John E. Hoffman, Jr., United States Bankruptcy Judge.
This matter is before the Court in the Chapter 11 case of George A. Bavelis and the adversary proceeding he commenced against several parties, including Ted Doukas. Earlier in the case, Doukas sought to establish that one of his wholly owned companies, Quick Capital of Long Island Corp. ("Quick Capital"), held a $14 million secured claim against Bavelis's bankruptcy estate. But unbeknownst to Bavelis, Doukas had already caused Quick Capital to assign its interest in the note and security agreement on which the claim was based to Socal Capital LLC ("Socal"), a company in which Doukas had no interest. Gary A. Goldstein, counsel for Doukas and Quick Capital, admits that he became aware of the assignment soon after Doukas executed it.
Fully aware of the assignment, Goldstein, Doukas and Quick Capital (collectively, the "Respondents") engaged in a two-year long pattern of deception designed to conceal the assignment from Bavelis and the Court. They failed to produce the assignment in response to multiple document requests that should have elicited it, and they even sent Bavelis's counsel discovery responses stating that no responsive documents existed. The Respondents concede that Quick Capital was no longer a creditor post-assignment, yet they filed several documents with the Court — including a motion seeking the appointment of a Chapter 11 trustee — that identified Quick Capital as a creditor after Doukas executed the assignment. The Respondents then participated in a four-day hearing in which they attempted, without once mentioning the assignment, to establish that Quick Capital held a secured claim.
Attempting to defend their conduct, the Respondents raise a slew of arguments, but they all fall flat. Withholding material evidence and lying to a party and the
The Court has jurisdiction to hear and determine this matter under 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding. See 28 U.S.C. § 157(b)(2)(A) and (O).
On July 20, 2010 (the "Petition Date"), Bavelis filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code, and three months later he commenced this adversary proceeding. The Court confirmed Bavelis's Chapter 11 plan, which provides for 100% payment of all creditors' claims, on December 12, 2014.
The parties brought this matter before the Court by filing:
Bavelis seeks attorneys' fees and costs as well as punitive damages from the Respondents because they (a) failed to produce "clearly responsive documents in discovery that would have disclosed Quick Capital's true status as a non-creditor" and (b) filed documents that "included direct misrepresentations about Quick Capital's `creditor' status." Mot. at 1-2. In light of the allegations in the Motion, the Court entered an order (a) directing the Respondents to appear and show cause why they should not be sanctioned under § 105(a) of the Bankruptcy Code and the Court's inherent authority and (b) directing Goldstein individually to appear and show cause why he should not be sanctioned under 28 U.S.C. § 1927 (Adv. Doc. 604).
The Show Cause Hearing was held over the course of two days. The transcript of the first day of the Show Cause Hearing (Adv. Doc. 664) will be referred to as "Transcript I," and the transcript of the second day (Adv. Doc. 666) as "Transcript II."
In accordance with an order that was amended multiple times at the request of the parties, Bavelis filed proposed findings of fact and conclusions of law (Adv. Doc. 675), as did Goldstein (Adv. Doc. 676) and Doukas and Quick Capital (Adv. Doc. 677).
On December 3, 2010, Quick Capital filed a proof of claim asserting a secured claim in the amount of $1,667,791.10 based on a promissory note (the "Note") and a security agreement (the "Security Agreement") that Bavelis signed before the Petition Date. Claim 49-1. Several months later, Quick Capital filed an amended proof of claim based on the same loan documents, asserting a secured claim in the amount of $14 million (the "Claim"). Claim 49-2. The Court disallowed the Claim after finding, among other things, that Doukas fraudulently induced Bavelis to sign the Quick Capital loan documents. Bavelis v. Doukas (In re Bavelis), 490 B.R. 258, 284 (Bankr. S.D. Ohio 2013) ("Bavelis I"), aff'd, No. 13-8015, 2013 WL 6672988 (6th Cir. BAP Dec. 19, 2013), aff'd, 773 F.3d 148 (6th Cir. 2014). Bavelis I is final and non-appealable. Leading up to that decision, however, the Respondents engaged in the dishonest conduct detailed below, which came to light only after the decision was issued. And it is this dishonest conduct by the Respondents following the Petition Date that warrants the imposition of sanctions.
Doukas is the sole shareholder and only officer of Quick Capital. Tr. I at 35-36. On April 6, 2011, he signed a document in his capacity as the President of Quick Capital entitled "Assignment and Assumption Agreement" (the "Assignment") (Ex. 218),
There is no evidence that Doukas or Quick Capital had any ownership interest in Socal or Avatara or that Doukas or Quick Capital had any direct or indirect interest in a recovery on the Note. In fact, Doukas, Quick Capital and Socal later stipulated that the Assignment eliminated any interest that Quick Capital otherwise had as a creditor of Bavelis's bankruptcy estate. See Adv. Doc. 328 ¶ 13 ("With the assignment of the QC Loan Documents, Quick Capital has no claims against Mr. Bavelis or his estate and is not a party in interest as contemplated under Title 11 of the United State[s] Code for any purposes in the Chapter 11 Case."); see also Tr. I at 44. Goldstein likewise conceded that Quick Capital was not a creditor of the estate after it assigned the loan documents to Socal, Tr. I at 45-46, and he also admitted that Doukas — who had not even filed a proof of claim in Bavelis's bankruptcy case — personally would have recovered nothing on the Note post-Assignment. Tr. I at 46-47, 144-45. In short, as a result of the Assignment, neither Doukas nor Quick Capital was a creditor of Bavelis's estate, and thus neither party was entitled to any recovery on account of the Claim.
