Law Solutions of Chicago LLC v. Corbett

          MEMORANDUM OPINION

          ABDUL K. KALLON UNITED STATES DISTRICT JUDGE

         Law Solutions of Chicago LLC, UpRight Law PLLC, and Mariellen Morrison (collectively referred to as “UpRight”) appeal from the bankruptcy court's order imposing non-monetary and monetary sanctions against them. Doc. 1. In a nutshell, the bankruptcy court sanctioned UpRight based on its finding that UpRight breached a settlement agreement UpRight entered into with J. Thomas Corbett, the Bankruptcy Administrator for the Northern District of Alabama, and, by doing so, violated the court's order approving the settlement agreement, Rule 9011 of the Federal Rules of Bankruptcy Procedure, and §§ 526(a)-(b) and 707(b)(4). See doc. 34-11. UpRight contends that the court abused its discretion and failed to afford UpRight due process before sanctioning them. The appeal is fully briefed, docs. 34, 35, 36, and ripe for review. For the reasons detailed below, the order of the bankruptcy court is due to be affirmed.

         I. STANDARD OF REVIEW

         The district court sits as an appellate court in reviewing final decisions of a bankruptcy court. 28 U.S.C. § 158(a)(1). Accordingly, the district court reviews the bankruptcy court's findings of fact under the clearly erroneous standard, while the bankruptcy court's legal conclusions are subject to de novo review. See, e.g. Educ. Credit Mgm't Corp. v. Mosley, 494 F.3d 1320, 1324 (11th Cir. 2007). See also Fed. R. Bankr. P. 7052 (incorporating Fed.R.Civ.P. 52); Fed.R.Bankr.P. 8013. “The factual findings of the bankruptcy court are not clearly erroneous unless, in the light of all the evidence, ‘[the district court is] left with the definite and firm conviction that a mistake has been made.'” In re TOUSA, Inc., 680 F.3d 1298, 1310 (11th Cir. 2012) (citations omitted).

         The court reviews the bankruptcy court's imposition of sanctions for abuse of discretion. In re Ocean Warrior, Inc., 835 F.3d 1310, 1315 (11th Cir. 2016) (citation omitted). “‘The application of an abuse-of-discretion review recognizes the range of possible conclusions the [bankruptcy] judge may reach.'” Norelus v. Denny's, Inc., 628 F.3d 1270, 1280 (11th Cir. 2010) (quoting United States v. Frazier, 387 F.3d 1244, 259 (11th Cir. 2004) (en banc)). When reviewing for an abuse of discretion, the district court “must affirm unless [it] find[s] that the [bankruptcy] court has made a clear error of judgment, or has applied the wrong legal standard.'” Id. The court may affirm the bankruptcy court “on any legal ground the record supports.” Gwynn v. Walker (In re Walker), 532 F.3d 1304, 1308 (11th Cir. 2008) (per curiam).

         II. PROCEDURAL HISTORY AND FACTUAL BACKGROUND

         UpRight and Corbett entered into a Settlement Agreement, effective September 16, 2016, that resolved adversary proceedings in two bankruptcy cases, and other related disputes between the parties. Doc. 34-1 at 10-17. Under the terms of the Agreement, UpRight agreed to pay $50, 000 to the bankruptcy trustees in the two underlying cases, and to a six-month bar on filing new cases in this District for clients who retained UpRight during this period. Id. at 11-12. Relevant to the sanctions at issue, the Agreement mandated also that “[f]or those clients who retained UpRight prior to March 21, 2016, UpRight shall provide the services referred to in Paragraph 9 of UpRight's standard client retention agreement without additional charge for attorney's fees, ” with the exception of fees incurred for pursuing or defending adversary proceedings. Id. at 12-13. After a hearing, the bankruptcy court issued an Agreed Order approving the Agreement. Id. at 44-45.

         Thereafter, UpRight filed six cases for debtors who had retained UpRight prior to March 21, 2016 (the “Post-Settlement Cases”). Doc. 34-11 at 17. Corbett discovered subsequently that the Rule 2016(b) attorney disclosure statements UpRight filed in those cases reflected “an extensive list of services excluded from the base attorney fee of $1, 250.00, ” including services the Agreement required UpRight to provide without any additional fees. Docs. 34-1 at 48; 34-11 at 16. Based on the disclosure statements, Corbett believed that UpRight had violated the terms of the Agreement. Doc. 34-1 at 48. Consequently, Corbett filed motions asking the bankruptcy court to determine whether UpRight had breached the Agreement, filed materially inaccurate disclosure statements, and violated §§ 526(a)(2)-(3) and 704(b)(4)(C)-(D). Docs. 34-1 at 48-50; 34-11 at 16. In the event the court answered the first question in the affirmative, Corbett asked the court to set a show cause hearing regarding why the court should not impose appropriate sanctions against UpRight, including disgorgement of attorney's fees, civil penalties, or an injunction under §§ 105 and 526(c)(5), or the court's inherent authority. Docs. 34-1 at 48-50; 34-11 at 16.

