Some time ago, I wrote about John Gellene, the silk-stocking lawyer who went to prison for failure to disclose his connections in a high dollar case. (The article has received 2,423 page views making one of the most read postings from this blog). I described his situation as what it must feel like to be struck by lightning, that is, a random and thoroughly unexpected reversal of fortune. Now it looks like Texas attorney Calvin Braun is in the path of the lightning bolt, although in a much smaller case. The case is an object lesson in the importance of disclosures in bankruptcy and the virtually limitless discretion of the prosecutor.
Attorney Braun made news when he was the subject of a four count indictment on February 12, 2014 in Case No. 14-0066, United States of America v. Calvin C. Braun in the United States District Court for the Southern District of Texas. However, the case goes back to February or March 2010, when Mr. Braun received a referral from a former client, a common occurrence for most lawyers. In this case, Karl Stomberg referred his ex-wife, Tammy, to Mr. Braun. Calvin Braun had previously represented Karl in buying businesses and had represented one of his companies as a party in interest in a chapter 11 case.
Proceedings in Bankruptcy Court--Pt. 1 Tammy's Bankruptcy
Calvin filed a chapter 7 proceeding for Tammy on May 31, 2010. Calvin said that he disclosed his ongoing representation of Karl to Tammy and produced a detailed waiver of conflict letter. However, Tammy’s signature did not appear on the waiver and she denied any knowledge of it. In his disclosure of compensation, he said that he had been promised payment of $2,500.00 and had received that payment. The Statement of Financial Affairs showed the same payment. This was his first false statement, but it was a pretty small one.
Calvin apparently failed to timely file Tammy’s financial management course certificate with the result that the case was closed without a discharge on November 5, 2010. Calvin claimed that he delayed filing the certificate because Tammy was wavering over a reaffirmation agreement, while Tammy said that he simply failed to do it. On December 7, 2010, Calvin promised to reopen the case within the week. Calvin charged Tammy a fee of $300 to reopen the case and ultimately collected an additional $1,258.91 from her. However, he did not reopen the case and according to Tammy, he stopped returning her phone calls.
Proceedings in Bankruptcy Court--Pt. 2 Karl's Bankruptcy
Meanwhile, Karl was experiencing his own financial difficulties. He came to see Calvin for a chapter 11 filing. On December 23, 2010, he filed a Chapter 11 petition for Karl. The schedules listed Tammy as a priority creditor with a claim of $20,000. When Calvin filed his application to be employed, he failed to disclose his representation of Tammy. Tammy was not pleased with this. She hired another lawyer to object to the application. The new attorney also filed the motion to reopen her personal case and she obtained her discharge on January 31, 2011. Shortly thereafter, Calvin amended his disclosure to show that his partner had represented Karl in his divorce from Tammy while employed by another firm, that he had previously represented Tammy and that he had previously represented one of Karl’s companies.
Notwithstanding the objection, Calvin proceeded with the application to employ. Curiously, the U.S. Trustee did not object to the employment, telling the Court:
This is a potential conflict. It's not an actual conflict. Ms. Stomberg's course of action lies in seeking disgorgement of fees from Mr. Braun based on the way he handled her Chapter 7 case. That's the remedy that needs to be perceived in this matter.
Transcript, pp. 89-90. However, Judge Bohm based his ruling on the failure to disclose rather than the conflict issue. He stated:
The fact of the matter is that she's a creditor in this case, and I don't know how on God's green earth one attorney can represent an ex-spouse and an ex-spouse without having a fair amount of ill feeling in the pit of his stomach, but obviously Mr. Braun concluded he could.
There's no question that 11 U.S.C. Section 327 says: "In a case under Chapter 7, 12, or 11, a person is not disqualified from employment ... solely because of such person's employment by or representation of a creditor, unless there is objection by another creditor ... in which case the Court shall disprove such employment if there is an actual conflict of interest."
