March 7, 2002 – The bankruptcy code does not allow a lawyer to discharge more than $12,000 in sanctions imposed by the Wisconsin Office of Lawyer Regulation (OLR), the U.S. Court of Appeals for the Seventh Circuit has ruled.

In Osicka v. Office of Lawyer Regulation, No. 21-1566 (Feb. 7, 2022), a three-judge panel held that sanctions were a “fine, penalty, or forfeiture” and therefore fell within an exemption for dischargeabilty under the U.S. Bankruptcy Code.

Restitution, Sanctions

The OLR began disciplinary proceedings against Tim Osicka in 2009.

A referee determined that Osicka committed “professional misconduct” and violated the Wisconsin Supreme Court’s Rules of Professional Conduct for Attorneys by failing to respond to client grievances, and by failing to cooperate with the investigation into the grievances.

The referee recommended the following: 1) temporary suspension of Osicka’s law license; 2) $150 in restitution; and 3) $12,878.14 in sanctions – the cost of the disciplinary proceedings.

Osicka appealed to the supreme court. The court reduced the suspension of Osicka’s law license to a public reprimand but upheld the restitution and sanctions, reducing the amount of the latter to $12,500.64.

Osicka failed to pay the sanctions by the deadline set by the supreme court, and as a result his license was suspended.  

Bankruptcy Filing

Osicka closed his practice and filed for Chapter 7 bankruptcy in 2011. He listed the OLR as an unsecured creditor, which meant that if Osicka’s filing were approved his obligation to pay the OLR the sanctions would be discharged.

The OLR did not contest the discharge, and the bankruptcy court granted Osicka a general discharge.

Osicka thought the discharge had eliminated his obligation to pay the sanctions. But when he applied to the State Bar of Wisconsin for readmission, the OLR informed him that it would not recommend his reinstatement unless he paid the sanctions.

In 2019, Osicka moved to reopen the bankruptcy case. He also filed a proceeding against the OLR.

The supreme court put a hold on Osicka’s petition for reinstatement, dependent on the outcome of the litigation.

Sanctions More Than Compensation

The bankruptcy code provides an exemption for dischargeability for a “fine, penalty, or forfeiture payable to and for the benefit of a governmental unit” that is “not compensation for actual pecuniary loss, other than a [particular] tax penalty.”

Osicka argued that the sanctions were neither a fine, a penalty, nor forfeiture – they were instead compensation designed to defray the expenses that the OLR incurred in its proceeding against him.

The bankruptcy court disagreed, ruling that a sanctions were more than compensation because they were imposed to punish Osicka.

Osicka appealed to the district court, which affirmed the bankruptcy court.

In an opinion written by Circuit Judge Michael Scudder, the Seventh Circuit upheld the district court’s ruling.

Because Congress had failed to define “fine, penalty, or forfeiture,” Judge Scudder explained, the court would apply the term’s ordinary meanings within the content of the bankruptcy code.

The sanctions imposed on Osicka were not a forfeiture, Judge Scudder reasoned, because according to Black’s Law Dictionary a forfeiture was the “loss of a right, privilege, or property because of a crime, breach of obligation, or neglect of duty.”

The sanctions didn’t fit within that definition, Judge Scudder wrote.

“Although the Wisconsin Supreme Court conditioned reinstatement of Osicka’s law license on the payment of his disciplinary costs, the costs themselves were based on OLR’s expenses, not the loss Osicka caused any clients.”

Fine or Not?

Whether the sanctions were a fine was a closer question, Scudder explained. Black’s Law Dictionary defines “fine” as “[a] pecuniary criminal punishment or civil penalty payable to the public treasury.”

The sanctions were like a fine in that they were payable to the state government and were imposed after the OLR determined that Osicka had committed misconduct. However, Judge Scudder reasoned, courts have not usually treated cost orders as fines for all purposes under the law.

Sanctions Were a Penalty

The court need not answer whether the sanctions were a fine, Judge Scudder explained, because it was clear that the sanctions imposed on Osicka were a penalty.

Black’s Law Dictionary defines “penalty” as a “[p]unishment imposed on a wrongdoer” – one that includes “a sum of money exacted as punishment for either a wrong to the state or a civil wrong.”

It was clear, Judge Scudder wrote, that the sanctions fit within that definition.

“Although there are several types of proceedings in which the Wisconsin Supreme Court may order costs … attorney discipline uniquely requires a ‘finding of misconduct as a precondition for doing so.”

The rule Osicka was determined to have violated – SCR 22.24(1)(m) – “unambiguously singles out attorney discipline as a penal endeavor,” Judge Scudder wrote. “And in Osicka’s case, the referee imposed costs only after assessing various aggravating and mitigating factors.”

Not Compensation

Judge Scudder explained that the sanctions were not “compensation for pecuniary loss,” which would have placed them outside the exemption for dischargeability.

“The OLR’s use of its operating budget neither resulted in the disappearance or diminution of value, nor the real and substantial destruction of property,” Judge Scudder wrote.

“It was instead ‘an expenditure by the government, part of the expense of governing’ that was not undertaken ‘expecting to create a debtor-creditor relationship’ – the exact use of the funds contemplated by Wisconsin law.”

Moreover, Scudder explained, the U.S. Supreme Court has held that cost orders like the one entered against Osicka was punitive, not compensatory. And every other circuit presented with the same question has held that such cost orders are punitive.