In re: Wayne A. Seare and Marinette Tedoco

FILED
1 ORDERED PUBL ED
ISH AUG 25 2014
SUSAN M. SPRAUL, CLERK
2 U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5
6 In re: ) BAP No. NV-13-1196-KiTaJu
)
7 WAYNE A. SEARE and MARINETTE ) Bk. No. 2:12-bk-12173-MKN
TEDOCO, )
8 ) Adv. No. 2:12-ap-01108-MKN
Debtors. )
9 )
)
10 ANTHONY J. DeLUCA, )
)
11 Appellant, )
)
12 v. ) O P I N I O N
)
13 WAYNE A. SEARE, )
)
14 Appellee. )
______________________________)
15
Argued and Submitted on January 24, 2014,
16 at Las Vegas, Nevada
17 Filed - August 25, 2014
18 Appeal from the United States Bankruptcy Court
for the District of Nevada
19
Honorable Bruce A. Markell, Bankruptcy Judge, Presiding
20
21
Appearances: Christopher Burke, Esq. argued for appellant,
22 Anthony J. DeLuca; Appellee Wayne A. Seare argued
pro se.
23
24 Before: KIRSCHER, TAYLOR and JURY, Bankruptcy Judges.
25
Opinion by Judge Kirscher
26 Concurrence by Judge Jury
27
28
1 KIRSCHER, Bankruptcy Judge:
2
3 Appellant Anthony J. DeLuca (“DeLuca”) was the bankruptcy
4 attorney for chapter 71 debtors Wayne A. Seare (“Seare”) and his
5 wife Marinette Tedoco (“Tedoco”) (collectively, “Debtors”).
6 DeLuca appeals an order from the bankruptcy court sanctioning him
7 for conduct related to his handling of Debtors’ case. We AFFIRM.
8 I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
9 A. Prepetition events
10 1. The district court lawsuit and judgment against Seare
11 In December 2010, Seare sued his former employer St. Rose
12 Dominican Health Foundation (“St. Rose”) for employment
13 discrimination, alleging that he had been the victim of sexual
14 harassment by a female co-worker and that he was wrongfully
15 terminated in retaliation for his reporting the harassment. The
16 co-worker’s harassment of Seare allegedly included sending him
17 sexually explicit emails. After an investigation of the matter by
18 St. Rose, Seare was terminated.
19 While the lawsuit was pending in the United States District
20 Court for the District of Nevada (“district court”), Seare
21 admitted to his attorney that he had “embellished” the explicit
22 emails to bolster his harassment claims. Seare’s attorney
23 disclosed the misconduct to the district court in a motion to
24 withdraw. Ultimately, on October 24, 2011, the district court
25 ordered sanctions against Seare, dismissed his lawsuit against
26
27 1
Unless specified otherwise, all chapter, code and rule
references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
28 the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
-2-
1 St. Rose with prejudice, and ordered him to pay St. Rose’s
2 attorney’s fees (“Sanctions Order”). The district court found
3 that Seare had committed “fraud upon the court” by knowingly
4 providing false information, allowing his attorney to file an
5 amended complaint based upon that false information and
6 instituting and conducting litigation in bad faith.
7 A judgment was entered on October 25, 2011, in favor of
8 St. Rose for its attorney’s fees of $67,430.58 (“Judgment”). The
9 one-page Judgment did not mention “fraud” or provide any factual
10 or legal bases for supporting the Judgment. Thereafter, St. Rose
11 obtained a Writ of Garnishment and served it on Seare’s current
12 employer. The garnishment of Seare’s wages prompted Debtors to
13 seek counsel about whether to file bankruptcy.
14 2. Debtors retain bankruptcy attorney DeLuca
15 Some of the facts surrounding Debtors’ meeting with DeLuca
16 are disputed, but other facts are not. DeLuca contends that
17 certain facts asserted by Tedoco and relied upon by the bankruptcy
18 court were not admissible, which we address below.
19 Debtors consulted with DeLuca, a bankruptcy attorney of
20 eleven years, at his office on February 13, 2012, at around 5:00
21 p.m. This meeting was Debtors’ only in-person contact with
22 DeLuca, but DeLuca testified that he spoke with them at least once
23 by phone thereafter.
24 During an evidentiary hearing, Seare testified that Debtors
25 gave DeLuca a copy of the “order” and the Writ of Garnishment and
26 that DeLuca “thumbed through them.” Seare had also asserted in a
27 pre-hearing brief that Debtors gave DeLuca two documents at their
28 initial consultation — a copy of the Order for Wage Garnishment
-3-
1 and the Sanctions Order. Tedoco also asserted that Debtors gave
2 DeLuca copies of the Order for Wage Garnishment and the “Wage
3 Sanctions.” DeLuca had no independent recollection of meeting
4 Debtors or of reviewing the Sanctions Order or Judgment. He did,
5 however, concede that his firm knew about the Judgment and Order
6 for Wage Garnishment at the time the bankruptcy petition was
7 filed.
8 Debtors claimed DeLuca reviewed the district court papers and
9 told them that the debt referred to in the Order for Wage
10 Garnishment and Judgment was dischargeable. Seare claimed in a
11 pre-hearing brief that during the consultation, Tedoco told DeLuca
12 that the St. Rose debt and Order for Wage Garnishment were not
13 from medical expenses. Rather, the debt was based on the
14 Sanctions Order for attorney’s fees, which was imposed because
15 Seare submitted embellished emails to the district court in his
16 lawsuit against St. Rose. Seare also testified that he told
17 DeLuca about his embellished emails. According to Seare, DeLuca
18 affirmatively told Debtors that the St. Rose debt referenced in
19 the Order for Wage Garnishment was dischargeable, even though it
20 was incurred through fraud. However, Seare contradicted himself
21 when he testified that “fraud” was never discussed during the
22 consultation. Seare testified that DeLuca did not discuss with
23 Debtors about what sort of debts might not be dischargeable or
24 that an adversary proceeding might be filed against him.
25 After the brief consultation with DeLuca, Debtors were placed
26 in a room to read, initial and sign the 19-page retainer agreement
27 (“Retainer Agreement”) under which they hired DeLuca. Tedoco
28 claimed that DeLuca’s staff periodically checked to see if they
-4-
1 had completed the documents, but that no one sat with them to
2 explain any part of the Retainer Agreement. DeLuca testified that
3 standard protocol in his office required a paralegal to sit with a
4 client and explain every paragraph of the retainer agreement to
5 make sure the client understood it. However, he did not know and
6 had no record of which paralegal met with Debtors because he did
7 not keep such records.
8 Debtors executed the Retainer Agreement, initialing every
9 paragraph and signing every page, and paid DeLuca a $200 down
10 payment.2 At the bottom of each page (right above Debtors’
11 signatures) is the statement: “I have read, understand, and agree
12 to this page and its contents.” On the last page (right above
13 Debtors’ signatures) is the statement: “I have read and received
14 the foregoing NINETEEN (19) pages and I understand and agree to
15 its terms and conditions.” In addition, DeLuca provided Debtors
16 with a 19-page document entitled “Frequently Asked Questions”
17 (“FAQ”). DeLuca did not sign the Retainer Agreement, which is
18 evidently the same agreement signed by all clients, with only a
19 few differences in fees depending on whether the case is filed
20 under chapter 7 or 13. His stamped signature is, however, on the
21 first page of the Retainer Agreement, which is a form letter
22 thanking clients for their business. This letter also states that
23 while “some advisories (in the retainer agreement) may not appear
24 to apply to you at this time, we do need you to sign that you
25 understand or that you agree that you have been advised on each
26
27 2
DeLuca’s flat fee to file a chapter 7 case was $1,999,
which included the $306 filing fee and the credit report fee of
28 $35.
-5-
1 topic.”
2 The Retainer Agreement separates basic services from those
3 services requiring additional fees. For matters beyond the “basic
4 services,” DeLuca’s billing rate was $495.00 per hour (or perhaps
5 $395.00, as the relevant paragraph refers to both figures).
6 The Retainer Agreement provides:
7 BASIC SERVICES: Services to be performed by DeLuca &
Associates include:
8
a. Analysis of debtor’s financial situation and
9 assistance in determining whether to file a petition
under . . . Chapter 7 or chapter 13. . . .
10 b. Review, preparation and filing of the petition,
schedules, statement of affairs, and other documents
11 required by the bankruptcy court;
c. Representation at the meeting of creditors.
12 d. Reasonable in person and telephonic consultation with
the client . . . .
13
ADDITIONAL FEES: There are circumstances which may
14 require additional fees.
15 Additional attorney fees will be charged for additional
services including but not limited to: [1] Addressing
16 allegations of fraud or non-dischargeability; . . .
[13] . . . Adversary Proceedings . . . .
17
18 For the additional fees, the Retainer Agreement does not explain
19 the relationship between items [1] and [13].
20 The Retainer Agreement also includes a “fraud” disclaimer:
21 “DEBTS THAT DO NOT GO AWAY: Non-dischargeable debts (debts that
22 you must re-pay), or debts not affected by client’s bankruptcy,
23 include but are not limited to the following: debts incurred
24 through fraud . . . .” Seare testified that he signed the
25 Retainer Agreement despite reviewing and understanding the fraud
26 disclaimer because DeLuca had told him that the St. Rose debt was
27 dischargeable. The FAQ also explains that debts incurred through
28 fraud are nondischargeable. Seare said that he did not read the
-6-
1 FAQ because Debtors had already asked DeLuca questions during the
2 consultation. Seare testified that based on the Retainer
3 Agreement, he understood that DeLuca would not be representing him
4 against allegations of fraud. Seare also testified that adversary
5 proceedings were not discussed at the consultation and at that
6 time he did not know what an adversary proceeding was.
7 The Retainer Agreement also includes a request for copies of
8 “ALL LAWSUITS you have been involved in within the last two (2)
9 years . . . .” DeLuca claimed Debtors never provided sufficient
10 documentation relating to the district court lawsuit as required.
11 Finally, the Retainer Agreement explains the length of
12 DeLuca’s representation of a client: “I understand that following
13 the discharge of my bankruptcy DeLuca & Associates’ representation
14 is concluded by operation of law. I understand that DeLuca &
15 Associates is no longer obligated to represent me in any capacity
16 with regard to my bankruptcy filing after the discharge order is
17 entered. I understand that any work requested following discharge
18 of the bankruptcy will be an additional fee.”
19 B. Postpetition events
20 1. The bankruptcy case is filed.
