debtor seeks to overturn the decisions of the State
Bar Court and Supreme Court and vacate the resulting
discipline. The Rooker-Feldman doctrine clearly bars such a
result.
May 1, 2017 Order on Defendant the State Bar of California and the State
Bar Court of California’s Motion to Dismiss First Amended Complaint to
Determine Dischargeability of Certain Debts and For Other Relief (“Mem.
Dec.”) at 10–11.
On appeal, Stone argues that the bankruptcy erred because the
17
Rooker-Feldman doctrine does not apply:
In this case, appellant contends that his right to protection from
discrimination on account of his being a Debtor, under 11
U.S.C. § 525(a), relates back to his 2012 bankruptcy discharge
and predates the 2014-2016 State Bar Court and Supreme Court
proceedings. The “exact injury” which existed prior in time is
the risk that one’s bankruptcy discharge will not be recognized.
Appellant’s Opening Br. at 5.
But Stone misreads the bankruptcy court’s reasoning; it is not so
broad. The bankruptcy court did not conclude that the Rooker-Feldman
doctrine prevented Stone from asserting a § 525(a) claim. Instead, the
bankruptcy court noted that the amended complaint requested broad-
reaching relief and concluded that such relief was inappropriate.
Ultimately, however, Stone seems to recognize that his remedy is limited.
Appellant’s Opening Br. at 6 (“Appellant seeks only statutory remedies
under 11 U.S.C. § 525(a).”). And at oral argument, Stone clarified that he
was not seeking monetary damages. In short, Stone has on appeal stated an
intent to confine his relief to statutory remedies.
To be clear, however, we agree with the bankruptcy court’s
conclusion that the Rooker-Feldman doctrine bars much of the requested
relief. Stone’s complaint asked the bankruptcy court to compel the State Bar
to alter and purge its administrative records, to not consider particular
information in any future disciplinary proceedings, and to compel the
California Supreme Court to vacate the disciplinary proceeding and its
18
resulting judgment. The bankruptcy court correctly refrained from
disturbing the State Bar’s disciplinary records and second guessing the
California Supreme Court’s disciplinary decision. Scheer v. Kelly, 817 F.3d
1183, 1186 (9th Cir. 2016).6
The amended complaint fails to state a claim under
§ 525(a)(5). Section 525(a)(5) provides in relevant part that “a governmental
unit may not deny, revoke, suspend, or refuse to renew a license to . . . a
person that is or has been a debtor under this title . . . solely because such . .
. debtor . . . has not paid a debt that is dischargeable in the case under this
title . . . .” 11 U.S.C. § 525(a)(5). As the Supreme Court put it: “Section 525
means nothing more or less than that the failure to pay a dischargeable
debt must alone be the proximate cause of the cancellation—the act or
event that triggers the agency’s decision to cancel, whatever the agency’s
ultimate motive in pulling the trigger may be.” F.C.C. v. NextWave Pers.
Commc’ns Inc., 537 U.S. 293, 301–02 (2003).
The bankruptcy court concluded that, accepting the allegations in the
amended complaint as true, there was “no basis for finding a violation of
6
Stone sought a stay with the Supreme Court of California and indirectly
asserted that § 525(a) might apply to his case. The Supreme Court of California denied
the stay and suspended Stone from the practice of law; it is unclear if, in doing so, the
Supreme Court concluded that § 525(a) was inapplicable—it has engaged with § 525(a)
questions in the past, e.g., Kwasnick v. State Bar, 50 Cal. 3d 1061 (1990), Hippard v. State
Bar, 49 Cal. 3d 1084 (1989), Brookman v. State Bar, 46 Cal. 3d 1004 (1988)—but to the
extent it did, Stone’s de facto appeal of that conclusion may be barred by
Rooker–Feldman.
19
Section 525(a).” Mem. Dec. at 10. We agree.
We start with the text of the amended complaint. As the bankruptcy
court noted, the amended complaint alleges that Stone was suspended for
violating Rule 9.20(c) in two ways: first, not timely repaying the unearned
fees; and second, not timely filing a compliant declaration. So, if
paragraphs 11, 23, and 33 of the Complaint are true, then Stone’s failure to
repay unearned fees was not the sole reason for the suspension. Mem. Dec.
at 10. Instead, the amended complaint alleges that Stone was suspended
“for the additional reason that he failed to comply with the separate
reporting requirement included in [Rule] 9.20(c).” Id. As Nextwave Personal
Communications, a case Stone cites, explains, the “failure to pay a
dischargeable debt must alone be the proximate cause of the cancellation
. . . .” 537 U.S. at 301 (emphasis added). So the amended complaint does not
state a claim for relief; dismissal was proper.
