SUZANNE H. BAUKNIGHT, Bankruptcy Judge.
On June 24, 2015, the Court entered an order directing James H. Price and Chadwick B. Tindell, who were at that time counsel for Debtors, to appear and show cause why they should not be sanctioned, including but not limited to a directive to disgorge fees, pursuant to 11 U.S.C. § 105(a) and Rule 9011 of the Federal Rules of Bankruptcy Procedure ("Show-Cause Order"). [Doc. 158.] The Show-Cause Order was issued in response to a number of procedural and substantive errors in violation of the Local Rules of the Bankruptcy Court for the Eastern District of Tennessee ("E.D. Tenn. LBR"), the Administrative Procedures for Electronic Case Filing for the United States Bankruptcy Court for the Eastern District of Tennessee ("ECF Administrative Procedures"), and the Federal Rules of Bankruptcy Procedure committed by Mr. Price and Mr. Tindell in their representation of Debtors. The final straw resulting in issuance of the Show-Cause Order was the alarming testimony of Debtor Samuel K. Morton ("Mr. Morton") during the trial held on June 23, 2015, on the Motion of Bank of Camden for Relief From the Automatic Stay ("Motion for Stay Relief") that Debtors' counsel had not obtained, as of that date, Debtors' original signatures on their bankruptcy petition, statements, or schedules that were filed in March 2015, or on any of the subsequently filed amendments.
An evidentiary hearing on the Show-Cause Order was held July 13, 2015,
This matter arises out of a litany of problems in this Chapter 11 case that was filed on March 24, 2015. The major impetus for this sanctions proceeding against Debtors' initial counsel were revelations that they had filed documents bearing the electronic signatures of Debtors when Debtors had not actually signed any documents and counsel's piecemeal disclosure of significant connections with Debtors, including pre-petition debt owed by Debtors and/or their related entities in an amount exceeding $150,000.00 and potential preferential payments made by Debtors to counsel in the amount of $6,000.00, only after such connections were unexpectedly discovered by the United States Trustee or the Court. The following facts catalogue by category the series of problems with counsel's disclosures and counsel's competency.
On April 2, 2015, Mr. Price and Mr. Tindell
After Bank of Camden, now Apex Bank,
The passive notice deadline on the Amended Application to Employ expired on April 27, 2015; however, because of the numerous problems in the case and because the cash collateral issue raised by Apex Bank had not been resolved, the Court noticed the Application to Employ, the response filed by Apex Bank, and the Amended Application to Employ for hearing on May 21. One week after the hearing was noticed, Mr. Morton testified at the meeting of creditors that Debtors owed pre-petition legal fees to the Firm in the amount of $150,000.00. As a result, notwithstanding that the objection time had passed, the United States Trustee filed an objection to the Amended Application to Employ, notifying the Court of the previously undisclosed pre-petition debt, which violated the requirements for disclosure of all connections with debtors contained in Rule 2014(a) of the Federal Rules of Bankruptcy Procedure, and arguing that Mr. Price, Mr. Tindell, and the Firm were not, in fact, disinterested under 11 U.S.C. § 327(a), as defined by 11 U.S.C. § 101(14).
The day before the May 21 hearing, in response to the United States Trustee's objection to counsel's employment filed nine days earlier, Debtors filed a third iteration of the Application to Employ ("Second Amended Application to Employ"), disclosing the existence of the pre-petition legal fees owed to the Firm by Debtors and their closely-held limited liability companies: Jubilee Center, LLC; Jubilee Banquet Facility, LLC; Morton Construction, LLC; and S.R. Morton Properties, LLC. The Second Amended Application to Employ declared that all of the outstanding pre-petition attorneys' fees had been waived by the Firm with respect to Debtors and their related entities. In the Amended Unsworn Declaration Under Penalty of Perjury ("Amended Declaration") submitted in support of the Second Amended Application to Employ, Mr. Price stated that "[p]rior to the filing of this case, certain attorneys [sic] fees were owed to the Firm by the Debtors and/or entitles related to the Debtors. All prepetition attorneys [sic] fees owed by the Debtors and entities related to the Debtors have been waived and are no longer due or payable." [Doc. 78-2.] The Amended Declaration did not contain Mr. Price's original signature as required by section III.A.2 of the ECF Administrative Procedures, and he was later ordered to cure the deficiency.
During the June 23, 2015 trial on Apex Bank's Motion for Stay Relief, Mr. Morton testified that Debtors had been making regular monthly payments of $2,000.00 to the Firm in the year preceding the bankruptcy filing, including the ninety-day preference period. These payments, however, were not disclosed in Debtors' Statement of Financial Affairs, in any of the applications to employ counsel, or in any of Mr. Price's declarations filed in connection with the applications to employ. Based on this testimony, the Court entered an order on June 25, 2015, directing Mr. Price and Mr. Tindell to appear and show cause why they "should not be disqualified as counsel for Debtors in this case for an actual conflict of interest under the Tennessee Rules of Professional Responsibility arising due to an apparent preferential payment made to them by Debtors and/or misrepresentation concerning their disinterestedness as required by 11 U.S.C. § 101(14)." [Doc. 161.]
Subsequently, Debtors filed an Amended Statement of Financial Affairs on June 29, 2015, disclosing, inter alia, that between January and March 2015, they had paid $2,000.00 monthly to the Firm. As directed by the Court because the Amended Declaration did not bear his signature, Mr. Price filed his Second Amended Declaration, also including the information that had been revealed in testimony about Debtors' pre-petition payments to counsel, stating "[o]ut of an abundance of caution, the Firm states that within ninety (90) days of the filing Debtors made three (3) monthly payments to the Firm totaling Six Thousand Dollars ($6,000.00). The payments were the same monthly payments made for more than one (1) year prior to filing the Petition in this case and were partial payments and in the ordinary course for new value for the work being performed contemporaneously by the Firm for services unrelated to this proceeding." [Doc. 176 at ¶ 3.]
