Business Law
In re Lacher
The Ninth Circuit Bankruptcy Appellate Panel held that neither sovereign immunity nor the Younger abstention doctrine constrain bankruptcy courts from enjoining state governmental disciplinary proceedings where the debtor asserts discrimination under 11 U.S.C. section 525(a). In re Lacher, 669 B.R. 548 (B.A.P. 9th Cir. June 11, 2025). View the full decision.
Facts[1]
Litigation Trouble
Pamela Lacher (the “Debtor”) is a California licensed attorney. In 2001, she retained for a client the services of an investigation agency. When she refused to pay the resulting fees, the entity obtained a judgment against her in the amount of $3,830.85, plus attorneys’ fees, costs, and interest (the “Judgment”). In 2002, Debtor and her mother sued the investigation entity and its owners (collectively, “ECI”) in the superior court, asserting claims for misrepresentation, intentional infliction of emotional distress, and breach of contract. The superior court granted ECI’s anti-SLAPP motion and dismissed the lawsuit. It awarded ECI $7,687.90 in attorneys’ fees and costs.
The Debtor filed two appeals in the California Court of Appeal. The appellate court upheld the lower court in both appeals and awarded ECI various sanctions and costs. The Debtor filed a notice of Lis Pendens against ECI, which was subsequently expunged with additional fees and costs awarded against her.
The Debtor subsequently refused to cooperate in ECI’s discovery attempts, including after being ordered to do so by the superior court. She appealed again, resulting in an opinion that was critical of the Debtor’s efforts to evade the Judgment collection efforts and her filing of a frivolous lawsuit.
In September 2018, the superior court issued an order requiring the Debtor to pay fees and costs regarding the last failed appeal, as well as over $75,000 in previously-imposed attorneys’ fees. Subsequently, the superior court held the Debtor in contempt for violating multiple court orders. By April 2021, the Debtor owed $153,670.80 pursuant to the Judgment, with interest continuing to accrue.
Disciplinary Proceedings
The Debtor’s legal trouble did not escape notice by the State Bar of California (the “Bar”). In 2009, it instigated disciplinary proceedings against her for failing to report two judicial sanction orders imposed in the ECI litigation. The California Supreme Court suspended the Debtor for one year, which it stayed, and placed her on a two-year probation. In 2023, the Bar found her liable under four counts of misconduct relating to an unrelated disciplinary proceeding. She was suspended for 90 days and placed on probation for another year.
In June 2022, the Bar initiated the disciplinary proceedings at issue in this case. It accused the Debtor of ethical misconduct in the ECI litigation. 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;
- Failed to report to the Bar that judicial sanctions were imposed against her; and
- Commingled trust account funds with her personal funds.
The Bar court identified multiple aggravating factors, including the Debtor’s prior record of discipline, a pattern of misconduct, and “significant harm,” which outweighed the mitigating factors. It recommended a nine-month suspension (“or until she paid the ECI Judgment”), holding that the Debtor “abused the judicial process and harmed [ECI] in her crusade to thwart [ECI’s] collection efforts.” Though it concluded that the Debtor’s “failure to comply with eight court orders” was a serious ethical violation, the Bar Court did not recommend monetary sanctions.
In June 2024, the Review Department of the Bar issued an opinion in which it partially affirmed the Bar Court’s recommendations and findings that the Debtor failed to comply with court orders, filed a frivolous appeal, abused the judicial process, failed to report judicial sanctions, and comingled client trust account funds. It affirmed the Bar Court’s aggravating factor findings and concluded that the Debtor’s misconduct merited disbarment regardless of whether she paid the Judgment and penalties. The Debtor’s license to practice law was “immediately transferred to involuntary status,” and the Bar Court’s recommendation transmitted to the California Supreme Court for final review.
In October 2024, the Debtor filed for bankruptcy under Chapter 7, scheduling an unsecured debt in favor of an ECI principal in the amount of $161,243.33. ECI subsequently filed a nondischargeability action under Section 523(a)(6), which is still pending. 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. The Debtor filed a petition for review of the Bar Court’s disbarment recommendations, which is pending.
The Bankruptcy Proceedings
The Debtor filed an emergency motion (the “Motion”) in the bankruptcy court, requesting a determination that the automatic bankruptcy stay applied to the disciplinary proceedings pending in the California Supreme Court. According to the Motion, the proceedings were discriminatory under Section 525(a), because they arose from her failure to pay a dischargeable prepetition debt. She asked the bankruptcy court to order the Bar to reinstate her license to practice law.
