A district judge in Shreveport, La., upheld sanctions imposed by the bankruptcy court against a self-described “national consumer law firm.” The significance of the opinion lies in coercing compliance with state rules of professional conduct and Section 526, regulating “debt relief agencies.”
According to the September 24 opinion by District Judge Elizabeth Erny Foote, the parties agreed that the case was “horribly screwed up.” Based on findings in other cases, the firm advertises nationally, has non-attorneys perform intake over the telephone, has the client sign a retainer agreement, collects the retainer, and assigns the case to an attorney presumably admitted to practice where the debtor will file bankruptcy.
The shortcomings in the particular debtor’s case included initially assigning a local counsel not licensed to practice in Louisiana, later assigning a local attorney located 350 miles from the chapter 7 debtor, never sending the debtor a retainer agreement signed by a lawyer admitted to practice in the state, employing a retainer agreement violating the Louisiana Rules of Professional Conduct, making oral representations that contradicted the written retainer agreement, repeatedly breaking promises to the debtor, and failing to supervise the local attorney properly.
With regard to the local counsel, the bankruptcy judge found that she “consistently” failed to contact the debtor, delayed filing the first petition, negligently allowed the first petition to be dismissed, falsely “indicated” that the debtor had signed the second petition, and allowed the second petition to be dismissed by failing to file required documents.
Judge Foote said the bankruptcy court found “professional negligence on the part of both [the nationwide firm] and [the local counsel], including multiple, continuous violations of the Louisiana Rules of Professional Conduct.”
With regard to the nationwide firm, sanctions imposed by the bankruptcy court included disgorgement of fees paid by the debtor, suspension from practice in the district for 90 days, precluding the firm from accepting a retainer until the client had consulted with a lawyer in the district, requiring the retainer agreement to comply with Louisiana’s Rules of Professional Conduct, requiring the client’s wet signature on all documents filed in court that purport to bear the client’s signature, requiring the client’s wet signature on the engagement agreement, precluding the firm from accepting a retainer before the client signs the engagement agreement, and requiring local counsel to obtain a separate PACER login for cases where the attorney is representing a client though the nationwide firm.
The nationwide firm appealed, without success.
The firm argued that the 90-day suspension did not comply with Federal Rule 65(d) governing injunctions. Judge Foote ruled that courts have power to determine who may practice before them independent of Rule 65, based on Fifth Circuit authority. Furthermore, she said, a suspension is not an injunction.
Judge Foote found jurisdiction in the bankruptcy court to impose the sanctions, even though she said that nothing other than the 90-day suspension was a sanction or discipline. She also found no violation of the firm’s due process rights.
Judge Foote rejected the notion that the bankruptcy court was required to make specific findings of bad faith based on clear and convincing evidence. With regard to state rules of professional conduct, she said the Fifth Circuit had held that a bad faith finding is not required to exercise authority under local rules.
Findings in the bankruptcy court’s order required the nationwide firm’s retainer agreement to include the provision of “all services integral to a chapter 7 filing.” The firm argued that the order was not clearly defined and violated the specificity requirements under Rule 65.
Judge Foote said that “services integral to a chapter 7 filing” was not “ambiguous” when read in context with the bankruptcy court’s opinion.
The firm objected to being characterized by the bankruptcy court as a “referral service” or a “marketer of legal services.”
Judge Foote said that the statements were not intended as findings of fact, but if they were, “they are not clearly erroneous.”