On June 30, 2015, the United States Trustee filed a brief in support of the Court's show-cause orders concerning disqualification and sanctions, including the disgorgement of fees, asserting that both were appropriate because (1) Mr. Price and Mr. Tindell had twice failed to disclose significant connections with Debtors that exposed the existence of either actual or potential conflicts of interest and (2) through their repeated non-compliance with the procedural rules and filing requirements, both attorneys had failed to demonstrate the requisite competence and care required to represent Chapter 11 debtors.
Debtors' bankruptcy case was initiated when Mr. Price filed, on behalf of Debtors, the Voluntary Petition, bearing Debtors' electronic signatures "under penalty of perjury that the information provided in this petition is true and correct." [Doc. 1.] The next day, Mr. Price filed Debtors' Statement of Social Security Number(s), List of Creditors Holding 20 Largest Unsecured Claims, and Verification of Creditor Matrix, each of which was required to have been (but was not) filed with the Voluntary Petition commencing the case and each of which contained Debtors' electronic signatures "under penalty of perjury that the foregoing is true and correct." Two days after filing the Voluntary Petition, Mr. Price filed both Debtors' Exhibit D — Individual Debtor's Statement of Compliance With Credit Counseling Requirement; the Statement of Financial Affairs; Schedules B, D, E, F, G, and H; and the Certification of Notice to Consumer Debtor(s) Under § 342(b) of the Bankruptcy Code, all of which contained Debtors' electronic signatures under penalty of perjury. Mr. Price filed the requisite Certificates of Credit Counseling for both Debtors the following day.
While being examined by counsel for Apex Bank during the June 23 trial on the Motion for Stay Relief, Mr. Morton testified that he and Mrs. Morton had not actually signed hard copies of their bankruptcy petition, statement, schedules, or any of the subsequent amendments. During the lunch recess of the hearing, the Court entered an order formalizing its oral direction to Mr. Price and Mr. Tindell before the recess to produce the original documents with Debtors' "wet" signatures when the trial reconvened for the afternoon. At the beginning of the afternoon court session, Mr. Tindell advised the Court that there were no such documents to be produced.
In response to this information, the Court directed that Debtors were required to sign their statements, schedules, and declarations before the close of court that day to cure the deficiency, which they did. Because counsel had not obtained Debtors' signatures on documents requiring actual signatures before the filing of such documents bearing electronic signatures, on June 24, the Court entered an order rescinding application of Section III.A.3 of the ECF Administrative Procedures with respect to Mr. Price and Mr. Tindell, such that they were no longer permitted to file any documents in Debtors' case that did not contain Debtors' original signatures rather than electronic signatures.
From the outset, counsel's handling of this case created problems for the Court. Because the Summary of Schedules; Official Form B22B; Schedules C, I, and J; and the Payment Advices Statement were not filed with the Petition, the Court entered an Order Regarding Certain Unfiled Documents on March 27, 2015, directing Debtors to file the missing documents by April 7, and advising that the failure to do so "will constitute cause for dismissal of this case, see 11 U.S.C. §§ 521(i), . . . 1112(b) and (e) . . ., and the court may, without further notice, enter an order summarily dismissing this case." [Doc. 22.] Also on March 27, the clerk's office sent a memorandum to Mr. Price advising him to file the statement disclosing his compensation within fourteen days from the date the petition was filed. Schedules C, I, and J; Official Form B22B; the Summary of Schedules; the Statement Regarding Payment Advices or Other Evidence of Payment; and the Disclosure of Compensation of Attorney for Debtors were subsequently filed on April 7, which was the deadline set forth in the March 27 order and clerk's memorandum.
At the meeting of creditors in early May, the United States Trustee directed Debtors to amend their schedules and provide other required information. On June 1, the United States Trustee filed the Motion of United States Trustee to Dismiss or Convert or, in the Alternative, Compel Future Compliance ("Motion to Dismiss"), stating that Debtors (1) had not timely filed the monthly operating report required by E.D. Tenn. LBR 3015-2 for April 2015; (2) had not timely filed a Substantial/Controlling Interest Report as required by Rule 2015.3 of the Federal Rules of Bankruptcy Procedure and as requested in an email to counsel and again at the meeting of creditors; (3) had not amended their Statement of Financial Affairs and schedules to correct and include information as requested during the meeting of creditors; and (4) had not provided the United States Trustee with bank account statements as requested at the initial debtor conference, again in two separate emails, and once more at the meeting of creditors. The United States Trustee also filed an objection to exemptions on June 1, arguing that Debtors' claimed exemptions under Tennessee Code Annotated § 26-2-103 exceeded the amounts allowable under the law.
Less than thirty minutes before the scheduled hearing on the Motion to Dismiss on June 18, Debtors' counsel filed the Substantial/Controlling Interest Report (consisting of nineteen pages) and the April and May monthly operating reports (consisting of 121 and 141 pages, respectively).
