Allen et al v. Fitzgerald, III, No. 5:2018cv00057 - Document 9 (W.D. Va. 2019)
Court Description: MEMORANDUM OPINION. Signed by Chief Judge Michael F. Urbanski on 12/11/2019. (jv)
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j cl -Egx' : OFFICEU.S.DISI COURT AT ROANOKE,VA FILED IN T H E U N ITED STATE S D ISTRICT COU RT FO R TH E W E STERN D ISTRICT OF W RGIN IA RO AN O K E D IW SIO N DE2 11 2218 JUL sY: .D LEY CLERK è, DE/U CLERK JASON ROYCE ALLEN ,eta1.y D efendants-Appellant, Cid lAction N o. 7:18-cv-00134 5:18-cv-00057 V. JOHN P.FITZGERAI.D, A cdn Trustee forR e 'on Foury By:H on.M ichaelF.U rbansld ChiefUnited StatesDistdctJudge Plaintiff-Appellee. M EM O RAN D U M O PIN IO N Thisisan appealofan ordetby the United StatesBankruptcy Cotutfor the W estetn DisttictofVitginiaputsuantto28U.S.C.j158(a)(1)andFed.R.Bankt.P.8001.OnFebruary 12,2018,the banltruptcy court entered an order and m em orandum opinion resolving the adversaryproceeclingand on M arch 12,2018,thebankmlptcycouttgranted appellants'm oéon to am end thebankmlptcy couztorder.O n M arch 26,2018,appellantsftled an am ended noéce ofappealofthebanktuptcy court'sFebruaty 12,2018 ordet,asam ended.Forthereasonsthat follow,this courtAFFIRM S the bankmlptcy court's Febtuary 12,2018 order in part as it relatesto thepracécerevocaéon imposed agninstappellantsKevin Chetn,Jason Allen,and Allen et al v. Fitzgerald, III Law SoludonsCllicago,LLC,d/b/aUprightLaw,LLC (TTLSC'')andtheptacécerevocaéon Doc. 9 andmonetarysancéonsimposed individuallyagainstappellantsDarren Delafield andlohn C. M organ,Jr.,REM AN D Sin partto thebankruptcy courtforconsidetaéon oftheabilityof Chezn,Allen,andLS/ topaythemonetarysancdonsimposedagainstthem,andVACATES Dockets.Justia.com the banknlptcy cotut's ozdetin partasitpertains to the m onetary sancéon im posed against appellantEdm und Scanlan. Thiscase concetnsthe powetoftheU nited StatesBanktnaptcy Courtforthe W estetn DisttictofVitginia to im pose practke and m onetary sanctions for conductitfound to be in bad faith in connecéon with two consum erbanlm lptcy casesin thisdistrict.Thecaseitw olved LSC,an Illinois consum er banlm lptcy 1aw flzm thatoperates on a nadonalbasis,afflliadng with localbanktnpptcy attozneys.M en and Chern arem em bezsofLSC,with Chern serving as its m anaging partner and Allen its cllief operating officer.Scanlan,nota lawyet,is LSC'S execudve director.D elafield and M organ areVitginia lawyetsw ho,in associadon with LSC, tepresented Tim othy and Addan W illiamsandJessica Scotq in theirChapter7 banlm zptcy casesin thisdistzict. A fter a four-day triàl, the banktuptcy coutt found that LSC'S hatd-sell m azkeéng pracdces and involvem entin a schem e,know n as the Sperzo Pzogram ,w hich operated to unde= ine the secuzed posiéon of vehicle fm ance com panies, was in bad faith. The bankruptcycourtim posed pracdceand m onetary sancdonson the appellants.The banktnzptcy couttconcluded' . Consideting (1) the hard sell tacécs encoutaged on its sales people,(2)thettanscriptsoftheacmaltecordingsofthecalls with clients,(3) the lack of svperdsion and conttolover its salespeople in connecéon with the unauthorized pracdceoflaw , due in no sm all patt to the com mission and sales sttazctute imposeduponthem,(4)thefocuson cash flow overprofessional responsibility,and (5)the participadon in the Sperto Program and the tecozd asa whole,including Upright's efforts to getthe W illiam ses and Scottto assertthe atlozney-clientprivilege in a thinly-veiled attem ptto coveritsown tracks,thisCourtbelieves 2 that the Upzight D efendants have acted in bad faith and the privileges of LSC, Uptight Law, Chezn, and Allen to flle or conductcases,directly or indirectly,in the W estern D istrictof Virginia shallbe zevoked for a peziod of five (5) yeats.Tlnis includesany ftrm tIUtLSC,UprightLaw,Allen,orChern,directly or inditectly, have an ow nership interest in ot conttol over. Further,LSC,U pright,Chern,Allen,Scanlan and Sperro shallbe ûned collecdvely the smn of $250,000.00. Chern shall be separately and personally fmed the sum of$50,000.00 for his patécipation in and leadership of the Sperro schem e. Given LSC'S hnancialresoutcesand tevenuesin patécular,asreflected by itstax zetutnsand evidence ofreceiptsfrom residence ofthe W estern Disttict of Vitginia,these sum s are appzopriate in an effottto deterfuturem isconduct.A lessersancéon would notbe m ore appropziate. / Banlm lptcyOpinion rfBankr.Op.''),ECFNo.75,at506-07. Thebanktnlptcy courtalso sancdoned D elaûeld and M organ,theVirginialawyers,for theitindividualfnilings.Delafield'sprivilegetopracdcein thisdistrictwasrevoked forone(1) yeatandhewassanctioned$5,000,tobepaid to theW illiam ses.M organ received an eighteen (18)month revocation andwassancéoned$5,000,payableto llisclient,M s.Scott. Appellantsflled thisappealcontending thatthe banktnzptcy couttlacked the quthority to impose the pracéce and m onetary sanctions. Fitst, appellants azgue that the pracéce revocaéonisanitjuncéonastowllichthebanktnzptcycomtlackedjutisdicéon.Second,they argue that the m onetary sancdons were im posed in d olation of due process as they were excessive,and appellantshad no opporturlityto presentevidenceoftheirabilityto pay.Third, appellants argue thatthe Urlited States Banktnzptcy