Opinion
NOT FOR PUBLICATION
Thomas C. Nelson, Counsel for Phish House, LLC, Debtor.
MEMORANDUM DECISION AND ORDER TO THOMAS C. NELSON TO RESPOND, APPEAR AND SHOW CAUSE WHY HE SHOULD NOT BE ORDERED TO COMPLY WITH DISCLOSURE RULES, SANCTIONED, AND SUSPENDED FOR SK MONTHS FROM PRACTICING BEFORE THIS COURT
MARGARET M. MANN, JUDGE UNITED STATES BANKRUPTCY COURT.
The Court issues this order to Attorney Thomas C. Nelson ("Nelson") to respond, appear and show cause ("OSC") before this Court on October 18, 2010, at 10:00 a.m., as to why he should not be required to:
1) File a Disclosure of Attorney Compensation form and employment application in this case,
2) Disgorge all fees received from the client in this case,
3) Be subject to further sanctions in this case for filing the Chapter 11 petition without justification and for an improper purpose,
4) Be referred to the Southern District of California Standing Committee on Discipline ("Committee"), and the California State Bar, and
5) Be suspended from the practice of law in this Court for a period of not less than six months while the Committee considers any additional sanctions or discipline that may be appropriate.
This OSC is based upon Nelson's conduct in this case in which he appears to have misused client funds, misrepresented his knowledge of the situation to the Court, failed to comply with his compensation disclosure obligations, and filed pleadings without substantial justification and for an improper purpose. The Court also will consider imposing the more severe sanction of suspension of Nelson from practicing in this Court for a six-month period to protect clients, the public and the profession due to his misconduct in other cases pending before this Court.
References to the "Court" refer to the United States Bankruptcy Court, Southern District of California.
Nelson's conduct before this Court over the last two years suggests that he is a serial ethics offender. The very same misconduct found in the case has occurred in the majority of other cases filed by Nelson in this Court during this period, amounting to dozens of clients potentially harmed. Nelson's conduct has not improved despite being sanctioned on three previous occasions earlier this year in other cases for similar misconduct, including being referred to the Committee. The Court is therefore concerned Nelson will not be deterred from further misconduct by any lesser sanction than suspension.
The referral to the Committee was made on July 30, 2010.
This pattern of bad acts dates back nearly a decade. Nelson was suspended by the California State Bar in 2002 for misuse of client trust funds and in 2008 for other ethical violations. Yet during this latter period of suspension, he continued to practice law in this Court.
Nelson's California State Bar number is 82506.
Nelson failed to disclose his compensation as counsel for the Debtor as required by 11 U.S.C. §329 and Bankruptcy Rules 2016(b) and 2014, leading to orders to show cause in several Chapter 11 cases in this Court: In re Simplon Ballpark, LLC, 08-01803-JM11; In re Prize Properties, LLC, 09-09817-JM7; and In re Marshall Shields, 09-17085-JM11. In response to orders to show cause entered in those cases, Nelson agreed to disgorge the retainers he received in Prize Properties and Shields, and his conduct was referred to the Committee. California State Bar records also reflect Nelson was suspended from the practice of law for the period from February 2, 2002 to September 14, 2004 for accepting client funds in trust and spending them on other purposes. Nelson was again suspended by the California State Bar from My 1, 2010 to August 28, 2010 for ethical violations.
The Court's goal in issuing this OSC is not to punish Nelson, hut to protect the public and the administration of justice. It is contemporaneously referring this matter to the Committee, the State Bar and United States Trustee for further consideration of disciplinary sanctions that maybe punitive. Under the circumstances, however, the Court would be remiss if it did not seek to protect members of the public who may retain Nelson in the future while these investigations are pursued. Despite the potential presence of the mitigating factor of Nelson's health problems, protecting the public from further harm is the Court's paramount goal.
This OSC is brought pursuant to this Court's authority under 28 U.S.C. § 157, 11 U.S.C. §105, Bankruptcy Rule 9011, CivLR 83, and the Court's inherent power to monitor the proceedings before it for the benefit of the Court, the profession and the public. Chambers v. NASCo, Inc., 501 U.S. 32, 43, 47 (1991); see also U.S. v. Wunsch, 54 F.3d 579, 582-83 (9th Cir. 1995) (attorney admitted to a particular bar may be disciplined for violations of that bar's local rules of professional conduct).
Local Rules of Practice for the United State District Court for the Southern District of California.
To respect Nelson's due process rights, and to provide him a full and fair opportunity to respond; the Court details the basis, grounds and nature of the discipline considered in this OSC.