21 DeLuca filed Debtors’ chapter 7 bankruptcy petition on
22 February 29, 2012. The St. Rose debt was listed as a
23 “garnishment” on Schedule F in the amount of $67,431.00. The
24 Judgment underlying the St. Rose debt was listed in Debtors’
25 Statement of Financial Affairs and indicated that the nature of
26 the proceeding was a “collection.” The Disclosure of Compensation
27 of Attorney for Debtors stated that Debtors agreed to exclude
28 “representation . . . in any dischargeability actions” or “any
-7-
1 other adversary proceedings” from the flat fee.
2 At the § 341(a) meeting of creditors on March 30, 2012,
3 St. Rose informed Debtors and counsel that it intended to enforce
4 its rights under the Judgment through a nondischargeability
5 action.
6 2. The adversary proceeding is filed.
7 St. Rose filed an adversary complaint against Seare, seeking
8 to except its debt from discharge under § 523(a)(4) and (a)(6).
9 The summons and complaint were served on Seare on or about June 5,
10 2012. DeLuca apparently received electronic notice of the
11 complaint the day it was filed.
12 Debtors received a discharge on May 30, 2012. Approximately
13 $137,430 in unsecured debt was discharged, or 62% of Debtors’
14 unsecured, nonpriority claims.
15 On June 4, 2012, DeLuca sent Debtors an email informing them
16 of their discharge and that, as of the discharge date, their case
17 was completed. The email is a “form” message and did not mention
18 any particulars of Debtors’ case or the recently-filed adversary
19 proceeding by St. Rose. It stated, “[W]e are very happy to inform
20 you that you can now move forward with a fresh start on life, free
21 from the stress of excessive debt. Now you can place your
22 financial situation back on the right track.”
23 Debtors replied to the June 4 email later that day, thanking
24 DeLuca for his help with their bankruptcy and inquiring whether
25 the St. Rose “Judgement [sic] Order” had been discharged, since
26 St. Rose had indicated at the § 341(a) meeting that it was
27 pursuing the adversary proceeding against them. They closed the
28 email by asking DeLuca to “[p]lease let us know what we need to
-8-
1 do.”
2 DeLuca’s office responded to Debtors’ email on June 5, 2012.
3 The response reminded Debtors of St. Rose’s expressed intent at
4 the § 341(a) meeting to pursue legal action for the Judgment. The
5 response also stated that on April 16, 2012, about six weeks prior
6 to the filing of the adversary complaint, DeLuca received from
7 counsel for St. Rose a “fax cover letter . . . with an attached
8 Stipulation and Order regarding the discharge-ability [sic] of
9 subject debt in question as to Mr. Sear [sic] only,” and that his
10 office had promptly responded to the letter advising counsel that
11 DeLuca “would not sign off on any Stipulation regarding the
12 discharge-ability [sic] of any debt listed in the schedules.”
13 DeLuca never consulted with Seare before rejecting the proposed
14 stipulation and order. It is unknown whether DeLuca informed
15 St. Rose that he was not representing Seare in the adversary
16 proceeding. The response went on to explain that DeLuca had
17 performed all of the duties for which he was contracted, and that
18 he would not be representing Seare in the St. Rose adversary
19 proceeding. DeLuca’s office referred Seare to another attorney.
20 Debtors replied to the June 5 email on June 6, 2012. They
21 admitted that DeLuca was hired only to “do our bankruptcy,” but
22 were very upset and frustrated that the proposed stipulation and
23 order were never sent to them or that DeLuca’s office, “at the
24 very least,” had not made them aware it. Debtors requested copies
25 of the referenced documents between St. Rose and DeLuca’s office.
26 In closing, Debtors stated: “Not informing your clients of very
27 important documents and failing to return phone calls are
28 unacceptable and unprofessional customer service.”
-9-
1 On June 6, 2012, DeLuca personally sent a letter to Debtors
2 informing them that he would not be representing them in the
3 adversary proceeding and referring them to another attorney.
4 Seare later claimed that he and Tedoco found it disturbing that
5 DeLuca advertises a “full service” bankruptcy firm, yet he was
6 requesting that Debtors hire another attorney. Seare testified
7 that he tried to retain other law firms to represent him; one
8 declined, one said they did not handle such matters and another
9 said it would be very expensive.
10 In his pro se answer to the St. Rose complaint, Seare argued
11 that the debt was dischargeable “due to hardship on the dependents
12 of debtor.” Seare admitted to having embellished the emails in
13 the district court case, but stated that other evidence existed to
14 support his position. Seare alternatively requested that the debt
15 be “modified” to a feasible payment plan. Notably, Seare
16 complained that his district court attorney had “thrown [him]
17 under the bus” when he informed the court of Seare’s manufacturing
18 of the emails and that this same attorney had also “failed to
19 forward settlement information” regarding St. Rose.
20 On August 2, 2012, the bankruptcy court held a scheduling
21 conference. DeLuca did not appear for Seare. Seare told the
22 court that DeLuca had told Debtors that he did not represent
23 clients in adversary proceedings. Counsel for St. Rose stated
24 that he had informed DeLuca shortly after Debtors filed their
25 petition of his client’s intent to file a nondischargeability
26 action.
27 3. The court issues the order to show cause.
28 On August 3, 2012, the bankruptcy court issued its “Order to
-10-
1 Show Cause Why This Court Should Not Sanction Anthony J. DeLuca
2 for Failing to Represent Debtor in the . . . Adversary Proceeding”
3 (“OSC”). The court was concerned that DeLuca had violated certain
4 provisions of the Nevada Rules of Professional Conduct (“NRPC”),
5 specifically, NRPC 1.2(c), NRPC 1.1 and NRPC 1.5.
6 DeLuca was ordered to show his compliance with NRPC 1.2(c),
7 particularly, whether not representing Seare in the adversary
8 proceeding was reasonable and whether he had obtained Debtors’
9 informed consent for such limitation. DeLuca also had to produce
10 a copy of his June 6 letter to Debtors. The OSC provided that if
11 the court found DeLuca had violated any of these rules, it could:
12 (1) impose monetary sanctions, including requiring DeLuca to pay
13 for Debtors’ representation in the adversary proceeding;
14 (2) impose nonmonetary sanctions, such as requiring DeLuca to
15 represent Debtors; (3) order disgorgement of his fees; or
16 (4) refer the matter to the Nevada State Bar.
17 In response to the OSC, DeLuca explained that Debtors had
18 mentioned a judgment from “medical debts” during the consultation,
19 but they failed to mention the significant detail that the debt
20 was ordered by the district court as a result of Seare’s
21 manufacturing of evidence, lying to his attorney and then allowing
22 his attorney to submit an amended complaint containing false
23 information to the court. Had these details about the fraudulent
24 nature of the debt, of which Debtors were well aware at the time
25 of the consultation, been brought to DeLuca’s attention, DeLuca
26 claimed he would have declined to represent them, citing to his
27 “Tell the Truth” section of his retainer agreements. In short,
28 DeLuca contended that he undertook the representation of Debtors
-11-
1 based on incomplete, inaccurate or intentionally omitted
2 information regarding the fraudulent nature of a significant
3 portion of their debts. DeLuca argued that he was entitled to
4 accept representation of debtors based on full disclosure,
5 particularly when it related to substantive issues such as a large
6 debt incurred as a result of manufacturing evidence and committing
7 fraud upon the court.
8 DeLuca also noted that his retainer agreements specifically
9 exclude adversary proceedings as part of the services he provides
10 for the basic fee. Further, his office had immediately advised
11 Debtors via the June 5 email and his June 6 letter that he would
12 not be representing Seare in the adversary proceeding and that
13 they should seek alternative counsel. Attached to DeLuca’s
14 response were portions of an unsigned retainer agreement, copies
15 of the emails between his office and Debtors and a copy of his
16 June 6 letter.
17 a. The initial OSC hearing
18 The bankruptcy court held an initial hearing on the OSC on
19 September 13, 2012. DeLuca, Seare and Tedoco appeared. The court
20 noted that DeLuca’s brief did not substantively address the
21 specific provisions of the NRPC raised in the OSC, namely, whether
22 DeLuca obtained informed consent from Debtors to limit his
23 representation and whether limiting his representation was
24 reasonable under these circumstances. In response, DeLuca said
25 that the Retainer Agreement excluded adversary proceedings and
26 that it was reasonable to not represent debtors because they were
27 not forthcoming about the fraudulent nature of the St. Rose debt,
28 saying only that it was a debt to a hospital. DeLuca further
-12-
1 argued that it was reasonable for any competent attorney to assume
2 that a debt to a hospital was for medical services, which are
3 dischargeable, and not a debt relating to fraud for manufacturing
4 evidence and that it would be reasonable for a client to tell the
5 attorney about it. DeLuca conceded that he knew the Judgment
6 existed, but contended that it would be incumbent upon the client
7 to inform the attorney about the details of it. DeLuca also
8 conceded that had he reviewed the Sanctions Order and Judgment, it
9 would have been obvious the St. Rose debt was based on fraud.
10 Based on DeLuca’s responses, the bankruptcy court expressed
11 concern that he may have also violated two sections of the Code:
12 §§ 707(b)(4) and 526(a). For that reason, the court ordered
13 additional briefing and set an evidentiary hearing, during which
14 either party could call witnesses. DeLuca offered to return
15 Debtors’ fee, but the court found this offer potentially
16 insufficient as Debtors were now embroiled in a
17 nondischargeability action and the court questioned the benefit of
18 their discharge.
19 On September 20, 2012, the bankruptcy court entered an order
20 setting the evidentiary hearing and confirming its instructions
21 that DeLuca be prepared to address his compliance with the
22 aforementioned provisions of the NRPC, as well as his compliance
23 with §§ 707(b)(4)(C) and 526(a)(1)-(3).
24 b. The OSC evidentiary hearing
25 In response to the bankruptcy court’s concern about his
26 compliance with NRPC 1.2(c) and NRPC 1.5, DeLuca contended in his
27 supplemental brief that Debtors had consented to the limited scope
28 of representation and that limiting his representation was
-13-
1 reasonable under the circumstances. To show Debtors’ consent,
2 DeLuca argued that Debtors had signed the pages of the Retainer
3 Agreement where it explained the scope of services covered under
4 “Basic Services” and “Additional Fees.” Debtors had also signed
5 the last page, which stated they had read the Retainer Agreement
6 and agreed to its terms and conditions. DeLuca contended that
7 Debtors were clearly advised of what services would be covered
8 under the $1,999 flat fee and what services would require
9 additional fees because it was his office’s protocol for a
10 paralegal to review a retainer agreement line by line with each
11 client. Debtors had also initialed the paragraph and signed the
12 corresponding page setting forth the Length of Representation,
13 which stated that DeLuca was no longer obligated to represent them
14 after entry of the discharge order.