And there's no question here that Ms. Stomberg is a creditor of this Chapter 11 estate. So she has objected, which means I should not employ unless there is -- I should not employ if there is an actual conflict. So the question is, is there an actual conflict?
Mr. Stomberg's counsel has argued that there is not. Mr. Burger has argued that there is, and that their conflict exists just because of breach of confidences.
My view of the world is this: I don't have to approve. It doesn't say I shall approve. It says Trustee may employ with my approval. What bothers me here is Mr. Braun filed that original 2016 affidavit and did not disclose to me that he was representing Ms. Stomberg. He also didn't disclose to me that it was prior representation of Mr. Stomberg's company and that Ms. Orlando had represented in the divorce. But what really bothers me is that he didn't disclose to me that he was representing Ms. Stomberg in her Chapter 7, even though he listed her as a creditor.
This is yet another example of Mr. Braun's continued sloppiness at best, deviousness at worst.
I'm not putting up with it anymore. Every time I see something from Mr. Braun now, I'm going to flyspeck it not once, not twice, but three times.
And here, if I can analogize to the 523 action, debtors who file false statements and then it's brought to the attention by a creditor and then they amend can't stand up and say, "Oh, well, we really didn't mean it the first time around."
There's no excuse for Mr. Braun filing the original 2016 and not making this disclosure. And then he amends only after Mr. Burger brings it to my attention. I cannot tell you how bad of a taste that leaves in my mouth.
And, Mr. Braun, all I can tell you is, I'm not putting up with any more shenanigans, I'm not tolerating any more of your old, "Your Honor, I just missed it, I'm too busy, I've got too many cases."
You're lucky I don't sanction you for this because you filed a statement that was false, dead false. You're representing Ms. Stomberg and you don't even have the guts to tell me that. And if you're stupid enough to forget it, then I'm not sure you should be practicing law.
But, in any event, I'm not approving the application, not because of any kind of actual conflict, but because I've been lied to. And it's not good for the integrity of the system for me to approve an application of an attorney who has lied to me. So this application is being denied because Mr. Braun filed a false statement under oath on January 10, 2011.
Transcript, pp. 92-95 (emphasis added).
Proceedings in Bankruptcy--Pt. 3 The Show Cause Orders
Notwithstanding Judge Bohm’s comment that Calvin was lucky that the Court didn’t sanction him, the court issued an order to show cause. The Court stated:
This Court is concerned that Braun’s conduct was an attempt to deceive the Court and interfere with the administration of justice. Therefore, he must appear before this Court and show cause why he should not be sanctioned for his actions in this case.
Order to Show Cause, Case No. 10-41603, p. 1.
Calvin took the Court’s order to heart and engaged a respected bankruptcy attorney to represent him in the sanctions hearing. He took responsibility for his inaccurate disclosures and apologized to the Court. The Court entered an order in which it accepted his apology and ordered him to pay sanctions to Tammy and her attorney. He also ordered him to receive mentoring from his attorney, Leonard Simon, at a cost of $1,000.00 per month.
This might have been the end of the matter. However, Tammy subsequently wrote a letter to the Court stating that Karl’s financial disclosures filed with the Bankruptcy Court conflicted with what he was telling the divorce court. Judge Bohm convened a show cause hearing at which Karl, who was now represented by Barbara Rogers, testified that he did not see the petition, schedules or statement of financial affairs until three weeks after the case was filed and that he did not sign these documents or the declaration of electronic filing.
Concerned about these revelations, Judge Bohm issued his third order to show cause in the case and the second one directed to Calvin. On January 10, 2013, Judge Bohm issued an order imposing sanctions on Calvin for the second time. He imposed eight separate sanctions of $500.00 payable to the Clerk’s Office for his conduct involved in forging the Debtor’s signature to various documents. He also ordered that various parties be reimbursed for their expenses. Among other amounts ordered was reimbursement to Karl’s new attorney, Barbara Rogers, for having to engage an attorney to represent her and reimbursement for her time spent testifying.
