Disclosures Matter: The Case of Calvin Braun

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.   

The Indictment

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 1^st 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.”     

Note on Sources:  I have relied exclusively on public records for this post.   I do not have personal knowledge of any of the facts myself and have not spoken with any of the participants.   Where matters stated appear to be reasonably certain, such as that a document was filed on a certain date, I have stated them as facts. Where a statement is an allegation of a party, I have tried to indicate that.  A Grand Jury Indictment is an allegation.   The Defendant Calvin Braun, is presumed to be innocent.

Death Penalty Sanctions Applied in Case of Double-Dealing Attorneys

In a disturbing 52-page opinion, Judge Stacey Jernigan has administered “death penalty” sanctions against The Cadle Company based on double-dealing and non-disclosures by Cadle’s long-time attorneys who also represented the trustee.     The Cadle Company, LLC v. Brunswick Homes, LLC, Adv. No. 06-3417 (Bankr. N.D. Tex. 4/23/12).  The opinion may be found here.    The Court went so far as to state that “the entire Adversary Proceeding has been tainted and the temple of justice has been defiled.”   Opinion, p. 5.  

  

The Cadle Company is a sophisticated party that purchases and collects debts.    It is known for its aggressive tactics in collecting debts from parties in bankruptcy.   Many of the leading Fifth Circuit cases involving Section 727 were brought by The Cadle Company.    (Disclosure:    I represented the debtor in Bobby D Associates v. Walsh (In re Walsh), 143 Fed.Appx. 580 (5^th Cir. 2005), a case brought by a Cadle affiliate).     I have previously written about the Cadle Company here, here and here.

In this particular case, The Cadle Company succeeded in having the debtor’s discharge denied and made new law with regard to a trustee’s ability to settle rather than settle claims, see Cadle Co. v. Mims (In re Moore), 608 F.3d 253 (5^th Cir. 2010).    However, their trail of successes in the case came to a screeching halt when the Court found out that Cadle had been simultaneously paying the attorneys for both sides to a dispute without making disclosure of that fact.    

What Happened

The Cadle Company several large debts against James H. Moore, III.   In an attempt to collect those debts, it filed a suit in state court against several entities related to the debtor seeking to hold them liable as transferees or alter egos of the debtor.    When the debtor filed bankruptcy in 2006, the state court action was removed to bankruptcy court.    The Cadle Company recognized that the claims now belonged to the trustee and arranged for the trustee to be substituted in as plaintiff.

Cadle’s long-time attorneys, Bell, Nunnally & Martin, LLP offered to represent the trustee on a contingent fee basis.   This appeared to be a good deal for the trustee since Bell Nunnally was familiar with the file and agreed to take the case on a contingent fee basis.    Bell Nunnally signed an engagement agreement with the trustee which was incorporated into an application to be employed as special counsel.    The application and the engagement agreement represented among other things:

That BNM had previously represented the Cadle Company but understood “that it represents and owes fiduciary duties only to the Trustee in the Action and not the Cadle Company.”

“Compensation to BNM, if any, will be paid only upon recovery of money or property of value in connection with the Adversary Action on behalf of the estate and will be subject to the Court’s approval of a fee application to be filed by BNM at the conclusion of the Adversary Action.”

“No promises have been made to BNM or any of its partners or associates as to compensation in connection with this case other than in accordance with the provisions of the Bankruptcy Code.”

The application to employ was filed on August 22, 2006.    

Three days later, on August 25, 2006, Bell Nunnally filed an adversary proceeding objecting to the debtor’s discharge on behalf of Cadle.   

On October 23, 2006, the Court held a hearing on the application to employ.    The Court noted that “there was no disclosure of any special arrangements whereby the Creditor-Cadle might pay BNM’s fees and expenses in connection with the Veil-Piercing Action.”    Opinion, p. 14.

Just two weeks later, on November 6, 2006, Bell Nunnally entered into a letter agreement with the Cadle Company that was, according to the Court “the proverbial smoking gun.”    In the letter agreement, Cadle confirmed that it would pay Bell Nunnally for both its work on behalf of the Trustee and in the adversary proceeding to deny discharge.   The letter stated:

The Cadle Company has agreed to pay our firm’s fees related to the prosecution of the adversary proceeding [the Veil-Piercing Action] as well as to the representation of The Cadle Company’s interests as a creditor in the main case and its unrelated action to deny discharge.   At the conclusion of the case, assuming a positive result, we will request payment of the fees and expenses incurred by our firm in the prosecution of the [Veil-Piercing Action].    Upon receipt of payment from the Trustee, this firm will reimburse Cadle for the fees and expenses it has actually paid our firm in connection with the adversary proceeding.