The Bar opposed the Motion, arguing that the automatic stay did not apply to the disciplinary proceedings, which involve the State’s police and regulatory power, that the license suspension did not violate Section 525, that the bankruptcy court should abstain under the Younger doctrine, and based on the Eleventh Amendment’s sovereign immunity doctrine.
The bankruptcy court held that the automatic stay was not implicated and that the disciplinary proceedings did not violate Section 525(a). The latter holding was based on a finding that the disbarment order was not imposed “solely” based on Debtor’s failure to pay the Judgment or the costs and penalties imposed against the Debtor. The bankruptcy court did not address either the sovereign immunity or Younger abstention doctrine arguments.
After she received a discharge, the Debtor filed a supplemental request for an emergency hearing, arguing that her disbarment was based solely on the Judgment and violation of various related collection orders. She posited that the Bar’s disciplinary proceedings were discriminatory under Section 525(a) and that the discharge injunction barred further disciplinary actions by the Bar.
The bankruptcy court denied the supplemental motion, concluding that the discharge injunction neither voided the Bar Court’s disciplinary recommendations nor precluded the ongoing disciplinary proceedings pending before the California Supreme Court.
The Debtor appealed the bankruptcy court’s orders to the Bankruptcy Appellate Panel (“BAP”).
Reasoning
The BAP identified multiple questions on appeal, including whether the Eleventh Amendment’s sovereign immunity defense permits bankruptcy courts to interfere with state disciplinary proceedings, whether the bankruptcy court should have abstained from ruling on the Motion pursuant to the Younger abstention doctrine, and whether the Bar’s disciplinary proceedings were discriminatory under Section 525(a), among others.
Though the bankruptcy court did not rely on either the Bar’s sovereign immunity or the Younger abstention doctrine in its ruling, the BAP addressed both. It held that the Bar’s right to control its own attorney disciplinary proceedings is not protected by the Eleventh Amendment and that the Younger abstention doctrine did not bind the bankruptcy court as to the Debtor’s discrimination allegations asserted under Section 525(a). It 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.
While it affirmed the bankruptcy court’s rulings, the import of this published opinion is the BAP’s conclusion that neither the Eleventh Amendment nor the Younger abstention doctrine protect the States from the potential interference by bankruptcy courts in state-managed disciplinary proceedings.
Eleventh Amendment
The Eleventh Amendment (the “Amendment”) to the United States Constitution states,
The judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by citizens of another state, or by citizens or subjects of any foreign state.
The Amendment has been held to protect the States from suits by their own citizens. Tennessee Student Assistance Corp. v. Hood, 541 U.S. 440, 446 (2004).
The BAP acknowledged that the Bar is an arm of the State and therefore may assert sovereign immunity as a defense. However, it held that the Bar’s disciplinary proceedings fall within the bankruptcy court’s in rem jurisdiction, citing to Tennessee Student Assistance Corp. v. Hood, which noted that sovereign immunity does not prohibit in rem admiralty proceedings even where the State did not possess the res, namely estate assets.
The BAP further relied on Central Virginia Community College v. Katz, 546 U.S. 356 (2006), where the Supreme Court held 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 Hood and Katz, 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 noted that the Supreme Court has not considered whether sovereign immunity exempts governmental entities from the antidiscrimination prohibition in Section 525(a). However, based on Hood and Katz, it held that bankruptcy courts can enforce Section 525(a) notwithstanding the Amendment. It reasoned that Section 525(a) is merely a “reinforcement of the [bankruptcy] discharge,” which is unaffected by the sovereign immunity defense. According to the BAP, “[f]or the purposes of the Eleventh Amendment, there is no meaningful distinction between an action against a state to enforce the automatic stay and an action to enforce the discharge or the antidiscrimination provision.”
The BAP rejected the Bar’s reliance on Montana Department of Revenue v. Blixseth (In re Blixseth), 112 F.4th 837 (9th Cir. 2024), where the Ninth Circuit Court of Appeals distinguished Hood and Katz. The Blixseth court addressed whether sovereign immunity barred efforts to obtain sanctions against a State pursuant to Section 303(i), for the improper filing of an involuntary bankruptcy case. It concluded that such claims did not further either property of the bankruptcy estate or a discharge of the debtor’s obligations and therefore were not in rem claims that were exempt from sovereign immunity. The BAP held that the Debtor’s attempt to reverse her disbarment based on Section 525(a) implicated the fresh start policy that Congress intended to advance through the discharge injunction.
The BAP refused to follow Franceschi v. State Bar of California (In re Franceschi), 268 B.R. 219 (9th Cir. BAP 2001), finding that it was implicitly overruled by the Supreme Court in Hood and Katz.