Tm steewaived tlle ability to defend any m onetary sancéon above $5,000.00.Folztth,appellants contend thatthe banl> ptcy cotut exceeded its statutory and inherent pow ers in im posing the m onetary sanctions without specifying the f'uttue m isconduct to be deterred.Fifth,appellants atgue Chern,M en and . Scanlanwetenotsubjecttosancdonsastheyhad noroleintheWilliamsandScottbankrlptcy cases.Sixth,appellantsazgtze thatthe banktuptcy courtabused its discretion by sancéoning the Vitginia lawyers.Seventh, appellants arpze that the m onetary sancéons im posed on Scanlyn shotzld bevacated forlack ofevidence.These argum entswillbe addressed in tarn.l II. Disttictcoul'tshavejuzisdicéontohearappealsfzom fmaljudgmentsandordersofthe banlm zptcy coutts.See28U.S.C.j158(a).Thedistdctcotutêeviewsffgfjindingsoffactbythe banlmzptcycoutt...onlyforcleatezrozandlegalquesdonsatesubjecttodenovozeviem ''See In re-lohnson,960F. 2d396,399(4thCir.1992)9seealsoInreDillon.189B.R.382,384(W.D. Va.1995).2Thedistrictcouttffwillnotreyetsethettialcoutt'sfindingoffactthathassuppott in the evidence unlessthatfinling is clearly wtonp''ln re ESA Envtl.S ecialists Inc.,709 F.3d 388,399 (4th Cit.2013).Thedisttictcourtmayonly considerevidencepzesented to the bankruptcy court and naade pa< of dae record.Seeln re Dillon.189 B.R.at 3849 In re Com uterD nanlicsInc.,253B.R.693,698(E.D.Va.2000). The questbn before the cout't is whethet the banlm lptcy coutt etted in im posing sancéons on appellants pursuantto itsinherentpower and Banktntptcy Code j 105(a). Appellantsassertthatthe bankmlptcy courtclid nothavetheauthority to im pose the ptacéce revocationsorm onetarysancdonsin tlliscase.The cotutconcludesthatthebankmlptcy cotut did have the authority to im pose the pracdce revocadon sancdons putsuantto itsinherent 1' l'hefactsareaddressedin greatdetailitlthebankmlptcycourt'sm em orandum opinion andwt ' llnotberestated here,exceptwhereperdnentto theissueson appeal. 2Urllessotherwisenoted,thecotzrthasom itted internalcitadons. 4 , authozity and the authority to im pose m onetary sancdons putsuantto itsinherentauthority augmentedbySecéon105(a).Howevez,thecourtfindsthatthebanlm lptcycouzterredbynot petm itting appellantsChezn,Allen,and LSC to presentevidenceregarding theitabilityto pay the sanctions and by sancéoning Scatalan, a non-lawyez,who was not itw olved in the underlying banknlptcy cases. JfFedezalcourtspossess cett/in inherentpowers,notconferred by rtzle or stattzte,to m anage their own affairs so as to acllieve the orderly and expedidous disposidon ofcases.'' Good earTite& RubberCo.v.Hae er, U.S. ,137S.Ct.1178,1186(2017).Assuch, ffga) federalcotutalso possesses theinherentpower to regulate liégants'behavior and to sancdonalidgantforbad-faith conduct''In reW eiss,111F.3d 1159,1171 (4th Cit.1997) (citing Chambersv.NASCO,lnc..501U.S.32,43-44 (1991)).Futther,ffga)coqtthasthe inherentauthorityto disbatorsuspendlawyersfrom practice.''lnreEvans.80iF.2d703,706 (4th Cit.1986).Thisinherentpowerto sancéon litigantsforbad-faith conductappliesto banlm lptcy cotuts,in addition to Ardcle lII cotuts.See In re W eiss,111 F.3d at 1171-72 (tecognizingthesancdoningpowerin Chambersappliesto abanlm lptcycourt);seealsoInre Bowman,CasqNo.08-cv-339,2010W L 2521441,at*6(W.D.Va.June21,2010)(affi= ing banktnnptcy courtordet sancdoning attotney based on itsinherentauthority);In re Heck's Pro etées Inc., 151 B.R.739,765 (S.D.W .Va. 1992)(<fltis well-recognized ...that gbanlm zptcyqcotutshavetheinhezentauthority to impose sanctionsupon counselwho gare) found to haveacted in bad faith,vexaéously,wantonly orfotoppressivereasons').A coutt can sanction a party based on itsinherentpowerin conjuncéon with,orinstead of,other sancdoning statutesortules.ln l:eW eiss,111F.3d at1171;see also Cham bers,501 U .S.at50 5 l (f<But neither is a federalcoutt forbidden to sancdon bad faith conductby meansofthe - I inherentpowezsim ply becausethatconductcould also be sancdoned underthe statute orthe Rules'). Flzttherm ore, banlm zptcy courts m ay take any acdon ot naake any detetnùnadon necessaryorappropdateto enforceorim plem entcouttordersorrules,ozto preventan abuse ofprocess.11U.S.C.j105(a).Secdon 105(a)providesbankruptcycouztswiththeauthot'ity toholdpardesorattorneysin ciyilcontempt.SeeInzeW alters,868F.2d 665,669(4th Cir. 1989)9ln re Skinner,917 F.2d 444,447 (10+ Cit.1990)Solding thatfrsection 105(a) empowersbanluuptcy courtsto entercivilcontemptorders7).Putsuantto theauthorityto entezcivilcontem ptotders,bankruptcy couttscan Trsuspend an attorney from the pracdceof law,':ln ze Com utezD nanlics,253 B.R.at699,and ffentermonetarysancdons Elforcivil contempt.''InreSkinner,917F.2dat448.However,theimposiéonofsancdonsissubjectto proceduzal due process tequitem ents.See, e.g., In ze Ruffalo.390 U .S. 544, 550 - (1968)Soldingthatanattozneysubjecttodisciplineisendtledtoptocedutaldueprocess);In zeCom utezD natnics,253 B.R.at699. Putsuantto eitheritsinherentpowerotSecdon 105(a),thiscourtTfreviewgsjforabuse ofdisczetion agbanlmlptcyjcourt'sawardofsanctions.'?Sixv.GenerationsFed.CreditUnion, 891F.3d 508,518-19 (4th Cir.2018).