15 As for reasonability, DeLuca made several arguments. First,
16 Debtors had indicated they could not afford to pay DeLuca the
17 additional fees for litigation services. Therefore, argued
18 DeLuca, he was not required to work without compensation, citing
19 the Thirteenth Amendment. DeLuca next argued that it was
20 reasonable and within his discretion to not represent Seare
21 because Seare had a history of lying to his own attorneys and
22 manipulating them into pursuing judicial claims. DeLuca asserted
23 that once he learned of the full breadth of Seare’s unscrupulous
24 conduct, he determined that representing Seare was a liability to
25 him and his firm, so he did not wish to represent him.
26 Next, DeLuca argued that the adversary proceeding was legally
27 indefensible because Seare had committed fraud, so representing
28 him in litigation would have been futile. However, DeLuca claimed
-14-
1 that after the initial OSC hearing, he did try to procure a
2 settlement with St. Rose on Seare’s behalf. According to DeLuca,
3 St. Rose was receptive and willing to reduce its claim to $23,000,
4 with a nominal down payment and monthly payments of $300.00.3
5 DeLuca advised Debtors of the offer, but they wished to pursue
6 their own settlement directly with St. Rose. Lastly, DeLuca
7 argued that Seare was not prejudiced by the nonrepresentation
8 because DeLuca had advised him immediately after the adversary
9 complaint had been filed that he was unable to represent him.
10 Thus, Seare had months to find substitute counsel, yet he chose to
11 represent himself.
12 As for his compliance with § 707(b)(4)(C), DeLuca argued that
13 he performed due diligence in light of the limited information
14 Debtors provided and their urgency to file bankruptcy to stop the
15 garnishment. Despite the Retainer Agreement’s request for all
16 documentation from lawsuits within the last two years, DeLuca
17 contended that Debtors provided only copies of a letter from
18 St. Rose indicating its intent to file a notice of name change and
19 the Writ of Execution, which indicated the amount of the Judgment
20 but did not disclose the nature of the award. In any event,
21 argued DeLuca, Seare knew he had committed fraud and the Retainer
22 Agreement expressly stated that debts incurred by fraud “do not go
23 away.” The FAQ given to Debtors provided the same information.
24 Therefore, argued DeLuca, Seare was fully aware prior to filing
25 that debts incurred through fraud were nondischargeable. DeLuca
26
3
The bankruptcy court admonished DeLuca for attempting to
27 disclose settlement terms on the record. However, it did allow
him to question Seare about it on a limited basis and Seare
28 testified that the settlement offer amount was less than $67,000.
-15-
1 disavowed ever telling Debtors that fraud debts were
2 dischargeable.
3 Lastly, DeLuca argued that even though the St. Rose debt was
4 nondischargeable, Debtors benefitted immensely from the bankruptcy
5 filing. Their total unsecured debt was approximately $220,000,
6 and they eliminated about $137,000 of it, excluding the $67,000
7 Judgment and $15,000 in student loans. Further, Seare’s credit
8 score had increased by over 100 points since the filing, which
9 Seare even conceded was a benefit. Thus, argued DeLuca, the
10 benefits clearly exceeded the $1,999 they paid. Moreover, the
11 filing temporarily stopped the garnishment; Debtors now had an
12 opportunity to settle with St. Rose. DeLuca did not address the
13 court’s concern regarding his potential violation of § 526(a).
14 The OSC evidentiary hearing was held on October 23, 2012.
15 Seare and DeLuca testified. The bankruptcy court admitted all of
16 DeLuca’s exhibits and announced that the matter would be deemed
17 submitted once the transcripts from the two OSC hearings were
18 placed on the record. The OSC hearing transcripts were filed on
19 October 30, 2012. Tedoco filed a “Supplemental Hearing Brief” on
20 December 4, 2012, requesting that the bankruptcy court “make it
21 part of the record.” It provided most of the same information
22 already testified to by Seare, namely, what was said or not said
23 about the St. Rose debt at the consultation. The only new and
24 potentially relevant information it provided was that when making
25 calls to DeLuca’s office asking to speak to him personally,
26 Debtors were continually passed off to other staff members, who
27 also would not return their calls without Debtors leaving multiple
28 messages. Tedoco also claimed again that no staff member ever sat
-16-
1 down with them to review the specifics of the Retainer Agreement.
2 4. The opinion and order for sanctions
3 The bankruptcy court issued its opinion and order sanctioning
4 DeLuca on April 9, 2013 (“Sanctions Opinion”).4 Dignity Health v.
5 Seare (In re Seare), 493 B.R. 158 (Bankr. D. Nev. 2013). The
6 court held that DeLuca had violated ethical rules NRPC 1.1, 1.2,
7 1.5, and 1.4. and certain sections of the Code — §§ 526(a)(1) and
8 (3), 528(a)(1) and (2), and 707(b)(4)(C).
9 a. The bankruptcy court’s findings and conclusions
10 To the bankruptcy court, this case presented the legal issue
11 of when consumer bankruptcy attorneys may limit the scope of their
12 representation, a practice referred to as “unbundling.” In re
13 Seare, 493 B.R. at 176. While acknowledging that unbundling is
14 permissible in Nevada, and that an attorney can charge additional
15 fees for adversary proceedings, the court noted that it had to be
16
17 4
After entry of the Sanctions Opinion, the bankruptcy court
granted DeLuca’s requests to temporarily stay, until determined by
18 this Panel, publication of the Sanctions Opinion and the
requirement that for the next two years DeLuca provide a copy of
19 the Sanctions Opinion to future adversary clients whose case he
declines. We address the latter issue later in this Memorandum.
20 As to the first issue, DeLuca disputes the bankruptcy court’s
decision to publish the Sanctions Opinion, contending that it
21 impermissibly went beyond its own list of what potential sanctions
DeLuca faced. DeLuca argues that due to his lack of a prior
22 disciplinary record and the court’s finding that he did not act
knowingly, and because he tried to represent Seare in a
23 settlement, publication of the Sanctions Opinion is too severe.
He requests that we make the stay permanent or, at minimum, that
24 his name be deleted from the Sanctions Opinion, citing In re
Martinez, 393 B.R. 27, 30 n.1 (Bankr. D. Nev. 2008), a case where
25 the same bankruptcy judge did not publish the subject attorney’s
name.
26 Unfortunately, during our review of this appeal, we
discovered that the Sanctions Opinion has been published.
27 Therefore, we are unable to provide this relief given prior
publication. Further, deleting DeLuca’s name from it, presuming
28 we could even order such a remedy, would be ineffective.
-17-
1 done in a manner consistent with the rules of ethics and
2 professional responsibility binding on all attorneys. Id. In the
3 court’s view, DeLuca had not complied with the applicable rules in
4 this case; his boilerplate retainer agreement did not override
5 such mandatory rules. Id.6 The court set forth several preliminary findings of fact to
7 support its decision to sanction DeLuca. It found that the issue
8 of Seare’s fraud was not overtly discussed during the consultation
9 and that DeLuca never affirmatively represented to Debtors that
10 the St. Rose debt was dischargeable. Id. at 180. It found that
11 DeLuca simply “thumbed through” the district court documents
12 without paying them much heed and that he did not represent either
13 way whether the debt was dischargeable. Id. The court also found
14 that DeLuca did not explain anything about adversary proceedings
15 during the consultation — what they are, whether one was likely in
16 this case, or what the potential consequences would be. Id. at
17 180-81. DeLuca’s cursory review of the district court documents
18 would not have led him to conclude that an adversary proceeding
19 was likely in Debtors’ case. Id. at 180. In sum, the court found
20 that DeLuca failed to carefully review the district court
21 documents or inquire about the nature of the Judgment during the
22 consultation, as had he known the debt was for fraud, he would
23 have told Debtors that St. Rose would likely seek to have it found
24 nondischargeable in an adversary proceeding. Id. at 180-81. The
25 court found that DeLuca moved quickly and did not pay sufficient
26 attention to Debtors’ individual goals and needs and that his
27 boilerplate forms and standardized approach, which may work for
28 most clients, failed to work for clients like Seare and Tedoco,
-18-
1 whose circumstances do not fit the mold of the prototypical
2 consumer debtor. Id. at 181.
3 1. DeLuca violated NRPC 1.1.5
4 The bankruptcy court held that DeLuca had violated his duty
5 of competence under NRPC 1.1 by deciding to unbundle adversary
6 proceedings in Debtors’ case. In re Seare, 493 B.R. at 192.
7 Specifically, the court found that as a result of a lack of
8 communication at the initial consultation DeLuca failed in his
9 primary duty — ascertaining Debtors’ objectives and defining the
10 goals of the representation. Id. at 190.
11 Debtors’ primary goal was to permanently stop the
12 garnishment, and once DeLuca was aware of a garnishment connected
13 to a prior judgment, he, as the bankruptcy expert, had an
14 affirmative duty to investigate. Id. at 190-91. It was not
15 Debtors’ burden to reach the legal conclusion that fraud, as
16 defined in the Code, included the fraudulent act Seare committed
17 in the district court. Id. at 190. The court found that DeLuca
18 either did not understand Debtors’ primary objective or he
19 negligently assumed the St. Rose debt was dischargeable and thus
20 Debtors’ objective would be met. Id. at 191. Either way, he did
21 not exercise the legal knowledge, skill and thoroughness
22 reasonably necessary for the representation. Id. The court found
23 that Debtors could have reasonably anticipated the St. Rose debt
24 would be discharged and that the garnishment would permanently
25 cease. Id. But, they did not likely expect that an adversary
26
5
NRPC 1.1 provides: “A lawyer shall provide competent
27 representation to a client. Competent representation requires the
legal knowledge, skill, thoroughness and preparation reasonably
28 necessary for the representation.”
-19-
1 proceeding would be filed, especially since DeLuca did not explain
2 what an adversary proceeding was or the connection between
3 nondischargeable debts and adversary proceedings. Id. In the
4 court’s view, Debtors moved forward and filed a bankruptcy case
5 they might not have otherwise filed had they known it was nearly
6 certain to lead to an adversary proceeding. Alternatively, if
7 given adequate legal counsel, they may have sought an attorney who
8 had a different fee structure concerning adversary proceedings.