Younger Abstention Doctrine
The BAP further 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 quasi-criminal and civil proceedings. Pennzoil Co. v. Texaco, Inc., 481 U.S. 1, 11 (1987). Congress has codified three exceptions to the doctrine: (1) when expressly authorized by an Act of Congress, (2) when necessary to aid in a court’s jurisdiction, and (3) to protect or give effect to a court’s judgments. A judicial exception also applies to person’s who can show that a pending prosecution in state court would cause him or her “irreparable damage.”
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 quoted a decision from 1934, where the Supreme Court stated that a primary purpose of bankruptcy was to “‘relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes,’” quoting Loc. Loan Co. v. Hunt, 292 U.S. 234, 244 (1934). Arguably, the BAP’s ruling may encourage disruptions in state disciplinary proceedings which seek to determine whether debtors are honest.
The BAP acknowledged its contrary ruling in In re Franceschi, where it previously affirmed a lower court’s abstention under the Younger doctrine while applying a different test than the one used in the present case. The BAP held that Pennsylvania Department of Public Welfare v. Davenport, 495 U.S. 552, 564 (1990) and subsequent Supreme Court rulings narrowing the applicability of the Amendment in bankruptcy proceedings mean that the Franceschi discussion of the Younger doctrine is no longer good law.
Discharge Injunction
Dismissing the State’s Eleventh Amendment and Younger doctrine defenses, the BAP next considered the substance of the Debtor’s claims. It rejected her argument that the Section 524(a)(1) discharge injunction nullified the Judgment and all proceedings arising from it, including the Bar’s disciplinary action. It noted that the Judgment was still the subject of a nondischargeability action. Regardless, a discharge would have related only to her personal liability to ECI, but not to the non-financial consequences of the discharged debt, such as the disciplinary proceedings. Finally, it held that discharge of the Judgment did not relieve the Debtor of “nonmonetary responsibility of [her] many wrongful acts …. To hold otherwise would lead to an absurd result.”
The BAP also rejected the argument that the discharge injunction under Section 524(a)(2) barred the State’s disciplinary proceedings, concluding that the Bar was not attempting to “collect, recover or offset” the ECI Judgment as the Debtor’s personal liability. It further held that, under similar facts, it previously concluded that the Bar’s disciplinary action did not represent an attempt to collect a discharged debt; rather it was a proceeding designed to discipline an attorney for “conduct deemed harmful to the public.”
Antidiscrimination Provisions of Section 525
The BAP also rejected the Debtor’s argument under Section 525(a) that the disciplinary proceedings discriminated against her because she was a debtor in bankruptcy and because she failed to pay the Judgment. Section 525(a) prohibits a governmental unit from denying or revoking a license held by a person “solely” because he or she was a debtor in bankruptcy. The BAP concluded that the Bar’s disciplinary action was not commenced “solely” because the Debtor failed to pay the Judgment or that she was a debtor in bankruptcy. Rather, it was based on multiple wrongful conduct allegations asserted against the Debtor.
Postscript
The BAP denied the Debtor’s motion for reconsideration. On August 8, 2025, she appealed the BAP’s decision to the Ninth Circuit Court of Appeals (Case No. 25-5026).
Author’s Comments
The BAP rejected the Debtor’s argument that her discharge injunction precluded the Bar from proceeding with efforts to discipline her for unethical behavior, based on its interpretation of Sections 524 and 525. However, the BAP’s holdings that neither the Eleventh Amendment’s sovereign immunity defense nor the Younger doctrine applies to a debtor’s attempts to disrupt a State’s disciplinary proceedings based on Section 525(a)’s nondiscrimination prohibition raises questions.[2]
It is unclear that the Supreme Court’s holdings in either Katz or Hood support the BAP’s ruling in this case. In Katz, the Supreme Court clarified that bankruptcy jurisdiction “is principally [an] in rem jurisdiction.” Katz, at p. 369. However, there are times when a bankruptcy court must exercise an ancillary in personam jurisdiction to enforce the authority it is granted under the Bankruptcy Clause. Examples of the ancillary jurisdiction include issuance in the early days of the country of in personam writs of habeas corpus directing the States to release debtors from prison, enforcement of the bankruptcy discharge, and even actions to avoid preferential transfers received by the States. To the extent the ancillary jurisdiction exceeds a bankruptcy court’s in rem jurisdiction, the Katz Court concluded that the States agreed in the plan of the Constitutional Convention to waive their sovereign immunity rights to the extent “necessary to effectuate the in rem jurisdiction of the bankruptcy courts.” Id., at p. 377.