<<A gtriallcourtabusesitsdiscteéon whereithasacted arbitrarily oritraéonally,hasfailed to considerjudicially recogzu'zed factorsconsttaining its exetcise ofdisczeéon,ozwhen ithasrelied on ertoneous factualor legalpremises.''U nited Statesv.w elsh,879 1?.3d 530,536 (4t.h Cit.2018). ffunlessthesancéoning coutthasacted 6 contrary to the 1aw orreached an unteasonable result,w ewillaf6t.m the sancdonsdecision.'' InreRimsat,Ltd.,212F.3d 1039,1046(7t1'1Cit.2000). The courtwillfustexanline the sanctionsasthey apply to the non-vitginia aaorneys, Chern,Allen,and LSC.The courtwillthen turn to thesancéonsasthey apply to theVirginia atorneys,D elaûeld and M ozgan.Finally,the courtwillreview the sanctionsas they apply to non-attorney Scanlan. 111. Thebane ptcy cotutim posed laot.h pracdceand m onetary sancdonsagainstthenonVitginiaattotneys,Chezn,M en,and LSC.3Fitst,appellantsquestion whetherthe banlm lptcy courthad the authority,either inherentor statutorily,to im pose the pracdce revocaéon on attorneysthatdid notappearin theW estern DisttictofVirginia.Second,appellantsassettthat thebankiuptcy cotuterred in im posing them onetarysancéons. a. PracdceRevocaéon A coutthas the inherentauthotity to disbat or suspend lawyers from pracdce as a sancéon.See In re Sn der 472 U.S.634,643 (1985)9see also In re Evans,801 F.2d at706. This authority is derived ftom the lawyer's role as an offk er of the coutt.1d.at 643.The Suprem e Cout'thasstated thatgteatdisczedon m ustbegiven to the ttialcollf'ton decisionsto suspend otdisbatan attotney: On onehand,theprofession ofan attozneyisofgreatim portance to an individual,and the prosperity oflliswhole life m ay depend on itsexercise.Therightto exerciseitoughtnotto be lightly or 3ThecourttreatsChern and Allen,aswellasthe1aw 5t'm LSQ asthenon-virgml ''aattorneys.SeeEnmon v. Pros ectCa italCo .,675F.3d138,147(2dCir.2012)(Cfgtlhereisnoseriousdisputethatacourtmaysanction alaw 6- putsuantto itsinherentpower').Accorclingly,theanalysisremninsthesameforthetwo at'torneys and the1aw firm. capziciously taken from him . O n the othet, it is extrem ely desitable thattherespectability ofthe batshould bem aintained, and thatits harm ony with the bench should be preserved.For theseobjects,someconttollingpower,somediscreéon,oughtto zeside in the coutt.Tlais cliscretion ought to be exercised with greatmoderaéonandjudgment;butitmustbeexercised;andno otherttibunalcan decide,in a caseofzem ovalfrom thebat,wit. h the sam em eansofitlform adon asthe couttitself. Ex arteButr 22 U.S.529,529-30 (1824);seealso ln reG. L.5..745F.2d 856 (4th Cir.1984) (courtsTfhavetheauthorityto decide,withintheboundsofdueprocess,whowillbeadmitted to pzacéce').An appellatecouttowestfsubstantialdeferenceto the gttial)coutt''inreviewing a decision to disbar or suspend an attozney.In reEvans.801 F.2d at7069 see also In re M orrisse ,305F.3d211,217(4th Ciz.2002)(afflt-ming disbarmentofattorneyand notingthe ' ffgreat defeêence a reviewing colztt is dizected to show to the couzt wlaich im poses the clisbnt-ment'). Theinherentpowerto dijbaran attorneym ustbe exercised with gteatcaution.Byrdv. Ho son,108F.App'x 749,756 (4th Cit.2004)(unpublished).Theextteme sancdon of disbnt-m entor suspension ffm ustbeexercised w1t.11thegreatesttesttnintand cauéon,and then only to the extentnecessaty,'?based on thezecord befote the court.United Statesv.Shaffer E ui .Co.11F.3d 450,461(4th Cir.1993);seealso Resoluéon Tr.Co .v.Bri ht,6F.3d 336,340 (5th Cit.1993).Attorneysfacingpracécesuspension ateguaranteedtherightto fair noéce,butnotnecessatilytherighttoahearing.lnreChipley,448F.2d1234,1235(4thCit. 1971)rTzoceduraldueprocessinadisbntmentproceedingdoesnotrequitethatahealingbe given to the attorney involved,buthem ustbegiven fai. tnodceofthechatge againsthim and an oppottunityto explain anddefend hisactions'). 8 H eze,the bankmlptcy courtinvoked its inherentauthority and tevoked the pracéce privileges of Chetn,Allen,and LSC.4 Appellants azgue that the bankruptcy court lacked authorityto sancéon Chern,Allen,and LSC becausethemisconductthatthebanktnlptcy cotut found ctid notoccurin the underlying proceedingssub 'udice.Forthe reasonsstated below, the court concludes that the bankmzptcy court clid notabuse its discretion in im posing the practicetevocadon asto Chern,Allen,orLSC.5 1. The Unauthorized PracticeofLaw Itisuncontested that Chern,Allen,and LSC did not appear before the banktnlptcy coutt and appellants argue that the authority to suspend or revoke pracéce privileges only apphesto attorneysthatatepracécing beforethecotut.Thecotutdisagtees.Asthecouttheld in the August 1,2018 m em otandum opinion,itagreeswith the holding ofU nited Statesv. Johnson,327 F.3d 554,560 (7t. h Cir.2003).ln Johnson,theSeventh Circuitfound that<<a court's pow er to zegulate and discipline attozneys w ho appeat before it extends to nonm embers of the bar who engage in unautholized acévities affecdng the court.''J-I. L 4 T' he courtnotes that in another case Sled agam ' st LSC,the N oztherzz D istrict ofA labam a affirmed a banlm lptcy court'sdecision to Tfrely upon itsinhetentauthoritytoimposenon-m onetarysancdonsy''inclucling an l8-m ont .h pracdcerevocadon,againstLSC asaresultofafm dingofbad faith conduct.Law Sols.ofChica o TJE v.Corbett,CaseNo.18-a-677,2019WL 1125568,at*3(N.D.Ala.Mar.12,2019). ' 5 As a prelim inary matter,the court has alteady dete- ined that appellants'argum ent that the pracdce revocadonisanitjuncdondisguisedasapracdcesuspension fal 'ls.Chern,Allen,andLSC contendthatthe practicerevocadonwasanimpermissibleitjuncdonentereditzacaselackingjusdciabilitp Thecourtaddressed thisvezy quesdon in am emorandum opinion ftled on August1,2018.ECF N o.112.Therein,the colzrtheld RthatthePracdceRevocadonis,asamatteroflaw,notaninjuncdon.'