The remarkable Sundquist opinion from March and its $45 million in punitive damages has spawned another notable decision, both written by Bankruptcy Judge Christopher M. Klein of Sacramento, Calif. The judge called his new opinion “an important tool in the judicial toolbox for addressing the dilemma of counsel who incompetently represent debtors who have a meritorious case.”
The Deal to Settle $45 Million in ‘Punies’
In March, Judge Klein imposed more than $46 million in actual and punitive damages against a bank for what he called “uncivilized conduct” resulting in a “Kafkaesque nightmare of stay-violating foreclosure.” Sundquist v. Bank of America NA, 566 B.R. 563 (Bankr. E.D. Cal. March 23, 2017). While the case was on appeal, the bank and the homeowner reached a settlement agreement for an undisclosed amount.
Although Judge Klein did not say how much the confidential settlement would entail, it would give the homeowners more than the $6 million in actual and punitive damages he awarded them in March. As additional punitive damages in March, Judge Klein also awarded $40 million to five California law schools and two nonprofit groups that aid bankrupt consumers. He said that the $40 million must “be used only for education in consumer law and delivery of legal services in matters of consumer law.” Evidently, the proposed settlement has nothing for the law schools and consumer groups.
Two problems arose that have delayed Judge Klein’s approval or disapproval of the settlement. Perhaps of more significance, approving the settlement would require Judge Klein to vacate his March opinion, which excoriated the bank for its contemptuous behavior.
Following a hearing in mid-October, Judge Klein took the settlement motion under advisement, with the issue of vacating his March decision being a primary sticking point.
The Former Lawyer’s Alleged Contingency Fee
Meanwhile, one of the debtor’s former lawyers filed a notice of lien claiming her right to collect a contingency fee from the $46 million settlement. The contingency-lien claim is also delaying the settlement because the former lawyer threatened to sue the homeowners and the bank if they settled without paying her contingency fee.
Attempting to remove the former lawyer as an impediment to settlement, Judge Klein vacated the former lawyer’s lien in an opinion on Nov. 15 while allowing her to collect $70,000 in fees once the settlement is paid, if it is.
Revolving around Section 329(a), Judge Klein’s 39-page opinion on Nov. 15 covers a plethora of issues with regard to an attorney’s claim and lien for fees. The decision is far too complex for any adequate summary, so we recommend reading the opinion in full text by clicking here.
With regard to the underlying facts, Judge Klein said that he awarded $46 million “despite” the former lawyer’s efforts, not because of them. Among other things, he vacated the former lawyer’s contingency lien because of her “lack of competence,” which, he said, was “among the ten weakest performances . . . [he] had the misfortune to observe” over his 29 years on the bankruptcy bench.
For example, Judge Klein said the lawyer’s questions at trial were “amateurish” and that she “showed no ability to lay a foundation for introducing evidence.” The judge was able to rely on a debtor’s contemporaneous diary as the centerpiece of his March opinion because the bank had marked the document into evidence. The debtors’ lawyer, he said, “made no attempt to introduce the . . . diary into evidence.”
Violations of Section 329(a)
Not disclosed when required by Section 329(a) and Rule 2016(b), the contingency agreement allegedly giving rise to the lien was concededly invalid under California law. Judge Klein referred to the document as a “doctored, back-dated contingency fee agreement.”
The lawyer’s delayed disclosure of the contingency agreement, Judge Klein said, violated Section 329(a), which requires counsel for a debtor to disclose “compensation paid or agreed to be paid.” Even if the agreement were not invalid under state law, he said the court had discretion under Section 329(b) “to cancel the contingency agreement.”
If the lawyer’s “undisclosed intention to enforce the full fee agreement” was “not a recent fabrication,” Judge Klein said there was a failure of disclosure under Section 329(a) “for which all fees may be denied.”
“If the undisclosed intention is a recent fabrication,” Judge Klein said that the lawyer “lied” in several court filings “for which sanctions are appropriate on a variety of theories.”
“Either way, this court has discretion to deny all fees,” Judge Klein said.
Nonetheless, Judge Klein stood by his decision in March to pay the former lawyer $70,000 based on her ordinary time charges and the number of hours she devoted to the matter. In other words, Judge Klein was saying that the lawyer should be happy with $70,000 when the facts would justify denial of all fees.
Judge Klein also dealt with the possibility that the former lawyer might sue the debtors and the bank in another court. If that happens, the judge said the bank or the debtors could remove the action to bankruptcy court, allowing him to exercise “arising under” jurisdiction pursuant to Section 1334(b) of the Judicial Code.
Update: The former lawyer has already appealed to the Bankruptcy Appellate Panel.