The Ninth Circuit Bankruptcy Appellate Panel ("BAP") has held for the first time that neither sovereign immunity nor the Younger abstention doctrine constrain bankruptcy courts from enjoining State governmental disciplinary proceedings where the debtors assert discrimination under 11 U.S.C. section 525(a). In re Lacher, 669 B.R. 548 (B.A.P. 9th Cir. June 11, 2025). Click here for the full decision.
Background on the Case
The case involved an attorney ("Debtor") licensed to practice law in California who was accused by the California State Bar ("Bar") of engaging in unethical conduct. Following trial, a State Bar Court judge found, among others, that the Debtor violated and ignored multiple court orders, failed to pay court-imposed sanctions, filed and failed to dismiss an unjust action, which she filed with a corrupt motive, pursued a meritless appeal with the intent to delay payment of the Judgment, and commingled trust account funds with her personal funds. It recommended a nine-month suspension ("or until she paid the ECI Judgment"), holding that the Debtor "abused the judicial process and harmed [a litigation opponent] in her crusade to thwart [its] collection efforts."
The Review Department of the Bar partially affirmed the Bar court's recommendations and the Debtor's license to practice law was "immediately transferred to involuntary status." The Bar court's recommendations were transmitted to the California Supreme Court for final review. Likely to avoid a possible disbarment, the Debtor filed for bankruptcy under Chapter 7. The California Supreme Court initially stayed the disciplinary proceedings due to the bankruptcy filing but ultimately held that the stay did not apply to attorney disciplinary proceedings.
After she received a discharge in her bankruptcy case, the Debtor sought a determination by the bankruptcy court that efforts to disbar her were based solely on the judgment obtained against her in state court and her alleged violations of related collection orders. She claimed that the Bar's disciplinary proceedings against her were discriminatory under Section 525(a), which prohibits certain acts of discrimination by governmental entities against bankruptcy debtors, and that the discharge injunction barred further disciplinary actions by the Bar.
Ninth Circuit Bankruptcy Appellate Panel Decision
The Bar argued, among others, that it was entitled to the protections of sovereign immunity and the Younger abstention doctrine. The BAP rejected these defenses, holding that they are not implicated by the Debtor's discrimination allegations under Section 525(a). The BAP relied on Central Virginia Community College v. Katz, 546 U.S. 356 (2006), which held, in part, that bankruptcy courts have the exclusive jurisdiction over a debtor's property, distribution of that property, and the discharge giving the debtor a fresh start. The BAP concluded that "[u]nder this framework, the [Supreme] Court has held that bankruptcy proceedings generally do not infringe on state sovereign immunity."
Analogizing to the rulings in Katz and Tennessee Student Assistance Corp. v. Hood, 541 U.S. 440, 446 (2004), where the Supreme Court held that the discharge of student loans and preference avoidance actions were not barred by sovereign immunity, the BAP concluded that the Debtor's attempts to use her discharge injunction to stop the Bar's disciplinary proceedings against her were "within the bankruptcy court's in rem jurisdiction and not subject to sovereign immunity." The BAP concluded that Section 525(a)'s antidiscrimination provisions are akin to a bankruptcy discharge, which does not implicate sovereign immunity.
The BAP acknowledged that the Supreme Court has not considered whether sovereign immunity exempts governmental entities from the antidiscrimination prohibitions in Section 525(a). It declined to follow its precedent in Franceschi v. State Bar of California (In re Franceschi), 268 B.R. 219 (9th Cir. BAP 2001), finding that the case was implicitly overruled by the Supreme Court in Hood and Katz.
The BAP also held that the Younger abstention doctrine does not constrain bankruptcy courts from enforcing the antidiscrimination provisions of Section 525(a). In Younger v. Harris, 401 U.S. 37 (1971), the Supreme Court held that, "with rare exceptions," federal courts cannot enjoin criminal proceedings pending in State courts. Subsequent courts extended the doctrine to civil proceedings.
The BAP acknowledged the rulings in Middlesex County Ethics Committee v. Garden State Bar Ass'n, 457 U.S. 423, 431-35 (1982) and Hirsh v. Justices of the Supreme Court of the State of California, 67 F.3d 708, 712 (9th Cir. 1995), where the Supreme Court and Ninth Circuit Court of Appeals barred "federal court injunctions against state bar proceedings." Nevertheless, it concluded that the Younger doctrine does not apply to a debtor's efforts to enforce its bankruptcy discharge or to antidiscrimination claims under Section 525(a). It explained that Congress explicitly authorized bankruptcy courts under Sections 525(a) to enforce antidiscrimination provisions against governmental units. The ability to issue an injunction against a state agency, therefore, is necessary for bankruptcy courts to carry out their jurisdiction to grant debtors a fresh start and to enforce discharge orders.
The BAP ultimately affirmed the lower court's rulings, though, holding that the disciplinary proceedings did not violate Section 525(a) and that the discharge injunction did not preclude the Bar or California Supreme Court from proceeding with the disciplinary actions against the Debtor.
Why This Case Matters
This ruling appears to further limit the reach of sovereign immunity in bankruptcy cases. While Congress expressly abrogated sovereign immunity as to many bankruptcy proceedings (see 11 U.S.C. section 106(a)), including as to Section 525(a), the BAP's ruling may take the "bankruptcy exceptionalism" concept to a new level. Under this ruling, bankruptcy courts may have a broader mandate than merely to oversee estate assets, creditor claims, and debtor discharge. They may have the authority to interfere with governmental proceedings that are unrelated to the res of a bankruptcy estate or a debtor's discharge. Parties facing governmental disciplinary actions may find solace in this ruling, though they must still comply with the Bankruptcy Code.
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