This side agreement was problematic, since the firm had previously represented under oath that it had no other agreements for compensation.    Besides constituting a false oath (something the firm knew much about since it often filed actions under section 727(a)(4)), it created a possible conflict between its two masters.   As determined by the Court, that possible conflict matured into an actual conflict.

On April 18, 19 and 25, 2007, the Court conducted a trial on the objection to discharge, which ultimately resulted in denial of discharge.   While this trial was pending, Bell Nunnally filed a motion to withdraw as the trustee’s counsel in the Veil-Piercing Action for a reason that aroused the Court’s suspicion.   In the Motion to Withdraw, Bell Nunnally stated that its agreement with the trustee was that its fees would be contingent, but The Cadle Company would pay its expenses.   The firm further represented that as of April 5, 2007, it had “it had learned definitively that Cadle was not willing to pay any expenses to assist Mims Trustee.”   

In one pleading, the firm managed to contradict both its own Engagement Agreement with the Trustee (which did not include any reimbursement of expenses from The Cadle Company) and its November 6, 2006 agreement with Cadle (which provided for payment of both fees and expenses.    It was also false in that Cadle continued to pay fees and expenses until February 2009.

The Court was not pleased.    At the hearing on the motion to withdraw on May 15, 2007, expressed surprise that there was an agreement for Cadle to pay expenses.   At one point, the Court asked, “If there was an agreement, show me the agreement.”    Notwithstanding the Court’s request, the firm did not disclose the November 6, 2006 letter.    The Court denied the motion, finding that the trustee would be prejudiced.   The Court denied the motion without prejudice to being re-urged, but added that if it did so, the Court expected that the firm would “present some proof that there was an agreement that The Cadle Company would pay the ongoing expenses of BNM in pursuing this matter.”    

Bell Nunnally succeeded in defeating a motion for summary judgment filed by one of the defendants.   However, the Court’s opinion highlighted the difficulties the plaintiff would have in ultimately proving its case.

On the eve of trial, the Trustee reached an agreement with the defendants to settle for $37,500.   This is when the conflict matured from possible to full-blown.   The Cadle Company, acting through other lawyers, objected to the settlement, stating that it would pay $50,000 to purchase the causes of action.    The Court ruled that the Trustee was entitled to settle the claims rather than auction them.   

At the hearing on the settlement, Cadle’s representative testified that there was no agreement to pay Bell Nunnally’s expenses, but that Cadle had paid “some bills” totaling $50,000-$60,000 towards the litigation.    The Trustee was not pleased to learn that his ostensible lawyer was being paid by the other side and demanded that the attorneys amend their disclosures to the Court.   They did not.

Cadle appealed the Court’s order.   For reasons that are not clear in the opinion, the Trustee continued to retain Bell Nunnally to represent him on the appeal.    This meant that for a period of time, Cadle was footing the bills for both sides to the appeal.   (Cadle stopping paying Bell Nunnally in February 2009, about nine months into the appeal).    This conflict was even more serious because Bell Nunnally was sending invoices to Cadle for its trustee representation which referenced privileged communications with the trustee.    The trustee, however, neither knew that Cadle was receiving the invoices or saw them himself.  

The day before oral argument in the Fifth Circuit, the principal attorney who had been representing the trustee left Bell Nunnally for another firm.    Although the oral argument had been scheduled for six weeks, the lawyers at Bell Nunnally apparently had not planned for this contingency.    The departing lawyer declined to handle the oral argument.  Instead, the firm sent a first year lawyer to the Fifth Circuit.     This later raised suspicions that the firm had intentionally taken a dive on the appeal to curry favor with Cadle.     (Note:    The Fifth Circuit’s opinion in Cadle Co. v. Mims was solidly reasoned so that sending a more experienced lawyer probably would not have made a difference.    However, the appearance was not good).    The Court found that “the surrounding circumstances here give every indication of the Chapter 7 trustee having been treated like the proverbial ‘hot potato.’”    Opinion, p. 34.

After the Cadle Company prevailed on the appeal, the trustee conducted an auction sale of the cause of action.    Cadle was the high bidder at $41,500, an amount just $4,000 more than had been offered by the defendants to settle and $8,500 less than it had previously indicated that it was willing to pay.    The Court commented:   “A marvelous result?   Hardly.”    Opinion, p. 36.