On February 12, 2014, approximately one year after the second sanctions order, the Grand Jury returned its four count indictment against Calvin.
The First Count alleged Bankruptcy Fraud under 18 U.S.C. §157(3). The indictment describes the alleged scheme to defraud as follows. I am going to quote it at length to show just how mundane the allegations are.
12. The scheme and artifice consisted of the defendant concealing and omitting material facts of a potential conflict of interest from the Bankruptcy Court and his client, TM.S, whom he represented in a Chapter 7 bankruptcy case, by failing to disclose Braun's representation of her ex-husband, K.C.S in a Chapter 11 bankruptcy case. Moreover, the defendant falsely represented and promised to perform additional legal work for T.M.S., obtained additional money from her, and never performed the legal work.13. It was part of the scheme and artifice to defraud that the defendant on July 2, 2010, filed a Disclosure of Compensation Certification with the court indicating that T.M.S. had paid him $2,500 on said date, to represent her in the Chapter 7 case, when in truth and in fact, T.M.S. had not paid the full amount owed. The defendant did file a Chapter 7 bankruptcy petition on her behalf on May 31,2010.14. It was further part of the scheme and artifice to defraud that on August 22,2010, T.M.S. completed a financial management course that was a requirement of the Bankruptcy Code and Rules, and she provided a Certificate of Debtor Education to the defendant who was to file the Certificate with the Bankruptcy Clerk's Office to insure that T.M.S. would receive her discharge; however, the defendant did not file the Certificate.15. It was further part of the scheme and artifice to defraud that as a result of the defendant's failure to file the Certificate in T.M.S. 's behalf, the Chapter 7 case was administratively closed without T.M.S. receiving her discharge.16. It was further part of the scheme and artifice to defraud that the defendant agreed to reopen the case and file the Certificate if T.M.S. would pay him an additional $259. On November 30, 2010, T.M.S. paid the defendant $300.00 to reopen the case.17. It was further part of the scheme and artifice to defraud that on December 7, 2010, the defendant told T.M.S. he would reopen her case and file the Certificate by the end of the week, but defendant did not file the Certificate.18. It was further part of the scheme and artifice to defraud that in or about December 22 or 23,2010, the defendant was retained by K.C.S to file a Chapter 11 bankruptcy petition in his behalf. On December 23, 2010, defendant did file the Chapter 11 petition for K.C.S.19. It was further part of the scheme and artifice to defraud that on December 28,2010, T.M.S. paid the defendant $1,258.91, but he failed to reopen her case, and he did not file the Certificate so that she could obtain her discharge.20. It was further part of the scheme and artifice to defraud that on January 7, 2011, the defendant filed Schedules and a Statement of Financial Affairs in K.C.S.'s Chapter 11 case. In Schedule E the defendant listed T.M.S. as a Priority Creditor holding an unsecured claim for $20,000.00.21. It was further part of the scheme and artifice to defraud that the defendant filed in the Bankruptcy Court, the Debtor's (K.C.S.) Application to Employ Orlando & Braun LLP as counsel for Debtor.22. It was further part of the scheme and artifice to defraud that the defendant stated in the Application to Employ and an attached Affidavit that "the firm of Braun nor any of its members, represented Debtor (K.C.S.) prior to the filing of Debtor's Chapter 11 case. To the best of Debtor's knowledge and except as otherwise disclosed in the attorney's affidavit, neither Braun nor any of its members has any other connection with Debtor, Debtor's creditors, equity security holders, or any other parties in interest. .." The defendant did not, in fact, disclose to the Bankruptcy Court that his firm had previously represented Debtor on numerous occasions. Further, defendant well knew that T.M.S. was a creditor of the Debtor and he did not disclose this fact to the Bankruptcy Court.23. It was further part of the scheme and artifice to defraud that the defendant stated in the Affidavit to the Application to Employ "neither Braun nor any of its members holds or represents any interest adverse to the Debtor [sic] estate in the matter on which Braun is to be engaged by Debtor and Braun [sic] its members are "disinterested persons" within the meaning of Section 101(3) of the Bankruptcy Code." Defendant did not disclose to the Bankruptcy Court the fact that he currently represented T.M.S. in a Chapter 7 case for which he had been paid and that he had a potential conflict of interest in representing both parties. Moreover, defendant did not disclose to the Bankruptcy Court that T.M.S. was a creditor in K.C.S.'s Chapter 11 case when he well knew that she was and that he represented her in a Chapter 7 case.24. It was further part of the scheme and artifice to defraud that the defendant, after T.M.S. filed an Objection to the Application to Employ, filed a 1st Amended Affidavit he filed with the Bankruptcy Court. However, defendant still represented that he did not represent any creditors of the Debtor (K.C.S.), when in truth and in fact, and he well knew because he represented T.M.S. in her Chapter 7 case, that she was a creditor in K.C.S.'s Chapter 11 case.