?Thecourtneednotrestateitsreasoning hereand adoptsentirelyitsopinion ftom theAugust1,2018m emorand'lm opinion.A ccordingly,thepracdce tevocadon isnotanitjunction andthe couttfindsthatthebanlrtnlptcycourthad jttrisdicdon toimposethe pracdcerevocation.SeealsoMatterofBanks,770F.App'x168,168-69(5thCir.2019),gff -g zLaw Sols.Chica o LLC v.UnitedStatesTr.,592B.R.624,630 (W.D.La.2018)(adopdng districtcourt'sopitzion affïtming banktnxptcycourt'spracticerevocadon,EndingthataTfcourtdoesnotnecessarilyissuean V juncdon'when it restdctsanatlorney'sabl 'litytopracticewithinitsdistrict orregtllatethatpracdce'). 9 Likewise,underVitginia law ,lawyers are responsible for the unauthozized ptacéce (?flaw of theirnon-lawyeremployees.Pt.6,j 1,RulesofSupreme Ct.ofVa.6Here,the bankruptcy cokut found that the non-lawyet em ployees of LSC w ere consistently engaged in the unauthodzed pzacéceoflaw affecdng thebanktuptcy court.SçeBanlct.O p.459-60,506-07. Chern and Allen,asm anaging pattnersofLSC,oversaw thisunauthodzed pracéce of 1aw thatwasfueled by LSC'Slligh-presstzte salesenvironm ent.TheLSC salesstaff,known as Tfclientconsultants,'?ffengaged in nmnerousinstancesofptovicling im petm issiblelegaladvice topotentialclients,albeitallegedviolatbnsofF=SC'Sjpolicies,andsomeofitwasjustouttight wrong,such asadvising clientsto hidecollateralorleavecertain debtsofftheirschedules.'?Id. at 510.The bankmlptcy couzt found that ffgcjoupled with the pressure to hit sales and com m ission tatgets, the fact that sales people engaged in overreaclling conduct is not sulprising''and Tfgtlhesampling oftheclientconsultants'actionsin thiscase,combinedwith evidence as awhole,was enough to saésfy the gbank'tnzptcy cotut)tiat LLSQ has serious oversightissues.''Id.at510-11,n.81. Allen also created and im plem ented the ffsales Play Book''that encouraged client consultantsto ffcompeteagsinstotherlawyersforthezepresentation oftheclients.'?1daat503, n.66.The Sales Play Book was <dreplete with laigh pressure sales tactics'' that m ade the banktuptcy court deternaine that LSC was m ore concezned wit. h closing the sale than represendng theitclients.J.dxat458.Thebankruptcycouztw asespeciallyttoubledbytheffnow ornever''pitch,thatincluded aHm e sensidveofferto potentialdebtorsand included scdpted . 6Pt.6,j1,RulesofSupremeCt.ofVa.provides,itzpertinentpart:T'Anylawyerwho aidsanon-lawyerin the unauthorizedpracdceof1aw issubjecttodisciplineandclisbnrment.'' 10 language such as it is frbetter to ask for forgiveness than ask fot perm issiony'' when a prospecdveclientsaid they needed tim eto discussthebanl m zptcy flling with theirspouse.Id. W hile clientconsultantswete instructed thatthey could notptovide legaladvice,ffin sevezal instancesin the mattersbefore the gbankmlptcy court),thoseinstrucdonswerenotfollowed by (LSQ non-attorneypersonnel.'?Li at459.Further,clientconsultantswerepaid abase salav of$40,000,plusacommission tied to how manyprospectstheyclosed.Jd.a H ere,the clientconsultantswere itw olved ditectly with the debtorsin the underlying casesand engaged in theunauthozized pracéceoflaw within thisdistdct.Forexam ple,anonlawyerclientconsultantlocated in Chicago gaveM s.Scottthelegaladvicethatshecotlld leave a debtoffherbanktnlptcy schedule.J -I. L at460,n.12.Assuch,undetVirginialaw,Chern and . Allen ate responsible for the unauthorized pracdce oflaw conducted by theiz suborclinates becausethey aided them by trlinitng the em ployeesand implem enéng the SalesPlayBook in theunauthodzed practiceoflaw.Pt.6,j1,RulesofSupzemeCt.ofVa.Even though Chern and Allen arenon-m em bersoftheW estern DistrictofVirginia bar,theit failure to propetly supervise their em ployees,which led to theunauthorized ptactice oflaw in thisdisttict,had an im pacton the banktuptcy courtand the underlying proceedings. 2. TheS erro Pro ram Thebanktnlptcy colzttfound thattheSpetro Program wasa ffscam from the start''and held Chern zesponsible foritscreation and im plem entadon.Bankr.O p.503,506.TheSpetto Pkogzam involved LSC clivnts surzendering theit hnanced cars to com panies operated by nonpatty Btian Fenner.The Fennet enddesw ould tow cars outofcertain states,inclucling Virgt 'm'a,ffto Fenner-related storage lotsin N evada,M ississippi,ozIndiana forthe purposeof 11 trying to pêim esecured lenders,orhold thei. rcollateralhostage,w1t11excessivehookup,towing and storagefeesthatwerecom pletelyunnecessarp''JILat468-73.InretutntheFennerenddes -. would payLSC'Sffclients'attorney'sfeesand fllingfeesin ordertogetthezeferralfrom (LSQ to do it.77ld.at472. From the m om entChern em ailed theLSC partnersregarding the Sperro program ,he w as alerted to the quesdonable natate ofthe business atzangem ent.1d.at472.To futther evidencethism isconduct,potentialdebtozs,incluclingtheW illiam ses,w ereoffered theSperro program byLSC'Sclientconsultantsbefotethedebtorconsulted * t.11an attorney.J-d.aat472, 504.7 The banktnlptcy courtlaid outa detailed facttzalfinding regarclipg the creation ofthe Sperro progzam .See Bankt.O p.468-78.In essence,Chetn created the program to increase thespeedandlikelihood ofreceiptofattorneyfees.Jdxat503.Thebanlcruptcycotztt'sfinding thatthe Spetto progtam wascreated and im plem ented in bad faith isam ply supported by the record and isnotcleatly wrong.Id.at507. 