At this point the plot thickened.   As recounted by Judge Jernigan:

At the April 11, 2011 sale hearing, in the midst of this lackluster result, Attorney BA appeared—purportedly on behalf of the Chapter 7 Trustee—seeking a continuance of the trial date in the Veil-Piercing Action.    At that point, the bankruptcy court raised questions as to whom exactly Attorney BA considered himself to be representing?   On the one hand, Attorney BA had apparently not felt like he could represent the Chapter 7 trustee at the Fifth Circuit oral arguments—because he had gone to a new firm.    Now, suddenly, Attorney BA was filing pleadings for the Chapter 7 Trustee.    But the Chapter 7 Trustee indicated that he had not instructed Attorney BA to seek a continuance or even talked to him about it.    Attorney BA’s actions had all the appearance of him seeking a continuance for the benefit of Creditor-Cadle, which had just newly purchased the claims in the Veil-Piercing Action.

Opinion, pp. 36-37.  

The Court granted the continuance but ordered that a representative of Cadle be present “to address some of the conflicts issues that had seemed to percolate to the surface.”    

At the next hearing, Cadle sent a representative who stated that it was not able to find any agreement to pay Bell Nunnally for representing the Trustee, but that they had paid $92,000 to the firm over a two year period anyway.   

Upon hearing this testimony, the defendants filed a motion to dismiss the adversary proceeding.     The Court conducted three days of hearings upon the motion and heard testimony from Cadle, Attorney BA (the former Bell Nunnally attorney) and the trustee.    The Court found the trustee’s testimony to be credible, while describing Attorney BA’s testimony as “cavalier” and “mostly devoid of any regret or concern.”    Opinion, pp. 39, 42.   

The Ruling

Employment of professionals is strictly regulated in bankruptcy.    In order to be employed as a professional, a person must “not hold or represent an interest adverse to the estate” and be a disinterested person.   11 U.S.C. Sec. 327.     In order to evaluate a professional’s eligibility, the Court relies upon the disclosures submitted.   As stated by Judge Jernigan:

If a proposed attorney for the trustee represents a creditor, and a party-in-interest objects (which, by the way, did happen in this case in 2006), the bankruptcy court must look to whether there is an actual conflict of interest.   Conflicts of interest are often a matter of degree. They are fact-intensive analyses.

So how does a bankruptcy court ascertain if there is an actual conflict of interest? Bankruptcy Rule 2014 is designed to help in this regard. Bankruptcy Rule 2014 states that an employment application for a professional person seeking to represent a trustee “shall state,” among other things, “any proposed arrangement for compensation” and “all of the person’s connections with . . creditors” and a verified statement of the person to be employed as to such connections. In other words, there are critical disclosures contemplated so that conflicts of interest can be identified and analyzed.

Opinion, p. 44.   

In a display of understatement, the Court described the firm’s disclosures as “amazingly inadequate.”    The Court recounted the various misrepresentations and failures to disclose discussed in the factual recitation discussed above.  The Court referred to the firm’s actions as “inexcusable and baffling” and that “the circumstances are highly suspect.”    The Court added:

Bankruptcy requires an open kimono when it comes to possible conflicts.    Here, there was no open kimono.   There was no transparency.   

Opinion, pp. 45-46.

The Court noted that “there is more that has happened here than simple nondisclosure.”   The Court noted that the conduct included breaching the duty to maintain confidences and disregarding the instructions of a client.  

However, the Court was not content to simply blame the attorneys.   The Court stated:

But the problematic behavior lies not merely at the feet of Attorney BA and BNM, but also at the feet of Creditor-Cadle. This is not just a case of rogue attorneys. Creditor-Cadle has some accountability in all of this. Creditor-Cadle is a sophisticated party that regularly hires lawyers to monetize assets. Here, as earlier stated, the bankruptcy court believes that the very temple of justice has been defiled. Here, there is not merely a situation of lawyers representing a bankruptcy trustee that were conflicted and compromised by loyalty to another client. Creditor-Cadle itself failed twice to testify candidly about the exact financial arrangements it had with BNM . . . . . Creditor-Cadle is, again, a sophisticated party. BNM and Attorney BA were Creditor-Cadle’s trusted lawyers. It appears that Creditor-Cadle was happy for a while to quietly pay BNM while BNM ostensibly represented the Chapter 7 Trustee. But then, after a year of paying both sides of litigation and an appeal, someone at Creditor-Cadle said “no more.”