Goldstein had begun representing Doukas and Quick Capital in Bavelis's bankruptcy case and the adversary proceeding in January 2011. Tr. I at 28. While Goldstein contends that he did not represent Doukas and Quick Capital in connection with the execution of the Assignment, it is undisputed that he had become aware of the Assignment by early May 2011. Tr. I at 43. On or about May 5, 2011, Goldstein sent one of Socal's managers — John Stravato's son, Lennon Stravato — an engagement letter regarding Goldstein's representation of Socal in its capacity as the assignee of the Note and the Security Agreement (the "Engagement Letter") (Ex. 277). Goldstein stated in the Engagement Letter that he would continue to represent Quick Capital. The Engagement Letter did not disclose Goldstein's continued representation of Doukas, but it is undisputed that Goldstein indeed continued to represent Doukas personally. It is also undisputed that Goldstein did not disclose any conflicts of interest arising from his joint representation of Doukas, Quick Capital and Socal in the Engagement Letter. Tr. I. at 139-40, 145-46.
Goldstein acknowledged in the Engagement Letter that the Federal Rules of Bankruptcy Procedure might require filing a notice of the Assignment. Ex. 277 at 3; Tr. I at 48, 57. But Goldstein nonetheless advised Lennon Stravato, who was Goldstein's only contact at Socal, Tr. I at 140, to "withhold filing the [A]ssignment," because "[t]hat way [Bavelis and his attorneys] must deal with Ted [Doukas] and can't get into how much Socal paid for the
The strategy, of course, could not succeed if the Respondents revealed the Assignment to Bavelis or the Court. In view of this strategy, the Respondents no doubt realized that they could not keep Bavelis in the dark about the Assignment and at the same time respond truthfully to discovery requests pertaining to it. And they also undoubtedly knew that Quick Capital would need to mislead the Court if it was going to litigate the validity of the Claim when it no longer had an interest in it. The Respondents would have been further aware of the need to double down on their duplicity if Quick Capital was going to seek affirmative relief based on its purported standing as a creditor. It also would have been readily apparent to them that Doukas would need to participate in the scheme indirectly as the President and sole owner of Quick Capital. Not only that, but Doukas would need to be involved directly in the deception if he was going to personally respond to discovery requests that called for the production of the Assignment and if documents that identified Quick Capital as a creditor were going to be filed on his behalf personally. As detailed below, in the course of events that followed the Assignment, the Respondents chose deceit at every turn.
The Respondents' deceptiveness infected the discovery process. More than five months after Goldstein became aware of the Assignment, Quick Capital responded to an October 2011 document request by which Bavelis sought "all contracts or agreements, including but not limited to loan agreements, to which Quick Capital has been or is a party, for which the value exceeds $25,000 [since January 1, 2007]." Ex. 226 at 4. The Assignment is a document that clearly should have been produced in response to this request; it was an agreement to which Quick Capital was a party, it was entered into well after January 1, 2007, and the value to be received by Quick Capital far exceeded $25,000. Yet Quick Capital's response failed to mention the Assignment, stating only "[o]ther than the instant transaction [i.e., the Note and the Security Agreement] no documents." Id. This response was untrue and, given their knowledge of the Assignment, Goldstein and Doukas knew it was untrue. Also untrue was Quick Capital's response to Bavelis's request for documents relating to "assets held by Quick Capital anytime from January 1, 2007 to the present, the status of the assets, the disposition of the same, and the timing of the disposition." Id. The Quick Capital loan documents had been personal property assets held by Quick Capital since the time Bavelis signed the documents in June 2009, and Quick Capital had disposed of its interest in these assets by way of the Assignment. Yet Quick Capital responded to this request by stating "NO Documents." Id. at 5. Goldstein concedes that the Assignment was not produced in response to Bavelis's October 2011 document requests. Tr. I at 75-77.
Bavelis's counsel knew to ask about Socal because, in response to a question from Bavelis's counsel during a four-day hearing in April 2012 on Bavelis's objection to the Claim (the "Claim Objection Hearing") regarding "[any] claim [Doukas] assisted others in buying," Doukas identified the claim filed by Independent Bankers' Bank of Florida ("IBB") and Socal as its purchaser. Adv. Doc. 199 (Apr. 12, 2012 Tr.) at 1010-11. Bavelis therefore asked for "[a]ny form of agreement or contract entered into between or among" certain entities, including Socal and Quick Capital. Id. at 19; see also id. at 17. Although the Assignment clearly fit the bill — it was an agreement between Socal and Quick Capital — the Respondents again failed to identify or produce it in response to the June 2013 document requests. As he did with respect to the October 2011 document requests, Goldstein concedes that the Assignment was not produced in response to Bavelis's June 2013 document requests. Tr. I at 83. In short, Goldstein had been aware of the Assignment since at least May 2011, and he responded falsely to each of the document requests discussed above after that date. Furthermore, by the time Goldstein assisted Doukas and Quick Capital in responding to Bavelis's document requests in June 2013, he not only was aware of the Assignment, he admittedly had obtained a copy of the Assignment. See Tr. I at 42-43, 50, 80, 83-84, 90-91.