3. Li; adon M isconduct Chetn, Allen,and LSC also engaged in lidgation naisconductwhen appellants ffused heavyhandedtacdcs,includingtextmessages,to tryandgetgscottandtheW illiamsesjto sign conflictwaivers''to allow the appellantsto ffassertthe attozney-clientprivilegeon thei. rbehalf and attemptto shield theitfllesand IJJSC'SIfrom cliscovery.''Id.at482-83. Appellants spillsignihcant ink in theiz reply btief,ECF N o. 120, atguing that the bankruptcy court's finding wascleatly erroneousthatLSC engaged in bad-faith conductby 7Such conductisalso furtherevidenceoftheunauthorizedpracdce oflaw. 12 atlem pting to gettheW illiam sesand Scottto assertthe attorney-clientprivilegein an aaem pt to avoid the U nited States Tm stee's subpoenas.Bankr.O p.54.The court disagrees.A fter reviewing the record,the couttfindsthatthere is sufikientevidence,including evidence of m alv CIXIZIS,text m CSSV CS, afld PMOIRC cais fzonn LSC to the k/ilhannses regarding the subpoenas,to suppottthe bankmlptcy court's finding thatLSC'S acdonsw ete done in bad faith.Furtherm ore,in an attem ptto obfuscate LSC'S conduct,appellants azgue thatLSC'S com m unicadonswith theW illiam seshad a sense ofurgency because LSC asked an in-house lawyerffto help W illiam stwo#@JbefozetheW illiam ses'responsesw ere due.''D efs.'Reply Br. 10 (emphasisin origm 'a1).Anysuch delayinLSC retniningan in-houselawyettoassistwith the subpoena response was of the appellants'own doing as there is no clnim that the subpoenaswereservedorfiledkte.Finally,appellants'replybdeffailstopresentanyevidence as to why LSC'S interacéons with M s.Scottpertnining to her subpoena were appropriate. Accozdingly,the couttaffit'm s the bankm:ptcy cotut's finding offactthatLSC'S attem ptsto get the W illiam ses and Scotl to sign the w aiver ofpotenéalconflictwas inappropriate and Broundsforsancdons. Connecéonsto theW estezn D istdctofVit 'nia Chezn,Allen,and LSC wete otherwiseinvolved lnoth with the underlying banlm lptcy casesofScottand theW illiam ses,along with num erousothercasesin theW estern Disttictof Virginia.Based on LSC'Shatd-selltacdcsand SalesPlay Book,itenteted into attotney-cliept relaéonshipswith mulépleresidentsoftheW estern DisttictofVizginia,earning$821,156.52 in attorney'sfees.Bankt.Op.467.Ofthat,roughlyhalfofthefees,or$409,650.22,werefor caseswhere they acttzally filed bankmlptcy peédons.LdaPriorto September2015,an LSC 13 fTteam of docum ent collectors'' would Rinterface vdfh dae chent and coEect az of the docum entsremotely gand!an associateattozneyon staffin Chicago wotzld preparean initial draftofthepetdon and do aniniéalSkypeinterview with theclient.8Jg.xat462.Therefore,at least som e of the fees retained fot unflled legalw ork m usthave been earned by attorneys workingoutsideoftlaisdistrict.ChernflptthertesdûedthattheRule2016$)disclosuresffwete and stillareprepated in Claicago.'?Bankt.O p.497.M r.W illiam salso spokewith m uléplenonV irginialicensed attotneys,aboutvariousissues,including thelegalityoftheSperro program . Id.at475.In theend,therecotd isclearthatlegalworkwasconducted byLSC attorneyswho w ere outside of the W estern D istrict ofVitginia for clients in this districtand LSC client consultants,also located outside ofthis disttict,iniéated the attorney-clientrelaéonsllip with clientsin thisdisttict.Tllissufficiently establishesanexusbetween Chezn,Allen,and LSC and thecasespenclingin thisdisttict. Finazy,appellants'azgum entthatChern,Allen,and LSC are beyond thereach ofthe coutt'sinherentauthority because they did notappearbefore the courtm istakenly relieson thewrongdefinitionofwhatconsétaztesthepracdceoflaw.TheRuleso?theSupremeCourt OfATitg/ 'rn'a state: A Petson or entity engages in the practice of law when representing to another, by w ords or conduct, that one is authorized to do any of the following:(a) Undeztake for com pensation,ditectorindirect,to give advice or counselto an endty ozperson in any m attetinvolving the applicadon oflegal principlestofacts.@ Select,dtaftorcompletelegaldocuments oragteem entswhich affectthelegalrightsofan endtyorpetson. (c) Represent another enéty or person before a tdbunal.(d) Negodatethelegaltightsorresponsibilideson ùehalfofanothet entity otperson. 8TheW illiam s'& stinteracdon with LSC wasitlAugust2015. 