A law firm has no right to a jury trial and cannot withdraw the reference when the U.S. Trustee goes after sanctions and an injunction for violating Section 526, according to District Judge J. Phil Gilbert of East St. Louis, Ill.
Actually, it was the sixth time that a district court in Illinois has denied a withdrawal-of-the-reference motion by the same law firm in the same consumer bankruptcy case or in related consumer cases.
The 14-Month Delay in Filing a Petition
Judge Gilbert opened his March 24 opinion by saying the U.S. Trustee had mounted an adversary proceeding based on the law firm’s “method of doing business.” According to the U.S. Trustee, the firm was “simply a legal referral agency that refers potential bankruptcy filers to local attorneys.”
According to Judge Gilbert, the government’s watchdog claimed “that delays caused by not beginning legal work promptly cause harm to the bankruptcy filers.” After the legal work began, the U.S. Trustee alleged that the services were “subpar and overpriced.”
In the consumer bankruptcy before him, Judge Gilbert said that the married couple first contacted the Chicago-based firm in June 2018 and paid the full attorneys’ fee about five weeks later.
Seven months after the debtors had paid the attorneys’ fee in full but the lawyers had not filed a petition, a creditor filed a lawsuit against the couple and obtained a judgment for about $10,500. The firm eventually filed a bankruptcy petition 14 months after the couple paid the fee in full and seven months after entry of the judgment.
Asserting violations of Sections 526(a)(1), (a)(3) and 329(b) and Bankruptcy Rule 2017, the U.S. Trustee alleged in the complaint that the firm “failed to provide immediate legal help and failed to act with appropriate diligence.” The complaint sought an injunction, a civil penalty and disgorgement of fees.
In a footnote, Judge Gilbert said that the Chicago-based firm had signed a partnership agreement with the local attorney who filed the petition. The agreement called for the Chicago-based office to retain 67% of the fee, with 33% for the local lawyer. He said that the initial consultation was performed in the Chicago office by a “non-attorney or attorney salesperson.”
The docket reveals that the bankruptcy court denied the firm’s motion to dismiss the U.S. Trustee’s complaint. Then, the firm filed the instant motion to withdraw the reference.
In her papers in district court, the U.S. Trustee said that another district judge had previously denied the firm’s withdrawal motion in the debtor’s main bankruptcy case. The second unsuccessful withdrawal motion was made in 35 cases that had been consolidated in bankruptcy court, the U.S. Trustee said.
The district court had denied withdrawal motions in three other adversary proceedings filed by the U.S. Trustee in three other consumer cases, the U.S. Trustee said. In other words, the withdrawal motion before Judge Gilbert was the firm’s sixth.
No Mandatory Withdrawal
The firm argued to Judge Gilbert that withdrawal was mandatory under Section 157(d) because the firm claimed it had a right to a jury trial and because the firm’s defenses raised constitutional issues.
According to Judge Gilbert, the firm contended that it had the right to a jury trial on the U.S. Trustee’s claim “for civil penalties for a clear and consistent pattern or practice of violating 11 U.S.C. § 526(a)(1) and (3). See 11 U.S.C. § 526(c)(5)(B).”
Judge Gilbert said that the right to a jury trial turns on whether particular claims are legal or equitable. Of greater relevance to the instant withdrawal motion, he said, “Legal claims asserting public rights, as opposed to purely private ones, do not require a jury trial if Congress has assigned the adjudication of such claims to an administrative agency or a specialized court of equity sitting without a jury,” citing Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 41 n.4, 51 (1989).
Judge Gilbert went on to say that “the Seventh Circuit Court of Appeals does not guarantee the right to a jury trial for legal actions based on statutory public rights committed to an equitable tribunal.”
Citing Milavetz, Gallop & Milavetz, P.A. v. United States, 559 U.S. 229 (2010), Judge Gilbert said that “Congress created a novel cause of action in 11 U.S.C. § 526 of the Bankruptcy Code to achieve the Government’s legitimate interest in preventing a specific public harm — abusive practices by debt relief agencies.”
By giving bankruptcy courts power to enforce Section 526, Judge Gilbert said that Congress enacted the statute “to preserve the integrity of the federal bankruptcy regulatory scheme as a whole and the discipline of those who practice in bankruptcy, not any particular debtor’s or creditor’s private rights.”
Judge Gilbert therefore held that the claims under “§ 526 fall within the public rights exception noted by Granfinanciera and do not require a jury trial.”
The firm also failed in its argument that constitutional issues required withdrawal.
Citing the Second Circuit, Judge Gilbert said that withdrawal is “reserved for cases where substantial and material consideration of non-Bankruptcy Code federal statutes is necessary for the resolution of the proceeding. In re Ionosphere Clubs, Inc., 922 F.2d 984, 995 (2d Cir. 1990).” In the instant case, he said that the firm had not shown that non-bankruptcy federal law issues had “more than a de minimis effect on interstate commerce.”
Judge Gilbert rejected the firm’s arguments that there was a due process violation, that the bankruptcy court could not be “a neutral arbiter,” and that the U.S. Trustee had “disregarded notions of proportionality.” By proportionality, he said that the firm was contending that the cost of more than 100 Rule 2004 examinations in related cases “outstripped” the fees that the firm had received.
In response, Judge Gilbert said that the firm’s “own objections into each investigation and inquiry is what has exponentially increased the costs it complains of now.” He found “that defendants have simply not met their burden to show the Bankruptcy Court is biased.”
Judge Gilbert likewise rejected the firm’s contention that its First Amendment rights were being violated. In Milavetz, Gallop & Milavetz, P.A. v. United States, 559 U.S. 229 (2010), he said that the Supreme Court held that limitations on commercial speech in Sections 526 – 528 were justified.
Judge Gilbert denied the motion for mandatory withdrawal of the reference.
No Permissive Withdrawal
The firm’s arguments for permissive withdrawal required comparatively little argument.
Citing the Seventh Circuit, Judge Gilbert said that claims of attorney misconduct relating to the administration of an estate are “core.” The “core” claims under Sections 329 and 526 and Bankruptcy Rule 2017 weigh in favor of keeping the complaint in bankruptcy court, he said.
Furthermore, “uniformity and efficiency” would be promoted by keeping the suit before the bankruptcy court that is “most familiar with the underlying case,” Judge Gilbert said. He denied the withdrawal motion.
A law firm has no right to a jury trial and cannot withdraw the reference when the U.S. Trustee goes after sanctions and an injunction for violating Section 526, according to District Judge J. Phil Gilbert of East St. Louis, Ill.
Actually, it was the sixth time that a district court in Illinois has denied a withdrawal-of-the-reference motion by the same law firm in the same consumer bankruptcy case or in related consumer cases.
The 14-Month Delay in Filing a Petition
Judge Gilbert opened his March 24 opinion by saying the U.S. Trustee had mounted an adversary proceeding based on the law firm’s “method of doing business.” According to the U.S. Trustee, the firm was “simply a legal referral agency that refers potential bankruptcy filers to local attorneys.”
According to Judge Gilbert, the government’s watchdog claimed “that delays caused by not beginning legal work promptly cause harm to the bankruptcy filers.” After the legal work began, the U.S. Trustee alleged that the services were “subpar and overpriced.”
In the consumer bankruptcy before him, Judge Gilbert said that the married couple first contacted the Chicago-based firm in June 2018 and paid the full attorneys’ fee about five weeks later.