Opinion
Case No. 99-17499
October 23, 2002
MEMORANDUM OF OPINION
On September 28, 1999, Joan Kodish, an experienced bankruptcy attorney, filed this case on behalf of the then-Chapter 11 debtor. At about that time, she received a $10,000.00 retainer to be applied to her legal fees. She did not deposit the retainer into a client escrow account and she spent the funds without a Court order approving any fee payment to her.
On May 22, 2002, after notice and a hearing, the Court found that Ms. Kodish was not entitled to the $10,000.00 because she had not complied with the Bankruptcy Code and Rules relating to attorney compensation. To remedy the situation, the Court ordered her to deposit $10,000.00 with the Clerk of the United States Bankruptcy Court until the Court could determine to whom the funds should be paid. (the "Order") (Docket 195; see also 192, 193). Ms. Kodish did not appeal from that Order, did not request additional time to comply, and did not pay any funds into the Clerk's office.
The issue arose on April 17, 2001 when the UST filed a Motion to Review Retention of Debtor's Counsel. (Docket 109). That motion and related motions were partly held and adjourned multiple times at the request of Ms. Kodish and/or her former counsel to permit Ms. Kodish to address the issue and to attempt to remedy it, in part through filing a belated fee application. (Docket entry 7/27/01, Docket 124, Docket 125, docket entry 9/7/01, docket entry 10/24/01, docket entry 11/8/01, docket entry 11/29/01, docket entry 12/12/01, Docket 148). Ultimately, Ms. Kodish attempted to withdraw her fee application unilaterally, but keep the $10,000.00. (Docket 154). On May 7, 2002, the Court issued a Memorandum of Opinion and Order denying that attempt and ordering that the fee application could only be withdrawn if Ms. Kodish paid the $10,000.00 to the Clerk of Court, among other stated conditions. (Docket 192, 193). That same Order gave Ms. Kodish the opportunity to accept the conditions or to proceed on her application. When she did not respond, the Court entered the May 22, 2002 Order dismissing the application under the stated conditions. That Order provided that it would become final unless Ms. Kodish filed a motion to reconsider within five days. She did not do so.
The United States Trustee ("UST") moves for an order finding Ms. Kodish in civil contempt of court because she has not obeyed the Order and asks that she be incarcerated to coerce compliance because she is ignoring this problem. Ms. Kodish defends on the ground that she does not have the money to comply. The UST disputes this and also argues that if there is an inability to pay, it was caused at least in part by Ms. Kodish's own unauthorized actions in removing $2,500.00 from her client escrow account which, by separate order, the Court had ordered her to deposit in the Debtor's name. (Docket 126).
For the reasons stated below, the UST's motion to find Joan Kodish in civil contempt is granted, with the appropriate sanction to be determined at a later hearing.
JURISDICTION
The Court has jurisdiction to determine this matter under 28 U.S.C. § 1334 and General Order No. 84 entered on July 16, 1984 by the United States District Court for the Northern District of Ohio. This is a core proceeding under 28 U.S.C. § 157(b)(2).
PROCEDURAL HISTORY
The UST filed this motion on August 21, 2002. The next day, the Court entered a scheduling and briefing order setting an evidentiary hearing on October 14, 2002. The order further stated that:
(1) If Ms. Kodish opposes the Motion, she is to file her brief in opposition on or before September 30, 2002; and
(2) The United States Trustee and Ms. Kodish shall file witness lists and exhibit lists on or before October 4, 2002.
(Docket 205). Ms. Kodish did not comply with this order. Consequently, on October 10, 2002, the UST filed a motion in limine seeking to bar her from presenting evidence at the hearing. (Docket 212).
Ms. Kodish did not address these issues until a few minutes before the hearing was set to start on October 14, 2002, at which time she provided the Court with these documents:
(1) a Jury Demand;
(2) a Motion to Strike Motion of UST to Find Joan Allyn Kodish in Civil Contempt of Court and to Disqualify Dean Wyman, Senior Trial Attorney, From Further Proceedings; and
(3) a Hearing Memorandum,
with no explanation for the tardy presentation. The Court denied the motions for the reasons stated on the record, including that they were untimely, any jury demand had been waived, the version of Federal Bankruptcy Rule 9020 Ms. Kodish relied on to support her jury demand had been significantly amended, and the late filings were part of a pattern of delay.
The Court has since learned from the docket that these papers were not filed until the next day, again without explanation. (Docket 213, 214, and 215).
Ms. Kodish did not file anything in opposition to the motion in limine. She argued at the hearing that the motion should be denied because she was not required to comply with the Court's scheduling order. Her theory was that the UST had the burden of proof and she would only be offering evidence in rebuttal, thus she had no obligation to file a witness or exhibit list. This is not an accurate statement of the law regarding Ms. Kodish's defense of inability to pay, where the burden falls to the party claiming hardship. Beyond that, Ms. Kodish did not explain the failure to file a brief addressing the merits of the UST's motion. Nevertheless, the Court found that it would advance the interests of a full and fair hearing to permit Ms. Kodish to present evidence, and so the motion in limine was overruled.