We now consider the gravamen of Stone’s position: his allegation that
In re Scheer changed the applicable legal landscape. This is a legal
conclusion; we need not, and do not, accept it as true.
To start, Stone fancifully reinterprets the nature of his disciplinary
proceedings; he argues that he “was disciplined for no other reason than
for violating Rule 9.20 as to certain debts that appellant contends he can
prove were then discharged.” Appellant’s Opening Br. at 5. But this was
not Stone’s first brush with the State Bar. As he admits in his complaint, he
20
had been disciplined before. And the documents he refers to in his
complaint make clear the wide range of his disciplinary problems. And
both the State Bar Court trial judge and State Bar Court Review
Department viewed Stone’s previous discipline as aggravating factors that
weighed toward disbarment. So Stone’s focus on only the most recent
disciplinary case is misplaced, and his account for why he was suspended
(failure to pay a discharged debt) is not plausible. Given his disciplinary
history, Stone’s rehabilitation is paramount. Indeed, at the time of the
suspension, he had made the required payments. As a result, it is
implausible to assume that the State Bar Entities were using suspension to
obtain payment of a discharged debt; the only plausible conclusion is that
they suspended Stone because his pattern of behavior, which included
failing to timely make a stipulated payment, evidenced a lack of
rehabilitation.
Consistent with this view, the State Bar Court hearing judge found
that Stone failed to file a declaration of compliance under Rule 9.20; Stone
did not contest that culpability finding; and the State Bar Court Review
Department adopted it as fully supported by the record. A wilful Rule 9.20
violation is cause for either suspension or disbarment. Cal. Rule of Court
9.20(d). Stone alleged an excuse. But as the bankruptcy court noted: “While
Debtor may believe that his failure to comply with the timely reporting
requirement was excusable, the merits of his assertion was determined by
21
the State Bar Court and Supreme Court [of California].” Mem. Dec. at
10–11. Namely, Stone could have, but did not, seek an extension of time to
comply. Again, it is not plausible that the sole reason for Stone’s suspension
was his nonpayment of allegedly discharged debt. Complying with
deadlines, or seeking extensions of them, is part of the practice of
law—Stone failed to do either at a time where the consequences could not
be more severe or personal.
Further, even assuming Stone’s obligations to his former clients were
discharged, the amended complaint does not present a plausible claim for
relief under § 525(a) because Stone consented post-discharge to the
treatment he now questions. After his 2012 discharge, he negotiated
conditions of discipline with the State Bar. As part of those negotiations
(perhaps in exchange for concessions from the State Bar and as an
alternative to other sanctions), Stone stipulated that he would repay
unearned fees to former clients—that is, he agreed that he would make
restitution. Nothing prevents chapter 7 debtors from voluntarily repaying
debts despite a discharge of personal liability. 11 U.S.C. § 524(f). So Stone
breached his stipulated agreement with the State Bar by not punctiliously
adhering to the conditions of his probation—the conditions that he, after
receiving a discharge, agreed to comply with. Unsurprisingly, the State Bar
instituted new disciplinary proceedings, resulting in Stone’s suspension.
In addition, the California Supreme Court has authorized the State
22
Bar to consider restitution efforts as indicative of rehabilitation. Hippard,
49 Cal. 3d at 1088 (“We hold that petitioner’s discharge in bankruptcy of
indebtedness to clients arising from misconduct did not preclude the
State Bar from considering, as an indicator of rehabilitation, petitioner’s
efforts, if any, to make restitution . . . .”).7
These points, cumulatively, distinguish In re Scheer. In that case, after
arbitration, an attorney owed a client money for unearned fees; the state
bar, at the presiding arbitrator’s request, administratively suspended the
attorney from the practice of law for her failure to pay. 819 F.3d at 1208–09.8
The attorney filed bankruptcy, received a discharge, and brought a § 525(a)
7
See also Brookman, 46 Cal. 3d at 1008 (“As we noted recently in Kent v. State Bar
(1987) 43 Cal. 3d 729, 736 [239 Cal. Rptr. 77, 739 P.2d 1244], the purpose of attorney
discipline is not to penalize petitioner merely for having obtained a discharge of his
debt in bankruptcy. Instead, it is to protect the public from specified professional
misconduct (see ante, fn. 1), and at the same time to rehabilitate the errant attorney.
