Helen E. Burris, US Bankruptcy Judge.
1. Upright is a national consumer bankruptcy law firm headquartered in Chicago, Illinois. Upright conducts business in South Carolina utilizing affiliations with locally licensed attorneys.
2. Ryan Galloway of Upright testified that since 2014, Upright has filed approximately 50,000 bankruptcy petitions nationwide. His testimony was that of the approximate 11,400 petitions Upright filed in 2019, 865 were filed by residents of South Carolina.
3. Through online marketing, Upright connects with individuals to provide debt relief assistance. This is done utilizing a main intake office in Chicago. An individual who contacts Upright over the telephone speaks with a Senior Client Consultant ("SCC") who conducts the "initial consultation." The SCC may or may not be an attorney. There was no evidence that the SCC is ever an attorney licensed in South Carolina or admitted to practice before the federal courts of this state or this Court ("SC attorney").
4. During the initial consultation, the SCC gathers general information regarding the individual's assets, debts, income, and motivating factors for contacting Upright
5. At the conclusion of the initial consultation, if the individual elects to proceed, the telephone call continues while Upright conducts its formal "intake process." During the intake process, the SCC obtains more detailed information about the individual's financial circumstances, including researching asset values and obtaining spousal and employment information. The SCC also relays scripted disclosures that discuss the basic differences between the bankruptcy chapters and available bankruptcy alternatives. A bankruptcy chapter is "preliminarily selected" by the individual and noted in Upright's records. The SCC also gives contact information the individual can provide creditors to confirm he has retained Upright for debt relief services, even though no bankruptcy petition has been filed.
6. At the conclusion of the intake process, the SCC discusses a payment plan for Upright's fees, which must be paid before any bankruptcy petition is filed. Once the payment plan is set, the telephone call typically ends.
7. The SCC then reviews the information provided, which forms the case file. The SCC submits the case file to an "onboarding attorney" located in Chicago. The onboarding attorney reviews the information gathered by the SCC to ensure it is complete and accurate and preliminarily approves the case file. There was no evidence that the onboarding attorney is ever a SC attorney.
8. The case is then assigned to a "local partner" in the state where the individual resides. If there is more than one local partner in a state, cases are assigned on rotation based on the partner's geographical location in relation to the individual.
9. The onboarding attorney's preliminary approval generates a notification email to that local partner. The notification includes the intake information and requests the local partner complete a "compliance call" with the individual to confirm the information acquired during the intake, determine whether the bankruptcy chapter preliminarily selected is likely to meet the individual's objectives, set proper expectations, inform the individual of documents and information to gather in preparation for filing, answer any questions, and conduct a conflict check. At the conclusion of the compliance call, the local partner may approve or reject the assignment.
10. A local partner is someone who signed a Partnership Agreement with Upright and agreed to act with Upright and provide bankruptcy services to Upright's clients. The Partnership Agreement provides, in relevant part:
(emphasis in original).
11. In Chapter 13 cases, Upright receives all pre-petition fees ($1,500.00 where permissible), except for approximately $50.00 provided to the local partner to cover pre-petition expenses. The local partner receives post-petition fees paid through plan distributions by the Chapter 13 trustee.
12. The onboarding attorney's preliminary approval of the case file, which happens prior to the individual's consultation with a local partner, generates a retainer agreement for the onboarding attorney to send to the individual. Although the individual and local partner have not yet spoken, pursuant to the Partnership Agreement, this retainer agreement includes a local partner's digital signature. The retainer agreement is for bankruptcy services and is specific to the chapter that was preliminarily selected during the intake process.
13. The Attorney Client Legal Services Agreement for Chapter 13 Bankruptcy ("Retainer Agreement") signed in this case includes the following provisions:
15. The Retainer Agreement explains that if the individual cancels, he "would be charged for all services provided up to the date of cancellation" and Upright would
16. The Retainer Agreement also includes a cover page
(emphasis in original). The cover page is signed by Kevin Chern as Upright's Managing Partner.