In sum, time and time again the Respondents failed to produce the Assignment in response to document requests that clearly called for its production, and they even falsely stated that no responsive documents existed. If the Respondents had responded honestly during discovery, then Bavelis would have known that motions and other documents submitted in the name of Quick Capital instead should have been filed by Socal. Armed with that
The Respondents filed multiple documents in which they failed to disclose the Assignment and even went so far as to make the false representation that Quick Capital was a creditor of the bankruptcy estate post-Assignment:
Goldstein admits that he improperly failed to identify Socal as the creditor in all of these documents. Adv. Doc. 676 at 4. And Doukas shares the blame for this failure. He received copies of all of the documents listed above from Goldstein. Tr. I at 59, 70-75. Further, Doukas was the
Additional evidence demonstrates that Doukas actively participated in the concealment of the Assignment. Along with Goldstein, Doukas personally participated in a full-day settlement conference with Bavelis at the office of Bavelis's counsel in January 2012 for the purported purpose of resolving Bavelis's objection to the Claim (the "Claim Negotiations"). Tr. I at 161-65. At no point during the all-day settlement conference did Doukas or Goldstein disclose the Assignment. Tr. I at 161-62. Doukas also testified over the course of the four-day Claim Objection Hearing and did so without once mentioning Socal's purchase of the Claim even though he specifically referenced Socal's purchase of the claim held by IBB. It is inconceivable that Doukas would have failed to disclose the Assignment during the lengthy Claim Negotiations and the four-day Claim Objection Hearing unless he was fully complicit in the effort to keep Bavelis and the Court from becoming aware of it.
According to the Respondents, Goldstein could have taken each of the documents discussed above, deleted any references to Doukas and Quick Capital, inserted "Socal" instead and then filed the documents on Socal's behalf. Adv. Doc. 366 at 5; Adv. Doc. 676 at 5, 8. In essence, the Respondents contend that Bavelis — and more importantly, the Court — should view this as a case of "no harm, no foul," because Socal would have conducted itself in Bavelis's Chapter 11 case in exactly the same manner that Doukas and Quick Capital did. But this argument will not wash. For even if the interests of Doukas/Quick Capital and Socal truly were identical, that would in no way justify the Respondents' lies to Bavelis and the Court.
Moreover, this argument fails because it ignores a critical fact that came to light during the Show Cause Hearing: Rather than being aligned, Socal's interest in Bavelis's bankruptcy and the interests of Doukas and Quick Capital were not the same.
First, Doukas asserted ownership interests in assets that Bavelis was attempting to recover — assets that might have been used to repay creditors such as Socal. By way of background, Doukas was the sole owner of R.P.M. Recoveries Inc. ("R.P.M.") and Nemesis of L.I. Corp. ("Nemesis"), entities that were also represented by Goldstein. Tr. I at 27. Before the Petition Date, Doukas had used R.P.M. and Nemesis to obtain assignments from Bavelis or Bavelis-owned entities of the membership interests in the following four limited liability companies: (1) George Real Estate Holdings, LLC; (2) FLOVEST, LLC; (3) BMAQ, LLC; and (4) GMAQ, LLC. The Court will refer to George Real Estate, FLOVEST, BMAQ, and GMAQ collectively as the LLCs.
Second, Doukas, Quick Capital and his other companies also were attempting to derail Bavelis's claims against them in the adversary proceeding for monetary damages. To avoid paying damages, Doukas and his companies would have to successfully defend against Bavelis's claims, or else obtain the appointment of a Chapter 11 trustee who might dismiss or settle the adversary proceeding in a manner favorable to them. But given that a judgment in favor of Bavelis would constitute another source of funds for the repayment of creditors, Socal and other creditors had an interest in Bavelis succeeding on his claims against Doukas and his companies.
Third, apart from the adversary proceeding, Doukas was working to maximize the claim of the Federal Deposit Insurance Corporation (the "FDIC") in a way that could have significantly diluted the recovery of Socal and other creditors of Bavelis. Before the Petition Date, Doukas filed a complaint with the Federal Reserve against Sterling Bank of Palm Beach County, Florida, a bank Bavelis had been a director of before it failed and was taken over by the FDIC. Bavelis I, 490 B.R. at 266, 307. In its capacity as the receiver for Sterling Bank, the FDIC filed a proof of claim in Bavelis's bankruptcy case stating that it was acting "to protect the insured depositors and creditors of failed depository institutions." Claim 52-2. Perhaps Doukas believed that his complaint made him a creditor of Sterling Bank and that he therefore would benefit personally from
Goldstein contends that Socal gave its consent to the actions he took on behalf of Doukas and his companies in the Bavelis bankruptcy case. Tr. I at 55. Of course, any consent that Socal gave would in no way justify the Respondents' lying to Bavelis and the Court. Moreover, each of the conflicting interests discussed above existed when Goldstein began representing Socal, yet Goldstein conceded that he made no disclosure of these conflicts to Socal at the time he filed the documents in the name of Doukas and Quick Capital. Tr. I. at 138-40, 145-46. Thus, even if it is true, as Goldstein contends, that Socal consented to the actions he took in the Bavelis bankruptcy case, Socal could not have given informed consent.