On June 22, Debtors' counsel collectively filed "amended" Schedules A, B, C, D, E, and F. By order entered June 24, these documents were stricken because they did not comply with (1) E.D. Tenn. LBR 1009-1(a) requiring that all amended schedules be verified by the debtor and include the word "amended" in the title; (2) E.D. Tenn. LBR 1009-1(b) requiring a certificate of service on the United States Trustee and any affected entity, and on all creditors when Schedule C is amended; and (3) E.D. Tenn. LBR 1009-1(c) requiring payment of a $30.00 fee to amend any schedule adding additional creditors or changing a creditor's classification and requiring service on all affected creditors and the United States Trustee. The $30.00 fee for the stricken "amended" schedules was paid on June 26. On June 30 — only after the Court ordered Debtors to sign all documents that previously had been filed with their electronic signatures and barred Mr. Price and Mr. Tindell from filing documents bearing Debtors' electronic (as opposed to original) signatures — Debtors' counsel filed the Amended Statement of Financial Affairs signed by Debtors and Amended Schedules A, B, C, D, E, F, G, and H, along with an Amended Summary of Schedules and an Amended Declaration Concerning Debtor's Schedules, all of which bore Debtors' original signatures. Once again, the required $30.00 filing fee was not paid at the time of the filing; however, it was paid on July 2.
The United States Trustee and the Court were not the only entities inconvenienced by Debtors' counsel's errors. Two days after the United States Trustee filed his Motion to Dismiss, the City of Knoxville filed a motion to compel, asking the Court to order Debtors to amend Schedules D and E concerning the City's claim. This motion was set for hearing on July 2; however, the City of Knoxville withdrew it on June 22, after Debtors filed the "amended" schedules that were subsequently stricken on June 24.
On April 3, Debtors filed a motion to use the cash collateral of Apex Bank and requested "an emergency hearing" for April 9; however, the notice of hearing legend appearing on the face of the motion gave the address for the clerk's office rather than the courtroom, requiring the deputy clerk to edit the Court's docket text to reflect the correct information. At the April 9 hearing, the Court directed Debtors' counsel to submit an agreed order providing for the interim use of cash collateral; extending the "authorized" period to the close of business on May 21, 2015; and setting a final hearing on the motion for May 21, with objections to be due by May 14. No such order was submitted until late on May 14 — i.e., not until the day after the Court entered an order directing that an appropriate order be uploaded within five days.
During this same time period, Debtors and United Cumberland Bank were negotiating use of cash collateral,
United Cumberland Bank filed a third motion for entry of agreed interim cash collateral order on June 3, and an agreed order was entered on June 8 that, inter alia, (1) provided for Debtors' interim use of United Cumberland Bank's cash collateral; (2) set the final hearing for June 18, with any objections to be filed no later than June 17; (3) required the timely filing of all monthly operating reports with the failure to do so being cause for dismissal; and (4) directed Debtors' counsel to serve the agreed order on the twenty largest creditors, all parties in interest having requested notice, and as required by E.D. Tenn. LBR 2002-1(b), all secured creditors, the United States Trustee, the United States Attorney, and the United States on behalf of the Internal Revenue Service, with counsel to certify such within three days. Debtors' counsel, however, did not certify service of the June 8 agreed order, and on June 19, the Court entered an order directing Debtors' counsel to appear and show cause why they had not complied with the agreed order. The certificate of service was not filed until July 2, after the show-cause hearing.
On June 19, Debtors filed two documents entitled "Combined Application by Debtors-in-Possession for Approval of Employment of Professionals and to Shorten Notice Time" through which they sought permission to employ Robert Webb and Charles Smith, respectively, as expert witnesses for the June 23 trial on Apex Bank's Motion for Stay Relief. Both applications improperly included a one-day passive notice not authorized by E.D. Tenn. LBR 9013-1 and an identical statement that Debtors' counsel was unable to meet with each expert before Thursday, June 18, to verify his assistance at trial. This statement, however, was contrary to the trial testimony of Mr. Smith, who testified that he was contacted by Mr. Price early in the week and had worked on very little else since the preceding Tuesday.
On July 2, 2015, along with a number of other matters, including the continued Motion to Dismiss, the Court held its initial show-cause hearing on the failure to file a certificate of service as to the Interim Agreed Order with United Cumberland Bank, the failure to comply with court orders, and the conflict-of-interest issues. Concerning the certificate of service, Mr. Price assured the Court that it would be filed that day, and it was, in fact, filed on July 2. Additionally, because Debtors had filed an application to employ different counsel to represent them in the bankruptcy case on June 30, the conflict-of-interest issues were likewise resolved. With respect to counsel's failure to comply with court orders, at their request for additional time and to accommodate Debtors and the parties in interest, the Court scheduled an evidentiary hearing for July 13.
At 4:55 P.M. on Friday, July 10 (i.e., at nearly the eleventh business hour before the show-cause hearing set to begin at 1:30 P.M. on Monday, July 13), Mr. Price, Mr. Tindell, and the Firm filed a Response to Show Cause Order in which they apologized to the Court, acknowledged that errors were made, pointed out that they had suggested to Debtors that they retain new counsel to correct the conflict-of-interest problems, and stated that they had worked to cure all deficiencies. The Response to Show Cause Order also stated that the Firm had agreed to disgorge the entire $15,000.00 retainer received from Mrs. Morton's mother
At the July 13 evidentiary hearing, both Debtors testified in response to questions by the Court. Mrs. Morton testified that she saw their bankruptcy petition before it was filed because Mr. Morton brought it home, and she discussed it with him. She, however, authorized the filing of the case on her behalf over the phone or through her husband; she did not go the offices of the Firm before the case was filed; and she did not sign any of her bankruptcy documents before the case was filed. Similarly, with respect to documents filed after the case was filed, including the monthly operating reports and valuation report, Mrs. Morton testified that she also saw and read through those documents before they were filed. When questioned by the Court about the Firm's pre-petition representation of Debtors and their businesses and the fees paid to the Firm, Mrs. Morton's testimony was similar to Mr. Morton's: the payments made to the Firm totaling $6,000.00 were not a retainer but were for past debt owed to the Firm by Debtors for the Firm's representation of them in two state-court lawsuits, the first a land/contract dispute between a Mr. Houston and Debtors and the second a dispute with Tennessee State Bank dating back to 2008 concerning property owned by Morton Properties, LLC. She also testified that the Firm does not represent her mother, Dixie Bopp, who paid the $15,000.00 retainer on Debtors' behalf. She testified that she and Mr. Morton had been paying the same amount per month for some time, and it was her understanding, prior to the bankruptcy, that although they were making monthly payments, if they received an award in the Houston lawsuit, it would be used to pay the debt to the Firm in full. Mrs. Morton further testified that due to the hurried nature of the filing and the stress of filing, she did not notice that the debt owed to the Firm was not listed in Debtors' initially filed bankruptcy schedules even though Debtors knew they owed the debt of approximately $150,000.00. She also testified that Debtors did not have any discussions concerning payment of the claim to the Firm after the bankruptcy case was filed, and she and Mr. Morton were unaware that it created a problem that the Firm was one of their creditors. Finally, Mrs. Morton testified that the Firm had agreed to waive its claim against Debtors at the end of the meeting with the United States Trustee.
