Upright Law Firm Sanctions
Upright Law Firm Sanctions
The Federal Appeals Court in Atlanta (11th Circuit Court of Appeals) recently affirmed a decision coming out of Alabama sanctioning Law Solutions of Chicago (Upright Law) and local counsel $150,000 and disgorgement of fees in three cases and barred Upright Law from filing cases in the Northern District of Alabama for 18 months for violation of bankruptcy laws.
Specifically, there had been a prior settlement with Upright requiring, among other things, that Upright Law to perform certain bankruptcy services without charge for a group of clients when their standard contracts had allowed charges for such services. The disclosure Upright filed with the court about the fees paid and services to be provided did not comply with that settlement in 6 cases. The sanctions were awarded despite no evidence that any charges were actually made, or services in that category actually performed.
The Upright Law firm is a large legal firm based in Chicago that solicits clients through the internet and refers them to ‘partner’ attorneys who practice in the locality where the clients reside. While designated as partners, the attorney in this case had never attended a partnership meetings, did not receive year end draws or distributions, and did not know the names of other attorneys in the firm.
The case results for a prior settlement agreement in two cases in 2016 in the Northern District of Alabama concerning Upright’s involvement in a car repossession scheme involving referral to companies controlled by an associate of the firm of clients that had cars they wished to surrender, who would then take possession of the vehicle, pay the attorneys fees and filing fee for the bankruptcy, tow the vehicle to another state, and notify the creditor that they had just a few days to pay large fees for the loading, towing, and storing expenses. As part of the settlement in that case after mediation Upright agreed to $50,000 sanctions, barred the firm from filing new cases in the district for six months, and required any cases for clients that had hired them during such bar period filed after such bar to provide the above noted ‘excluded services’ for free.
About seven months after the approval of the compromise the bankruptcy administrator discovered three cases for clients covered by the settlement where the Rule 2016 disclosure indicated Upright would charge for those excluded services and filed a motion to examine .the transactions and determine whether such disclosures violated the settlement agreement. Prior to any court action Upright amended the disclosures in accordance with the settlement agreement. Following an evidentiary hearing the bankruptcy court determined that Upright violated §707 and §526, and that the conduct warranted the sanctions ordered. The court found that Upright would not have allowed the error to occur had they been operating in good faith. The bankruptcy court’s order also cited at length the prior complaints regarding the repossession scheme.
The 11th Circuit initially found authority for the bankruptcy court to issues sanctions, and found such authority in the debt relief agency provision of §526(a)(2) of the Bankruptcy Code by the misleading disclosure that Upright was authorized to charge fees not allowed under the settlement agreement. Upright argued at the circuit level that the bankruptcy court did not have jurisdiction (the legal right to rule on the matter) on some or all of the 6 cases. First, three of the cases were closed when the sanctions were imposed, and never reopened. The 11th Circuit disagreed, finding a number of cases indicating court’s retained jurisdiction to impose sanctions even when cases are discharged or closed. Next the court rejected Upright’s argument that since the bankruptcy order approving the settlement in the prior litigation had not incorporated the agreement or it’s terms, the court lacks jurisdiction to enforce such settlement. The 11th Circuit rejected this argument as there is an independent basis for jurisdiction, the bankruptcy provisions on which the motion to examine was based and Upright’s compliance with the Bankruptcy Code provide independent grounds for subject matter jurisdiction.
Upright next argued that their due process rights were violated when it imposed sanctions without specific notice that §§526, 707, and rule 2016 were in play. The court cited a prior ruling from the 11th Circuit as to what notice is required to a party before ruling against them:
Due process requires that the attorney (or party) be given fair notice that his conduct may warrant sanctions and the reasons why. Notice can come from the party seeking sanctions, from the court, or from both. In addition, the accused must be given an opportunity to respond, orally or in writing, to the invocation of such sanctions and to justify his actions.
The Court found that Upright had ample notice that the bankruptcy administrator was alleging violations of §§526, 707 and Rule 2016 based on the motion to examine, the hearing, the show cause order issued after the initial hearing, the evidentiary hearing on the show cause order, and the post- cause hearing briefing.
Finally, Upright contended that their conduct was unintentional, and the sanctions were grossly excessive. Again, all but the $150,000 monetary sanctions had been rendered moot. Upright alleged the court ‘went out of its way to portray Upright in a negative light’, referring to the firm as a high-volume, monolithic, internet cartel and bankruptcy mill, and making repeated references to ethical problems with the firm’s business model, as well as repeating at length the details of the repossession scam. The Circuit court believed such sanctions were warranted based on a clear violation of §526, the bankruptcy court’s opportunity to observe the demeanor and credibility of Upright’s witnesses (finding them to be arrogant and indifferent), and finding that the previous sanctions failed to get Upright’s attentions.