Motivated by his own financial interests, Doukas (and through him, Quick Capital) took several positions in this case that ran directly counter to Socal's interests as a creditor. For instance, in the Disclosure Statement Objection, Doukas and Quick Capital maintained that Bavelis should disclose whether Bavelis's execution of the Note and the Security Agreement was part of "a scheme on [his] part to divest himself of assets in order to defraud his other creditors." Ex. 224 (Doc. 243) at 6. If the fraudulent scheme suggested by Doukas and Quick Capital existed, it would have provided a basis for invalidating the Note as a fraudulently incurred obligation and unwinding the Security Agreement as a fraudulent transfer, thereby depriving Socal of any recovery on the Claim. Objecting to Bavelis's disclosure statement based on the suggestion that the Quick Capital loan documents were fraudulent are hardly steps that Socal — a creditor seeking payment on the Note — would have had an interest in taking.
Furthermore, Quick Capital argued for the appointment of a Chapter 11 trustee in part so that the trustee could reassess the merits of Bavelis's request to avoid the transfer of the membership interests in the LLCs. Ex. 227 (Doc. 280) at 10. But Socal's interests would have been served if Bavelis were to prevail in his attempt to unwind the transfers, because in that event the value of Bavelis's direct or indirect interests in the LLCs might become available to satisfy the claims of Socal and other creditors.
Doukas and Quick Capital took other positions that clashed with the financial interest of Socal. They stated in the Disclosure Statement Objection that "Federal Regulators closed Sterling Bank; that the losses sustained by [the] FDIC exceeded $50,000,000 ... and that the breach of fiduciary duty and gross negligence claims of the FDIC [against Bavelis] are non-dischargeable." Ex. 224 (Doc. 243) at 4. Quick Capital made essentially the same allegations in its Exclusivity Extension Objection, Ex. 229 (Doc. 282) at 5, and the Trustee Motion, where Quick Capital even alleged that Bavelis had "defrauded the
For their part, Doukas and Quick Capital were merely defendants in the adversary proceeding, a status that afforded them no standing to assert the arguments they made.
According to his bankruptcy counsel, Bavelis "was committed to getting out as quickly as possible of Chapter 11," so he was willing to attempt to resolve the dispute over the Claim "even though he believed that it was a claim that should have ultimately been disallowed." Tr. I at 166. Unfortunately, the Respondents' failure to disclose the Assignment thwarted Bavelis's efforts to reach a negotiated resolution of the Claim and caused him to incur unnecessary attorneys' fees engaging in those efforts.
As previously stated, the Claim Negotiations included a full-day settlement conference convened at the offices of Bavelis's litigation counsel in January 2012. Tr. I at 144. The Assignment of the Claim to Socal had taken place nine months earlier. Despite this, neither of the principals of Socal — Lennon Stravato and Ian Chen — attended the conference. Instead, only Doukas and Goldstein came to negotiate with Bavelis and his counsel. Conceding that neither Doukas nor Quick Capital had
The extent of the adversity between Doukas and Socal meant that the Claim Negotiations between Doukas and Bavelis had no chance of resolving the Claim. Doukas's goal in engaging in the Claim Negotiations with Bavelis would have been to retain the membership interests in one or more of the LLCs or to receive compensation for the transfer of those interests back to Bavelis and his affiliates. A settlement proposal that Goldstein sent to Bavelis's counsel following the conference reveals Doukas's purpose. The Claim Negotiations having failed, Goldstein sent the settlement proposal to Bavelis's counsel the next morning, stating that during "the 5 hour trip back to South Florida Ted [Doukas] and I had some time to really consider how to structure a settlement that may work for both of the parties...." Ex. K at 1. Goldstein sent a blind carbon copy of the proposal to Doukas, but did not copy Lennon Stravato or anyone else affiliated with Socal. Tr. I at 149. When asked why he did not copy Stravato, Goldstein said only: "I don't know. I don't know." Id.
Under the first paragraph of the settlement proposed by Goldstein and Doukas, Bavelis would have paid $2 million to Quick Capital, and under the second paragraph, Doukas's company Nemesis would have assigned its interests in three of the four LLCs — GMAQ, BMAQ and George Real Estate — back to Bavelis or his affiliates. Ex. K at 1. But Doukas would "keep" Nemesis's membership interest in FLOVEST. Id. at 1.