14. Despite the appearance of a local partner's electronic signature on a Retainer Agreement, it specifies that the individual hired the firm — not a particular attorney — and the firm will immediately begin providing services and accrue billable time. The local partners and representative of Upright testified that they consider the individual to be a client of only the firm and no specific attorney. They do not consider the individual to be a client of the local partner until the partner completes the compliance call and agrees to accept the assignment.
15. The only evidence of conflict checks performed by Upright during the intake process includes running through Upright's database the individual's name and any creditors the individual can provide during the intake process. There was no evidence of a thorough conflict check at Upright involving the entities on the individual's full credit report or ultimately his creditor list. A conflict check is also conducted by the local partner prior to the compliance call to compare the names provided to Upright during the intake process to that local partner's firm or personal database. It is within the local partner's discretion/obligation to run another conflict check once he obtains the individual's full credit report. There was no indication of a mechanism employed to compare conflicts among the numerous local partners' databases.
1. In June 2018, Mr. Walker was unemployed and the Walkers anticipated a foreclosure proceeding involving their home. Mr. Walker researched debt relief options online and discovered Upright's website. He was interested in Upright's services because the firm offered a free consultation and assistance without requiring a down payment. Although Upright's website discloses the initial consultation is conducted by an SCC, Mr. Walker believed it would be provided by an attorney.
2. On June 18, 2018, Mr. Walker called the telephone number listed on Upright's website seeking more information. He
3. Ms. Harris informed Mr. Walker that before Upright could be retained, he must execute a Retainer Agreement and provide a down payment of $1,860.00
4. During the initial consultation, Mr. Walker asked for the contact information for his attorney. Instead, Ms. Harris informed him that his attorney would be in contact shortly and provided a telephone number to give creditors and a website for information regarding his case file. Ms. Harris assured Mr. Walker that he would be taken care of because Upright would be able to handle his issues once the Retainer Agreement was signed.
5. After the initial consultation, Mr. Walker was provided a Retainer Agreement for representation of he and his wife for a Chapter 13 bankruptcy for a total of $4,010.00, including filing fees. The Retainer Agreement specified that the Walkers were to pay the Upfront Fee before their bankruptcy petition would be filed and the remainder would be paid through Chapter 13 plan payments distributed by the bankruptcy trustee.
6. The Walkers reviewed and electronically signed the Retainer Agreement on June 18, 2018. The Retainer Agreement also included the electronic signature of local partner Rick Richardson, a SC attorney located in Prosperity assigned to the case by Upright. At the time the Retainer Agreement was signed, the Walkers had not spoken with a SC attorney. At no time during the intake procedure did any attorney or representative of Upright speak with Ms. Walker.
7. On June 20, 2018, Ms. Walker notified one of her creditors, Set Financial, that she was filing bankruptcy and provided Upright's contact information. That same day, a representative of Set Financial contacted Upright and was directed to a website where he was able to verify that Ms. Walker had retained Upright. The website did not provide the name of a specific attorney who represented Ms. Walker as of that date. Upon confirming Upright's retention, Set Financial ceased contact with Ms. Walker.
8. Although the Retainer Agreement was executed and the case assigned to attorney Richardson, he did not contact the Walkers to conduct the compliance call within the 48-hour timeframe provided in the Partnership Agreement. Mr. Walker left messages for Mr. Richardson that were not returned
9. No new Retainer Agreement was executed when the case was reassigned, even though Mr. Owen also authorized Upright to digitally affix his signature to retainer agreements. Mr. Owen and Mr. Richardson do not share a practice in South Carolina, work in separate towns, and independently represent consumer bankruptcy clients in addition to and outside of their professional relationships with Upright.
10. Although the Walkers signed the Retainer Agreement on June 18, 2018, and Mr. Owen was notified of the case reassignment on June 25, 2018, he did not contact Mr. Walker until July 2, 2018.
