Lawyer Off Hook for Improperly Charged Fees

     (CN) — A suspended, bankrupt California lawyer need not pay the nearly $6,000 she improperly charged a client for residential mortgage modification services, the Ninth Circuit ruled.
     When a client identified in court documents only as “Clark” retained Irvine, Calif.-based attorney Marilyn Scheer to help modify his home mortgage loan in 2010, he paid her $5,500 before any change occurred.
     But Clark soon fired Scheer and tried to get his money back under California’s mandatory attorney fee arbitration program.
     The arbitrator found in 2011 that although Scheer had good intentions, she violated state law by receiving advanced fees for residential mortgage modification services, so she must return the improperly collected fees, plus the $275 arbitration filing fee, for a total of $5,775.
     Though Scheer made a few payments, the court documents say she ultimately claimed a lack of funds and failed to pay the full balance, so Clark asked the presiding arbitrator to sue her in state bar court.
     Finding in February 2013, that Scheer could pay the award, the court suspended her right to practice law until she paid Clark back.
     After seeking relief from the State Bar Court Review Department and the California Supreme Court to no avail, Scheer filed for Chapter 7 bankruptcy in July 2013, naming Clark and the State Bar as creditors, and demanded reinstatement of her law license.
     Scheer then filed suit in the Bankruptcy Court against the State Bar and certain officials, both individually and in their official capacities, arguing that her suspension violated state law.
     U.S. District Judge John Walter in San Francisco rejected that claim, and Scheer appealed.
     The Ninth Circuit reversed the lower court’s ruling and remanded the case Thursday.
     “Scheer’s performance as an attorney leaves much to be desired, and it is unsettling that she can use bankruptcy to avoid refunding her client’s improperly collected fees,” Judge John Owens wrote for the three-judge panel. “But our moral take on Scheer’s conduct does not control—the statutory language and policies underlying section 523(a)(7) do.”
     The court brushed aside the claim that ruling in Scheer’s favor undermines the State Bar’s power to regulate lawyers who violate state law.
     “We of course agree that the State Bar must keep a close eye on attorneys and sanction those who misbehave,” Owens wrote. “But the debt in this case was purely compensatory—an arbitration fee award between Scheer and her former client. It was not disciplinary. To categorize the fee dispute in this case as nondischargeable simply because the State expresses a strong regulatory interest in a particular industry would render any attorney-client fee dispute nondischargeable.”
     The judge added that “the state’s logic would extend to fee disputes in any closely regulated industry — doctors, dentists, chiropractors, barbers, locksmiths, real estate agents, acupuncturists, tattoo artists, and so on. We require clearer language in section 523(a)(7) before we can endorse such an incremental yet horizonless approach — otherwise, we will end up boiling a frog that Congress never intended to leave the lily pad.”
     The individual named defendants are State Bar Executive Director Joseph Dunn, President Arbitrator Kenneth Bacon, Presiding Judge Joann Remke, and Board of Trustees President Luis Rodriguez.
     The defendants’ San Francisco-based attorneys, Michael von Loewenfeldt with Kerr & Wagstaffe and Kevin Coleman and Todd Holvick with Schnader Harrison Segal & Lewis, and Scheer did not return requests for comment Friday.

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