Misuse of Client Funds
Nelson filed this Chapter 11 Case on June 17, 2010 and paid the filing fees of $1, 039.00 with a bad check drawn on his office account. This Court's Clerk's Office spoke with Nelson on June 23 and 25, 2010 regarding the bad check. Nelson assured the Court both times he would cover the bad check or pay the filing fee immediately. The Clerk's Office then left two follow up voice mails for Nelson, and sent a letter on July 13, 2010. The letter advised Nelson that his failure to pay the filing fees by July 19, 2010 would cause this case to be dismissed.
At the Chapter 11 status conference held in this case on July 29, 2010, the Court questioned Nelson about the unpaid filing fees. Nelson claimed to be unaware of the bad check. The Court finds this claim not credible given the five times the Court had contacted Nelson regarding the problem in the preceding month. This was also the third, not the first, bad check Nelson paid to the Court for filing fees for clients, and the Court had provided reminders to Nelson in those instances as well. Within the last seven months, Nelson also provided bad checks for the filing fees in In re Cookie D. Wikander, Case No. 10-01785, and In re Sloan Zsiros, Case No. 10-01905.
Any funds Nelson received from the client to pay the filing fees should have been held by him in trust. Ethically, he could not commingle them with his office funds. California Rule of Professional Conduct 4-100. Nelson, instead of maintaining the client funds in trust, apparently treated them as his own and spent them for other purposes. This left insufficient funds in Nelson's office account to cover the check he wrote for the filing fees.
Applicable in this Court pursuant to CLR Rule 83.4(b).
Misuse of client funds provided to pay filing fees is sanctionable misconduct. In re Reno, 2002 Bankr. LEXIS 2008 (Bankr. N.D. Tex. 2002) (attorney sanctioned for failing to maintain client funds in trust resulting in payment of filing fees with a bad check); see also In re Lewis, 309 B.R. 597, 611-2 (Bankr. N.D. Okla. 2004) (attorney sanctioned for payment of the filing fee with a bad check from his office after accepting post-dated checks from clients); In re Pagaduan, 429 B.R. 752, 763-765 (Bankr. D. Nev. 2010) (attorney sanctioned for unethical conduct including failure to maintain client trust accounts).
Disclosure Obligations
Nelson has also violated his disclosure obligations in this case and myriad others. In order to permit the Court to protect the creditors and the debtor against overreaching by the attorney, the Bankruptcy Code and Rules contain an array of disclosure obligations that counsel must meet. Law Offices of Nicholas A. Franke v. Tiffany (In re Lewis), 113 F.3d 1040, 1045 (9th Cir. 1997), citing In re Walters, 868 F.2d 665, 668 (4th Cir. 1989); see also 11 U.S.C. §§ 327, 329, 330 and Bankruptcy Rules 2014 and 2016. The disclosure rules reflect ethical obligations that are broader than state ethical rules, (In re: Perry, 194 B.R. 875, 880 (E.D. Ca. 1996)), and impose fiduciary obligations on counsel. Lewis, 113 F.3d at 1045 (disgorgement proper when, among other factors, the debtor's counsel did not timely file an employment application).
The importance of these disclosure requirements is recognized In re Park-Helena Corp., 63 F.3d 877, 880, 882 (9th Cir. 1995), cert, denied, 516 U.S. 1049 (1996). Strict compliance with the disclosure obligations is mandated. "[F]ailure to comply with the disclosure rules is a sanctionable violation." Park-Helena, 63 F.3d at 880. This is true even absent harm to the estate. Id. at 881. See also In re Basham, 208 B.R. 926, 930 (9th Cir. BAP 1997), affd 152 F.3d 924 (9th Cir. 1998)(disgorgement of fees when compensation disclosure was filed albeit months late). Sanctions, of course, are particularly justified where there has been harm to the client from the attorney's misconduct. Peugeot v. United States Trustee (In re Crayton), 192 B.R. 970, 980 (9th Cir. BAP 1996).
Nelson filed neither a disclosure of compensation as required by Bankruptcy Rule 2016(b); or an employment application as required by Bankruptcy Rule 2014 in this case. The need for this disclosure is evident since the Court was unable to review Nelson's compensation arrangements with his client to ascertain the circumstance of the bad check.
The Court believes Nelson's disclosure failures were intentional because they helped conceal his misconduct about the bad check and because he cannot claim ignorance of these disclosure obligations. He has already been sanctioned by this Court three times for similar disclosure lapses. The previous sanctions, which include the obligation to disgorge fees, should be a poignant reminder of his obligation. Nelson is reminded anew of this obligation each time he files a new case. If the disclosure is not filed with the petition, he receives from the Clerk of the Court a reminder notice. Nelson was reminded a third time of his disclosure obligations at the status conference on July 29, 2010. He promised the Court to promptly provide the disclosure, but has not.
