Wednesday, September 15, 2010

Tax Obligation Discharged, Attorney Reinstated

The Oklahoma Supreme Court has granted the reinstatement petition of an attorney who had been suspended for four years. Reinstatement was deemed appropriate notwithstanding the fact that the attorney had failed to pay tax liabilities that had led to the suspension. The obligation had been discharged in bankruptcy:

In her petition for rehearing, [the attorney] argued (as did the dissenting opinion) that refusing to restore her license based on her nonpayment of the discharged tax liability is contrary to 11 U.S.C. § 525(a), and the United States Supreme Court's decision in Perez v. Campbell, 402 U.S. 637 (1971). Upon further consideration, we now conclude that § 525(a) precludes any consideration of a debt discharged in bankruptcy in connection with the debtor's application for a government granted license.

To be sure, an important state interest is served by recognizing that suspended attorneys have a moral obligation to pay any tax liability that led to their suspension. Likewise, this Court has an interest in applying such a standard fairly and consistently to achieve justice, to rehabilitate errant members of the bar and to protect the public. However, the United States Supreme Court has made it clear that such interests cannot be enforced when to do so would frustrate the purpose of the Bankruptcy Act.

In Perez, the Supreme Court said that "'(o)ne of the primary purposes of the Bankruptcy Act' is to give debtors 'a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt.'" 402 U.S. at 648 (citations omitted). The Court also concluded that section 525(a) was enacted to fulfill this purpose and observed that "any state [action] which frustrates the full effectiveness of federal law is rendered invalid by the Supremacy Clause." 402 U.S. at 652. Suspended attorneys who obtain a bankruptcy discharge of the tax liability that led to their suspension are not excepted from the protection afforded by section 525(a), and the existence of a state interest in perpetuating such liability is not a sufficient reason to deprive such attorneys of "the full effectiveness of the federal law."

Aside from [her] nonpayment of the tax liability that led to her suspension, she has otherwise met the requirements for reinstatement. The record reflects that [the attorney] has demonstrated (1) appreciation for the seriousness of the misconduct that led to her suspension; (2) remorse for the harm done and the adverse impact of the misconduct on her clients, the legal profession, and the judicial system; (3) compliance with the condition of suspension to refrain from the practice of law; and (4) competence in the learning of the law. If this Court gives the bankruptcy discharge and § 525(a) "full effectiveness," then we have no further inquiry to make about the bona fides of [her] resort to bankruptcy vis-à-vis her reinstatement to the practice of law. Not only has [her] inability to pay the tax liability been conclusively established and the liability extinguished, but the party to whom the liability was owed - the United States Internal Revenue Service - raised no objection to such actions by the bankruptcy court.

The court withdrew an earlier opinion that had denied reinstatement. It is unusual to see a motion for reconsideration granted in a bar discipline matter. The original dissent eventually carried the day.(Mike Frisch)

Bar Discipline & Process | Permalink

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