In Re Monteagudo

Case: 13-20044 Document: 00512312722 Page: 1 Date Filed: 07/18/2013
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
July 18, 2013
No. 13-20044 Lyle W. Cayce
Summary Calendar Clerk
In the Matter of: GENE MICHAEL MONTEAGUDO,
Debtor
------------------------
JASON D. ANDERSON,
Appellant
Appeals from the United States District Court
for the Southern District of Texas
USDC No. 4:12-CV-2481
Before REAVLEY, JOLLY, and DAVIS, Circuit Judges.
PER CURIAM:*
Appellant Jason D. Anderson (“Anderson”), an attorney, appeals an order
of the District Court affirming an order of the bankruptcy court imposing certain
sanctions on Anderson for his refusal to comply with directives to refrain from
routinely violating Rule 9 of the Federal Rules of Civil Procedure by persistently
refusing to plead fraud with particularity. For substantially the same reasons
set forth in the district court’s careful opinion of January 23, 2013, we AFFIRM.
*
Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.
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No. 13-20044
I.
At the time of the events relevant to this appeal, Anderson worked as an
associate at Weinstein & Riley, P.S., a Seattle-based firm that represented
Discover Bank (the issuer of the Discover Card) in various bankruptcy matters.
Anderson appeared regularly before the bankruptcy court for Discover in § 523
proceedings seeking to deny the discharge of credit card debt pursuant to 11
U.S.C. § 523(a)(2). Section 523 provides an exception to the discharge of debt in
chapter 7 bankruptcy if the debtor obtained the debt by “false pretenses, false
representations, or actual fraud.” 11 U.S.C. § 523(a)(2)(A). Because fraud is an
element of a § 523(a)(2)(A) action, Anderson was required to plead fraud in these
actions.1
In this case, Monteagudo, filed for chapter 7 bankruptcy in January 2012,
seeking to discharge all debts, including charges made on his Discover card. In
March, Anderson filed a complaint on behalf of Discover alleging that
Monteagudo fraudulently charged $6,000 to his Discover card and that, pursuant
to § 523(a)(2)(A), this amount was nondischargeable. Despite the plain language
in Rule 9 of the Federal Rules of Civil Procedure, requiring a party alleging
fraud to “state with particularity the circumstances constituting fraud or
mistake,”2 Anderson’s complaint alleged no facts to support his fraud claim.
The presiding bankruptcy court judge (Judge Isgur) had dealt with
Anderson as Discover’s counsel in previous § 523(a)(2)(A) complaints. Indeed,
Judge Isgur first confronted Anderson about his failure to allege facts as
1
The record indicates that Anderson filed sixty-eight § 523(a)(2) complaints before the
Southern District in the twenty-two months preceding the issuance of the bankruptcy court’s
order at issue here.
2
FED. R. CIV. P. 9(b); see also FED. R. BANKR. P. 7009; In re Mercer, 246 F.3d 391, 401-03
(5th. Cir. 2001) (en banc) (holding that in order to succeed in a §523(a)(2)(A) action, a credit
card lender must plead facts sufficient to prove fraud under a common law standard).
2
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required by Rule 9 during a hearing in a separate case, In re Fuentes,3 in May
of 2012. During that hearing, Anderson argued that Rule 9(b) should not be
interpreted to require the moving party to plead fraud with particularity as a
matter of course; rather, the rule to plead with particularity becomes obligatory
only after objection by opposing counsel. Judge Isgur rejected Anderson’s
argument and made clear to Anderson that he must fully comply with Rule 9
when alleging that the debtor committed fraud.
Despite Judge Isgur’s unequivocal instruction to Anderson, Anderson did
not amend the complaint he had filed in Monteagudo earlier in the year.
Consequently, Judge Isgur ordered Anderson to show cause why “Discover Bank
and its counsel should not be compelled to comply with Rule 9(b) in filing future
adversary proceedings” and scheduled a hearing on the matter for July 26, 2012.
The show cause order further stated:
Jason Anderson (Discover Bank’s counsel of record) must be
present. In addition, a corporate representative who has the full
authority to direct Discover Banks’s present and future counsel . .
. must be present.
On July 26th, Anderson appeared before Judge Isgur but he was not
accompanied by Discover Bank representatives. When Judge Isgur brought the
absence of the Discover personnel to Anderson’s attention, Anderson responded
that he did not believe that the show cause order’s direction regarding the
Discovery personnel was mandatory, so he neither brought them to the hearing
nor informed them that it was scheduled.
In response, Judge Isgur ordered Anderson to appear in court twice a day
each day until the Discover personnel joined him. When the Discover officers
arrived several days later, Judge Isgur proceeded with the show cause hearing
in order to receive assurance from the Discover officers and Anderson that they
3
474 B.R. 497 (Bankr. S.D. Tex. 2012).
3
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would follow Rule 9(b) in § 523(a)(2) filings as a matter of course. While the
Discover officers readily promised to heed the court’s instruction, Anderson’s
own statements left Judge Isgur unconvinced that Anderson would comply with
his instructions.4
Concerned about “Anderson’s lack of candor and his untruthfulness” and
unconvinced that Anderson would plead future § 523(a)(2) complaints with
particularity, Judge Isgur issued a Memorandum Opinion and Order directing
him and any other attorney from Weinstein & Riley to comply with Rule 9 in all
§ 523 complaints and to file a copy of the order along with all § 523(a)(2)
complaints they filed in the Southern District of Texas for a period of one year.
