The bankruptcy court did not abuse its discretion in imposing sanctions for violation of section 526(a) against UpRight law firm for statements in its Attorney Disclosures which were prohibited by an earlier settlement agreement and were therefore misleading. Law Solutions of Chicago, LLC v. Corbett, No. 19-11405 (11th Cir. Aug. 31, 2020).
Mariellen Morrison was an Alabama attorney and a partner in the national megafirm of UpRight Law LLC which operates out of Chicago and represents bankruptcy clients in all fifty states. Two of her cases came to the attention of the Bankruptcy Administrator (Alabama’s equivalent of a trustee) because of a questionable scheme targeting clients who had vehicles subject to repossession (the “repo scam”). The BA filed adversary proceedings on behalf of two of Ms. Morrison’s clients based on this scheme and other violations of Bankruptcy Rules and Code provisions. Although the BA abandoned the claim with respect to the repo scam, he continued against UpRight and Ms. Morrison on other violations. Specifically, he challenged UpRight’s Attorney Disclosures in its standard fee agreement which excluded from the fee many standard bankruptcy services including motions for relief from stay, lien avoidance, continued 341 meetings, and reaffirmation agreements. The parties reached a settlement under which, among other things, UpRight agreed to pay $25,000 to both of the clients, and to discontinue the Attorney Disclosure’s exclusionary language. The court approved the settlement.
Shortly after the settlement, the BA became aware of three new clients (Open Cases) of UpRight whose fee agreements contained the same exclusions which were the subject of the settlement agreement. The BA filed “motions to examine” seeking sanctions in the bankruptcy court for violations of sections 707 and 526, and Rule 2016 with respect to those three clients. The BA later discovered three other clients whose cases were closed but who had been given the identical exclusions in their agreements with UpRight (Closed Cases). Upright claimed harmless mistake as none of the clients had actually been charged extra fees for those excluded services.
After a hearing and additional briefing, the bankruptcy court, exercising its authority under sections 105(a) and 526(a)(2), sanctioned UpRight in the amount of $150,000 and suspended the firm from filing any bankruptcy cases in the district for 18 months. With respect to Ms. Morrison, the court found her less culpable and suspended her from filing for 6 months. The district court affirmed, and UpRight appealed to the Eleventh Circuit.
On appeal, the circuit court found the source of the bankruptcy court’s authority to impose sanctions in section 526(a)(2) which provides that “A debt relief agency shall not—
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(2) make any statement . . . in a document filed in a case or proceeding under this title, that is untrue or misleading, or that upon the exercise of reasonable care, should have been known by such agency to be untrue or misleading[.]”
Specifically, the court found that UpRight’s Attorney Disclosures were misleading because they indicated to clients that UpRight had the right to charge additional fees for the excluded services despite the terms of the settlement agreement to the contrary.
The court turned to UpRight’s arguments why sanctions should be reversed notwithstanding the violations of the settlement agreement. UpRight first argued that the bankruptcy court lacked jurisdiction to impose sanctions in the Closed Cases because they were closed. The court found this argument simply unsupported by the law under which courts generally agree that the open/closed status of a case does not affect the court’s power to impose sanctions.
UpRight next argued that because the bankruptcy court merely approved the settlement agreement without incorporating it into its order, violation of the agreement was a matter of state contract law. The circuit court disagreed, finding that the Bankruptcy Code sections that were the basis for the action against UpRight provided an independent federal basis for the bankruptcy court’s jurisdiction.
UpRight next argued that it was deprived of due process at the sanctions hearing because it was not forewarned that any Bankruptcy Code provisions would be called upon to justify sanctions beyond the terms of the settlement agreement. The court found this argument failed on both factual and legal grounds. The court pointed to the hearing transcript showing UpRight’s witness being questioned about sections 707 and 526(b) and Rule 2016, all of which constituted the legal basis for the imposition of sanctions. The federal bases for the sanctions were also raised in several pre- and post-hearing motions and briefings giving UpRight all the notice it needed to understand and address those issues.
UpRight’s challenge to the bankruptcy court’s order suspending it from practice was deemed moot because the suspension had expired by the time of the appeal.
Finally, UpRight challenged the imposition of the $150,000 sanction as being grossly excessive in light of the inadvertence of the violations. UpRight pointed to the bankruptcy court’s language disparaging the firm and questioning its ethical standards as well as the bankruptcy court’s reference to the repo scam which was not before the court and which was not proven to have involved culpability on UpRight’s part.
The court disagreed, finding that the bankruptcy court supported its decision with specific findings as to the attitude of UpRight’s witnesses and their “absurd” defense. It also relied on the fact that while there had been only six post-settlement cases filed by UpRight all of them included the prohibited language and the court was convinced that UpRight’s conduct would have been the same had there been one hundred cases.
Under the court’s highly deferential review of a bankruptcy court’s exercise of discretion, the circuit court found the imposition of a $25,000 for each affected client was not excessive.
The court affirmed.
Tags: Sanctions