14 Pt.6,j2,RulesofSupremeCt.ofVa.Here,theLSC clientconstzltantsroudnely engagedin the unauthorized ptacéce oflaw,including giving legaladvice or counselfoz com pensaéon, and lawyersnotadmitted in theW estern DisttictofVirginiaselected,drafted,and com pleted legaldocum entswllich affected thelegaltightsofthe debtorsin theunderlying cases.Seealso Johnson, 327 F.3d at 561 (<fln Illinois, the pracdce of law includes, at a nainimum, representadon pzovided itl coutt pzoceedings along with any serdces rendezed incident thereto,evenifrendered outofcoutt').Thefactthatallofthishappenedin Chicago andnot physicallywithin thisdistrictisim m aterialbecauseitim pacted casesin tllisdisttict. The courtconcludes thatno m atter how you look atit,Chern,Allen,and LSC w ere engaged in the pracéce of1aw in the W estezn D istricyofVirginia.Ftuther,the banlm lptcy courthas the inheztntauthority to suspend otrevoke an gttorney'sability to appear before them ,especially when the colzttconcludesthatthe attozney acted in bad faith.See Roadwa Ex .lnc.v.Pi er,447U.S.752,767(1980);butseeInreRimsat,212F.3dat1047(af6tming banlmlptcy sanctionsdespitebanktnlptcy couztnotexplicitly findingbad faitlal.Assuch,the banlm lptcy courtclid noterrin zevoking Chezn,Allen,orLSC'Sauthority to pracdce befoze theW estern DisttictofVitgt 'tlt 'aforfiveyears.g 9Thec' ourtalso fm dsthatappellants'argum entthatthesanctbnswereimposed solelyforprelidgadon conduct iswithoutmedt.w hileitis ttaze thatçherrlcreated the Sperro program before the Scottand Williams' banktnlptcieswer' e flled, the Sperro ptogram nevetthelesshad a ditectimpacton the underlying bankrllptcy cases.Specifically,theitcarswere towed and sold by Sperro.Bankr.O p.476,480.T,ikewise,examples ofthe unauthorized pracdce of1aw cited by the banlrrll*pt c*y courtalso occurred before theunderlyi'ng bankrlpptcy '' ' ' . caseswereftled,yetslmilarmisconductoccurreditltheunderle gcases,includingnon-lawyerclientconslzltants advising M r.W illiam sto keep l' liscarhidden untiltheSperro program could tow it.Bankr.Op.475. 15 b. hlonet Spncdons A colzrt m ay ozder a m onetaty recovery under its inherent authority for bad faith conductby attotneys.Six,891F.3dt519.ln addidon to thecourt'sinherentauthority,Secéon 105(a)oftheBanlmlptcyCodepreservestheauthorityofthecourtto ffsuasponte,takgeqany acéon ...to preventtheabuse ofpzocess.''Forexam ple,federalcouttscan aw ard opponents attotney'sfeesasa sanction forbad-faith conductrelying on eitheztheirinherentauthorityot Secéon105(a).lnrelemsekClinic,P.A.,850F.3d150,159(4thCir.2017)(inherentauthority); lnreRimsat,Ltd.,212F.3dat1048(inherentauthorityandSecdon105(a)). Appellants assert several issues resulting from the m onetary sanctions that the banlmzptcycourtimposed:(1)thesancdonsviolatedappellants'dueptocessrightsasthefines wereexcessive;(2)thesancéonsviolated appellants'dueptocesstightsastheappellantshad noopportaznitytopresentevidenceoftheirabilitytopay;(3)thebanlttuptcycouttexceeded its stataztory and inherent authority in im posing the m onetary sanctions without specifying futuzemisconductto bedeterzed;and (4)theUnited StatesTrusteewaived anymonetav sancdon above$5,000.00.Thecouttconcludesthatthebankmlptcycourthadtheauthorityto im pose m onetaly sancdons,butthe am ountofthe sancdonsimposed in this case wassuch thatappellantsshould have been given an opporm nityto be heard on theizability to pay. ExcessiveSancdons Appellantsfttstatguethatthesancdonsim posedviolated appellants'dueprocessrights because the sancdonswere excessive.Appellantstely on State Fatm M ut.Auto.lns.Co.v. Cam bell,538U.S.408,418(2003),whichestablishedthteeguidepoststodetezrrlinewhether 16 apunitive sancdon awazd isgrossly excessive.loTheguidepostsate:<:(1)gtlhe degree of reptehensibilityofthedefendant'smisconduct;(2)thedisparitybetween theacttzalorpotendal hll.m suffetedbytheplaintiffand thepunitivedamagesaward;and (3)thedifferencebetween thepunidvedam agesawatded ...and thecivilpenaléesauthorized orim posed in com parable cases.''J-d.Applying tflese guideposts to the case atbar,the couttcannot conclude the sancdonsagainstChetn,Allen,and LSC are excessive. First,thebankmzptcy courtconcluded thatthe hard-selltacdcsem ployed by the client consultants,the lack ofsupervision ofthe clientconsultants,including the abilityforthem to drinkbeetonthejob,thefocuson cash flow,theSperro ptogram,andalitanyofotherforms ofmisconductallam ounted to teprehensible and bad-faith conduct.Bankt.O p.at507.The courtconcludes thatthe recozd established is sufficient to support the banlm zptcy cotut's conclusion thattheappellantsacted in bad faith. Second, appellants azgtze that the banlm zptcy court based its m onetary sancdons prim atily on appellants'pastparticipadon in the Sperro schem e.Appellants further contend thatthey term inated the Sperro program overtwo yearsbefore the banl m lptcy couttissued itsjudgment.Wlùletheduraéon oftheSpetzo schememighthavebeen short,itdoesnot otherwise absolve the appellants ofthe misconductor estabEsh thatthe banktuptcy court abused itsdiscredon in im posing the sanctions.In fact,Chezn admitted thathe feltzem ozse foz the Sperro program and thatitTrwasa hotrible mistake.''Banlct.Op.504,n.67.Rather than dem onsttate the clisparity between the harm and the am ount of the sancéons,this 10Asthegovem m entproperly poirlts out,Cam pbellsetthe standard to review punitivedamages,and notthe court'sinherentor stattztory authority to issue monetary reliefas a sanctbn.H owever,the court fmdsita worthwhile com padson and willreview themonetac sancdonsunderthe Cam bellguideposts. 