            * * *

             

There is enough here to connect the dots. And it is not pretty. BNM and attorney BA had divided loyalties, and Creditor-Cadle was fine with that—it benefitted Creditor-Cadle having “its” lawyers on the other side of it in litigation. The various nondisclosures and conflicts of interest attributable to the Creditor-Cadle and its counsel (at both the bankruptcy court level and throughout much of a multi-month appeal) were so serious, so improper, and so demonstrative of callous indifference to applicable duties and ethical standards, that the entire Adversary Proceeding has been tainted. In the world of bankruptcy, lawyers are not only bound by the Rules of Professional Conduct, but lawyers and parties must abide by the Bankruptcy Code and Bankruptcy Rules. Bankruptcy Code section 327 and Bankruptcy Rule 2014 were totally side-stepped here.

“The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.” 11 U.S.C. § 105(a). Here, the court believes the evidence is clear and convincing that Creditor-Cadle and Attorney BA acted in bad faith and recklessly disregarded their duties.   Thus, the “death penalty” (i.e., dismissal with prejudice) in this Adversary Proceeding seems entirely fitting.     

Opinion, pp. 48-50.

 What Does It Mean?

     This is an opinion that should be discussed whenever ethics in bankruptcy is studied. This was not simply a case of crossing the line; the lines were obliterated. This opinion deserves more attention than I am capable of giving it. Therefore, I will limit myself to a few points

1. The court acted appropriately under its inherent authority.

There is a line of cases that holds a court possesses inherent authority to punish bad faith conduct which exists beyond 28 U.S.C. Sec. 1927 and Rule 11.   Chambers v. NASCO, Inc., 501 U.S. 32 (1991); In re First City Bancorporation, 282 F.3d 864 (5^th Cir. 2002).   While sanctions under the court’s inherent power are usually levied against attorneys, there is no reason why they would not apply to a party as well.   

The court’s conclusion that the entire process had become tainted justified termination of the litigation.    Where the court did not otherwise have an adequate remedy, ending the court’s participation was appropriate.    Besides the blatant disregard of rules and ethical standards amply documented by the Court, there is another subtext.   This was a case in which Cadle paid one set of lawyers $92,000 to pursue claims on behalf of the trustee, paid a second set of lawyers to appeal the case to the Fifth Circuit and then offered only $41,500 for the claims themselves.  It seems hard to understand what economic motive The Cadle Company was pursuing.  

Lawyers of any experience will confirm that sometimes litigation is pursued not for legal or economic principles, but for vengeance, the ability to inflict punishment upon another human being.   I can’t say definitively that malice explains this case.    However, it does look that way to this jaded observer.    It is a good thing when courts have the ability to terminate spiteful litigation.   Courts should exist to resolve conflict rather than to magnify it.   In this case, Judge Jernigan aborted a lawsuit which had become hideously deformed.   

2. Disclosures matter.

The disclosures that attorneys file in order to be employed by a bankruptcy estate are signed under penalty of perjury.    Just because they are routine does not mean that they are unimportant.   John Gellene went to jail and lost his license for non-disclosures that were arguably far less egregious than those in this case.   See United States v. Gellene, 182 F.3d 578 (7^th Cir. 1999).   In a recent case that I have not had time to blog about, a firm failed to disclose the source of its retainer and its prior connections with the debtor.   The court found that the firm was still disinterested notwithstanding the omitted information and that the omission was innocent.   Nevertheless, the court made the firm disgorge $135,000 in payments it had received.   Waldron v. Adams & Reese, LLP, 2012 U.S. App. LEXIS 6367 (5^th Cir. 2012).

3. Bankruptcy requires a heightened awareness of conflicts.

Others have made the point better than I, but conflicts in bankruptcy are more complicated than conflicts in ordinary two party litigation.    Under section 327(e), a law firm that represented a creditor may represent the trustee as special counsel.    However, in doing so, they must always remember that their fiduciary duty is to the trustee and not to their original client.    As a practical matter, this may be difficult to manage when, as here, the creditor is a regular client of the firm and may have unrealistic expectations about counsel’s loyalties.   The same situation arises when counsel has represented a creditor and becomes counsel for the creditor’s committee.   In that situation, counsel cannot use the committee to provide his client with inside information or to advance the original client’s agenda.   When an attorney represents a debtor-in-possession, he represents the artificial construct of the Debtor-in-Possession, but must take direction from the flesh and blood human beings who constitute the debtor’s management.    

Update:

Judge Jernigan's opinion was reversed by the Fifth Circuit.   You can read about it here.