Recently, in Rivers v. Aufrecht (In re Galloway),[1] the U.S. Court of Appeals for the Fifth Circuit spared an attorney from sanctions and disgorgement directives, reversing the bankruptcy court after consideration of the totality of the facts in the case. While the opinion does not cut particularly new ground on the law of sanctions and disgorgement, it deserves attention for the skepticism expressed regarding the fairly common “local practice” of unaffiliated consumer bankruptcy attorneys “covering” for one another in the representation of clients at meetings of creditors.
Galloway involved a consumer bankruptcy attorney, Nelson Rivers, who, in conjunction with his abrupt retirement, sold his office building to another attorney. Rivers’s office telephone number stayed connected and the signage remained, and his client files were left in the office (although the purchasing attorney was unaware that this last circumstance would occur). Rivers then failed to timely inform his clients of his planned retirement before moving 2,000 miles away. In the meantime, despite the sale of his office and his relocation, Rivers continued to file pleadings in some matters — although he relied on his former secretary (who had been hired by the purchasing attorney to continue to work at the office) to communicate with clients. His former secretary also prepared and filed pleadings without his supervision. To any degree, Rivers never returned to represent any client in person and failed to monitor his email, which resulted in him missing critical client deadlines. Eventually, the purchasing attorney agreed to serve as substitute counsel in some of Rivers’s cases — cases that had been filed pursuant to the local “no-look fee” rule.[2] However, in the meantime, some of Rivers’s clients were effectively abandoned, including the debtors in Galloway.
Rivers’s abandonment of his clients came to light when no one appeared to represent his clients at critical hearings. Ultimately, the U.S. Bankruptcy Court for the Eastern District of Louisiana commenced a show-cause order proceeding and determined that Rivers had violated state professional rules of conduct, and imposed $3,500 in sanctions.[3] In addition, the bankruptcy court ordered that Rivers, pursuant to Bankruptcy Code § 329(b)(1), disgorge $6,300 in fees that Rivers had collected but had not earned, following his failure to represent clients.[4]
On appeal, the U.S. District Court for the Eastern District of Louisiana affirmed in part and reversed in part. However, in doing so, the district court acknowledged that the bankruptcy court found “ambiguity in the statements and surrounding circumstances and, more important, that the bankruptcy court failed to find expressly that Rivers acted in bad faith.”[5]
Upon further appeal, the Fifth Circuit reversed both the sanctions and disgorgement directives. In reversing the sanctions directive, the court began with the standard of evidence for sanctions: “[I]n the absence of a finding of bad faith by clear and convincing evidence, a federal court is not empowered to impose sanctions for attorney misconduct under its inherent authority.”[6] In applying this standard, the Fifth Circuit affirmed the bankruptcy court’s finding that the sanctioned attorney made a “knowing misstatement,”[7] but reversed the conclusion that such a “knowing misstatement” alone was sufficient to establish bad faith when viewing the facts of this case “in totality.”[8]
In reversing the disgorgement directive, the Fifth Circuit reasoned that “the disgorgement order ... was unnecessarily ex post facto[[9]]” because, although the local rules “specify the duties of ‘counsel’ toward a client in no-look fee cases …[, they] do not say that the duty is personal and non-delegable in order to justify the no-look fee.”[10] The court then considered this ambiguous language, in addition to other circumstances — including the lack of unforeseen consequences, and the fact that the replacement counsel did not seek to recover the sanctions — and concluded that it was a situation of “no harm/no foul.”[11]
But the reversals are not what makes Galloway particularly noteworthy. Of broader interest is the Fifth Circuit’s other commentary. First, the Fifth Circuit pointed out that the bankruptcy court has the authority to require the fulfillment of certain duties by no-look fee applicants to their clients: “[C]onsumer bankruptcy attorneys should take note that the courts may reasonably impose personal, non-delegable duties on counsel who seek no-look fees, and indeed they may interpret, for the future, the rules of the Eastern District of Louisiana, to so require.”[12] Presumably, such duties would help to ensure that a no-look fee award rule does not become an opportunity for abuse by shorting debtors certain services and adequate representation of knowledgeable counsel. In light of Galloway, bankruptcy courts might undertake a review of their local no-look rules to ensure that their rules do not read ambiguously, or otherwise create an opportunity for local practices that the bankruptcy court does not intend to allow or endorse.