Mr. Morton testified that the Firm had represented him for several years in connection with the lawsuits with Mr. Houston and Tennessee State Bank and in negotiations with creditors and tenants. He testified that he had not paid the Firm a retainer; that the $150,000.00 debt arose from both lawsuits and all prior work done by the Firm; and that the monthly payments were for ongoing services, explaining that he had been making the payments for approximately two years pursuant to an agreement to make the monthly payment, which was intended for both past and current services.
At the close of Debtors' testimony, the Court asked questions of Mr. Price and Mr. Tindell, asking first whether the Firm had retainer agreements with Debtors and/or any of their wholly-owned limited liability companies. In response, Mr. Price answered that the Firm had represented Debtors and their companies in many matters over many years and that the approximately $150,000.00 debt arose from all of those matters, including the state-court lawsuits with Mr. Houston and Tennessee State Bank; lawsuits filed against Mr. Morton, Morton Construction, and/or one of his other companies by vendors and/or contractors; and lease/tenant disputes. Mr. Price stated that approximately three years ago, services rendered for all matters and issues were consolidated into one quarterly bill at Mr. Morton's request, and that Debtors began paying the $2,000.00 per month before the Firm undertook the Houston and Tennessee State Bank lawsuits approximately two years ago, although the agreement was never memorialized in writing. Mr. Price also insisted that the monthly payments were for current services because the services performed each month on Debtors' behalf, exclusive of the bankruptcy matters, exceeded $2,000.00. When asked why or how it did not occur to him that the outstanding debt owed to the Firm did not need to be disclosed during the preparation of the statements and schedules or the application to employ and accompanying declaration, Mr. Price stated that in the haste to get the bankruptcy case filed, he and his Firm relied on Debtors to complete the information in the statements and schedules and did not conduct an independent investigation to ensure their debt was included. Mr. Price also agreed that neither he, Mr. Tindell, nor the Firm would seek fees for representation of Debtors in this case.
At the close of the evidentiary hearing, the Court directed Mr. Price and Mr. Tindell to provide the Court with copies of any and all retainer agreements with Debtors and/or their limited liability companies, as well as copies of all billing statements sent to Debtors within the last year, along with a copy of the most recent statement reflecting the total debt owed to the Firm by Debtors that had been waived by the Firm. Those documents were filed on July 17 and are restricted from public access.
The Court issued the Show-Cause Order pursuant to 11 U.S.C. § 105(a), authorizing it to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code]," and Rule 9011 of the Federal Rules of Bankruptcy Procedure which states, in material part:
Fed. R. Bankr. P. 9011 (footnote omitted).
The Court also looks to the local rules of this Court, which provide:
E.D. Tenn. LBR 9011-4. Further, section III.A.3 of the ECF Administrative Procedures makes clear:
(Emphasis added.) Paragraph 4 of section III.A also relates the requirements to Rule 9011: "Electronic filing of a verified document by an attorney is a representation for the purposes of Fed. R. Bankr. P. 9011 that the person or persons required to sign and verify the document did in fact sign and verify it before it was filed." Finally, section II.D.1 of the ECF Administrative Procedures provides that failure to comply with the procedures may result in termination of an attorney's privileges to use ECF and/or sanctions by the Court.
Attorneys and other professionals employed in a bankruptcy case pursuant to 11 U.S.C. § 327(a) may not "hold or represent an interest adverse to the estate" and must be "disinterested persons." Correspondingly, 11 U.S.C. § 328(a) imposes a reasonableness standard on the "terms and conditions of employment" and compensation to be sought. Section 329 requires attorneys to file a statement of compensation paid within the preceding year or agreed to be paid in connection with the bankruptcy representation as well as the source of the compensation. Finally, "reasonable compensation for actual, necessary services rendered . . . and reimbursement for actual, necessary expenses" is governed by 11 U.S.C. § 330.
Rose Hill Bank v. Mark J. Lazzo, P.A. (In re Schupbach Invs., LLC), 521 B.R. 449, 2014 WL 6680122, at *5, 2014 Bankr. LEXIS 4936, at *18-19 (B.A.P. 10th Cir. Nov. 25, 2014) (citations omitted) (unpublished table decision).