11. During the July 2, 2018, compliance call with Mr. Walker, Mr. Owen verified the information Mr. Walker provided Upright, obtained additional details regarding the couple's financial information, and discussed the differences between Chapters 7 and 13. Mr. Owen also informed Mr. Walker that he was located in Orangeburg and invited the Walkers to his office to help prepare for their filing. Mr. Walker voiced concerns over the distance and travel to Mr. Owen's office (approximately three-hours roundtrip).
12. At the conclusion of the compliance call, Mr. Owen determined the Walkers were appropriate candidates for Chapter 13 and approved the assignment. Although Mr. Owen spoke with Mr. Walker a couple more times, he never spoke with Ms. Walker.
13. Mr. Walker contacted Upright on August 14, 2018, to terminate their relationship. Mr. Walker wished to retain bankruptcy counsel elsewhere because he did not believe Upright adequately represented him since it took several weeks before he communicated with a SC attorney and his assigned local partner was several hours away from his residence.
14. That same day, Mr. Walker requested a refund of the $1,290.00 paid toward the Upfront Fee thus far by deductions from his bank account. Upright paused the payment plan and informed Mr. Walker that his request may take ten days to process.
15. On August 22, 2018, a representative of Upright informed Mr. Walker that he would receive a partial refund due to time spent by Upright working on the case. Upright stated, "[s]ome of that time may have been administrative in nature, for example, opening your file, setting up payments, fielding calls, corresponding with you, processing your cancellation request; and some may have been legal in nature, for example, speaking with attorneys, doing legal analysis." Upright provided an accounting of the services rendered, which indicated it had billed $776.50 in fees.
16. Galloway testified that because the firm typically charges a flat fee for services, the accountings are not contemporaneous time records, the time increments are standard times charged by Upright and are not representative of the actual time spent by the individual on the corresponding task, and most of the time entries are estimates of the actual time spent.
17. Despite the joint Retainer Agreement, the accounting states it is for services for Mr. Walker and does not reference Ms. Walker. It includes fees incurred for various clerical tasks billed by staff, associates, and a partner of Upright, without providing any identifying information for the timekeeper. The time entries are as follows:
Date Activity Name Time Time Time Hourly Amount (Staff) (Associate) (Partner) Rate Earned 6/18/2018 Added new contact 0.1 $125.00 $12.50 6/18/2018 Added new form of 0.1 $125.00 $12.50 payment 6/18/2018 Created a payment plan 0.1 $125.00 $12.50 6/18/2018 Submitted case file for 0.5 $125.00 $62.50 attorney review 6/18/2018 Updated case file 0.1 $250.00 $25.00 information 6/18/2018 Reviewed and approved 0.3 $250.00 $75.00 case (associate) 6/18/2018 Update case file 0.1 $250.00 $25.00 information 6/18/2018 Sent retention agreement 0.1 $250.00 $25.00 to client 6/18/2018 Updated case file 0.1 $250.00 $25.00 information 6/18/2018 Updated contact 0.1 $250.00 $25.00 6/18/2018 Sent retention agreement 0.1 $250.00 $25.00 to client 6/18/2018 Updated case file 0.1 $250.00 $25.00 information 6/18/2018 Reassigned case file to 0.1 $250.00 $25.00 new partner 6/20/2018 General 0.1 $125.00 $12.50 6/20/2018 Other 0.1 $125.00 $12.50 6/25/2018 Reassigned case file to 0.1 $250.00 $25.00 new partner 6/25/2018 General bankruptcy 0.1 $250.00 $25.00 information 7/2/18 General 0.1 $125.00 $12.50 7/2/2018 General bankruptcy 0.1 $125.00 $12.50 information 7/2/2018 General bankruptcy 0.1 $125.00 $12.50 information 7/2/2018 Reviewed and approved 0.7 $395.00 $276.50 case (partner) 8/14/2018 Paused payment plan 0.1 $125.00 $12.50 ________$776.50
18. The fees billed include charges for Mr. Walker's calls with Upright, including phone calls to check on the status of his case when he had not heard from the local partner, charges for reassignment of his case due to Upright's lack of contact, and for tasks related to billing and collection procedures.