         In response, UpRight filed amended attorney disclosure statements that expanded “the scope of legal services they would provide without additional fees in the Post-Settlement Cases that remained open . . . .” Docs. 3-3 at 97-98; 34-1 at 85-86; 34-11 at 18-19. UpRight also amended their retention agreements and sent letters to their clients in the open Post-Settlement Cases stating that, contrary to statements in their original retainer agreement, UpRight had not and would not charge fees in addition to the flat fee the clients paid for UpRight's services in those cases. Docs. 3-3 at 98-100; 34-11 at 18-19.

         The bankruptcy court held a hearing on the motions on July 13, 2017. Docs. 34-1 at 83-95; 34-11 at 19. At that hearing, Corbett argued that UpRight violated §§ 526(a)(2)-(3) and 707(b)(4) by filing attorney disclosure statements that did not comply with the terms of the Settlement Agreement. Doc. 34-1 at 85-86. UpRight countered that they did not violate the Agreement because they only charged their flat fee in the Post-Settlement Cases, and they never collected any additional fees for their services in those cases. See Id. at 86-88. The bankruptcy court concluded that an evidentiary hearing was necessary “to determine the extent to which [UpRight] failed to comply with the order approving and implementing the settlement agreement . . . and to further determine what sanctions, if any, are appropriate due to such noncompliance.” Id. at 98. Accordingly, the bankruptcy court ordered UpRight to appear “and show cause, if there be any, why their failure to comply with the settlement agreement and order implementing the same does not warrant contempt sanctions, which may include disgorgement of fees and expenses . . ., and additional monetary and non-monetary sanctions, which may include, without limitation, a bar from [UpRight] practicing in [this District] for a period of up to two (2) years . . . .” Id. at 99.

         At the evidentiary hearing, Corbett argued that UpRight filed inaccurate attorney disclosure statements in the Post-Settlement Cases because the statements conflicted with UpRight's obligations under the Agreement. Doc. 3-3 at 71-73. Although Corbett admitted that the Agreement did not expressly require UpRight to amend their retention agreements or disclosure statements, he argued that UpRight should have amended their disclosure statements to accurately reflect the scope of services they agreed to provide to their clients for no additional charge. See Id. at 74-76. In response, UpRight countered that they did not intend to violate the Agreement, and had not violated it because they did not actually charge any additional fees for their services in connection with the Post-Settlement Cases. Id. at 87-88, 104. When questioned about their duty, if any, to amend their disclosure statements under Rule 2016(b), UpRight testified that they did not believe they violated that Rule because the statements they filed were consistent with the retainer agreements their clients had signed. See Id. at 110, 112. See also doc. 34-8 at 156-62. After the evidentiary hearing, UpRight and Corbett filed post-hearing briefs in support of their respective positions, and responded to each other's briefs. Docs. 34-9 at 6-40; 34-10 at 6-35, 186-229.

         On April 19, 2018, the bankruptcy court issued an order finding that UpRight intentionally filed false and misleading attorney disclosure statements in the Post-Settlement Cases that “wrongfully exclude[d] legal services that were to be provided under the Settlement [Agreement] for no additional fees, ” and that UpRight acted in bad faith. Doc. 34-11 at 18-19, 24. Based on those findings, the bankruptcy court imposed the following sanctions under 11 U.S.C. §§ 105(a), 526, and 707(b)(4)(B):

• An 18-month practice injunction banning UpRight from filing any new bankruptcy cases in this District;

• A complete refund of all fees and expenses paid to UpRight by clients whose cases UpRight had not yet filed;

• Monetary penalties of $25, 000 for each of the six Post-Settlement Cases, or $150, 000 total; and

• Disgorgement of all attorney's fees and filing fees in the Post-Settlement Cases.

Id. at 25-27. This appeal followed. Docs. 1, 34.

         III. ANALYSIS

         UpRight raises several points of error that boil down to one question: did the bankruptcy court abuse its discretion by imposing sanctions against them? To answer that question, the court must determine whether the bankruptcy court had authority to sanction UpRight, and, if it did, whether it abused its discretion in exercising that authority. For the reasons explained fully below, because the bankruptcy court had authority to impose sanctions against UpRight, and UpRight has not shown that the ...