Florida permits lawyers to do business using a fictitious law firm name, but disclosure requirements under Bankruptcy Rule 2014 are more rigorous. Because the retained lawyers did not disclose the details of their relationship, newly appointed Bankruptcy Judge John T. Dorsey sanctioned them $55,000.
In two opinions, Judge Dorsey let the lawyers off the hook for more severe sanctions because they were not bankruptcy lawyers and thus were “not accustomed to the stringent disclosure requirements mandated by the Bankruptcy Rules.”
Judge Dorsey was appointed to the bankruptcy bench in Delaware in June after 16 years as a partner at Young Conaway Stargatt & Taylor LLC in Wilmington.
The ‘Virtual’ Law Firm
The lawyers in question had represented the debtor corporation before bankruptcy. In chapter 11, the debtor retained the lawyers by order of the bankruptcy court as special litigation counsel to prosecute a lawsuit.
In discovery in the lawsuit, the defendants discovered that the lawyers were doing business as a law firm using a fictitious name. Although the fictitious name appeared on the building housing their offices, it turned out that the supposed firm was actually two law firms operating together from the same office and representing themselves to be one firm.
In his first opinion on August 9, Judge Dorsey said it is legal to operate a law firm under a fictitious name in Florida. He said the lawyers had been using the fictitious name for almost 30 years.
Alleging that the lawyers’ retention papers were not complete and accurate and violated Bankruptcy Rule 2014, the defendants moved to disqualify the lawyers and sought the disgorgement of fees.
The August Opinion
In his August opinion, Judge Dorsey said that the original retention papers did not mention the fictitious name, did not identify the two firms that actually provided the services, and did not disclose two other attorneys working on the matter who were an associate and counsel with the two firms.
Judge Dorsey found that the two actual firms shared fees based on the number of hours each spent on the case, “as opposed to a retainer or a referral fee.” He said that the two actual firms were “for all intents and purposes a partnership” with fee-sharing among the partners. He therefore found “no impermissible fee sharing arrangement.”
Judge Dorsey refused to disqualify the lawyers. Although the Rule 2014 disclosures were “defective,” he found that “the facts do not support disqualification,” which would have deprived the debtor of its “chosen counsel, who have the most knowledge and understanding of the facts of this adversary proceeding.”
Furthermore, Judge Dorsey surmised that the court would have approved the retention had there been full disclosure.
But that wasn’t the end of the story. Although disqualification was not warranted, Judge Dorsey decided that “economic sanctions” were “warranted” under the court’s “inherent authority to supervise the professionals appearing before it.” He said that the lawyers’ “negligent failure to disclose” did not relieve them of the “consequences of failing to make a fulsome and accurate disclosure.”
In his first opinion in August, Judge Dorsey directed the lawyers to update their disclosures but barred them from collecting fees to bring the disclosures up to snuff. Furthermore, he directed the lawyers to disgorge fees paid for their initial disclosures.
Most significantly, Judge Dorsey directed the lawyers to pay the defendants’ attorneys’ fees incurred in bringing the motion to disqualify and impose sanctions.
Subsequently, the three law firms representing the defendants sought recovery of a total of $238,000 in counsel fees they had expended on the motion for disqualification and sanctions.
Second Opinion on Rehearing
The two sanctioned law firms didn’t take it lying down and filed a motion for reconsideration, noting that Judge Dorsey had found only negligence, not bad faith. The firms argued that the court’s inherent authority does not provide a basis for fee-shifting sanctions absent a finding of bad faith.
On October 9, Judge Dorsey handed down his second opinion, saying he needed to correct “a clear error of law.”
Judge Dorsey began with Chambers v. Nasco Inc., 501 U.S. 32, 45-46 (1991), where the Supreme Court ruled that a court’s inherent power permits departure from the American Rule only if (1) “a party’s litigation efforts benefit others,” (2) there was “willful disobedience of court order,” or (3) the party “acted in bad faith, vexatiously, wantonly, or for oppressive reasons.”
Although “inherent power” did not provide the basis for fee-shifting, Judge Dorsey said he could “impose fee-shifting sanctions” under Section 105 or Bankruptcy Rule 9011. Neither requires a finding of bad faith, he said, only “objectively unreasonable conduct,” citing Fellheimer Eichen & Braverman P.C. v. Charter Technologies Inc., 57 F.3d 1215, 1225 (3d Cir. 1995).
Having found in August that the sanctioned firms were negligent, Judge Dorsey said that the conduct was, “by definition, objectively unreasonable,” making “sanctions under Rule 9011 . . . appropriate.”
Instead of the $238,000 in counsel fees sought by the three law firms representing the defendants, Judge Dorsey required the debtor’s two firms to pay $55,000.
Originally, Judge Dorsey had barred the two sanctioned firms from receiving compensation for defending the sanctions and disqualification motion. To “prevent manifest injustice,” he decided to withhold a ruling on the allowance of compensation until the firms file an application for reimbursement of fees paid to their outside counsel retained to defend the sanctions motion.
The August and October opinions are both in NNN 400 Capital Center LLC v. Wells Fargo Bank NA (In re NNN 400 Capital Center LLC), 18-50384 (Bankr. D. Del. Aug. 9 and Oct. 9, 2019).
Florida permits lawyers to do business using a fictitious law firm name, but disclosure requirements under Bankruptcy Rule 2014 are more rigorous. Because the retained lawyers did not disclose the details of their relationship, newly appointed Bankruptcy Judge John T. Dorsey sanctioned them $55,000.
In two opinions, Judge Dorsey let the lawyers off the hook for more severe sanctions because they were not bankruptcy lawyers and thus were “not accustomed to the stringent disclosure requirements mandated by the Bankruptcy Rules.”
Judge Dorsey was appointed to the bankruptcy bench in Delaware in June after 16 years as a partner at Young Conaway Stargatt & Taylor LLC in Wilmington.
The ‘Virtual’ Law Firm
The lawyers in question had represented the debtor corporation before bankruptcy. In chapter 11, the debtor retained the lawyers by order of the bankruptcy court as special litigation counsel to prosecute a lawsuit.
In discovery in the lawsuit, the defendants discovered that the lawyers were doing business as a law firm using a fictitious name. Although the fictitious name appeared on the building housing their offices, it turned out that the supposed firm was actually two law firms operating together from the same office and representing themselves to be one firm.