19. Upright agreed to discount this amount by $250.00 for one hour of "associate time" and refund the Walkers $763.50 of the $1,290.00 paid. The term "associate" means an onboarding attorney or other attorney at Upright's Chicago office. Upright told Mr. Walker the refund could take up to thirty days.
20. Mr. Walker contacted Upright several times in September and October 2018 to check on the status of his refund. On October 2, 2018, he was informed by Kathleen Hohe, a Senior Client Services Executive, that there was a delay in issuing the refund because Upright no longer represented clients in North Carolina and Montana and had to first issue refunds for those clients. Mr. Walker was told his refund could take up to 45 business days.
1. Prior to the partial refund, the Walkers hired F. Lee O'Steen of Rock Hill as bankruptcy counsel and filed a petition for Chapter 13 relief on August 29, 2018. This adversary was filed on October 10, 2018, asserting fraud, breach of contract, and request for sanctions under § 105 and "other sections of the Bankruptcy Code."
2. On April 24, 2019, the parties entered a settlement agreement wherein the Walkers dismissed the claims for fraud and breach of contract in exchange for a refund of the amount Upright had retained.
3. Pursuant to the Stipulation of Dismissal, "[e]ach side shall bear their own costs and fees, including all attorney fees." The attached Settlement Agreement and Release stated, in relevant part:
3. After the Court denied Upright's motion for summary judgment on the sanctions claim,
5. With this direction regarding the Court's task in this case, the matter was returned to the bankruptcy court for trial of the remaining issues.
6. The trial was held on December 20, 2019. At trial, Upright's attempts to call into question Mr. Walker's credibility and Mr. O'Steen's intentions in filing this adversary proceeding were not persuasive.
1. Upright provided information about bankruptcy relief and the differences between Chapters 7 and 13 to a South Carolina resident through a person that was not a SC attorney, and that resident and his spouse made decisions based on the advice.
2. A Retainer Agreement, forming an attorney/client relationship, was executed based on conversations with and information provided by a person and/or persons who were not under the control or supervision of a SC attorney.
3. Upright "signed" the name of a SC attorney to a Retainer Agreement, but that attorney was not involved in the formation of the attorney/client relationship and was never involved in the clients' case.
4. Fees were collected from the clients' bank account before consultation with a SC attorney.
5. No SC attorney spoke with clients for two weeks after the Retainer Agreement was executed, and never spoke to one client subject to the Retainer Agreement.
6. Upright advised at least one creditor that it represented a client before any SC attorney was consulted or had counseled the clients.
7. Upon termination of the attorney/client relationship, the clients were billed by Upright for tasks performed by non-attorney staff, tasks that appear unnecessary, tasks that did not actually occur, that were for clerical purposes such as billing and reassigning cases, and for duplicate time entries.
8. Upright did not promptly refund amounts to the clients upon termination of the attorney/client relationship.
10. To receive the refund, clients had to agree to releases and to be responsible for their attorney's fees and costs incurred in the pursuit of that refund.
11. Adequate procedures are not in place to ensure Upright and its local partners are free from conflicts of interest, including whether any conflicts exist among the local partners or between Upright and local partners not assigned to the client in question.
This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a) and 1334(b), and pursuant to the district court's order returning the matter to this Court. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2). Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409.
Bankruptcy courts, like Article III courts, have an inherent power to impose sanctions against parties or attorneys that appear or practice before it. This power is derived from the court's need to "manage its own affairs so as to achieve the orderly and expeditious disposition of cases," and includes "the power to control admission to its bar and to discipline attorneys who appear before it." Chambers v. NASCO, Inc., 501 U.S. 32, 43, 111 S.Ct. 2123, 2132, 115 L. Ed. 2d 27 (1991) (quoting Link v. Wabash R.R. Co., 370 U.S. 626, 630-31, 82 S.Ct. 1386, 8 L.Ed.2d 734 (1962)). "The federal courts may and should hold attorneys appearing before them to recognized standards of conduct in their jurisdictions: `The sanctioning court must, however, hold attorneys accountable to recognized standards of professional conduct.'" In re Computer Dynamics, Inc., 252 B.R. 50, 64 (Bankr. E.D. Va. 1997), aff'd, No. 98-1793, 1999 WL 350943 (4th Cir. Jun. 1, 1999) (quoting In re Finkelstein, 901 F.2d 1560, 1564 (11th Cir. 1990)). In most cases, before the Court may use its inherent powers to issue sanctions, it must first find that the party or counsel acted in bad faith. See Chambers, 501 U.S. at 50, 111 S.Ct. 2123.