Thus, the bankruptcy court possesses the inherent authority to manage attorney practices before it and to impose sanctions for violation of its local rules. Dhaliwal v. Singh (In re Singh), No. NC-13-1285, 2014 WL 842102, at *8 (B.A.P. 9th Cir. Mar. 4, 2014) ("Authority to impose sanctions in these circumstances is not `governed by rule or statute but by the control necessarily vested in courts to manage their own affairs so as to achieve the orderly and expeditious disposition of cases.'" (quoting Hale v. United States Tr., 509 F.3d 1139, 1148 (9th Cir. 2007) (citations omitted)). To quote Judge Phillips of the United States Bankruptcy Court for the Eastern District of Virginia, "[o]n occasion, a court must discipline an attorney in order to preserve the integrity of the bankruptcy system and the court and to protect the general public from abusive practices and unprofessional conduct of attorneys. Unfortunately, this case presents such an occasion." In re Smith, No. 13-31565-KLP, 2014 WL 128385, at *1, 2014 Bankr. LEXIS 135, at *1 (Bankr. E.D. Va. Jan. 14, 2014).
Notwithstanding the statement in each iteration of the application to employ filed by Mr. Price, Mr. Tindell, and the Firm that "[s]aid attorneys have significant experience with regard to bankruptcy, reorganization and other matters under the Bankruptcy Code and Rules" [Doc. 31 at ¶ 4; Doc. 39 at ¶ 5; Doc. 78 at ¶ 5], from the commencement of this bankruptcy case, Mr. Price and Mr. Tindell have made a series of clerical and procedural mistakes, have failed to fully abide by directives of the Court, have repeatedly failed to timely file documents without clerk or court intervention, and have repeatedly violated the Court's ECF Administrative Procedures and local rules.
In re Vettori, 217 B.R. 242, 245 (Bankr. N.D. Ill. 1998) (quoting In re Doors and More, Inc., 126 B.R. 43, 45 (Bankr. E.D. Mich. 1991) (alteration in original)); see also In re Wiley Brown & Assoc., LLC, No. 06-50886, 2006 WL 2390290, at *8, 2006 Bankr. LEXIS 1975, at *22 (Bankr. M.D.N.C. Aug. 14, 2006) (denying approval of employment application because attorney had not "demonstrated an extensive knowledge of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, or the Local Rules of this Court" in addition to having a conflict of interest); In re Ricasata, Nos. 10-44101T, 10-45356T, 2010 WL 2816330, at *2, Bankr. LEXIS 2389, at *5 (Bankr. N.D. Cal. July 16, 2010) (stating that "the Court has a duty to deny approval of the employment of counsel by chapter 11 debtors-in-possession on grounds of incompetence, among other things"). This competency requirement is also found in the Tennessee Rules of Professional Conduct, which require lawyers to "provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness, and preparation reasonably necessary for the representation." Tenn. S. Ct. R. 8, RPC 1.1.
As detailed above, from the beginning of this bankruptcy case, Mr. Price and Mr. Tindell made a series of errors and violations of the local rules and ECF Administrative Procedures. Between the March 24 filing date and June 25, the Court entered eleven show-cause, deficiency, or rejection orders directed to Mr. Price and Mr. Tindell on matters including but not limited to the failure to provide for an appropriate top margin on orders, the failure to include a referenced mailing matrix with a certificate of service, the failure to certify service and/or file amended certificates of service, the failure to timely file monthly operating reports, and the need to file amended documents, culminating with the Show-Cause Order entered on June 24 and the show-cause order related to disqualification concerns entered on June 25.
In the Court's view, the cumulative number of these errors and violations alone would be sufficient cause for disgorgement of at least a portion of fees under § 105(a). See, e.g., In re Wilde Horse Enters., Inc., 136 B.R. 830, 844 (Bankr. C.D. Cal. 1991) ("The Court may deny an attorney for a Chapter 11 debtor all fees claimed as due and owing on account of such attorney's wrongdoing, negligence, or serious breaches of fiduciary obligations. . . . While ethical violations are a factor to be considered by the court on fee applications, the absence of competence should be the primary focus . . . ." (emphasis in original)). The presence here of two ethical violations, as discussed below, in addition to the numerous errors and rules violations, more than satisfy the Court that there is sufficient cause to require disgorgement of all fees and to impose sanctions in the form of requiring both attorneys to attend continuing legal education programs focusing on ethical considerations and to self-report to the Tennessee Board of Professional Responsibility.
Of significant concern is the failure of Mr. Price and Mr. Tindell to obtain Debtors' signatures on their bankruptcy documents before they were filed with the Court, as is very clearly required under numerous provisions of the Bankruptcy Code, local rules, and ECF Administrative Procedures. All bankruptcy petitions, statements, schedules, and amendments are required under Rule 1008 of the Federal Rules of Bankruptcy Procedure to be verified or contain an unsworn declaration by debtors. The documents expressly state that they are signed under penalty of perjury. "The purpose of a debtor's signature on a petition is to verify that the facts contained in the petition are correct." Briggs v. LaBarge (In re Phillips), 317 B.R. 518, 523 (B.A.P. 8th Cir. 2004). Additionally, "the evidentiary support for the information in a petition comes from the debtor's signing of the petition under penalty of perjury. When documents requiring the debtor's original signature are not signed by the debtor, the evidentiary basis for the information in those documents no longer exists." In re Veluz, No. 14-20101 (DHS), 2015 WL 161002, at *4, 2015 Bankr. LEXIS 102, at *12 (Bankr. D.N.J. Jan. 9, 2015) (internal citations omitted).
The Court's ECF Administrative Procedures, which have been effective since May 2005 and are authorized by Rule 5005(a)(2) of the Federal Rules of Bankruptcy Procedure, contain the following pertinent requirements:
ECF Admin. Procedures at § III.A. Clearly, these provisions allow attorneys to file documents with electronic signatures only after the originals have been executed under penalty of perjury. Moreover, section III.A expressly imposes a duty under Rule 9011 to ensure that documents filed were, in fact, verified. See In re Veluz, 2015 WL 161002, at *2-3, 2015 Bankr. LEXIS 102, at *6.