This is a scheme to defraud? I can see malpractice writ large, but hardly a fraudulent scheme.
The indictment also included three counts for making a false bankruptcy declaration under 18 U.S.C. §152(3). These included the initial Affidavit of Proposed Attorney and Rule 2014(b) Disclosure and the Amended Affidavit of Proposed Attorney and Rule 2014(b) filed in Karl’s Chapter 11 case and the Disclosure of Compensation filed in Tammy’s Chapter 7 case. Specifically, Count IV alleged that Calvin “did knowingly and intentionally make a material false declaration, certificate and verification under penalty of perjury” when he stated that he had already been paid $2,500.00 by Tammy when in fact he had not received this much money and later sought to collect the balance of his fee from her.
What It Means
This is a disturbing case. In Count I of the indictment, the Grand Jury takes every mistake that Calvin made in representing Karl and Tammy and strings them together as a scheme to defraud. To me, this looks like the criminalization of negligence. If you assume that the scheme to defraud must include additional elements beyond the false declarations (I will address those more below), there must be something more. As I read the indictment, the additional elements consisted of failing to get Tammy her discharge and filing Karl’s case even though he had a conflict of interest. These items constitute malpractice and violations of the disciplinary rules, but a criminal scheme to defraud? That seems to stretch credibility beyond the breaking point. (I actually had stronger language in mind, but decided to tone it down).
I also have trouble seeing how the erroneous disclosure that Calvin had already been paid his fee in full was a knowing and intentional false statement. If he said that he had not been paid when he had, this would have been material because it would have meant that he had received an undisclosed transfer, but saying that he had been paid in full when he hadn’t? That strikes me as sloppy but not criminal.
The sworn statements submitted with the application to employ are another matter. Failing to disclose connections to parties in the case is what sent John Gellene to jail. Here, the connections to Tammy were open and obvious since Calvin scheduled Tammy as a priority creditor and his previous representation of Tammy was a matter of public record. Perhaps this conflict could have been overcome with disclosure and consent. However, Calvin continued to proceed with the application to employ even after Tammy had objected.
On the other hand, the U.S. Trustee did not believe that the omission was serious enough to warrant denial of employment and the Court accepted Calvin’s apology at the show cause hearing. It seems clear that Judge Bohm was trying to get Calvin’s attention and that he believed that he had succeeded.
The bottom line is that disclosures matter. As Judge Bohm correctly stated, full disclosure is essential to the integrity of the system. While all attorneys (myself included) make mistakes, the number of mistakes and the speed with which they are corrected say a lot about the attorney. In this case, Judge Bohm was sending a clear message that there had been too many mistakes that were not corrected in a timely manner. The other take-away is that once the U.S. Attorney gets involved, every small mistake may be blown out of proportion.
I feel badly for Calvin Braun because I do not think he belongs in the criminal justice system. However, I can sure understand why Judge Bohm was unhappy. It is a bad situation all around. In the words of the Sergeant in Hill Street Blues, “Hey, let’s be careful out there.”