See footnote 4.
Due to the disclosure problem in this case and the others where sanctions have been imposed, the Court has sought to determine the extent of the pattern of misconduct. The Court records reflect Nelson has failed to disclose his compensation in 53 out of the 62 cases he filed in the last 32 months.
See attached Exhibit A, listing all of the 53 cases filed since January 1, 2008 where Nelson failed to provide the necessary disclosure.
Abandonment of Clients
The Court record of cases filed by Nelson since January 2008 reveals an additional reason why Nelson should be suspended from practice in this Court. In 47 of the cases filed by Nelson during this period, Nelson abandoned his clients and failed to competently represent them. He either failed to meet all of the requirements to prevent these cases from being dismissed, or failed to appear at the 341(a) meeting of creditors. Non-appearance at the meeting of creditors also results in dismissal of the case. Dismissal of these cases would leave the clients facing foreclosure of their residence or whatever other financial problem led them to file bankruptcy in the first place.
See attached Exhibit B, listing all of the cases filed since January 1, 2008 reflecting this conduct
Failure to competently represent clients is an additional ground for sanctions. Hale v. U.S. Trustee, 509 F.3d 1139, 1144-45 (9th Cir. 2007) (attorney sanctioned for not ensuring clients' consent to limitations on representations; court imposed both monetary and nonmonetary sanctions against the attorney); Basham, 208 B.R. at 933 (attorney sanctioned for providing minimal and incompetent representation of clients; disclosure to court was also inadequate). Repeated misconduct of this type will justify the suspension sanction. Price v. Lehtinen (In re Lehtinen), 332 B.R. 404 (9th Cir. BAP 2005) affd 564 F.3d 1052 (9th Cir. 2009) (sanctions justified where attorney had abandoned the client, together with a lengthy pattern of misconduct); In re Brooks-Hamilton, 400 B.R. 238 (9th Cir. BAP 2009) (district-wide suspension on unprofessional and incompetent attorney with pattern of misconduct; case remanded for additional findings).
Bad-Faith Filing
Nelson's very filing of this case maybe sanctionable. This case is the successor to a case filed over a year ago, In re: Prize Properties, LLC, which is still pending in this district as Case No. 09-09817-JM7. In Prize Properties, Nelson was sanctioned for non-disclosure violations, was requested to disgorge his retainer of $7, 039, and was disapproved as general counsel for the Debtor. Nelson nevertheless continued to file pleadings in the Prize Properties case, and remains listed as its general counsel on the docket. After the Prize Properties case was converted to a Chapter 7 case, the trustee abandoned its sole asset back to the debtor on June 14, 2010. Three days thereafter, at 1:53 p.m. on June 17, 2010, Prize Properties conveyed this asset to the Debtor here. The Debtor has the same principals as did Prize Properties, holding the same ownership interests. Three hours after the Debtor acquired the asset, Nelson filed this case.
In response to an order to show cause issued by the Court, Nelson agreed to disgorge $6000 of his $7039 retainer.
A review of the docket in the Prize Properties case shows that the Chapter 7 Trustee in that case obtained an order authorizing the abandonment of the Property on June 9, 2010. On June 14, 2010, the Trustee in Prize Properties issued a Report to Abandon and Relinquish the Property to the debtor in that case. Docket 55.
This time and transfer appears from the Motion for Relief from Stay in this case, docket 13-1. A quitclaim deed was executed by Rebecca Gold as Manager for Prize Properties, LLC. and purports to transfer title to the Debtor of the condominium at 3914 Bayside Lane, San Diego. The quitclaim deed reflects the transfer was made for no consideration. The Motion for Relief from Stay also asserts that there is no evidence the debtor was ever validly formed.
The docket in Prize Properties reveals ownership is split among three individuals: Maurice Maio with 50%, and Rebecca Gold and Norm Wigginton each with 25%. Paragraph 21 of the Debtor's Statement of Financial Affairs in this case states that the Debtor is owned by the same three individuals in the same percentages, which they held their interests in Prize Properties. Docket 20.
Nelson failed to identify this case as related to the Prize Properties case. Had Nelson made this identification as required by Bankruptcy Rule 1015-2, this case would have been immediately assigned to Judge James W. Meyers. However, Judge Meyers has recused himself from hearing this case.