9 Id.
10 The court found that DeLuca, without understanding Debtors’
11 goals for his representation, could not determine which legal
12 services were reasonably necessary to attain those goals or
13 explain to Debtors the challenges they were likely to face in
14 trying to achieve those goals by filing for bankruptcy. Id. In
15 the absence of such guidance, the court found that DeLuca had a
16 duty to offer the services reasonably necessary to achieve
17 permanent cessation of the wage garnishment. Id. at 191-92.
18 Because an adversary proceeding was a near certainty in light of
19 what DeLuca should have known at the time of the initial
20 consultation — that the Judgment was based on fraud — representing
21 Debtors at an adversary proceeding was not only reasonably
22 necessary to achieve their goal of stopping the garnishment, but
23 likely the only way to stop it. Id. at 192. Consequently,
24 DeLuca’s decision to unbundle his representation in any adversary
25 proceedings in Debtors’ case violated the duty of competence under
26 NRPC 1.1. Id.
27 ///
28 ///
-20-
1 2. DeLuca violated NRPC 1.2(c).6
2 The bankruptcy court held that DeLuca violated NRPC 1.2(c)
3 because unbundling the service of adversary proceedings was not
4 reasonable in light of Debtors’ circumstances. In re Seare, 493
5 B.R. at 196. Although the court did not find fault with DeLuca
6 using pre-prepared forms that limit the scope of services included
7 in a flat fee, it did find that deciding to unbundle services
8 reasonably necessary to achieve a client’s objectives before even
9 meeting the client was unreasonable and violated NRPC 1.2(c). Id.
10 at 194. Here, it appeared that his decision to unbundle adversary
11 services was made before he ever met Debtors. Alternatively, even
12 if DeLuca’s decision to unbundle such services was made during
13 Debtors’ initial consultation, that decision was also unreasonable
14 and violated the rule because an adversary proceeding was a near
15 certainty. Id. The court found DeLuca should have known, and
16 would have known had he cursorily investigated the nature of the
17 Judgment, that representing Seare in an adversary proceeding was
18 reasonably necessary to achieve Debtors’ reasonably anticipated
19 result — a discharge of the St. Rose debt. Id. at 194-95.
20 Debtors’ expectation of a complete discharge was reasonable
21 because DeLuca did not inform them otherwise and they are not
22 bankruptcy experts. Id. at 195.
23 The court also faulted DeLuca for not communicating his
24 intent not to represent Seare in the adversary proceeding until
25 after the complaint had been filed, knowing that an adversary
26
27 6
NRPC 1.2 provides: “A lawyer may limit the scope of the
representation if the limitation is reasonable under the
28 circumstances and the client gives informed consent.”
-21-
1 proceeding was the only way Seare could possibly discharge the
2 St. Rose debt. Unbundling such service at that point in time was
3 “patently unreasonable” and violated NRPC 1.2(c). Id. at 196.
4 Lastly, the unbundling was DeLuca’s idea, which the court
5 found ran contrary to the ABA’s guidance that unbundling should be
6 client-driven. Id.
7 The bankruptcy court held that DeLuca had further violated
8 NRPC 1.2(c) because he did not obtain Debtors’ informed consent in
9 limiting the scope of his representation. Id. at 203. First, the
10 court found that DeLuca did not comply with the rule by adequately
11 communicating the material risks of unbundling adversary
12 proceedings, either in general or in Debtors’ case, or the
13 available alternatives to such unbundling. Id. His failure to
14 properly understand their goals and details of their situation —
15 i.e., the nature of the Judgment — rendered adequate communication
16 impossible. Id. at 204. The Retainer Agreement, which the court
17 found to be DeLuca’s primary communication with Debtors, did not
18 constitute adequate communication. The Retainer Agreement’s
19 “fraud” disclaimer and statements that the flat fee does not
20 include representation for nondischargeability allegations and
21 adversary proceedings, which were in different sections, did not
22 communicate the material risks of proceeding without
23 representation in adversary proceedings, or even that DeLuca may
24 decide not to represent Debtors in an adversary proceeding. Id.
25 Thus, reasoned the court, prospective clients are left to connect
26 the dots — that a debt incurred through fraud is raised in a claim
27 of nondischargeability that is litigated in an adversary
28 proceeding. Id. Hence, without adequate information upon which
-22-
1 to base a decision, the court found that obtaining Debtors’ valid
2 consent was impossible. Id. at 203.
3 The means of consent here — initialing and signing DeLuca’s
4 contract of adhesion — did not sufficiently demonstrate that
5 Debtors understood what services were unbundled, or their
6 particular circumstance, or the seriousness of proceeding without
7 representation in adversary proceedings. Id. at 203-05. Without
8 any explanation to Debtors about the risks of unbundling services,
9 the court found that Debtors could not have known that the bundle
10 of services in the flat fee was unlikely to meet their objectives.
11 Id. at 205. DeLuca neither explained the risks of going it alone
12 in adversary proceedings nor what particular risks Debtors faced,
13 or that they could seek counsel who structured his or her services
14 differently. Id. DeLuca did not communicate the high likelihood
15 of Debtors having to represent themselves pro se or find another
16 attorney, which the court found would have been evident had he
17 reviewed the Judgment. Id. Without DeLuca ever explaining
18 adversary proceedings to Debtors, they could have reasonably
19 agreed to exclude them, assuming that such proceedings were
20 unlikely to occur. However, the court doubted whether Debtors
21 actually made that decision, since DeLuca never explained what an
22 adversary proceeding was. Id.
23 ///
24 ///
25 ///
26 ///
27 ///
28 ///
-23-
1 3. DeLuca violated NRPC 1.5.7
2 The bankruptcy court held that DeLuca violated NRPC 1.5(b)
3 because he did not sufficiently explain the scope of services
4 covered under the flat fee and the scope of services available for
5 additional fees, as the rule requires. In re Seare, 493 B.R. at
6 206. The problem with DeLuca’s Retainer Agreement was three-fold.
7 First, the listed services were in legal jargon as opposed to
8 plain English. Id. Seare understood that adversary proceedings
9 were excluded, but did not know what they were. He also knew that
10 “nondischargeability allegations” were excluded, but similarly he
11 might not have known what they were. Id.
12 Second, Debtors were not aware of the likelihood that they
13 would need to pay for additional services. Id. at 206. Because
14 an adversary proceeding was reasonably foreseeable at the time
15 Debtors agreed to the fee structure and DeLuca did not explain
16 this eventuality to them, the court found that DeLuca improperly
17 unbundled the adversary proceeding from the flat fee. Id. at 206-
18 07. He unfairly placed them in the position of having to bargain
19 for additional legal services in the midst of an adversary
20 proceeding. Id. at 207.
21 Third, DeLuca violated NRPC 1.5(b) by changing the basis of
22 his fees without advance warning to Debtors. Id. The Retainer
23 Agreement did not state that DeLuca may decide not to represent
24
7
NRPC 1.5(b) provides: “The scope of the representation and
25 the basis or rate of the fee and expenses for which the client
will be responsible shall be communicated to the client,
26 preferably in writing, before or within a reasonable time after
commencing the representation, except when the lawyer will charge
27 a regularly represented client on the same basis or rate. Any
changes in the basis or rate of the fee or expenses shall also be
28 communicated to the client.”
-24-
1 Debtors in adversary proceedings, only that such services would
2 incur additional fees. The court found that Debtors agreed to pay
3 about $2,000 for an attorney that, for the additional fees, would
4 handle nondischargeability claims and adversary proceedings, and
5 part of the basis for the $2,000 fee was the availability of
6 services if needed. Id. By deciding later not to represent
7 Debtors at all, DeLuca essentially changed the basis of his fees.
8 The court further found that because Debtors did not understand
9 adversary proceedings, the likelihood of one being filed against
10 them, and what it would cost them, they could not have known that
11 the approximately $2,000 they agreed to pay did not include the
12 scope of services reasonably necessary to achieve their goal. Id.
13 Thus, reasoned the court, their choice to pay it could not be
14 considered voluntary. Id.
15 4. DeLuca violated NRPC 1.4.8
16 The bankruptcy court held that DeLuca violated NRPC 1.4 by
17 failing to properly communicate with Debtors. In re Seare, 493
18 B.R. at 208. Specifically, DeLuca violated NRPC 1.4(a)(2) by
19 failing to reasonably consult Debtors about the means to achieve
20 their objectives. Id. He also violated NRPC 1.4(a)(3) by failing
21 to forward the proposed stipulation and order DeLuca received
22 before St. Rose filed its complaint. Id. Finally, DeLuca
23
8
NRPC 1.4 provides, in relevant part:
24
(a) A lawyer shall:
25 . . .
(2) Reasonably consult with the client about the means
26 by which the client’s objectives are to be accomplished;
(3) Keep the client reasonably informed about the status
27 of the matter;
(4) Promptly comply with reasonable requests for
28 information[.]
-25-
1 violated NRPC 1.4(a)(4) by failing to timely respond to Debtors’
2 requests for information. Id. Although the court generally
3 questioned Debtors’ credibility, it did find convincing Tedoco’s
4 claims about DeLuca’s and his staff’s failure to return phone
5 calls and to keep them informed of their case. Id. The court
6 also found independently that DeLuca’s own records evidenced his
7 office’s inattention to detail and poor client communication. He
8 failed to log which paralegal reviewed the retainer agreement with
9 each prospective client, he twice incorrectly filed his OSC briefs
10 in the main case and he failed to serve copies of his OSC briefs
11 on Debtors until after the OSC evidentiary hearing, even though he
12 was ordered to serve them immediately after the initial OSC
13 hearing. Id.
14 5. DeLuca violated § 707(b)(4)(C).9
15 The bankruptcy court reasoned that, as with DeLuca’s ethical
16 violations, his violation of § 707(b)(4)(C) flowed from his
17 failure to investigate the nature of the Judgment. In re Seare,
18 493 B.R. at 211. The court disagreed that DeLuca performed due
19 diligence in this case, finding that he had taken no steps to
20
21 9
Section 707(b)(4)(C) provides:
22 The signature of an attorney on a petition, pleading, or
written motion shall constitute a certification that the
23 attorney has—
(i) performed a reasonable investigation into the
24 circumstances that gave rise to the petition, pleading,
or written motion; and
25 (ii) determined that the petition, pleading, or written
motion—
26 (I) is well grounded in fact; and
(II) is warranted by existing law or a good faith
27 argument for the extension, modification, or
reversal of existing law and does not constitute an
28 abuse under paragraph (1).