There is another reason that the failure to disclose the Assignment caused Bavelis to incur attorneys' fees unnecessarily. If the Respondents had disclosed the Assignment, Bavelis and his counsel would not have engaged in the Claim Negotiations with Doukas in the first place. After all, before the Petition Date, Doukas had led Bavelis to believe that he was negotiating with Bavelis's business partner, Qureshi, in order to resolve the disputes over the LLCs in a manner favorable to Bavelis, but Doukas instead perpetrated a scheme designed to deprive Bavelis of substantially all of his assets. See Bavelis I, 490 B.R. at 265, 275. Thus, Bavelis was well aware of the deception in which Doukas was inclined to engage when purportedly conducting negotiations on someone else's behalf. Given this, if the Respondents had disclosed the Assignment, Bavelis rightly would have resisted any suggestion that he negotiate with Doukas with respect to the Claim, and Bavelis would not have expended resources conducting the Claim Negotiations with Doukas. For all these reasons, the Respondents should compensate Bavelis for the fees and expenses his counsel incurred preparing for and participating in the Claim Negotiations.
More than two years after Doukas executed the Assignment — and following the four-day Claim Objection Hearing at which the Respondents again failed to disclose it — Bavelis's counsel discovered the Assignment and brought it to the attention of the Court. Bavelis and his attorneys learned of the Assignment in July 2013 when they obtained documents "relating to other litigation [in Tennessee] involving Doukas-related entities" in which Bavelis was not involved. Ex. 275 at 3; Tr. I at 158-59. Counsel for Bavelis then made the Court aware of the Assignment during a status conference in early August 2013. Ex. 241; Tr. I at 160. After Bavelis's counsel brought the Assignment to the Court's attention, Goldstein claimed that he had previously made Bavelis's counsel aware of it, an assertion denied by Bavelis's bankruptcy attorney, Stovall. Tr. I at 160. Finding Stovall's testimony to be highly credible — and, by contrast, Goldstein's mendacity to be rivaled only by Doukas's — the Court concludes that Goldstein never made Bavelis or his counsel aware of the Assignment. That is, Goldstein lied during the status conference when he represented that he previously had disclosed the Assignment to Bavelis's counsel.
As a result of the concealment of the Assignment, Bavelis was required to obtain an order substituting Socal for Quick Capital as the real party in interest with respect to Bavelis's objection to the Claim.
Under § 105(a) of the Bankruptcy Code, a bankruptcy court may "tak[e] any action or mak[e] 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). This section grants "broad authority... to bankruptcy judges to take any action that is necessary or appropriate to prevent an abuse of process." Marrama v. Citizens Bank, 549 U.S. 365, 375, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007). In addition, the United States Supreme Court has recognized the inherent authority of federal courts to sanction conduct that "abuses the judicial process." See Chambers v. NASCO, Inc., 501 U.S. 32, 44-45, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991).
In Chambers, the Supreme Court upheld a court's use of its inherent authority to sanction bad faith conduct in the form of "acts which degrade the judicial system," including "misleading and lying to the court." Chambers, 501 U.S. at 42, 111 S.Ct. 2123; see also Graham v. Dallas Indep. Sch. Dist., No. 3:04-CV-2461-B, 2006 WL 507944, at *4 (N.D. Tex. Jan. 10, 2006) ("It goes without saying that lying to the court constitutes bad faith." (citing Chambers, 501 U.S. at 42, 46, 50-51, 111 S.Ct. 2123)). For example, knowingly misrepresenting facts in a motion or other document is indicative of bad faith. See Enmon v. Prospect Capital Corp., 675 F.3d 138, 146 (2d Cir. 2012). A party also "shows bad faith by delaying or disrupting the litigation." Chambers, 501 U.S. at 46, 111 S.Ct. 2123 (quoting Hutto v. Finney, 437 U.S. 678, 689 n.14, 98 S.Ct. 2565, 57 L.Ed.2d 522 (1978)). And withholding material evidence disrupts and delays litigation. See First Bank of Marietta, 307 F.3d at 525 (finding bad faith where plaintiff withheld a document that it knew undermined its cause of action); accord Metz v. Unizan Bank, 655 F.3d 485, 489 (6th Cir. 2011).
By failing to produce the Assignment and stating that no responsive documents existed even though the Assignment was clearly responsive, the Respondents disrupted and delayed the course of the Bavelis bankruptcy case and the adversary proceeding. If the Assignment had been produced in October 2011 when Bavelis made the first document request that should have elicited it, then Quick Capital would not have been able to pursue the Trustee Motion. Furthermore, Bavelis would not have negotiated with Doukas regarding the objection to the Claim, which instead may well have been resolved through negotiations with Socal. The Respondents also delayed and disrupted Bavelis's bankruptcy case by making arguments that Doukas and Quick Capital, as noncreditors, lacked standing to make. See In re Royal Manor Mgmt., Inc., No. 08-50421, 2013 WL 6229151, at *3 (Bankr. N.D. Ohio Dec. 2, 2013) (finding that the filing of documents while lacking standing to do so delayed the proceedings), aff'd, 525 B.R. 338 (6th Cir. BAP 2015), aff'd, 652 Fed.Appx. 330 (6th Cir. 2016). Because the Respondents knew about the existence of the Assignment "when [they] made [their] misrepresentations to the [C]ourt" and Bavelis, their "repeated misrepresentations [are not] innocent," but instead show that they intentionally deceived Bavelis and the Court. Williamson, 826 F.3d at 303. In sum, the Court finds by clear and convincing evidence that the Respondents engaged in egregious, bad-faith conduct in multiple ways.