17 aclm ission suppotts the bankruptcy court's conclusion that appellants' acéons wete zeprehensible and com m itted in bad faith. A ppellantsalso assertthatthey miégated any hnt' m by taking self-correcdvem easutes, such astetrninaéng the Sperro program and changing the SalesPlay Book.The bankmzptcy courtconcluded thatChern'stesHm ony rfwasnotcredible''when he claim ed he did itto selfcorrect.In fact,Chetn Tfdecided to tetm inate''the Sperro program ffdue to avariety offactors, one ofwbich wasChern leatning from one ofhislim ited partnersthata law suitwasftled by AllyFinancialagninstSperro and othersalleging thattheappellantsin thatcasewerecom plicit in converting itscollateral.''Bankr.Op.473.W hile itis ttue thatappellantszepaid Scottand the W l 'lliam ses theit ftling fees, it did not rniégate all the dam ages cause by appellants' m isconduct.ll Appellantsseek to lim itthe ability ofthe bankruptcy couttto sancéon them beyond the$5,000soughtbytheUrlited StatesTrusteeinitscomplaint.Plainly,thebankmxptcycoury hasauthorityto im pose sancdonsaboveand beyond thatsoughtby theU rlited StatesTrustee putsuant to Banlmlptcy Code j 105(a) based on a sufhcient factualrecord. Here,the banlm lptcy couttfound thatTrggliven LSC'Sfinancialresotecesandrevenuesin pardctzlat,as reflected by itstax retutnsand evidenceofreceiptsfrom residentsoftheW estern Distdctof Vitginia,these sum sare appropriatein an effortto deterfuttzrem isconduct.''Bankr.O p.55. Given theexttemenatuteoftheH sconductand the factthatLSC eatned over$800,000in fees from residents ofthe W estetn D istrictofVirginia,the couttcannotconclude thatthe 11In foom ote 85,thebankmlptc' y courtfound thatthe dam age to the W illiam sesand Scottwasdue to m ore than justtheflling fee,includingthattheywereRputthrough much stress,anxiety,andZconvenienceitztllis case,includinghavingtotaketimetoappearfordeposidonsand/orcomt''Banltr.Op.513,n.85. 18 am otm tofthe sancdonsiscleatertozotan abuse ofclisczetbn.SeeLaw SoludonsofChica o LLC v.Corbett,CaseNo.18-cv-677,2019WL 1125568(N.D.Ala.Mat.12,2019)(affirming $150,000sancdon aglinstLSC). 2. Ability to Pay A ppellantsnextassertthatthe banlm lptcy cotzrtviolated theitproceduraldueprocess rights by im plem enting a sanction thatw as 12 tim es that requested by the U nited States Trustee withoutpeznnitting appellants to presentevidence regarding their ability to pay the sanction.W hile thiscouttneed notdetetmineifIn teKunstler,914 F.2d 505,524 (4th Cit. 1990)appliesoutsidethecontextofFed.R.Civ.P.11violaéons,itsanalysisishelpfulinthis context.The Fourth Citcuitheld thatffgwlhen the monetary sancdon islatge EIthepardes shotlld genetally begiven th: opporturlity to submitafhdavitson theirûnancialstatus,orto submitsuch otlaerevidenceasthecourt'sdiscredon permits.''JI. L Here,thecourtfindsthata $300,000sancéonissignificantlylargetowarrantappellants'needto azguetheirabilityto pay. The banktuptcy couttdetermined thatChern,Allen,and LSC could pay the large sancéon only based on Chezn and Allen'ssalaties,LSC'Stax retutns,and legalfeespaid byresidentsin thisdistdct.Bankz.O p.507.Thecourtconcludesthattherecord establishedbythebankmzptcy court did notsufficiently take into consideration appellants'ability to pay.Accozdingly,the courtrem andsto thebanknlptcy couztforan evidenéary hearing on Chezn,Allen,and LSC'S ability to pay them onetary sanctions. D eterrence Appellantsatguethatthebankn'ptcy cotutexceeded itsstam toryand inhezentpow ers by im posing m onetary sancdonswithoutspecifyingthef'utuzem isconductto bedetezred.The 19 banlçmlptcy couztconcluded thatthe sancéonswere im posed to dfdeter futute naisconduct.'' Bankr.O p.507.Itis clearfrom therecord the banknlptcy courtw anted to detez appellants from continuing the heavy-handed salestactics em ployed by the client consultantspursuant theSalesPlayBook entedngintoanotherprogtam similattoSpetro,and engaginginlidgadon m isconduct.The cotzttfindsthatbased on tlésrecozd the im posidon ofm onetary sancéons was notclearly ezroneousoz an abuse ofdiscredon,butrathetw asproperasa deterrentfor f'uture misconduct. IV. Thebanktnlptcycourtimposedaone-yearpracdcerevocaéon and$5,000 sanction and an eighteen-month pracdce zevocadon and $5,000 sancdon on Delaheld and M otgan, respecévely.Appellantscloim thebanlm lptcy cotuterred in im posing thepracécetevocadon and the m onetary sanctions for D elaheld and M organ's involvem entin LSC'Sm isconduct, includingtheSpetto ptogram ,and thei. tindividualfsilingsin thezepresentaéon oftheitclients werein ertor.Thecourtconcludesthatthe banlm lptcy courtestablished a record fm cling that 170th D elaheld and M organ acted in bad faith and,thus,did notabuseitsdiscredon orengage in clearerrorby sanctioning D elafield and M ozgan.See Six,891 F.3d at519. ltis undisputed thatthe bankmlptcy court has the authority to im pose the practice revocadon on D elafield and M organ.SeeIn reEvans,801F.2d at706.M oreover,asdiscussed above,banktnlptcy courts have the authority, both putsuant to theit inherent pow ez and Secéon 105(a),toimposesancéonson lidgantsforbad-faith conduct.See,. :..p. .,Six,891F.3d at519;11U.S.C.j105(a).Becausethecourtreviewsthebankmlptcycourt'sdeterrnination for an abuse ofdiscredon,the queséon isifTdithas acted arbito rily oz itrationally,has failed to 20 considerjudiciallyzecogluz 'edfactozsconsttainingitsexerciseofdiscretion,otgifjithasrelied on erroneous facttzalorlegalpzemises.'