-26-
1 investigate independently or verify the circumstances underlying
2 the Order of Wage Garnishment, which fell far short of the
3 “reasonable investigation” requirement of § 707(b)(4)(C). Id. at
4 211-213. Debtors told DeLuca of the circumstances giving rise to
5 the petition — the wage garnishment — and gave him documents from
6 the district court case. Id. at 211. DeLuca demonstrated his
7 awareness of the action by listing it in Debtors’ SOFA, including
8 the case name and number. Id. DeLuca’s reasonable next step
9 should have been to investigate the Judgment supporting the
10 garnishment, which could have been accomplished by asking
11 questions or reviewing the district court’s electronic docket.
12 Id. The fact that the Judgment led to a garnishment was a
13 sufficient “red flag” for further inquiry. Id. at 212. Instead,
14 the court found that DeLuca merely flipped through the documents
15 and assumed that since the debt was owed to a hospital, it must be
16 for medical bills and was thus dischargeable. Id. at 211-12. His
17 office also never obtained any further documents from Debtors,
18 which may have revealed information they failed to provide. Id.
19 at 212. Blaming his clients for that failure was inappropriate
20 because Debtors were not bankruptcy experts. Id.
21 ///
22 ///
23 ///
24 ///
25 ///
26 ///
27 ///
28 ///
-27-
1 6. DeLuca violated §§ 526(a)10 and 528(a).11
2 First, the bankruptcy court found that DeLuca was required to
3 comply with §§ 526 and 528(a) based on his role as a bankruptcy
4 attorney and “debt relief agency,” Debtors’ role as “assisted
5 persons,” and the nature of Debtors’ debts. In re Seare, 493 B.R.
6 at 214. Through analysis similar to that utilized in connection
7 with NRPC 1.4, the court found that DeLuca violated § 526(a) by
8 failing to accurately explain that he would not represent Debtors
9 in an adversary proceeding and the risks Debtors could face in
10 bankruptcy. Id. at 215. Although the Retainer Agreement states
11
12 10
Section 526(a) provides, in relevant part:
13 (a) A debt relief agency shall not—
14 (1) fail to perform any service that such agency
informed an assisted person or prospective assisted
15 person it would provide in connection with a case or
proceeding under this title;
16 . . .
(3) misrepresent to any assisted person or prospective
17 assisted person, directly or indirectly, affirmatively
or by material omission, with respect to—
18 (A) the services that such agency will provide to
such person; or
19 (B) the benefits and risks that may result if such
person becomes a debtor in a case under this title.
20
11
Section 528(a) provides, in relevant part:
21
(a) A debt relief agency shall—
22
(1) not later than 5 business days after the first date
23 on which such agency provides any bankruptcy assistance
services to an assisted person, but prior to such
24 assisted person’s petition under this title being filed,
execute a written contract with such assisted person
25 that explains clearly and conspicuously—
(A) the services such agency will provide to such
26 assisted person; and
(B) the fees or charges for such services, and the
27 terms of payment;
(2) provide the assisted person with a copy of the fully
28 executed and completed contract.
-28-
1 that representation for nondischargeability allegations and
2 adversary proceedings would result in additional fees, DeLuca
3 flatly refused to provide these services once the complaint was
4 filed. Thus, he violated § 526(a)(1) by failing to perform a
5 service he informed Debtors he would provide in connection with
6 their bankruptcy case. Id.
7 The court rejected DeLuca’s argument that because Debtors
8 could not afford the additional services anyway, it was immaterial
9 whether or not he was willing to perform them. This argument
10 improperly benefitted from hindsight. Id. The court found that
11 at the time DeLuca refused to perform the additional services, no
12 evidence existed that he ever offered these services to Debtors
13 and that Debtors refused them for lack of funds. Id. DeLuca
14 offered no evidence indicating he consulted at all with Debtors
15 before sending them the June 6 letter of nonrepresentation. Id.
16 At minimum, based on the Retainer Agreement, the court found that
17 DeLuca was obligated to at least quote Seare a price for the
18 adversary representation. Id.
19 The court found that DeLuca had also violated § 526(a)(3)
20 because he misrepresented, by omission, the risks associated with
21 an adversary proceeding that Debtors were nearly certain to face
22 if they filed for bankruptcy. Id. Because stopping the
23 garnishment was Debtors’ primary goal, DeLuca’s failure to address
24 the risks of a related adversary proceeding was a material
25 omission. Id.
26 DeLuca was also found to have violated § 528(a) for the same
27 reasons he had violated NRPC 1.5. Id. While he partially
28 complied with § 528(a)(1) by providing a written contract on the
-29-
1 same day as the consultation, DeLuca had violated § 528(a)(2)
2 because he failed to provide a “fully executed and completed
3 contract”; he never signed the Retainer Agreement. Id. Further,
4 the court found that DeLuca also violated § 528(a)(1) because the
5 Retainer Agreement did not “clearly and conspicuously” explain the
6 scope of services and fees. Id. Specifically, DeLuca excluded
7 services using technical terms like “nondischargeability
8 allegations” and “adversary proceedings,” which a layperson would
9 not likely understand. Further, the standard form contract did
10 not relate these services to a client’s particular case, and,
11 without clarification from DeLuca about which additional services
12 were likely to be needed, Debtors had no way of knowing which
13 exclusions were likely to apply and what the chances were of
14 facing increased legal fees. Id. at 215-16.
15 b. The sanctions imposed
16 After carefully reviewing the range of available sanctions,
17 the bankruptcy court ordered the following: (1) that DeLuca
18 disgorge the $1,999 fee paid by Debtors; (2) that the Sanctions
19 Opinion be published to deter such conduct by other attorneys in
20 the future; (3) that DeLuca complete some Continuing Legal
21 Education credits; and (4) that for the next two years DeLuca
22 provide a copy of the Sanctions Opinion to every client who is
23 sued in an adversary proceeding, but only if DeLuca declines to
24 represent them in that adversary proceeding for any reason. Id.
25 at 224-27. The court declined to impose any further monetary
26 sanctions beyond disgorgement, despite the authority to do so,
27 because of DeLuca’s good standing and his efforts to mitigate the
28 situation by offering to refund the fee and represent Seare in
-30-
1 negotiations with St. Rose. Id. at 226. DeLuca timely appealed.
2 5. The result of adversary proceeding
3 On January 2, 2013, St. Rose filed a Confession of Judgment,
4 in which Seare authorized a nondischargeable judgment against him
5 for $67,430.58.
6 II. JURISDICTION
7 The bankruptcy court had jurisdiction under 28 U.S.C. §§ 13348 and 157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158.
9 III. ISSUES
10 Did the bankruptcy court abuse its discretion in sanctioning
11 DeLuca and imposing the types of sanctions that it did?
12 IV. STANDARDS OF REVIEW
13 “We review all aspects of an award of sanctions for an abuse
14 of discretion.” Orton v. Hoffman (In re Kayne), 453 B.R. 372, 380
15 (9th Cir. BAP 2011) (citing Price v. Lehtinen (In re Lehtinen),
16 332 B.R. 404, 411 (9th Cir. BAP 2005), aff’d, 564 F.3d 1052 (9th
17 Cir. 2009)); In re Nguyen, 447 B.R. 268, 276 (9th Cir. BAP 2011)
18 (en banc)). The bankruptcy court’s choices of sanctions are also
19 reviewed for abuse of discretion. U.S. Dist. Ct. for E.D. Wash.
20 v. Sandlin, 12 F.3d 861, 865 (9th Cir. 1993). A bankruptcy court
21 abuses its discretion if it applies the wrong legal standard or
22 its factual findings are illogical, implausible or without support
23 in the record. TrafficSchool.com v. Edriver Inc., 653 F.3d 820,
24 832 (9th Cir. 2011).
25 With respect to sanctions, a bankruptcy court’s factual
26 findings are reviewed for clear error and given great deference.
27 Primus Auto. Fin. Servs., Inc. v. Batarse, 115 F.3d 644, 649 (9th
28 Cir. 1997). A factual finding is clearly erroneous if it is
-31-
1 illogical, implausible or without support in the record. Retz v.
2 Samson (In re Retz), 606 F.3d 1189, 1196 (9th Cir. 2010).
3 Whether an appellant’s due process rights were violated is a
4 question of law we review de novo. Miller v. Cardinale (In re
5 DeVille), 280 B.R. 483, 492 (9th Cir. BAP 2002), aff’d, 361 F.3d
6 539 (9th Cir. 2004).
7 V. DISCUSSION
8 A. The bankruptcy court’s power to sanction attorneys
9 “Bankruptcy courts have the inherent authority to regulate
10 the practice of attorneys who appear before them.” In re Nguyen,
11 447 B.R. at 280 (citing Chambers v. NASCO, Inc., 501 U.S. 32, 43-
12 45 (1991); Caldwell v. Unified Capital Corp. (In re Rainbow
13 Magazine, Inc.), 77 F.3d 278, 284–85 (9th Cir. 1996)).
14 “Bankruptcy courts also have express authority under the Code and
15 the Rules to sanction attorneys, including disbarment or
16 suspension from practice.” Id. at 281 (citing In re Lehtinen, 564
17 F.3d at 1058, 1062; § 105(a)). “The bankruptcy court has wide
18 discretion in determining the amount of a sanctions award.” In re
19 Kayne, 453 B.R. at 386 (internal quotation marks and citation
20 omitted). The Local Rules for the District Court of the District
21 of Nevada also grant considerable leeway in fashioning sanctions
22 for violations of the NRPC. Local Rule IA 10-7(a) provides that
23 “[a]ny attorney who violates these standards of conduct may be
24 disbarred, suspended from practice before this Court for a
25 definitive time, reprimanded or subjected to such other discipline
26
27
28
-32-
1 as the court deems proper.”12
2 In reviewing attorney disciplinary sanctions, we determine
3 whether (1) the disciplinary proceeding was fair, (2) the evidence
4 supports the findings, and (3) the penalty imposed was reasonable.
5 In re Nguyen, 447 B.R. at 276.
6
B. The bankruptcy court did not abuse its discretion when it
7 sanctioned DeLuca and imposed the sanctions that it did.