Second, although the Fifth Circuit ordered vacatur of the sanctions and disgorgement directives, it did so “with a caution to other attorneys handling consumer bankruptcy cases in the Eastern District of Louisiana.”[13] The Fifth Circuit called into question the propriety of the widely used — if only informally allowed — practice of unaffiliated attorneys “covering” for one another at meetings of creditors, expressly stating that it “do[es] not commend any ‘local practice’ whereby counsel substitute for each other at bankruptcy clients’ Section 341 meetings.”[14] As such, practitioners are now on notice that there may be serious problems with this practice — at least, where the “covering” is done without a pre-existing relationship between the “covering attorney” and the client, and especially where the “covering attorney” has no knowledge of the client file prior to the § 341 meeting.[15]
Galloway stands as an invitation to bankruptcy courts to either formally prohibit this “covering” practice in their local rules, or to formally allow this practice, pursuant to a local rule that imposes duties upon attorneys that would ensure proper representation based on a true attorney/client relationship, and prevent client abandonment or abuse. Attorneys should become involved with any such local rules-making or revision process, when the bankruptcy court seeks attorney input in revising the local rules, to ensure that the in-the-trenches perspective of practitioners is considered. Likewise, case trustees should take an interest in how to address this practice through the local rules, since they will be on the front lines when an attorney violates such a local rule at a meeting of creditors.
[1] 812 Fed. Appx. 212 (5th Cir. 2020).
[2] “No-look fee” rules allow a consumer debtor’s attorney to seek approval of fee award without further inquiry into the fee application, when the fees requested fall below a certain dollar threshold. Such requests are presumed to be reasonable to approve.
[3] In re Galloway, No. 15-12646, 2018 WL 1065124, at *15 (Bankr. E.D. La. Feb. 23, 2018), aff’d in part, rev’d in part, 812 Fed. Appx. 212 (5th Cir. 2020).
[4] Id.
[5] In re Galloway, 812 Fed. Appx. at 214.
[6] Id. (citing In re Moore, 739 F.3d 724, 729-30 (5th Cir. 2014)).
[7] Id.
[8] Id.
[9] Article I, section 9, cl. 3 of the U.S. Constitution prohibits ex post facto laws (laws that impose punishment for an act that was not punishable at the time the act was committed, or impose additional punishment after the act was committed). See Cummings v. Missouri, 71 U.S. 277, 325–26 (1866). The clause does not apply in civil matters, Calder v. Bull, 3 U.S. 386, 390 (1798), and there is no suggestion that the disgorgement directive was criminal in nature. See, e.g., Hudson v. U.S., 522 U.S. 93, 100 (1997). In addition, local rules are generally understood to be civil and regulatory, and not to invoke ex post facto considerations. In re Campbell, 398 F. App’x. 1, 2 (5th Cir. 2010). Galloway does not cite the clause and appears to use “ex post facto” for the more general proposition that it is unfair to change the rules in the middle of the game, then punish based on such a change.
[10] In re Galloway, 812 Fed. Appx. at 215 (citing Bankr. E.D. La. 4002-1(D); Bankr. E.D. La. Gen. Order No. 2011-1).
[11] Id. at 215.
[12] Id.
[13] Id. at 213.
[14] Id. at 215.
[15] As the Fifth Circuit observed: “The [bankruptcy] judge was not wrong to criticize Rivers’s conduct in availing himself of the professional courtesy of lawyers who had no pre-existing relationship to the clients.” Id.