Section 105(a) also specifically grants bankruptcy courts the power to "issue any order ... necessary or appropriate to carry out the provisions of this title." It states that "[n]o provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process." 11 U.S.C. § 105(a). Bankruptcy courts have "broad authority" under § 105(a). See Marrama v. Citizens Bank of Mass., 549 U.S. 365, 375, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007). However, they may not use § 105(a) or their inherent authority to issue sanctions that contradict or override explicit mandates of other sections of the Bankruptcy Code. Law v. Siegel, 571 U.S. 415, 421, 428, 134 S.Ct. 1188, 1194-95, 1198, 188 L. Ed. 2d 146 (2014).
"[T]he Bankruptcy Code, both in general structure and in specific provisions, authorizes bankruptcy courts to prevent the use of the bankruptcy process to achieve illicit objectives." In re Kestell, 99 F.3d 146, 149 (4th Cir. 1996); see also In re Chicora Life Ctr., LC, 553 B.R. 61, 67 (Bankr. D.S.C. 2016) ("The provisions of the Bankruptcy Code, including the equitable powers of the bankruptcy court under § 105, are designed to protect the public interest." (citing Fisher v. Apostolou, 155 F.3d 876, 882 (7th Cir. 1998))). To that end, § 105(a) has been interpreted to instill
The Court reviewed and considered provisions of the Bankruptcy Code and Bankruptcy Rules raised by the Walkers at certain points in this adversary proceeding. See 11 U.S.C. §§ 329 & 526; Fed. R. Bankr. P. 2017. It also reviewed and considered other provisions of the Bankruptcy Code and Rules as well as other authorities governing attorneys permitted to appear before this Court and a myriad of South Carolina Rules of Professional Conduct not previously raised. See 11 U.S.C. §§ 527 & 528; Fed. R. Bankr. P. 9011; Local Civ. Rule 83.I.08 (D.S.C.), RDE Rule IV(B); Rules 1.4, RPC, Rule 407, SCACR (Communication), 1.5 (Fees), 1.7 (Conflict of Interest: Current Clients), 1.9 (Duties to Former Clients), 1.10 (Imputation of Conflicts of Interest: General Rule), 1.16 (Declining or Terminating Representation), 5.1 (Responsibilities of Partners, Managers, and Supervisory Lawyers), 5.3 (Responsibilities Regarding Non Lawyer Assistance), and 5.5 (Unauthorized Practice of Law; Multijurisdictional Practice of Law).
Even if the Court found Upright's pre-petition conduct toward the Walkers and its failure to promptly and accurately issue a refund are bad faith warranting a sanction to benefit the Walkers, the prior settlement terms include a release and provide the parties are responsible for their own attorney's fees and costs in connection with "the Claims" asserted in this adversary proceeding. Additionally, the pleadings regarding withdrawal of reference and the district court's order returning the matter to this Court define the remaining issues as a matter involving this Court's review of the conduct of the parties appearing before it, not an action to impose sanctions in the form of attorney's fees and damages to benefit one party. These facts lead the Court to conclude that this is not an instance where it should exercise its discretion under § 105(a) to impose monetary sanctions for attorney's fees, costs, or other alleged damages to compensate or for the benefit of the Walkers.
The foregoing does not negate the Court's ability to scrutinize the conduct of the parties and attorneys that appear before it to prevent an abuse of process. Upright filed approximately 865 bankruptcy cases in South Carolina in 2019 and continues to advertise its services to potential clients in this state. The impact of Upright's practices and procedures on this Court is greater because this number