8 DeLuca raises several arguments on appeal, most of which
9 pertain to the bankruptcy court’s findings of fact or his dispute
10 with some of the sanctions imposed. We address each of his
11 arguments in turn.
12 We begin with the bankruptcy court’s consideration of
13 Tedoco’s late-filed brief after the matter had been taken under
14 submission. The court stated at the OSC evidentiary hearing that
15 once the transcripts from the two OSC hearings were recorded on
16 the docket, the matter would stand submitted. The transcripts
17 were recorded on October 30, 2012. Presumably, evidence closed on
18 that date. Tedoco’s brief was filed on December 4, 2012. Citing
19 to no authority, DeLuca argues that the bankruptcy court committed
20 reversible error by considering Tedoco’s late-filed brief and
21 relying on the inadmissible facts contained therein for much of
22 its decision.
23 Reopening of a case after the close of evidence rests in the
24 discretion of the trial court. Mo. Pac. Ry. Co. v. Oleson, 213 F.
25 329, 331-32 (8th Cir. 1914); United States v. Hugh, 236 F. App’x
26
12
Part IA of the Local Rules of Practice for the U.S.
27 District Court for the District of Nevada apply in all bankruptcy
cases and proceedings in the U.S. Bankruptcy Court for the
28 District of Nevada. See Local Rule IA 2-1.
-33-
1 796, 802 (3d Cir. June 14, 2007) (Ambro, J., dissenting) (“there
2 is no iron-bound, copper-fastened, double-riveted rule against the
3 admission of evidence after both parties have rested upon their
4 proof”) (quoting United States v. Blankenship, 775 F.2d 735, 741
5 (6th Cir. 1985) and citing Oleson). Therefore, it was within the
6 bankruptcy court’s discretion to consider Tedoco’s late-filed
7 brief.
8 However, we agree with DeLuca that Tedoco’s brief consisted
9 only of argument, not admissible evidence. As such, the
10 bankruptcy court erred in considering it. United States v.
11 Moreland, 622 F.3d 1147, 1162 (9th Cir. 2010) (argument is not
12 evidence); Hurley v. Student Loan Acquisition Auth. of Ariz. (In
13 re Hurley), 258 B.R. 15, 23 (Bankr. D. Mont. 2001). Nonetheless,
14 much of what Tedoco asserted had already been established by
15 Seare, either by his testimony at the OSC evidentiary hearing or
16 in documentary evidence the parties submitted. Therefore, it was
17 harmless error for the bankruptcy court to consider any facts
18 asserted in the brief because they were already before the court
19 through competent evidence. Lillie v. United States, 953 F.2d
20 1188, 1192 (10th Cir. 1992) (admission of improper evidence of a
21 fact in issue is harmless when the judgment is supported by
22 sufficient competent evidence). The few facts the court should
23 not have considered, however, as we discuss more fully below, are
24 insufficient to establish reversible error.
25 1. DeLuca’s arguments regarding the violations of the NRPC
26 a. NRPC 1.1 and NRPC 1.2
27 DeLuca first takes issue with the bankruptcy court’s findings
28 under NRPC 1.1 that his unbundling of adversary proceedings was
-34-
1 unreasonable in this case because it failed to achieve Debtors’
2 reasonably anticipated result — i.e., discharge of the St. Rose
3 debt. DeLuca contends that three problems exist with this
4 finding: (1) it assumes the debt was dischargeable; (2) the
5 bankruptcy court made comments during the initial OSC hearing with
6 Seare present that led Seare to testify at the evidentiary hearing
7 that dischargeability and adversary proceedings were not explained
8 to him by DeLuca; and (3) it fails to recognize that because
9 St. Rose did not include Tedoco in the adversary proceeding and
10 she received a discharge, the debt is uncollectible against Seare
11 under the community discharge, so DeLuca did in fact achieve
12 Debtors’ reasonably anticipated result.
13 Any bankruptcy professional would recognize the obstacles a
14 debtor faces in trying to achieve the discharge of a debt based on
15 fraud. However, the bankruptcy court found that Debtors could
16 have reasonably anticipated the St. Rose debt would be discharged
17 and that the garnishment would permanently cease, based on
18 DeLuca’s failure to investigate the Judgment and inform his
19 clients of the inevitable adversary proceeding. It further found
20 it impossible for DeLuca to provide adequate counsel as a result
21 of his erroneous assumption that the Judgment arose from unpaid
22 medical bills. We see no clear error in that finding.
23 As for comments made by the bankruptcy court at the initial
24 OSC hearing, it is true that Seare testified at the later
25 evidentiary hearing that he did not know what adversary
26 proceedings were and that DeLuca never discussed them. However,
27 this was not the only evidence showing that DeLuca failed to
28 explain the meaning of dischargeable versus nondischargeable
-35-
1 debts, the meaning of adversary proceedings or the connection
2 between them. It was reasonable for the court to infer that this
3 discussion never occurred with Debtors because, by DeLuca’s own
4 admission, he was not aware that the Judgment was based on fraud.
5 Also, Seare testified that the issue of fraud never came up at the
6 consultation. If it had, one would expect DeLuca to have
7 explained nondischargeable debts and adversary proceedings. More
8 importantly, DeLuca never affirmatively testified that he did
9 explain these matters to Debtors and no record exists that any
10 member of DeLuca’s staff did either. Although it was his office’s
11 protocol to have a staff member go through every page of his
12 retainer agreement with clients, DeLuca could not establish that
13 it occurred in this case. Tedoco claimed that no one went through
14 the Retainer Agreement with Debtors, but this was an inadmissible
15 fact the bankruptcy court should not have considered.
16 As for his third argument that the St. Rose debt is
17 uncollectible due to the community discharge, DeLuca admits he did
18 not raise this issue before the bankruptcy court. As such, we are
19 not required to consider it for the first time on appeal.
20 O’Rourke v. Seaboard Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d
21 955, 957 (9th Cir. 1989); Concrete Equip. Co. v. Fox (In re Vigil
22 Bros. Constr., Inc.), 193 B.R. 513, 520 (9th Cir. BAP 1996). In
23 any event, when considering whether the community discharge under
24 § 524(a)(3) applies, the bankruptcy court must first determine
25 whether the debt is a community debt under state law. The court
26 must then determine the scope of the discharge. Arcadia Farms
27 Ltd. v. Rollinson (In re Rollinson), 322 B.R. 879, 881 (Bankr. D.
28 Ariz. 2005) (“Once a debt has been determined to be a community
-36-
1 debt pursuant to state law, the second issue is the scope of the
2 discharge.”). Neither of those determinations have been made
3 here. Further, “when the debtor has incurred a nondischargeable
4 debt or is not entitled to a discharge, or the debtor’s spouse
5 would have been denied a discharge or had a debt declared
6 nondischargeable in a hypothetical bankruptcy case commenced on
7 the same day as that of the debtor, the nondischargeable debt of
8 either spouse will survive against after-acquired community
9 property.” 4 COLLIER ON BANKRUPTCY ¶ 524.02[3][a] (Alan N. Resnick &
10 Henry J. Sommer eds., 16th ed. 2013). Therefore, Debtor was not
11 entitled to a community discharge of a debt he could not himself
12 discharge. Even if DeLuca’s argument has merit, which we do not
13 believe it does, we find it improper that he rely on subsequent
14 events beyond his control to try to negate his prior shortcomings
15 in complying with the rules of ethics.
16 DeLuca next takes issue with the bankruptcy court’s finding
17 that he failed to obtain Debtors’ informed consent to unbundle
18 adversary proceedings. DeLuca rests his arguments on the
19 disclosures in the Retainer Agreement and FAQ about the
20 nondischargeability of fraud debts and Seare’s admission that he
21 did not read the FAQ. DeLuca contends the court erred in finding
22 that Seare did not give informed consent, after Seare had admitted
23 he made no effort to read any of the documents he signed and
24 failed to ask any questions. In other words, argues DeLuca, a
25 client cannot argue that disclosures are insufficient and consent
26 invalid when he makes no effort to read, review and question
27 critical documents. The bankruptcy court considered and rejected
28 this argument. It found that the Retainer Agreement’s “fraud”
-37-
1 disclaimer and its disconnected “legal jargon” statements about
2 what was or was not included in the flat fee left prospective
3 clients to “connect the dots” that a debt incurred through fraud
4 is raised in a claim of nondischargeability, which is litigated in
5 an adversary proceeding, and that it was something that requires
6 additional fees for representation. The court also found it
7 improper for DeLuca to put the onus on layperson debtors to make
8 these conclusions. We see no clear error here.
9 DeLuca also quibbles with the bankruptcy court’s
10 characterization of Debtors’ goal as one to “permanently” stop the
11 wage garnishment, when Seare testified that his desire was “to get
12 the wage garnishment stopped.” DeLuca argues that the court added
13 the word “permanently,” which it inferred from Tedoco’s late-filed
14 brief — a brief it should not have considered. Although Tedoco
15 used the word “permanently” in her brief, Seare also testified at
16 the evidentiary hearing that the sole reason for filing bankruptcy
17 was to “get rid of” the garnishment and that the temporary
18 cessation of it was not the benefit they were seeking. Further,
19 DeLuca’s argument defies logic. Of course Debtors wanted the
20 garnishment to disappear forever, not just for a few months.
21 DeLuca alternatively argues that even if Debtors’ goal was
22 permanent cessation of the garnishment, the garnishment was
23 stopped as of the date of the OSC evidentiary hearing, so DeLuca
24 did fulfill his duty of competence by achieving the goal of
25 “stopping the garnishment.” For the reasons already discussed and
26 given by the bankruptcy court, we need not address this meritless
27 argument.
28 Lastly, DeLuca argues that the bankruptcy court “improperly
-38-
1 put itself in Debtors’ place” and went outside the record when it
2 found that Debtors may have chosen not to file bankruptcy or may
3 have sought an attorney with a different fee structure, had they
4 known about the dischargeability concerns related to the St. Rose
5 debt. We disagree. This inference was reasonable for the court
6 to make in light of this record. Plus, this fact alone does not
7 change the conclusion that DeLuca violated his duty of competence.
8 Despite DeLuca’s contentions, whether the St. Rose debt was
9 actually dischargeable is not the point. The point is: What is
10 the nature of the debt; what relief may the creditor seek against
11 Debtors; and what will Debtors need to do to defend against the
12 claim? Debtors needed DeLuca to inform them sufficiently of the
13 risks associated with the St. Rose debt before they could properly
14 provide informed consent to allow DeLuca to unbundle services.