Section 525(a) of the Bankruptcy Act [sic] precludes suspension of a license to practice
law ‘solely because’ an attorney has failed to pay a debt that was discharged in
bankruptcy, but it does not preclude suspension for professional misconduct that
happened to culminate in the attorney’s bankruptcy. Nor, contrary to petitioner’s
position, does section 525(a) appear to preclude restitution ordered as a condition of
properly imposed suspension and probation. Such restitution is not imposed ‘solely
because’ the attorney has failed to pay a debt discharged in bankruptcy; instead, it is
imposed in order to protect the public and to help rehabilitate the State Bar member.”).
8
The California Business and Professions Code provides for arbitration of certain
attorneys’ fee disputes. Cal. Bus. and Prof. Code § 6200 et seq. If an award is entered
against an attorney, California Business and Professions Code § 6203(d) provides for the
state bar to “enforce the award, judgment or agreement by placing the attorney on
involuntary inactive status until the refund has been paid.” Cal. Bus. & Prof. Code
§ 6203(d).
23
action seeking reinstatement of her law license. Id. at 1209. The bankruptcy
court concluded that the debt was nondischargeable under § 523(a)(7). Id.
The Ninth Circuit disagreed; it held that § 523(a)(7) did not render
nondischargeable a debt an attorney owed a client for unearned fees. Id. at
1212. The unearned fees were not “assessed for disciplinary reasons.” Id. at
1211. “Rather, the debt at issue was effectively the amount [the attorney]
improperly received from a client, but did not pay back.” Id.
Here, the State Bar brought disciplinary charges against Stone and
suspended him because of professional misconduct. Stone’s obligation to
pay restitution arose out of the disciplinary case where he, post-discharge,
agreed to pay restitution as a condition of his discipline. In In re Scheer, by
contrast, the State Bar suspended the attorney in an enforcement or
collection capacity, and the debt “was not disciplinary.” Id.
In sum, the bankruptcy court’s logic is sound and correct: to bring a
§ 525(a) action, the failure to pay discharged debts must be the sole reason
for the license suspension; the amended complaint alleges that Stone’s
license was suspended for two reasons and Stone cannot plausibly argue
that the disciplinary history he acknowledges in his complaint was
irrelevant to the suspension decision. And Stone also does not plausibly
allege a violation of § 525(a) because he stipulated to the disciplinary
24
conditions that he then violated.9
C. Stone does not explain how the bankruptcy court abused its
discretion by denying leave to amend.
Concluding that amendment would be futile, the bankruptcy court
did not grant Stone leave to amend his amended complaint. Although
“leave to amend should be given freely, a district court may dismiss
without leave where a plaintiff’s proposed amendments would fail to cure
the pleading deficiencies and amendment would be futile.” Cervantes v.
Countrywide Home Loans, Inc., 656 F.3d 1034, 1041 (9th Cir. 2011); see Fed. R.
Civ. P. 15(a) (“The court should freely give leave when justice so
requires.”).10
On appeal, Stone simply states that the bankruptcy court should have
given him leave to amend. At no point does he argue how the bankruptcy
court abused its discretion. We conclude that he has abandoned any
argument on the point. Kohler v. Inter-Tel Techs., 244 F.3d 1167, 1182 (9th
9
The bankruptcy court also concluded that the amended complaint failed to
allege a violation of the discharge injunction: “Similarly, there is no basis for finding an
actionable violation of Section 524(a)(2).” Mem. Dec. at 10. In his opening appellate
brief, Stone withdraws any question about the bankruptcy court’s § 524(a)(2) decision.
10
Otherwise, we “consider five factors in assessing whether a district court
abuses its discretion in dismissing a complaint without leave to amend: ‘bad faith,
undue delay, prejudice to the opposing party, futility of amendment, and whether the
plaintiff has previously amended the complaint.’ ” Ecological Rights Found. v. Pac. Gas &
Elec. Co., 713 F.3d 502, 520 (9th Cir. 2013) (quoting United States v. Corinthian Colleges,
655 F.3d 984, 995 (9th Cir. 2011)).
25
Cir. 2001) (“Issues raised in a brief which are not supported by argument
are deemed abandoned.”); Fed. R. Bankr. P. 8014(a)(8). Perhaps most
importantly, Stone does not explain how he would amend the complaint to
cure its defects. Rutman Wine Co. v. E. & J. Gallo Winery, 829 F.2d 729, 738
(9th Cir. 1987) (“Denial of leave to amend is not an abuse of discretion
where the pleadings before the court demonstrate that further amendment
would be futile.”).
Accordingly, we conclude that the bankruptcy court did not abuse its
discretion when it denied Stone leave to amend.
CONCLUSION
Based on the foregoing, we AFFIRM.
26