In addition to its inherent authority and its authority under § 105(a), the Court also has the authority to sanction Goldstein under 28 U.S.C. § 1927. See Royal Manor, 652 Fed.Appx. at 341-42. Section 1927 of the Judicial Code states:
28 U.S.C. § 1927.
Before his admission pro hac vice was revoked, Goldstein was an attorney admitted to practice before the Court. "Section 1927 sanctions are warranted
As a result of Goldstein's misconduct, Bavelis incurred additional attorneys' fees and expenses. And because his conduct "multiplie[d] the proceedings" in Bavelis's bankruptcy case and this adversary proceeding "unreasonably and vexatiously," Goldstein will be required to "satisfy personally the excess costs, expenses, and attorneys' fees reasonably incurred because of such conduct," 28 U.S.C. § 1927, in an amount to be determined. The amount "may include ... the costs, expenses, and attorneys' fees that [Bavelis] incurred in obtaining the award." In re Royal Manor Mgmt., Inc., 525 B.R. 338, 366 (6th Cir. BAP 2015) (quoting Norelus v. Denny's, Inc., 628 F.3d 1270, 1298 (11th Cir. 2010)), aff'd, 652 Fed.Appx. 330.
In an attempt to avoid sanctions for their bad faith conduct, the Respondents take a scattershot approach: They seek to escape liability by raising a plethora of arguments. But as explained below, the Respondents' arguments simply do not hold water.
The Respondents first argue that they cannot be held liable for withholding documents and lying during discovery because Bavelis did not seek discovery sanctions under Rule 7037 of the Federal Rules of Bankruptcy Procedure ("Bankruptcy Rule 7037"). Adv. Doc. 366 at 2; Adv. Doc. 367 at 1. But "[a] court's inherent authority to impose sanctions is not displaced by sanctions schemes available through statutes or court rules; rather, such inherent authority provides an independent basis for sanctioning bad-faith conduct in litigation." Royal Manor, 652 Fed.Appx. at 342 (citing Chambers, 501 U.S. at 46, 50, 111 S.Ct. 2123 and First Bank of Marietta, 307 F.3d at 518 n.14). And "Chambers should be read broadly to permit the [trial] court to resort to its inherent authority to sanction bad-faith conduct, even if the court has not expressly considered whether such conduct could be sanctioned under all potentially applicable rules or statutes." First Bank of Marietta, 307 F.3d at 514. True, a court "ordinarily should rely on the Rules rather than the inherent power." Chambers, 501 U.S. at 50, 111 S.Ct. 2123. "But if in the informed discretion of the court, neither the statute nor the Rules are up to the task, the court may safely rely on its inherent power." Id.
Bankruptcy Rule 7037 is not up to the task here. The Respondents argue that Bavelis should have sought redress under
The Respondents next contend that Goldstein's joint representation of Doukas, Quick Capital and Socal negates the Respondents' liability because "a timely disclosure of the Assignment likely would simply have resulted in Debtor litigating the[ ] same issues with SoCal." Adv. Doc. 366 at 5 & n.9 (stating that "[p]ursuant to the terms of the Assignment, Quick Capital is required to cooperate in the defense of the assigned claim and, accordingly, would have been required to continue [to] participate in this litigation regardless of when the Assignment was ultimately disclosed"); see also Adv. Doc. 367 at 1; Adv. Doc. 676 at 4-5; Adv. Doc. 677 at 50-52. This argument rings hollow for several reasons. To begin with, even if it were true that Socal would have taken the same approach to the bankruptcy case and adversary proceeding that Quick Capital took, this would not justify lying to Bavelis and the Court. Moreover, as the Court found above, given their conflicting financial interests, it is highly unlikely that Socal would have conducted itself in the manner Quick Capital did. Socal never filed a motion for the appointment of a Chapter 11 trustee, and Socal would not have made many of the arguments on which Doukas and Quick Capital relied in the other documents they filed. In addition, Goldstein made those arguments on behalf of Doukas and Quick Capital after failing to disclose to Socal the adversity that existed between it and Doukas and Quick Capital. For his part, Doukas knew about Goldstein's joint representation, Tr. I at 59, and, unlike Socal, Doukas no doubt was aware of how his and Quick Capital's interests were adverse to Socal's interests. Despite his knowledge of the adversity, Doukas permitted Goldstein to continue the joint representation and to take positions both in proceedings before the Court and in negotiations with Bavelis that were contrary to Socal's interest as a creditor. For all these reasons, Goldstein's joint representation of Doukas, Quick Capital and Socal provides no basis for the Respondents to escape the imposition of sanctions for misleading Bavelis during discovery
The Respondents also argue that, because the FDIC joined the Trustee Motion and First Southern Bank filed its own motion for the appointment of a Chapter 11 trustee, the Trustee Motion imposed no additional costs on Bavelis. Adv. Doc. 366 at 6; Adv. Doc. 367 at 1; Adv. Doc. 676 at 4. But there would have been nothing for the FDIC to join if Quick Capital had not filed the Trustee Motion in the first place, and the FDIC in fact filed its joinder only after its counsel received strenuous urging to do so from Goldstein. As for First Southern Bank, Goldstein conceded that it likewise filed its motion for the appointment of a trustee only after he encouraged its counsel to do so. Tr. I at 98-99. Like other parties in interest, the FDIC and First Southern Bank were operating under the false pretense created by the Respondents that Quick Capital had standing to seek the appointment of a Chapter 11 trustee. Had they known the truth — and the Trustee Motion itself would have revealed the truth if the Respondents had not once again lied when they filed it — the FDIC and First Southern Bank may well have declined to seek the appointment of a Chapter 11 trustee. The FDIC's and First Southern Bank's involvement thus do nothing to absolve the Respondents from sanctions liability for filing a motion seeking the appointment of a Chapter 11 trustee that contained the false statement regarding Quick Capital's status as a creditor.