15 DeLuca failed to advise them about the debt or its risks because
16 he did not perform even a minimal investigation, which would have
17 revealed that the Judgment arose from fraud. Without that
18 knowledge, it was impossible for DeLuca to determine Debtors’
19 circumstances and advise them as to what sort of representation
20 would be needed to achieve their goal of eliminating the St. Rose
21 debt and the garnishment.
22 We conclude the bankruptcy court did not err in determining
23 DeLuca violated NRPC 1.1 and 1.2(c).
24 b. NRPC 1.4 and NRPC 1.5
25 DeLuca next argues that the bankruptcy court erred in
26 determining he violated NRPC 1.5 because he did not sufficiently
27 explain the scope of services covered under the flat fee and the
28 scope of services available for additional fees. DeLuca points to
-39-
1 Seare’s testimony that he understood DeLuca would not be
2 representing him in any allegations of fraud. Again, DeLuca
3 misses the point. Seare may have understood that defending fraud
4 allegations would require an additional fee or that adversary
5 proceedings or nondischargeability allegations were excluded from
6 the flat fee, but the Retainer Agreement — the only communication
7 to Debtors explaining the scope of DeLuca’s services and/or for
8 what fees — failed to make the connection between these issues.
9 Accordingly, we perceive no error with the bankruptcy court’s
10 decision that DeLuca violated NRPC 1.5.
11 Finally, DeLuca contends the bankruptcy court erred in
12 determining that he violated NRPC 1.4 by failing to properly
13 communicate with Debtors. DeLuca first asserts a due process
14 concern over whether he received sufficient notice that the
15 bankruptcy court was considering sanctioning him under this rule.
16 DeLuca correctly notes that any potential violations of NRPC 1.4
17 were not raised in the OSC, or in the order setting the
18 evidentiary hearing, or at either hearing. Therefore, he argues
19 that sanctioning him under this rule violated his due process
20 rights and should be reversed. “When an attorney is subject to
21 discipline, he or she has a right to notice and an opportunity to
22 be heard.” In re Nguyen, 447 B.R. at 278 (citing In re Ruffalo,
23 390 U.S. 544, 551-52 (1968); In re Lehtinen, 564 F.3d at 1060)).
24 To satisfy the requirements of due process in this context, “the
25 attorney must receive prior notice of the ‘the particular alleged
26 misconduct and of the particular disciplinary authority under
27 which the court is planning to proceed’ along with an opportunity
28 to respond.” Id. (quoting In re DeVille, 361 F.3d at 548). The
-40-
1 rule, however, is not absolute. In re Deville, 361 F.3d at 548.
2 Here, the OSC notified DeLuca of his alleged misconduct and
3 that the bankruptcy court was considering disciplining him under
4 NRPC 1.1, 1.2 and 1.5. Absent from this is any reference to
5 NRPC 1.4. Despite the court’s omission of NRPC 1.4 in the OSC or
6 in the order setting the evidentiary hearing, we conclude that
7 DeLuca was not deprived of due process. DeLuca had notice of the
8 conduct potentially subjecting him to discipline under several
9 provisions of the NRPC and under sections of the bankruptcy code,
10 which interrelatedly address similar, if not, identical
11 requirements imposed under the general rubric of professional
12 conduct. If the attorney has been sufficiently informed of the
13 alleged misconduct, the Ninth Circuit has upheld sanctions even
14 when a bankruptcy court, in advance of a disciplinary proceeding,
15 stated that Rule 9011 was the basis for discipline, yet it
16 proceeded to impose sanctions under its inherent authority. See
17 In re DeVille, 361 F.3d at 550. Even if the court improperly
18 considered NRPC 1.4, it committed harmless error as the elements
19 of this rule are also generally included in the provisions that
20 were identified by the court in its orders, i.e., NRPC 1.4,
21 § 526(a) and § 528(a) involve what services and means are
22 necessary to accomplish the client’s objectives. The bankruptcy
23 court informed DeLuca through orders and at the hearings of the
24 conduct that would be the subject of any discipline.
25 Nonetheless, we must address a second issue. Many of the
26 facts asserted in Tedoco’s brief were used extensively in the
27 bankruptcy court’s decision to find that DeLuca had violated
28 NRPC 1.4. Again, these “facts” should not have been considered.
-41-
1 However, other admissible facts in the record support the court’s
2 decision to find that DeLuca violated NRPC 1.4, namely, DeLuca’s
3 failure to inform Debtors of the St. Rose fax containing the
4 proposed stipulation and order about the Judgment. Also in
5 evidence was Debtors’ email to DeLuca’s office that his failure to
6 return phone calls was unacceptable and unprofessional customer
7 service. Finally, the court found independently that DeLuca’s own
8 records indicated his office’s inattention to detail and poor
9 client communication. He fails to log which paralegal reviewed
10 the retainer agreement with each prospective client. As such, we
11 see no error in the bankruptcy court’s decision that DeLuca
12 violated NRPC 1.4.
13 2. DeLuca’s arguments regarding the violations of
§§ 707(b)(4)(C), 526(a)(1) and (3), and
14 528(a)(1) and (2)
15 DeLuca also raises a due process concern with respect to the
16 bankruptcy court’s decision to sanction him under these various
17 sections of the Code. DeLuca contends that the court only
18 “orally” added §§ 707(b)(4) and 526(a), both of which have four
19 subparts each, at the initial OSC hearing and failed to specify
20 which subpart(s) DeLuca potentially violated. Thus, because he
21 was not provided adequate written notice of these alleged
22 violations, nor the potential sanctions associated with them,
23 DeLuca contends they should all be stricken. While it is true
24 that the court orally added these Code sections at the initial OSC
25 hearing out of concern for some of DeLuca’s answers, this was not
26 the only notice DeLuca received about them.
27 In the order entered on September 20, 2012, and setting the
28 evidentiary hearing, the bankruptcy court specifically set forth
-42-
1 which subpart(s) of each section were at issue, citing them right
2 in the order. Notably, DeLuca failed to include this order in his
3 excerpts of record. Given his failure to include the order,
4 DeLuca’s contention on appeal that he did not receive written
5 notice of the Code sections at issue is sanctionable.
6 DeLuca asserts that even if we conclude he received adequate
7 notice, he nonetheless complied with each section. As for
8 § 707(b)(4)(C), DeLuca argues that the “reasonable investigation”
9 requirement goes more to the omission of assets or debts, not
10 whether a debt is dischargeable. While it is true that much of
11 the case law on this issue has concerned an attorney’s omission of
12 assets in bankruptcy schedules, DeLuca has not cited any authority
13 establishing that this section could not be applied in the way the
14 bankruptcy court did here. Bottom line, DeLuca did not perform a
15 “reasonable investigation into the circumstances that gave rise to
16 the petition.” § 707(b)(4)(C). Accordingly, we see no error.
17 DeLuca also contends that he complied with § 526(a)(1) and
18 (3). Although his argument is somewhat unclear, DeLuca apparently
19 argues that he did not violate § 526(a)(1) because the Retainer
20 Agreement stated only that he would not represent Debtors in an
21 adversary proceeding without additional fees, not that he would
22 not represent them in one at all, as the bankruptcy court found.
23 DeLuca says he decided to not represent Debtors after the full
24 scope of Seare’s actions became known. First, the bankruptcy
25 court did not find that the Retainer Agreement said DeLuca would
26 never represent Debtors in an adversary proceeding. In fact, it
27 found just the opposite, which led to DeLuca’s problem. The
28 Retainer Agreement stated that representation for
-43-
1 nondischargeability allegations and adversary proceedings was
2 available for an additional fee, but DeLuca flatly refused to
3 provide these services once the complaint was filed. Hence, the
4 court found he violated § 526(a)(1) for his failure to perform a
5 service he informed Debtors that he would provide in connection
6 with their bankruptcy case.
7 As for § 526(a)(3), DeLuca contends that because the St. Rose
8 complaint did not include Tedoco and she received a community
9 discharge, and thus the debt is ultimately uncollectible against
10 Seare, the bankruptcy court erred in determining that he violated
11 § 526(a)(3). For the same reasons stated above, we reject this
12 argument. In any event, the record supports the bankruptcy
13 court’s decision. DeLuca failed to comply with § 526(a)(3)
14 because he did not inform Debtors about the risks associated with
15 an adversary proceeding they were nearly certain to face once they
16 filed for bankruptcy.
17 Lastly, DeLuca contends that he received even less due
18 process regarding any violations of § 528 because it was never
19 mentioned prior to the bankruptcy court’s decision. We agree that
20 § 528 was not mentioned anywhere prior to the entry of the court’s
21 Sanctions Opinion. However, as a bankruptcy attorney, DeLuca knew
22 he had not signed the Retainer Agreement as required by § 528.
23 Further, as noted by the bankruptcy court, DeLuca satisfied the
24 qualifying factors imposed by § 528 and was required by statute to
25 comply with its requirements. As § 528 mandates compliance, we
26 find no error.
27 3. DeLuca’s arguments about the sanctions imposed
28 DeLuca argues that the sanctions imposed upon him were too
-44-
1 severe. Specifically, he argues that the bankruptcy court
2 impermissibly went far beyond the list in its OSC of potential
3 sanctions DeLuca faced. The orders specifically provided that
4 monetary and nonmonetary sanctions may be considered and imposed.
5 Keeping in mind that bankruptcy judges have broad discretion in
6 determining the type of sanctions to impose, the court imposed
7 sanctions encompassed within the general designation of monetary
8 and nonmonetary sanctions expressly stated in the OSC. The court
9 did not impermissibly exceed the described sanctions. We further
10 conclude that the sanctions were fair, supported by the evidence
11 and reasonable. See In re Nguyen, 447 B.R. at 276.
12 DeLuca argues that ordering him to provide a copy of the
13 Sanctions Opinion to potential adversary clients whose case he
14 declines for the next two years is excessive and violates his
15 commercial free speech. Leaving aside momentarily the “excessive”
16 argument, DeLuca has not cited a case holding that ordering a
17 sanctioned attorney to provide prospective clients with the
18 court’s decision sanctioning the attorney violates his or her free
19 speech. In any event, this sanction was of particular importance
20 to the bankruptcy court as a means to protect future debtors by
21 ensuring they are properly informed of the risks of unbundling,
22 and to promote a systematic change in DeLuca’s practice, which the
23 court characterized as a “mill” practice. The court also saw this
24 sanction as a means of informing the bar that being disciplined
25 for unethical conduct has repercussions beyond just paying a fine
26 and moving on. We find it difficult to disagree with this
27 reasoning. Accordingly, we do not conclude that this sanction was
28 excessive.