This case involves many of the elements of the "new debtor syndrome, " in which the filing of a Chapter 11 case has been found to be in bad faith. The syndrome involves a single asset debtor, created by same principals, without employees, which acquires troubled real estate on the eve of filing bankruptcy for no consideration. See In re Yukon Enterprises, Inc., 39 B.R. 919, 921 (Bankr. CD. Ca. 1984); In re Eighty South Lake, Inc., 63 B.R. 501, 509 (Bankr. CD. Ca. 1986). Nelson is subject to sanctions under Bankruptcy Rule 9011 for filing this "new debtor" case without substantial justification and for an improper purpose as a "bad faith filing." Dressier v. Seeley Co. (In re Silberkraus), 336 F.3d 864, 871 (9th Cir. 2003). In Silberkraus, counsel was sanctioned under Bankruptcy Rule 9011 for filing the Chapter 11 case in bad faith. Applying Bankruptcy Rule 9011, the Ninth Circuit considered "both frivolousness and improper purpose (of the filing of the petition) on a sliding scale, where the more compelling the showing as to one element, the less decisive need be the showing as to the other." Id., citing Marsch v. Marsch (In re Marsch), 36 F.3d 825, 830 (9th Cir. 1994) (emphasis in original). It affirmed the bankruptcy court's findings that filing the bankruptcy petition was frivolous, due to the limited prospects for reorganization, and that the Debtor was motivated by the improper purpose of forum shopping. Id.
Here, Nelson filed a Chapter 11 petition for essentially the same debtor under a different name when the sole asset was no longer protected by the automatic stay due to the trustee's abandonment. Nelson has essentially conceded that the filing was frivolous by failing to oppose the secured creditor's motion from relief from stay, which asserted this case is a bad faith filing. See Order on Unopposed Motion, Docket No. 26. Nelson has also failed to comply with all of the requirements necessary to move the case forward toward reorganization, including timely filing of the schedules and statements, payment of the filing fees and disclosing compensation and necessary connections with the Debtor and its principals in his employment application as required by Bankruptcy Rule 2014. These latter omissions suggest that this case had no merit from the outset, and that it was filed for an improper purpose. Improper purpose is also indicated by the machinations regarding transferring the property on the eve of bankruptcy to the Debtor. Silberkraus, 336 F.3d at 871.
Unauthorized Practice of Law
After his first suspension from February 2, 2002 to September 14, 2004 for misuse of client trust funds, Nelson was again suspended from the practice of law by the California State Bar from July 1, 2008 to August 28, 2008. Despite this suspension order, Nelson continued to actively represent a client and file pleadings during this period of suspension in the In re: Simplon Ballpark LLC case, Case. No. 08-01803. See docket nos. 81-82, 84-86, 88, 89. Nelson, by engaging in the unauthorized practice of law before this Court, violated California Rules of Professional Conduct 1-311, applicable to attorneys practicing before this Court. CivLR 83.4(b).
Consideration of Sanctions
To evaluate the extreme sanction of suspending Nelson from practice in this Court, the Court is guided by three disciplinary criteria: 1) the disciplinary process must be fair; 2) the evidence must support any findings; and 3) the penalty imposed must be reasonable. Brooks-Hamilton, 400 B.R. at 247; Crayton, 192 B.R. at 978. To address the first two criteria, the OSC hearing scheduled for October 18, 2010 will be a full day evidentiary hearing. The Court's findings will consider the evidence presented, which must be clear and convincing to justify this sanction. In re Medrano, 956 F.2d 101, 102 (5th Cir. 1992); Arden v. State Bar of California, 43 Cal.3d 713, 725 (1987).
Evaluation of the third criteria, that the suspension be reasonable, must focus on protecting the public from harm. This appears necessary due to Nelson's continued, repeated and unrepentant conduct that has not been affected by previous sanctions awards. Lehtinen, 332 B.R. at 412 (suspension justified where there are multiple instances of misconduct and harm); Crayton, 192 B.R. at 980, 981 (injury to the public and repeated violations of Peugeot's ethical duty to his client justified suspension). The Court will also apply the ABA disciplinary standards articulated in Crayton, id.:
1) whether a duty to the client, the public, the legal system, or the profession, was violated; 2) whether the attorney acted intentionally, knowingly or negligently; 3) whether the lawyer's misconduct caused a serious, or potentially serious, harm; 4) whether aggravating or mitigating circumstances exist.
See also In re Brooks-Hamilton, 400 B.R. at 252 (citing Crayton, 192 B.R. at 981).
Factor 1: Whether a duty to the client, the public, the legal system, or the profession, was violated.