The Court has no difficulty holding that the failure of an attorney to ensure that a debtor reviews, verifies, and signs statements and schedules, even when those documents are to be filed electronically, constitutes a violation of Rule 9011. As artfully stated last year by the Bankruptcy Court for the Middle District of Florida,
In re Whitehill, 514 B.R. 687, 691-92 (Bankr. M.D. Fla. 2014) (footnotes omitted with citations added).
As is made clear by our local rules and the ECF Administrative Procedures, "[w]hen an attorney files a document purportedly containing the debtor's signature, he is representing to the court that he has secured the original executed document before filing it electronically. The electronic submission of a document by an attorney who falsely represents that the document has been signed by the debtor `is no different than [the attorney] physically forging the debtor's signature and handing [it] over the counter to the clerk.'" In re Smith, No. 13-31565-KLP, 2014 WL 128385, at *4, 2014 Bankr. LEXIS 135, at *14 (Bankr. E.D. Va. Jan. 14, 2014) (quoting In re Wenk, 296 B.R. at 725 (alterations in original)); see also In re Dobbs, 535 B.R. 675, 688 (Bankr. N.D. Miss. 2015) (quoting In re Stomberg, 487 B.R. 775, 815 (Bankr. S.D. Tex. 2013)).
Taking it one step further (in light of Debtors' acknowledgment that they authorized the filing of documents that they had not signed), this Court agrees with the following analysis and determinations of the Bankruptcy Court for the Southern District of Texas, following precedent of the Bankruptcy Appellate Panel for the Eighth Circuit, that it is always a violation of Rule 9011 and the ECF Administrative Procedures for an attorney to file on behalf of a debtor a petition or documents requiring verification without first obtaining the debtor's signature on the originals.
In re Stomberg, 487 B.R. 775, 807-08 (Bankr. S.D. Tex. 2013) (emphases in original) (footnote omitted); see also In re Bradley, 495 B.R. 747, 780 (Bankr. S.D. Tex. 2013) ("[T]his court reaffirms its agreement with the court in Phillips that there are no circumstances that would ever justify an attorney filing a petition, any Schedule, or a SOFA without first obtaining the debtor's signature, `regardless of how urgent the need may appear to be.'" (quoting Phillips, 317 B.R. at 521)).
Thus, while there might be a measure of leniency available to counsel in the fact that both Mr. and Mrs. Morton acknowledged that they had reviewed and authorized the filing of the various documents, the Court finds intolerable Mr. Price's and Mr. Tindell's conduct in filing the documents without first having procured their clients' actual signatures. Simply, there is no justifiable reason for their failure to obtain Debtors' signatures on their bankruptcy petition, statements, schedules, and amendments before filing them. Although Mr. Morton testified that he finally decided to file a bankruptcy case on the Friday before it was filed mid-day on Tuesday, only the Voluntary Petition was actually filed on March 24. The Social Security Number Certifications, List of Creditors Holding 20 Largest Unsecured Claims, and Verification of Creditor Matrix, with matrix attached, were filed on Wednesday, March 25, and Debtors' Statement of Financial Affairs; Schedules A, B, D, E, F, G, and H; Exhibit D — Individual Debtor's Statement of Compliance With Credit Counseling Requirement for both Debtors; the Statistical Summary of Certain Liabilities and Related Data; and the Certification of Notice to Consumer Debtor(s) Under § 342(b) of the Bankruptcy Code were not filed until Thursday, March 26. At the very least, Mr. Price and Mr. Tindell had the better of two business days to meet with both Debtors to review and sign the petition before it was filed, and even more time for them to sign the remaining documents filed over the course of the following two days. Nevertheless, it was only at the direction of the Court after confirming on June 23 that Debtors had never signed the first document that Debtors signed their bankruptcy documents.
An equally disturbing ethical issue is the repeated failure by Mr. Price, Mr. Tindell, and the Firm to disclose all connections with Debtors the outstanding claim in the amount of more than $150,000.00, payments totaling $6,000.00 received from Debtors within the three months preceding the bankruptcy filing, and the receipt of the $15,000.00 retainer from Mrs. Morton's mother — which presented potential conflicts of interest and constituted unquestionable violations of the Bankruptcy Code and Rules. Professionals may be authorized for employment under 11 U.S.C. § 327(a) only if they "do not hold or represent an interest adverse to the estate, and . . . are disinterested persons." Disinterested persons are defined by the Bankruptcy Code as "a person that — is not a creditor . . . and does not have an interest materially adverse to the interest of the estate or of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor, or for any other reason." 11 U.S.C. § 101(14). As explained very recently,
In re US Bentonite, Inc., ___ B.R. ___, No. 13-20211, 2015 WL 5179425, at *6, 2015 Bankr. LEXIS 2974, at *17 (Bankr. D. Wyo. Sept. 3, 2015) (emphasis in original) (footnotes omitted, citations inserted).
"An attorney holds an adverse interest to the estate if he or she (1) possesses or asserts `any economic interest that would tend to lessen the value of the bankruptcy estate or that would create either an actual or potential dispute in which the estate is a rival claimant' or (2) possesses `a predisposition under circumstances that render such a bias against the estate.'" In re Belmonte, 524 B.R. 17, 27 (Bankr. E.D.N.Y. 2015) (quoting Bank Brussels Lambert v. Coan (In re AroChem Corp.), 176 F.3d 610, 623 (2d Cir.1999) (internal citations omitted)). "More generally, it includes any interest or relationship, however slight, that would even faintly color the independence and impartial attitude required by the Code and Bankruptcy Rules." In re Keller Fin. Servs. of Fla., Inc., 243 B.R. 806, 812 (Bankr. M.D. Fla. 1999) (citations and internal quotation marks omitted).