-45-
1 Lastly, DeLuca argues that he should not have to disgorge his
2 fee, particularly the filing fee and credit report fee, because
3 Debtors did obtain the benefit of a discharge, and Seare’s credit
4 score increased by over 100 points following the discharge. As
5 for the actual fee paid to DeLuca, we cannot say the bankruptcy
6 court abused its discretion under the circumstances. In fact, it
7 did not, despite the authority to do so, order any additional
8 monetary sanctions because of DeLuca’s efforts to return his fee
9 to Debtors and to represent Seare in settlement negotiations with
10 St. Rose. Given the record, we conclude the bankruptcy court did
11 not abuse its discretion in including the filing and credit report
12 fees within the total amount to be disgorged, especially when
13 prior to the issuance of the Sanctions Opinion, DeLuca agreed to
14 return Debtors’ money.13
15 VI. CONCLUSION
16 Consumer bankruptcy attorneys can unbundle their services in
17 Nevada, particularly, adversary proceedings. However, unbundling,
18 or limited scope representation, needs to comply with the rules of
19 ethics and the Bankruptcy Code. A qualitative analysis of each
20 individual debtor’s case must be done at intake to ensure that his
21 or her reasonable goals and needs are being met. That calculus
22
13
DeLuca also argues that the bankruptcy court erred in
23 refusing to allow him to disclose the terms of the settlement
offer between St. Rose and Seare that he helped procure, before it
24 imposed sanctions. Actually, the “cat is already out of the bag”
since DeLuca mentioned it on the record at the OSC evidentiary
25 hearing, and the transcript is on the docket for the world to see.
Certainly, the bankruptcy court was aware of it at the time it
26 entered the Sanctions Opinion. In any event, we fail to see how
allowing this into the record would have made any significant
27 difference in the sanctions the court imposed. Actually, DeLuca’s
offer to help Seare procure a settlement with St. Rose appears to
28 have helped him.
-46-
1 was not applied in this case. For the foregoing reasons, we
2 AFFIRM.
3
4 Concurrence begins on next page.
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-47-
1 JURY, Bankruptcy Judge, Concurring:
2
3 I write separately to highlight what this disposition, and
4 the lengthy published opinion of the bankruptcy court in In re
5 Seare, 493 B.R. 158, hold and what they do not hold. Importantly,
6 they do not hold that unbundling representation of a debtor in a
7 nondischargeability adversary proceeding from general
8 representation of that debtor in a bankruptcy case is prohibited.
9 What they do say is that an attorney who wishes to limit her or
10 his scope of bankruptcy representation should be mindful of the
11 ethical minefield he or she must navigate.
12 I agree with the majority that the bankruptcy judge here did
13 not abuse his discretion in concluding that DeLuca violated
14 numerous sections of the Nevada Rules of Professional Conduct
15 (NRPC) and also failed to comply with certain requirements of the
16 Bankruptcy Code when he unbundled representation of Seare in the
17 St. Rose adversary. The factual findings amply support the
18 conclusion that Deluca stumbled in that ethical minefield.
19 However, unbundling representation of a consumer debtor in an
20 adversary proceeding is neither prohibited by state ethical
21 standards nor by the Bankruptcy Code. If done correctly,
22 unbundling may be key to competent consumer bankruptcy attorneys
23 providing much needed representation to debtors at an affordable
24 price. Without the ability to unbundle adversaries, the flat fee
25 which a consumer attorney would need to charge for basic
26 bankruptcy representation might become prohibitive and exacerbate
27 the already existing problem of pro se filings.
28 To be sure, the bankruptcy judge here did not suggest that
-1-
1 unbundling was never appropriate. Indeed, in his opinion he
2 describes the background and general acceptance of limited scope
3 representation by the American Bar Association (ABA), which has
4 provided for limited scope in its Model Rules, the American
5 Bankruptcy Institute (ABI), and by most states in their ethical
6 rules which monitor the performance of lawyers. Seare, 493 B.R.
7 at 183. Despite recognizing this broad acceptance, however, the
8 bankruptcy judge found that DeLuca fell woefully short of
9 complying with the ethical standards which surround unbundling and
10 therefore sanctioned him for this shortcoming. The judge found
11 that unbundling the adversary proceeding in the representation of
12 Seare based on the unique facts of this case was not possible to
13 achieve the reasonably anticipated result of the client.
14 Therefore, I believe it is useful to focus on why this unbundling
15 failed and how a consumer bankruptcy lawyer might avoid the
16 pitfalls which brought down DeLuca.
17 As highlighted by the bankruptcy judge, both the NRPC and the
18 ABA Model Rules state that an attorney may “limit the scope of
19 representation if the limitation is reasonable under the
20 circumstances and the client gives informed consent.”
21 NRPC 1.2(c); ABA Model Rule 1.2. It was the implementation of
22 this rule from the initial intake interview that tripped DeLuca up
23 because he did not properly define the goal of the representation
24 of Seare: to permanently stop the garnishment on the St. Rose
25 judgment. The failure to recognize this goal was caused by the
26 circumstances described by the bankruptcy judge and the majority
27 and need not be repeated here. In a nutshell, the communication
28 between Seare and DeLuca did not cause DeLuca to recognize that
-2-
1 the St. Rose judgment was likely nondischargeable as based on
2 fraud14; therefore, his representation would not stop the
3 garnishment permanently unless he defended and won or settled the
4 adversary proceeding. By not making the necessary reasonable
5 inquiry about the judgment, DeLuca’s attempt to unbundle did not
6 achieve the goal of limited scope: to provide a bundle of services
7 reasonably necessary to achieve the client’s reasonably
8 anticipated result. In re Seare, 493 B.R. at 188.
9 All the other ethical and statutory violations found by the
10 bankruptcy judge flowed from this initial deficiency in the
11 limited scope representation. DeLuca failed to perform
12 competently because he did not identify the goal and provide
13 services to accomplish the goal - i.e. representing Seare in the
14 adversary proceeding, causing the violation of NRPC 1.1. The
15 unbundled services he promised for the agreed flat fee was not a
16 reasonable limited scope, causing the NRPC 1.2 error. He did not
17 obtain informed consent because he relied on a boilerplate
18 Retainer Agreement with legal jargon which, although it described
19 fraud as nondischargeable and that representation in an adversary
20 was not included in the flat fee, did not connect the dots such
21 that Seare was made aware of the risk of accepting such limited
22 scope representation and why it would not achieve his desired
23 result, being free of the St. Rose garnishment. Just Seare
24 initialing every page of the Retainer Agreement did not provide
25 the particularized communication necessary for informed consent.
26
14
It is ironic to me that although every reference to this
27 judgment as being nondischargeable talks about fraud, the grounds
under which St. Rose sought nondischargeability were §§ 523(a)(4)
28 and (6), not fraud.
-3-
1 The other violations of the NRPC are similarly tied to failure to
2 identify the goal and provide the services necessary to achieve
3 it.
4 The Bankruptcy Code violations are founded on the same
5 deficiencies: DeLuca’s failure to investigate the St. Rose
6 judgment to determine its nondischargeable nature caused the
7 § 707(b)(4)(c) violation; the failure to get informed consent
8 regarding nonrepresentation in the adversary resulted in the
9 § 526(a)(1) violation (when DeLuca refused to represent Seare at
10 all in the adversary, even for a further fee); and DeLuca violated
11 § 526(a)(3) when he did not fully explain the limitation on the
12 services which the flat fee would buy.15
13 The bankruptcy judge chose to publish his opinion as part of
14 the sanctions of DeLuca “to deter such conduct by all attorneys.”16
15 I summarize here my suggestions for such attorneys to avoid
16 violating ethical rules and the Bankruptcy Code when they limit
17 the scope of representation of consumer debtors:
18 1. At the initial intake interview with the debtor, identify
19 fully and completely the debtor’s goals. Almost by definition,
20 the attorney therefore cannot have a predetermined business
21 practice that excepts representation in adversary proceedings from
22 the services the attorney will render unless the attorney and
23
24
15
The violation of § 528 is based on the failure of DeLuca to
25 sign the Retainer Agreement and is not related to the unbundling
issue.
26
16
In joining the majority, I also endorse their view that the
27 bankruptcy judge followed the proper procedures and had the
authority to impose the sanctions ordered, in accordance with In
28 re Nguyen, 447 B.R. 268 (9th Cir. BAP 2011) (en banc).
-4-
1 debtor identify that exception before deciding to commence
2 representation. As noted by the bankruptcy judge, the decision to
3 unbundle must be driven by the debtor’s needs, not the attorneys.
4 2. The attorney may not rely solely on the debtor’s input to
5 help him or her ascertain the debtor’s goal. Both the ethical
6 rules and the Code require the attorney to conduct a reasonable
7 investigation of the debtor’s assets and liabilities. If the
8 attorney learns that a judgment has been taken against the debtor,
9 the attorney must make reasonable inquiry into the nature of the
10 judgment in order to determine whether it might be subject to
11 nondischargeability.
12 3. If, after ascertaining the debtor’s goals, the attorney
13 believes that limited scope representation is consistent with
14 those goals, the attorney must then fully explain to the debtor
15 the consequences and inherent risks which might arise if an
16 adversary is filed against the debtor and the attorney has not
17 included representation in that proceeding in the unbundled
18 services. Informed consent is just that: informed. The debtor
19 must understand the “legal jargon” and the practical effect on him
20 or her of the limited scope representation before the consent is
21 informed.
22 4. The attorney must customize the retainer agreement to the
23 goals of debtor. That is not to say that much of the agreement
24 cannot be boilerplate, but boilerplate without the attorney’s
25 active role in its preparation will be insufficient for limited
26 scope representation. Just having the debtor read and initial the
27 agreement does not assure the debtor is giving informed consent.
28 5. After describing to the debtor the risks of limited scope
-5-
1 representation, the attorney must give the debtor the opportunity
2 to “shop elsewhere” for an attorney who will provide full
3 representation before entering into the contractual relationship
4 with the debtor for the limited scope.
5 6. The attorney should document as fully as possible all the
6 steps taken to comply with these requirements.
7 Following these suggestions should go a long way to allowing
8 consumer bankruptcy attorneys to unbundle adversary proceeding
9 representation without violating ethical rules.
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-6-