The order further required that Anderson file a copy of the order under a
separate docket entry and serve a copy to all parties to the proceeding.
Anderson appealed the bankruptcy court’s order to the district court. The
district court remanded the case to the bankruptcy court with instructions to
specify under what authority the court had issued the order. The bankruptcy
court issued a supplemental order stating that the court used its inherent
authority and provided further justification for its issuance. The district court,
in a thorough and well-developed opinion, affirmed the supplemental order,
rejecting all of Anderson’s claims on appeal. Anderson challenges that order in
this appeal.
II.
We review a district court’s sanctions order granted under inherent power
for an abuse of discretion. FDIC v. Maxxam, Inc., 523 F.3d 566, 590 (5th Cir.
4
For example, Anderson took issue with Judge Isgur’s characterization of his
statements during the Fuentes hearing, stating that the court must have misunderstood him
because he never said he interpreted Rule 9(b) to be optional. Anderson stated the following
during the Fuentes hearing regarding § 523(a)(2) complaints and why he did not plead fraud
with particularity: “Typically the adversarial process weeds that out. So that if the defendant
did appear and felt that for some reason there was a lack of merit, then that is the onus on the
defendant to either file a motion to dismiss or a motion for a more definite statement.”
4
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2008). Moreover, the inherent powers of the district court to sanction attorneys
for bad faith in the course of litigation “are equally applicable to the bankruptcy
court.” In re Case, 937 F.2d 1014, 1023 (5th Cir.1991). “We review the factual
findings underlying those sanctions, however, only for clear error.” Positive
Software Solutions, Inc. v. New Century Mortg. Corp., 619 F.3d 458, 460 (5th Cir.
2010).
III.
We have carefully considered the briefs and the record on appeal and are
not persuaded by Anderson’s claims of error. The district court thoroughly
addressed the arguments Anderson raises on appeal, and we affirm for
substantially the reasons set forth in its thorough opinion and amended order
of January 23, 2013. See In re Monteagudo, No. H-12-2481, 2013 WL 264443(S.D. Tex. Jan. 23, 2013).
In summary, Anderson contends that the district court erred in affirming
the bankruptcy court’s order for four principle reasons: (1) the bankruptcy court
did not properly invoke its inherent power to sanction because it did not make
an explicit finding of bad faith in its initial order; (2) the bankruptcy court erred
in finding Anderson acted in bad faith because, inter alia, he amended his
deficient complaints; (3) the order was improper because it had the practical
effect of suspension; and (4) the order violated his constitutional right to Due
Process because it did not afford him proper notice.
We reject the first argument because the bankruptcy court made a finding
of bad faith in his supplemental order and, in the alternative, we may infer bad
faith from the original order. Generally, a bankruptcy court can invoke its
inherent power to impose sanctions only if it makes a finding that the litigant
engaged in bad faith conduct. In re Yorkshire, LLC, 540 F.3d 328, 332 (5th Cir.
2008). However, “when bad faith is patent from the record and specific findings
are unnecessary to understand the misconduct giving rise to the sanction, the
5
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necessary finding of ‘bad faith’ may be inferred.” United States v. Ortlieb, 274
F.3d 871, 880 (5th Cir. 2001) (internal quotation marks omitted). The
bankruptcy court’s initial order recounted in detail Anderson’s lack of candor
and truthfulness in responding to the court’s concerns on the Rule 9(b) issue.
Thus not only did the court’s supplemental order make a specific finding of bad
faith, but the initial order was also sufficiently detailed for us to infer bad faith;
consequently, the court’s invocation of its inherent powers was proper.
Anderson’s second argument also fails. After the show cause hearing,
Anderson did amend some of his complaints to comply with Rule 9(b), including
the complaint in the underlying case. But this argument fails to recognize that
the basis for the bankruptcy court’s order was not only Anderson’s failure to
comply with Rule 9(b), but also his refusal to acknowledge the court’s
instructions and agree to abide by them.
We also reject Anderson’s last two arguments. Nothing in the court’s
limited order prevents Anderson from practicing law or inconveniences Anderson
to such an extent that it in effect prevents him from the practice of law. We
therefore agree with the district court’s finding and analysis that the bankruptcy
court’s order does not rise to the level of a suspension and was not quasi-criminal
in nature.
Finally, Anderson was not denied Due Process. As the district court
emphasized, all the cases Anderson cites to support the proposition that he was
entitled to more definitive notice of the proposed sanctions involved actual
suspension or disbarment. More importantly, the show cause order here clearly
stated that Anderson was to show cause why he should not be “compelled” to file
future § 523(a)(2) complaints in accordance with Rule 9(b). This was adequate
to put Anderson on notice that if he did not show cause to Judge Isgur’s
satisfaction, Judge Isgur might then fashion an appropriate sanction to ensure
compliance with Rule 9(b).
6
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IV.
For the foregoing reasons, we AFFIRM the order of the district court.
7