?W elsh,879 F.3d at536. W it. h respect to D elaEeld,the banktnlptcy couttproperly acknowledged that he did som ethingscorrectly in hisrepresentadon oftheW illiam sçs.Bankt.O p.508.H owever,asa pnt-fnerofLSC,healso isresponsible forthe shortcom ingsofthe fttm .Thebanktnlptcy court found that LSC'S attotneys regulatly ignozed, and to a certain extent, encoutaged, the unauthorized ptactkeof1aw by LSC'Ssalesconsultants.Thebanktnxptcycourtrecognized that Delaheldwasnotamanae gpartnerofLSC butfoundthatwasnotan excuseforviolae g the ethical tules.12 A ccotdingly, D elaield,is responsible for the acts of the other LSC attorneys.SeeVa.RuleofPtof.Conduct5.1(c).13 The bankmpptcy coutt also found that D elafield engaged itlsom e misconductwith respect to lzis representadon of the W illiam ses,including clnim ing to notknow about the Sperro pzogzam during tlae 341 ctedhors m eetinpl4 Id.at508.In fact,despite D elaheld's denial,ffhe knew SIIIwellwhatthe Spezro program wasand how itw orked.''12. .Therecord . 12AppellantsarguethatD elafield and M organ werenotpartofthefïfvn'smanagem entand should notbeheld responsible fottheSperzo pzogtam ortherampantunauthodzed pracdceof1aw atLSC.The couttfmdsthis argum entdisingenuous.AppellantsargueChern,Allen,andLSC arenotEablefortlzem isconductbecausethey werenotinvolved in thecasesbeforethebanktnzptcycourt.Yet,appellantsm aintain thatD elaseld andM organ arealso notliablebecause theiritw olvem entwaslim ited to the casesbefore the banlrmlptcy coktrt.Therefore, appellantswould have the courtdecide thatno partyis liable forthe bad-faith conductthatthe banlrtazptcy courtfound. 15TheVirgl 'm'aRuleofProfessionalConduct5.1(c)pzovides:ff A lawyershallberesponsibleforanotherlawyer's violadon oftheRulesofProfessionalConductif:(1)thelawyerordersor,withknowledgeofthespedfic conductaradfiestheconductitwolved;or(2)thelawyerisapartnerozhasmanagerialautholityinthelaw fttm in which the otherlawyerpracdces,orhasdirectsupervisoty authorityovertheotherlawyet,and knowsofthe conductata tim e when its consequences can be avoided or midgated butfails to take reasonable rem edial action.'' 14A 341 cteditorsm eedngisam eedng convened by theUnitedStatesTrustee ofcreditorswherequesdonsare presentedto thedebtor,underoath,pertniningtothebankruptcyfiling.11U.S.C.j341. 21 teflects thatD çlafield frknew aboutthe Sperro program before he m et* t. 11the W illiam ses'' andtheRule2016$)disclosure,thatDelaûeldflled,idendfiedthatSpetrowolzldpaythefiling fee fottheW illinm ses.Bankt.O p.509. W ith respectto M ozgan,thesam eholdstl'ueasto lzisknowledgeand itw olvem entwith the unauthorized pracdce oflaw atLSC and the use ofthe Sperro pzogram .H owever,the banlm lptcy couztalso found thatM ozgan'sindividualfailingsin llisrepresentation ofScott required a more sevete sancdon than D elafield.Specifically,M organ zelegated to hisnonlaw yet spouse,who w as em ployed asa paralegalin hisofûce,the tesponsibility to prepate, zeview,and witnessthe signaturesofhisclient'speddons.Thebanlm lptcy couttfound thisto berfbeyond thepale.''Bankt.O p.512.M organ fftlid notreview Scott'speétion orschedules. . . gandjdid notwittaessScottsign them.''Id.at479.In fact,tfthefastémeM ozganjlaideyes onJessicaScottwasatherdeposiéon onJune2,2017,nearly ayearand ahalfaftezhetcase wasftled.''Ld. aat511.Instead,M organ had hisspousem eetwif.h Scottand sentalaw partner to the 341 creditozsm eeting. Finally,the banktnlptcy couttrelied on 170th D elafield and M organ'spziordisciplinary recordsbefore thiscourt,and others,to deteznnine thata lessersancdon would beineffecdve to deter futute tnisconduct.Accotdingly,the couttconcludes the bankmzptcy colztt did not abuseitsdiscreéon in im posing thepzacdcerevocadon orm onetarysancdonson D elafield or M organ. V. Withrespectto Scanlan,thebankfnzptcycourtfoundlnim jointlyandseverallyliablefor. thesancdonsim posed on Chezn,Allen,and LSC.Appellantsatguethatthesesancéonsshould 22 bevacated forinsufficientevidence,and the courtagrees.The banlm lptcy courtheld Chern, Allen,Scaian,and LSC liable for $250,000 ofthe totalsancdonsimposed.As described above,Chern,Allen,and LSC were inHm asely involved in the m isconductthat led to the sancdons.H owever,Scanlan islinked to them isconductonly through hisownership interests in MightyLegal,LLC,Juséva,LLC, and Royce M arkeéng,LLC,his leadership of LSC'S , ' . marketingefforts,and oneemailsenttoFennetregarclingtheSperro program.J-1.Lat456,507. These connections are insufhcient to fmd that Scanlan w as zesponsible for any of the m isconductleacling to the sancdons.Becausethe couttfindsthattherecozd doesnotsupport sancéoning Scanlan,the court holds that the banlm zptcy court abused its cliscreéon and vacatesthe m onetary sanctionsasthey apply solelyto Scanlan. W . For the reasons stated above,the courtAFFIRM S the bankmlptcy court's Februaty 12,2018,order,as am ended,in partasitrelatesto the pracdce revocadon ofChern,Allen, and LSC and the practice revocation and m onetary sanctions of D elafield and M organ, RR M AN D S in pattto the bankmlptcy colzttforconsidetation ofthe ability ofChetn,Allen, and LSC to pay the m onetary sancéonsim posed againstthem ,and VACATES in partthe sancdon asitrelatesto Scanlan.A corresponding Ordez consistentwith thisM em orandum O pinion willbe entered thisday. 23 Itisso O RD E RED . sntered, ?w/////1 f*f M *' V f Mi elF.Ut anski hiefUnitedStatesDistrictludge 24 i
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