The Eleventh Circuit upheld $150,000 in sanctions imposed under Section 526(c)(5) on a self-described nationwide law for violating a settlement agreement with the bankruptcy administrator in the Northern District of Alabama.
Imposing sanctions, Chief Bankruptcy Judge James J. Robinson of Anniston, Ala., had characterized the firm as “arrogant” and “indifferent” and its defenses as “incredulous” and “absurd.” Using a “highly deferential standard of review,” the circuit court upheld the sanctions, showing that tough penalties will stand if the bankruptcy court uses enough derogatory adjectives pointed at a firm with a history of prior ethical lapses.
Bankruptcy Judge Robinson had also suspended the firm from practice in the district for 18 months. The appeal from the suspension was moot because it ended before oral argument in the circuit.
The opinion demonstrates that “improper and unethical conduct will not be condoned” in the Eleventh Circuit, Charles Tatelbaum told ABI. He is a partner with Tripp Scott PA in Fort Lauderdale, Fla.
Internet Intake of Consumer Cases
Based in Chicago, the firm aims to prosecute bankruptcy petitions for consumer debtors throughout the U.S. The business model solicits clients through the internet and refers them to “partners” where the client resides.
In his 37-page opinion on August 21 for the Eleventh Circuit, District Judge C. Roger Vinson, sitting by designation, cited Bankruptcy Judge Robinson for saying that the local “partners” had “very little, if any, input into how the firm’s business is conducted; they appear to be ‘partners’ in name only.”
The firm had previously been in a scrape with the bankruptcy administrator in the Northern District of Alabama. Through mediation, the administrator and the firm entered into a settlement approved by Judge Robinson.
Before the settlement, the firm’s retainer agreement called for a flat fee to cover basic bankruptcy services, such as preparation of the schedules and petition. However, the retainer required the clients to pay extra fees for other services they might need.
The settlement called for the firm to pay $50,000 and file no new cases in the district for six months. Of significance for the appeal in the circuit, the settlement required the firm to provide the excluded services without additional fees.
After the settlement, the bankruptcy administrator found that the firm had filed six petitions. In all six, the retainers violated the settlement by calling for extra fees to cover excluded services. In motion papers in bankruptcy court, the administrator alleged that the firm had therefore filed disclosures under Section 329(a) and Bankruptcy Rule 2016(b) that were materially inaccurate, untrue, or misleading, in violation of Section 526 and 707 and Rule 2016.
After the ensuing hearing, Bankruptcy Judge Robinson found that the settlement had been “pretty well . . . ignored” and that the firm was “undeterred” by the $50,000 in sanctions. He went on to find that the firm had “simply ignored” the settlement on the “misconception” that the administrator would not discover noncompliance. He said that the untrue statements in the disclosure evidenced “arrogant disregard” and “indifference” that were “tantamount to an intentional misrepresentation.”
For violating Bankruptcy Rule 9011 and Sections 707 and 526, Bankruptcy Judge Robinson imposed sanctions of $150,000 ($25,000 for each of the six cases) plus disgorgement of fees and filing fees paid in the six cases. Under Section 105, he suspended the nationwide firm’s right to practice in the district for 18 months and required repayment of fees to clients whose cases had not been filed.
Bankruptcy Judge Robinson suspended the local partner’s right to file new cases for 60 days. He said she was a “minor malefactor” with no other ethical problems.
The district court upheld the sanctions. The nationwide firm appealed to the circuit.
Sanctions Upheld in the Circuit
In his opinion for the court of appeals, Judge Vinson ruled that the firm’s violation of Section 526(a)(2) “was alone enough to authorize the Bankruptcy Court to impose sanctions.” The section provides that a “debt relief agency” like the firm “shall not . . . make any statement . . . in a document . . . that is untrue or misleading. . . .”
The violation resulted from the disclosures of compensation that violated Section 329(a) and Bankruptcy Rule 2016(b) because the retainer agreements called for extra fees that were prohibited by the settlement. Judge Vinson said that the retainer agreements might lead clients to believe they must pay for extra services that were to be free in compliance with the settlement.
The violations of Section 526(a), Judge Vinson said, were “alone enough to authorize the Bankruptcy Court to impose sanctions.” In turn, the sanctions were authorized by Section 526(c)(5), which permits “an appropriate civil penalty against” someone who has “intentionally violated this section, or engaged in a clear and consistent pattern or practice of violating this section.”
Judge Vinson found “no clear error” in what the bankruptcy Judge “found and did.” He rejected the firm’s defenses.
The firm claimed there was no subject matter jurisdiction to impose sanctions on cases that were closed but not reopened. Judge Vinson said there was no lack of jurisdiction “just because they were, in fact, closed cases.” He also found an independent ground for jurisdiction in the court’s ability to police compliance with the Code and Rules.
Citing Supreme Court authority, Judge Vinson said that the appeal from the 18 month suspension was moot because the suspension had expired before oral argument in the circuit.
Finally, the firm argued that the monetary sanction was “grossly excessive.”
Judge Vinson said the firm had “clearly” violated Section 526. Citing Section 526(c)(5), he said that the “evidence supports a finding of a ‘clear and consistent pattern or practice.’” He observed that “$25,000 per case seems to be the normal sanction for serious violations of the Bankruptcy Code.”
Applying a “highly deferential standard of review,” Judge Vinson affirmed, ruling that the monetary sanctions were not grossly excessive or outside the “range of choice” available to the bankruptcy court.
The Eleventh Circuit upheld $150,000 in sanctions imposed under Section 526(c)(5) on a self-described nationwide law for violating a settlement agreement with the bankruptcy administrator in the Northern District of Alabama.
Imposing sanctions, Chief Bankruptcy Judge James J. Robinson of Anniston, Ala., had characterized the firm as “arrogant” and “indifferent” and its defenses as “incredulous” and “absurd.” Using a “highly deferential standard of review,” the circuit court upheld the sanctions, showing that tough penalties will stand if the bankruptcy court uses enough derogatory adjectives pointed at a firm with a history of prior ethical lapses.
Bankruptcy Judge Robinson had also suspended the firm from practice in the district for 18 months. The appeal from the suspension was moot because it ended before oral argument in the circuit.
The opinion demonstrates that “improper and unethical conduct will not be condoned” in the Eleventh Circuit, Charles Tatelbaum told ABI. He is a partner with Tripp Scott PA in Fort Lauderdale, Fla.