The evidence before the Court to date indicates duties to each of these constituencies were violated. Nelson's clients were potentially injured by the failure of their cases and the loss of their retainers. The legal system was burdened by needing to call Nelson to task for his misconduct. The profession was tarnished in the eyes of the public by Nelson's low standards of practice. Most importantly, suspension may be necessary to ensure other clients in financial distress do not hire Nelson to protect them, pay him a retainer with their limited funds remaining, and then find themselves re-exposed to the same financial distress a few months later when Nelson abandons their cases. See In re Derryberry, 72 B.R. 874, 881 (Bankr.N.D.Ohio 1987)(disciplinary proceedings are not for punishment, but to protect the courts and the public those unfit to practice).
Factor 2: Whether the attorney acted intentionally, knowingly or negligently
Nelson's misrepresentations to the Court regarding the bad check for the filing fee, the repeated instances of disclosure lapses despite numerous reminders, his resistance to change despite previous sanctions, and the history of ethical problems in the past strongly suggest intentional violations here. This conclusion is supported by Nelson's self-interest in not revealing his compensation agreements from the Court.
Factor 3: Whether the lawyer's misconduct caused a serious, or potentially serious, harm
In the Court's experience, people file bankruptcy only after exhaustion of other options and only in the face of extreme financial distress. The Court suspects that many of the clients who hired Nelson in Chapter 13 cases may have lost their homes due to the dismissal of their cases or Nelson's abandonment of his responsibilities to them.
Factor 4: Whether aggravating or mitigating circumstances exist
Mitigating Factors
Mitigating factors may include a personal or emotional problem, inexperience in the practice of law, absence of past disciplinary offenses, or good faith effort to rectify any damage caused by the misconduct. Crayton, 192 B.R. at 981. Nelson is an experienced attorney, which does not mitigate his conduct here. The Court is aware that Nelson claims to suffer from ill health, which may be a mitigating factor. Nelson should provide details of his claim of illness with medical records at the OSC hearing. Medical records and information may be filed under seal in connection with the OSC hearing. Considering this factor in the best light, Nelson should address whether his health problems have affected his ability to practice competently, and whether he could rectify this misconduct.
Aggravating Circumstances
Aggravating factors may include considerations that justify an increase in the degree of discipline imposed, such as prior disciplinary offense, multiple offenses, dishonest or selfish motive, or a pattern of misconduct. Cray ton, id. Nelson's continued flaunting of disclosure and competence mandates for selfish fee related motives, which seem impervious to change despite repeated previous disciplinary actions over the last decade, may be aggravating factors.
Conclusion
The Court's view of its role in issuing this OSC can best be paraphrased from Judge Markell's decision under very similar circumstances in Pagaduan, 429 B.R. at 769-70 :
This quotation was altered by simply replacing the attorney's name in that case with Nelson's name and the previous sanction cases with those pending in this Court
It is thus this court's reluctant duty to deal with (Nelson's) many violations of the Rules, his disregard for the trust his clients place in him, and his cozening of people in their moments of weakness. These violations are external evidence that (Nelson) has designed the business side of his law practice with a grudging lassitude to his ethical obligations. Put another way, he operates as if the occasional sanction is simply a cost of doing business.
Sanctions are more than just mercantile matters. Sanctions seek to dissuade an attorney (and others similarly situated) from engaging prohibited and unethical conduct... The sanctions the court entered in (In re Simplon Ballpark, LLC, 08-01803-JM11; In re Prize Properties, LLC, 09-09817- JM7; and In re Marshall Shields, 09-17085-JM11) seem to have had little or no effect on (Nelson's) general operations. It thus appears that further sanctions are necessary to dissuade (Nelson's) (and others who might wrongheadedly attempt to emulate him) from continued and repeated violations of rules designed to protect his clients specifically and the legal profession generally.
IT IS ORDERED THAT:
1) Thomas C. Nelson shall appear before this Court on October 18, 2010 at 10:00 a.m. in Department 1, Room 218, 325 West F Street San Diego, CA. and show cause why the Court should not impose sanctions against him, including:
a. Requiring him to file a Disclosure of Attorney Compensation form and employment application in this case,
b. Requiring him to disgorge all fees received from the client in this case,
c. Monetary sanctions in this case for filing the Chapter 11 Petition without justification and for an improper purpose,
d. Referral of this matter to the Committee, and the California State Bar, and
e. Suspension from the practice of law in this Court for a period of not less than six months while the Committee considers any additional sanctions or discipline that may be appropriate.
2) Nelson shall file a written statement setting forth his response to this Order no later than October 4, 2010. A copy of the Response must be served on the U.S. Trustee and the Committee.