Doukas attempts to place the blame on Socal and Goldstein by arguing that Socal alone had the obligation to file a notice that the Claim had been transferred and that, as Socal's counsel, Goldstein should have taken responsibility for filing the notice. Adv. Doc. 677 at 46-49, 52. For his part, Goldstein attempts to portray his conduct merely as a failure to cause Socal to file a notice of the Assignment, arguing that he should not be sanctioned for that error. Adv. Doc. 676 at 8-11. But the question of who had an affirmative duty to file a notice that the Claim had been assigned — or whether anyone did — is beside the point. The Respondents had a duty to refrain from lying to Bavelis and the Court, and they are being sanctioned for their misrepresentations regarding Quick Capital's creditor status, as well as for the withholding of responsive documents and lying about the existence of the Assignment in discovery, not for the failure to file a notice of the Assignment. As already discussed, the Respondents' scheme depended on Socal's following Goldstein's advice (which was uncovered in the unredacted copy of the Engagement Letter) that Socal refrain from filing a notice that the Claim had been transferred. But that in no way relieves the Respondents of liability for their own misconduct, including making misrepresentations to Bavelis and the Court.
Doukas also contends that Goldstein alone should be liable for the misrepresentations the Respondents made in the discovery responses because only he signed them. Adv. Doc. 677 at 52-53. But there are several reasons why this argument does not provide a reason to exonerate Doukas and Quick Capital from liability for failing to produce the Assignment. First, Doukas and Quick Capital retained Goldstein to represent them, and a "client, having chosen a particular attorney to represent him in a proceeding, cannot `avoid the consequences of the acts or omissions of this freely selected agent....'" McCurry v. Adventist Health Sys./Sunbelt, Inc., 298 F.3d 586, 595 (6th Cir. 2002) (quoting Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. P'ship, 507 U.S. 380, 397, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993)); see also Merritt v. Int'l Brotherhood of Boilermakers, 649 F.2d 1013, 1091 (5th Cir. 1981)
Doukas argues that Goldstein alone should be liable for the additional reason that he failed to disclose his conflict of interest. Adv. Doc. 677 at 52-53. But Goldstein's failure to disclose a conflict of interest is not a valid justification for Doukas's lying to Bavelis and the Court. Further, the evidence shows only that Goldstein failed to disclose the conflict of interest to Socal. Doukas knew what he and Goldstein were trying to accomplish in filing the Trustee Motion, the Disclosure Statement Objection and the Exclusivity Extension Objection — protect Doukas's interests — and he would have known that those interests were adverse to Socal's interest as a creditor. For all these reasons, the argument that Doukas and Quick Capital should be absolved from liability for sanctions because Goldstein failed to inform Socal of his conflict of interest is a non-starter.
In addition to joining those arguments made by Doukas and Quick Capital that do not point the finger at him, Goldstein makes four additional arguments, all devoid of merit. First, Goldstein contends that "[t]here is no allegation by [Bavelis] or even the Court that anything contained in the [documents Goldstein filed in the name of Doukas and Quick Capital] was factually inaccurate" — other than the allegation that Quick Capital was a secured creditor. Adv. Doc. 676 at 3. The Court need not decide whether this contention is accurate. For even if the documents contained factually correct statements, such statements could not possibly justify representing to the Court that Quick Capital was a secured creditor when it was not.