Section 327 is supplemented by Rule 2014 of the Federal Rules of Bankruptcy Procedure, which requires professionals seeking employment to file an application that states the name of the applicant, the specific facts necessitating the representation, the services to be rendered, compensation arrangements, and all of the applicant's connections with the debtor, creditors, and any other party in interest. To further accomplish these required disclosures, "[t]he application shall be accompanied by a verified statement of the person to be employed setting forth the person's connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, the United States trustee, or any other person employed in the office of the United States trustee." Fed. R. Bankr. P. 2014(a). The requirements imposed by Rule 2014 "are more-encompassing than those governing the disinterestedness inquiry under section 327." In re Leslie Fay Cos., Inc., 175 B.R. 525, 536 (Bankr. S.D.N.Y.).
Because it is the responsibility of the Court, not the professional seeking employment, to determine whether past or current connections with a debtor rise to the level of a potential or actual conflict of interest, all of the professional's contacts must be disclosed. See Miller Buckfire & Co., LLC v. Citation Corp. (In re Citation Corp.), 493 F.3d 1313, 1321 (11th Cir. 2007). Indeed, it is disingenuous and unmeritorious for a party to argue that it "did not have to disclose its connections . . . because its attorneys did not feel that a conflict existed." In re Leslie Fay Cos., Inc., 175 B.R. at 536; see also In re Kappy Invs., Inc., 465 B.R. 839, 842 (Bankr. D. Minn. 2012) ("When an attorney fails to disclose relationships and facts necessary for the Court to make a determination as to whether they meet the requirements of the Code, three explanations may be inferred: oversight or negligence, failure to understand the importance of proper disclosure, or an intent to circumvent the Code." (citations omitted)); In re Keller Fin. Servs. of Fla., Inc., 243 B.R. at 812 ("The professional must disclose all facts that bear on his disinterestedness, and cannot usurp the court's function by unilaterally choosing which connections impact on his disinterestedness and which do not.").
"These disclosure requirements are not discretionary." Winship v. Cook (In re Cook), 223 B.R. 782, 790 (B.A.P. 10th Cir. 1998) (citing In re EWC, Inc., 138 B.R. 276, 280 (Bankr. W.D. Okla. 1992) (holding that professionals seeking employment "cannot pick and choose which connections are irrelevant or trivial")).
Jensen v. United States Tr. (In re Double J Cattle Co.), 226 B.R. 284, 1997 WL 837762, at *8, Bankr. LEXIS 1738, at *27 (B.A.P. 10th Cir. Oct. 24, 1997 (unpublished table decision).
Moreover, Rule 2014(a)'s disclosure requirements continue throughout the representation such that if an employed professional becomes aware of a potential or actual conflict of interest that arises after employment is authorized, counsel has a duty to file a supplemental disclosure statement.
In re US Bentonite, Inc., ___ B.R. at ___, 2015 WL 5179425, at *7, 2015 Bankr. LEXIS 2974, at *19-20 (emphasis in original) (footnotes omitted, citations inserted).
In re Sundance Self Storage-El Dorado LP, 482 B.R. 613, 625-26 (Bankr. E.D. Cal. 2012); see also In re EWC, Inc., 138 B.R. 276, 280 (Bankr. W.D. Okla. 1992) ("Compliance with these requirements is necessary to maintain the integrity of the bankruptcy system."). Because of the important policy considerations, "[v]iolation of the disclosure rules alone is enough to disqualify a professional and deny compensation, regardless of whether the undisclosed connections or fee arrangements were materially adverse to the interests of the estate or were de minimis." In re EWC, Inc., 138 B.R. at 280.
As for the disclosure required by § 329 concerning the "compensation paid or agreed to be paid, . . . and the source of such compensation," Rule 2016(a) also requires the attorney to file an application that includes "a statement as to what payments have heretofore been made or promised . . ., [and] the source of compensation so paid or promised." As with § 327, the disclosure requirements of § 329 are mandatory, not permissive. See In re Cook, 223 B.R. 782, 790 (B.A.P. 10th Cir. 1998). The disclosure is designed to promote the exercise of a fully informed, independent judgment by any party in interest about the effect on the estate of any given payment. See In re Rio Valley Motors Co. LLC, No. 11-06-11866 SS, 2007 WL 2492685, at *2, 2007 Bankr. LEXIS 3001, at *7-*8 (Bankr. D.N.M. Aug. 29, 2007); see also Hancock v. Limor (In re Innovative Entm't Concepts, Inc.), No. 3:07-0639, 2007 WL 4481436, at *6 (M.D. Tenn. Dec. 18, 2007) (affirming the bankruptcy court's sanction of an attorney who engaged in "shifting disclosures" where candor was required).
This bankruptcy case has been wrought with failure on the part of Mr. Price and Mr. Tindell to fully disclose their connections with Debtors and Debtors' insiders. The Court recognizes "that there may be occasional innocent errors and omissions. There comes a point, however, when such errors and omissions `are simply too numerous and substantial to overlook.'" In re Jakovljevic-Ostojic, 517 B.R. 119, 130 (Bankr. N.D. Ill. 2014) (quoting Davis, Mannix & McGrath v. Fawell (In re Fawell), No. 98 B 01274, 1999 WL 549449, at *13, 1999 Bankr. LEXIS 891, at *36-37 (Bankr. N.D. Ill. July 26, 1999)). As an initial matter, counsel failed to file their compensation disclosure statement at the commencement of the case, and it was only after the clerk's office sent a deficiency memo dated March 27, directing Mr. Price to file it within fourteen days, that it was subsequently filed on the fourteenth day, April 7. The disclosure statement, however, did not comply with § 329(a) and Rule 2016 because it failed to identify the source of the retainer as Mrs. Morton's mother, Dixie Bopp, indicating only that it was a "family member." Such was an important piece of information because, as revealed for the first time at the June 23 trial on the Motion for Stay Relief, Ms. Bopp is also one of Debtors' creditors (for a debt unrelated to the retainer).