The decision in Katz is clear, though, that the scope of the States’ consent to the bankruptcy court’s ancillary jurisdiction is limited to actions generally held to come within Congress’ power to enact “laws on the subject of Bankruptcies.” These acts and jurisdiction are still chiefly in rem. Id., at p. 378. The BAP concluded that the Debtor’s efforts to eschew disbarment based on her discharge injunction “is within the bankruptcy court’s in rem jurisdiction and not subject to sovereign immunity.” However, prior cases considering State sovereign immunity focused on the debtor and its assets, ensuring that the exercise of bankruptcy jurisdiction had a minimal impact on creditors and other third parties. The BAP’s ruling appears to expand the bankruptcy court’s in rem jurisdiction to include the right to prohibit a State entity from enforcing its police and regulatory powers. As the BAP conceded, this holding is untested at the Supreme Court level. Tellingly, the BAP cited to no other case that has ruled on this issue.
Will the ruling in Katz extend the Bankruptcy Clause to allow bankruptcy courts to interfere with governmental entities’ disciplinary proceedings? Requiring State agencies, including authorities responsible for licensing lawyers, doctors, pilots, etc., to appear in bankruptcy courts to explain why specific disciplinary proceedings do not violate Section 525(a) could be onerous and disruptive. This supervisory role by bankruptcy courts could result in inconsistent rulings, with a potentially deleterious impact on State efforts to protect the public from dangerous or unethical activities.
One can see how a government agency’s retaliation against a bankruptcy debtor whose debt to the State was discharged may be ancillary to the discharge granted in the case, and therefore within the bankruptcy court’s in rem jurisdiction. The same may be untrue when the State’s disciplinary action is unrelated to any debt it is owed by the debtor, removing the creditor/debtor dynamic underlying prior sovereign immunity cases. In the present case, there is no indication that the Bar is a creditor in the Debtor’s bankruptcy case, suggesting that the BAP’s ruling may veer beyond what has previously been contemplated as the bankruptcy court’s in rem jurisdiction.
It is also unclear that either the Katz or Hood decisions was intended to undermine the Younger abstention doctrine. The BAP relied on Pennsylvania Department of Public Welfare v. Davenport, 495 U.S. at p. 564, where the Supreme Court held that a Chapter 13 debtor was entitled to receive a bankruptcy discharge of criminal restitution obligations despite the Younger doctrine. The Davenport case, though, did not involve a bankruptcy court’s authority to interfere with a State’s efforts to protect the public from unscrupulous or incompetent professionals. The BAP ultimately concluded that it would be an “absurd result” were the discharge injunction utilized to prevent continuation of the Bar’s disciplinary proceedings against the Debtor. Does the same reasoning support abstention under the Younger doctrine?
In sum, the BAP’s holding that Section 525(a)’s antidiscrimination provision is akin to a bankruptcy discharge in terms of the States’ sovereign immunity defense is untested at the Supreme Court or other appellate court levels. It will be interesting to see whether this ruling will result in an increase in bankruptcy filings by professionals facing government disciplinary proceedings. Naturally, even under the holdings in this case, bankruptcy courts will usually deny debtors’ efforts to challenge State disciplinary proceedings under Section 525(a), as the proceedings are rarely based “solely” on the debtor’s status as a bankruptcy debtor or its receipt of a discharge.
[The Commercial Finance Newsletter is written by an ad hoc group of the California Lawyers Association’s (CLA) Business Law Section. These materials were written by Uzzi O. Raanan, a partner at Greenberg Glusker, LLP, located in Los Angeles, California, who is a member of the ad hoc group and a past representative from the Business Law Section (BLS) to the CLA’s Board of Representatives. Editorial contributions were made by the Honorable Meredith Jury (United States Bankruptcy Judge, C.D. Cal, Ret.), also a member of the ad hoc group. The opinions expressed herein are solely those of the author.]
[1] Unless stated otherwise, all statutory references are to the Bankruptcy Code, codified in 11 U.S.C. sections 101, et seq.
[2] The BAP did not discuss Section 106(a), where Congress abrogated sovereign immunity as to Sections 524 and 525. While some courts have held that Section 106(a) is unconstitutional (see Montana Department of Revenue v. Blixseth (In re Blixseth), 112 F.4th at p. 845), the Katz holding that the States waived their rights to assert sovereign immunity on the entire “subject of Bankruptcies” suggests that Section 106(a) may be a proper use of Congress’ Article I authority, with some limits. To the extent the antidiscrimination provisions in Section 525(a) are deemed to be the “subject of Bankruptcies,” as contemplated by the Katz decision, Section 106(a)’s abrogation of the States’ sovereign immunity as to this section would likely stand.