Toledo Bar Assn. v. Hales, 120 Ohio St.3d 340, 899 N.E.2d 130 (2008)

Brief Summary
In Ohio a lawyer whose debt has been discharged in bankruptcy may not be ordered to pay restitution (for discharged debts) as part of a disciplinary sanction.

Complete Summary
Attorney Steven Hales met Bonnie Oehlers when she was pursuing a medical malpractice claim through another lawyer. Oehlers asked Hales to review a draft settlement agreement related to the litigation. Hales, who had been practicing law for a little more than three years, advised her not to sign it. Oehlers then transferred the entire matter to Hales. Hales had never litigated a medical malpractice claim and he was unable to find an experienced lawyer to serve as co-counsel with him.

Because Hales failed to disclose his expert witnesses on time, the court granted defendants’ motions for summary judgment. Hales allegedly did not consider the possibility of being sued by Oehlers for malpractice because Oehlers later called Hales to discuss a different legal matter. Hales then filed for Chapter 7 bankruptcy. He did not list the possibility of a malpractice suit as a liability. The court discharged all of his indebtedness.

Oehlers then sued Hales for malpractice. Hales did not file an answer to the complaint. The court granted Oehlers a default judgment for $280,000, but she was unable to recover from Hales because of the discharge in bankruptcy. Oehlers was also unable to recover from Hales’ insurer because Hales had failed to disclose the malpractice claim to the insurer; thus relieving it from liability. Hales had not notified the insurer because he thought the discharge in bankruptcy eliminated the insurer’s liability.

On appeal in Hales’ disciplinary proceeding, the Ohio Supreme Court accepted the disciplinary board’s findings of misconduct but reviewed the appropriate sanction. The primary issue regarding the sanction was whether to order Hales to pay restitution to Oehlers. The court held restitution was not appropriate under Ohio precedent and federal bankruptcy law, although other jurisdictions had ordered restitution in similar circumstances. In reaching its conclusion, the court cited Cleveland Bar Assn. v. Gay, 94 Ohio St.3d 404, 763 N.E.2d 585 (2002), in which a lawyer was reinstated to practice despite the fact that, based on a bankruptcy discharge, he had not followed the court’s earlier order to pay restitution to a successful malpractice plaintiff. The Gay court relied on 11 U.S.C. § 525(a) which, according to the court, “prohibits a governmental unit from refusing to renew a license . . . for the reason that the applicant has sought bankruptcy protection or has not paid a debt that was discharged.” Hales, 120 Ohio St.3d at 346.

The court ultimately suspended Hales for two years with a stay on the last 18 months provided Hales completed an 18-month probation period.

Justice Lundberg Stratton dissented in part arguing that 11 U.S.C. § 525(a) prohibits denial of a license solely because the applicant has been a bankruptcy debtor. Lundberg Stratton noted that the purpose of ordering restitution in Hales’ case included rehabilitation and was not solely related to his status as a bankruptcy debtor. A separate dissent asserted that the sanction was not severe enough.

Significance of Opinion
This opinion highlights the competing policies behind bankruptcy law and lawyer disciplinary sanctions. This holding marks the second time in the last decade that the Ohio Supreme Court has given more weight to bankruptcy policy.

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