Most alarming were the failures to disclose the financial connections the Firm had with Debtors. First, Mr. Price and Mr. Tindell did not disclose in the initial Application to Employ filed on April 2, or in the Amended Application to Employ filed on April 6, the more than $150,000.00 of pre-petition debt that was owed to the Firm by Debtors for prior legal fees, nor was this debt listed in Debtors' Schedule F. This claim was discovered only after Debtors testified at their May 8 meeting of creditors that they owed pre-bankruptcy attorneys' fees to the Firm. And, only after it was disclosed by Debtors and called to the attention of the Court through the objection to employment filed by the United States Trustee on May 11 did the Firm finally formally disclose the debt and confirm that it was waived in the Second Amended Application to Employ filed on May 20. Because this claim was not disclosed by counsel before the Second Amended Application to Employ, the Court approved employment nunc pro tunc only to May 20, believing that, at that point, "all material information concerning the disinterestedness of counsel" had been disclosed. [Doc. 83.]
Such was not the case, however, and the Court learned for the first time during Mr. Morton's testimony at the June 23 stay-relief trial that Debtors had paid at least $4,000.00 to the Firm during the ninety days preceding the bankruptcy filing, an amount later confirmed as $6,000.00. These payments, likewise, were not originally disclosed in Debtors' statements and schedules, although they were listed in the Amended Statement of Financial Affairs filed on June 29. Following the issuance of the Court's June 24 and June 25 show-cause orders and the June 25 order directing Mr. Price to file a Second Amended Unsworn Declaration containing his original signature, Mr. Price filed another declaration and disclosed, for the first time, "out of an abundance of caution," that the Firm had received $6,000.00 in payments within the ninety days before filing the case. Mr. Price represented that the payments were "the same monthly payments made for more than one (1) year prior to filing the Petition in this case and were partial payments and in the ordinary course for new value of the work being performed contemporaneously by the Firm for services unrelated to this proceeding." [Doc. 176 at ¶ 3.] As discussed above, however, Debtors understood that the monthly payments were for past debt, even though they were continuing to incur additional debt for ongoing representation by the Firm.
The failures to disclose these very significant connections with Debtors violate not only the letter of the law in § 327 and Rule 2014(a), but they vitiate the integrity of the system. The Court, the United States Trustee, other counsel, and debtors themselves must be confident in the disclosures and representation of professionals being employed to represent debtors and bankruptcy estates. Unfortunately, such was never the case concerning Mr. Price and Mr. Tindell. Even after the United States Trustee raised the issue with respect to the initial outstanding claim that was later waived by the Firm, Mr. Price and Mr. Tindell failed to disclose other payments the Firm had received from Debtors and, instead, continued to aver their disinterestedness. The Court gave them the benefit of the doubt with respect to the first failure to disclose and granted the application to employ; however, once the question of their disinterestedness arose, counsel should have recognized a higher expectation of full and complete disclosure. Accordingly, the Court does not ascribe to counsel an innocent motive for their continued failures to disclose. Rather than proceed as they did by not making any additional disclosures until the truth was revealed unexpectedly, Mr. Price and Mr. Tindell should have made every effort to disclose any and all connections they and the Firm had with Debtors, which would have allowed the Court to make a fully informed determination whether there were material conflicts of interest that would have disallowed their employment. The same can be said of their preparation of an inadequate disclosure declaration for Charles M. Smith in support of Debtors' application to employ him and his firm as an appraiser.
Counsel's repeated nondisclosure and noncompliance resulted in a waste of judicial resources by the clerk's office, which was required to notify the Firm of delinquent filings and to edit docket entries that were incorrectly entered by Mr. Price, and by the Court, which was forced to issue a number of show-cause orders, denials, and rejections, as well as a waste of time expended by the United States Trustee and his staff having to file a number of motions and responses.
For the foregoing reasons, the Court determines that sanctions are appropriate. Accordingly, Mr. Price, Mr. Tindell, and the Firm shall be required to disgorge all monies paid to them in connection with Debtors' bankruptcy case, including the $15,000.00 retainer that they voluntarily agreed to disgorge in the Response to Show-Cause Order filed on July 10, 2015, and the $6,000.00 paid to them by Debtors in the ninety days before the bankruptcy filing. Also, Mr. Price, Mr. Tindell, and the Firm shall not be entitled to payment of any fees or expenses incurred in connection with their representation of Debtors in this bankruptcy case. Additionally, because they waived the pre-petition claim owed by Debtors, they will not be allowed to participate in Debtors' bankruptcy case as a creditor, nor will this Court approve employment of them in any capacity in or related to Debtors' case. Furthermore, because of the ethical considerations implicated by Mr. Price's and Mr. Tindell's actions, the Court finds that they require additional continuing legal education. Thus, the Court also requires that both Mr. Price and Mr. Tindell, within the next six months, attend ten hours of ethics continuing legal education in addition to the standard requirements imposed by the State of Tennessee. Each attorney shall provide proof of such attendance to the Court in camera no later than March 31, 2016. Finally, both Mr. Price and Mr. Tindell shall self-report their conduct in this case and this Court's Memorandum Opinion to the Tennessee Board of Professional Responsibility on or before November 2, 2015, and provide evidence of such submission (including but not limited to a copy of the documents submitted) to this Court in camera on or before November 30, 2015.
An Order consistent with this Memorandum will be entered.