Second, Goldstein relies on the fact that he withdrew the Trustee Motion and the other documents he filed in Doukas's and Quick Capital's name, helped Socal obtain
Third, Goldstein attempts to avoid being sanctioned by arguing that Bavelis benefitted from the Respondents' conduct in that "[t]he Bavelis estate and Mr. Bavelis personally settled the undisputed $1,280,000 IBB claim ... for $625,000 ... simply by naming SoCal as a defendant in the adversary case, and alleging improper conduct relating to the claims procedure." Adv. Doc. 676 at 7. Goldstein cites no authority for why this should absolve him of liability for his misbehavior, and there in fact is contrary authority. See Derzack v. Cnty. of Allegheny, 173 F.R.D. 400, 415 (W.D. Pa. 1996) ("[C]ounsel argued to the Court ... that `this is a Godsend to the Defendants' because they will now be able to use plaintiffs' schemes and deception against them to impeach their credibility. `Godsends' like this, litigants and the Court can do without."), aff'd, 118 F.3d 1575 (3d Cir. 1997). As did the district court in Derzack, this Court "rejects [the] clever `spin' on the prejudice issue as pure sophistry." Id. Bavelis's settlement with Socal in no way serves to mitigate the Respondents' liability for their role in misleading Bavelis and the Court.
Fourth, as he has done before, Goldstein again pleads inadvertence,
Goldstein's suggestion that his misbehavior "[a]t most ... arise[s] to a mistake," Adv. Doc. 676 at 12, is belied by (1) the sheer number of misrepresentations he made to Bavelis and the Court, (2) the extended period of time over which he made them, (3) the unredacted copy of the Engagement Letter — in which Goldstein counseled Socal not to disclose the Assignment and stated his belief that concealment would be strategically advantageous, and (4) Goldstein's well-established penchant for untruthfulness, as shown not only by his interaction with Bavelis and the Court, but also by his dealings with other parties in this case, most notably IBB and its counsel, Sarah Pape. In short, the record is replete with evidence that Goldstein intended to deceive Bavelis and the Court.
As already discussed, following the assignment to Socal, Goldstein filed document after document identifying Quick Capital as a secured creditor of Bavelis's bankruptcy estate. Those documents include the Disclosure Statement Objection, the Trustee Motion, the Exclusivity Extension Objection, a response to Bavelis's motion requesting that the Court bifurcate his objection to the Claim, two objections to the proofs of claim of certain third parties, and a motion for summary judgment. Again, one or two lapses by Goldstein might be chalked up to mistake, but not seven filings made over a two-year period (from July 2011 until Bavelis's counsel discovered the Assignment and brought it to the attention of the Court in August 2013). Then there is the smoking gun — the unredacted copy of the Engagement Letter, in which Goldstein advised Lennon Stravato (Goldstein's contact at Socal) that Socal should not file a notice of the Assignment and explained what Goldstein saw as the strategic benefits of concealing the Assignment. This also gives the lie to Goldstein's claim that his discovery violations and misrepresentations to Bavelis and the Court were merely unintentional lapses.
Finally, Goldstein's propensity for lying without reservation — made manifest by his dealings with IBB and Pape — also counsels strongly in favor of rejecting his facile suggestion that he did not act with intent to deceive. The evidence of the communications and course of dealing between Goldstein and Pape on behalf of their respective clients was offered by Bavelis's counsel in order to attempt to show that Doukas, despite his protestations to the contrary, was actually a secret principal of Socal. While the evidence adduced by Bavelis's counsel at the Show Cause hearing fell short of establishing that Doukas held an interest in Socal, it did lay bare the level of mendacity that Goldstein displayed in his communications and dealings with other parties in interest. This evidence is summarized below:
The upshot is that in his dealings with IBB's counsel Goldstein displayed a breathtaking disregard for the truth. He had no hesitancy in lying to advance the interest of his clients. Though he had engaged in a lengthy lobbying campaign aimed at convincing the FDIC to file a huge claim in the Bavelis bankruptcy case, Goldstein professed surprise when the FDIC ultimately filed its $30 million claim, describing it as a "game changer." Yet, in reality, as explained above, the FDIC's filing of a $30 million claim in January 2012 certainly would have come as no surprise to the Respondents, because the filing was the intended result of their nearly year-long efforts. The FDIC claim was a "game changer" only in the sense that Goldstein saw it as potential leverage Doukas could use to reduce the purchase price of the IBB claim.
An award of attorneys' fees and expenses jointly and severally payable by all of the Respondents is an appropriate sanction for their bad-faith litigation conduct. See Chambers, 501 U.S. at 45-46, 111 S.Ct. 2123. Under § 1927, the Court also may separately order Goldstein to pay the excess costs, expenses, and attorneys' fees Bavelis reasonably incurred because of such conduct.
In addition, the Court may award Bavelis punitive damages in an amount to be determined. See Adell v. John Richards Homes Bldg. Co. (In re John Richards Homes Bldg. Co.), 552 Fed.Appx. 401, 414 (6th Cir. 2013) ("In this Circuit ... bankruptcy courts appear to have some authority to award punitive damages for abuse of process and fraud on the court under both § 105(a) and the court's inherent powers."). But while bankruptcy courts have "authority to award mild noncompensatory
For the reasons explained above, the Court determines that sanctions shall be imposed against all of the Respondents under § 105(a) and the Court's inherent authority and against Goldstein under § 1927. The amount of attorneys' fees for which the Respondents shall be liable will be determined at a later hearing. In addition, during the same hearing, the Court will assess the amount of punitive damages, if any, that it will award.
The Court will hold a status conference in this matter on