The hearing memorandum filed by Ms. Kodish instead argues that bankruptcy courts do not have contempt powers. (Docket 214 at 1). Ms. Kodish did not square this legal position with the Sixth Circuit's comments in Pertuso v. Ford Motor Credit Co. (In re Pertuso), 233 F.3d 417, 423 n. 1 (6th Cir. 2000) (Bankruptcy Code "[s]ection 105 undoubtedly vests bankruptcy courts with statutory contempt powers . . .," although that section cannot be used to create substantive rights.)) See also 11 U.S.C. § 105(a); Caldwell v. Unified Capital Corp. (In re Rainbow Magazine, Inc.), 77 F.3d 278 (9th Cir. 1996); Koehler v. Grant, 213 B.R. 567 (8th Cir. BAP 1997); In re Walker, 257 B.R. 493 (Bankr. N.D. Ohio 2001). The memorandum, like the jury demand, also relies on an outdated version of Federal Rule of Bankruptcy Procedure 9020.
The evidentiary hearing then went forward. The UST presented his case through Yvonne Wood (Deputy Clerk in Charge of the Cleveland Clerk's Office), Deborah Plaga (Claims Supervisor for the Cleveland Chapter 13 Trustee's Office), John Weaver (Bankruptcy Analyst for the UST), Keith Rucinski (Counsel to the Akron Chapter 13 Trustee), and Anita Neiner (Financial Crimes Investigator for Fifth Third Bank), cross-examination, and exhibits. Ms. Kodish presented her case through her own testimony, cross-examination, and an exhibit.
LEGAL STANDARD
The party alleging civil contempt has the burden of proving by clear and convincing evidence that the respondent "violated a definite and specific order of the court requiring [her] to perform . . . a particular act . . . with knowledge of the court's order." Rolex Watch U.S.A., Inc. v. Crowle, 74 F.3d 716, 720 (6th Cir. 1996). "Willfulness is not an element of civil contempt and intent to disobey an order is irrelevant." In re Walker, 257 B.R. 493, 497 (Bankr. N.D. Ohio 2001). The respondent may defend by proving that she is unable to comply with the order. To do that, the respondent must show her inability "categorically and in detail." Rolex Watch, 74 F.3d at 720.
If a party is found in civil contempt, the court must determine the appropriate consequences. "The primary purpose of a civil contempt order is to "compel obedience to a court order and compensate for injuries caused by non-compliance'." McMahon Co. v. Po Folks, Inc., 206 F.3d 627, 634 (6th Cir. 2000). There are a variety of tools available to a court to encourage compliance with its order, including assessing a daily fine or incarcerating the contemnor until the individual conforms her behavior. Any sanction must be designed to bring about the desired result. In re Walker, 257 B.R. at 498.
FACTS AND DISCUSSION I.
These findings of fact reflect the Court's weighing of the evidence, including determining the credibility of the witnesses. In doing so, the Court considered the witnesses' demeanor, the substance of the testimony, and the context in which the statements were made, recognizing that a transcript does not convey tone, attitude, body language or nuance of expression. See FED. R. BANKR. P. 7052, incorporating FED. R. Civ. P.52 (applied to contested matters under FED. R. BANKR. P. 9014). When the Court finds that a witness's explanation was satisfactory or unsatisfactory, it is using this definition:
The word satisfactory "may mean reasonable, or it may mean that the Court, after having heard the excuse, the explanation, has that mental attitude which finds contentment in saying that he believes the explanation—he believes what the [witness] says with reference to the [issue at hand]. He is satisfied. He no longer wonders. He is contented.'
United States v. Trogden (In re Trogden), 111 B.R. 655, 659 (Bankr. N.D. Ohio 1990) (discussing the issue in context of Bankruptcy Code § 727) (quoting First Texas Savings Assoc., Inc. v. Reed, 700 F.2d 986, 993 (5th Cir. 1983)).
II.
Ms. Kodish admits that she had timely notice of the Order directing her to deposit $10,000.00 with the Clerk of Court and that she did not deposit any funds in response to that Order. The UST, therefore, proved by clear and convincing evidence that Ms. Kodish violated a specific court order that required her to perform an act and that she had knowledge of the order.
III.
Ms. Kodish defends on the ground that she could not make the $10,000.00 payment or any part of the required payment, either in the past or the future, due to her financial condition. The UST both contends that she did not prove this and also argues that any inability is due in part to her own actions.
Ms. Kodish offered little concrete evidence to support her defense of inability to pay. She testified in a conclusory fashion that in May 2002 there was "not a chance" that she could pay what she owed, she was "in debt up to her ears," and "not even hanging on by a thread." She also stated that she has been distracted by state criminal charges that were brought against her, which charges were resolved a week or so before the October 14th hearing.
Ms. Kodish did not provide information about her income on direct examination, stating only when pressed on cross-examination that she estimated she took home from her law practice a total of $3,000.00-$4,000.00 from the end of May 2002 through September 2002, after paying some unidentified expenses. She did not explain how she decided which expenses to pay.
Similarly, she did not provide expense information for her household, a budget for either her law practice or her home, a financial statement, an income tax return, business ledgers, or bank records to support her defense.
On the asset side, Ms. Kodish testified that she has a fully encumbered 1999 Saab, some old office furniture, and clothes.
Ms. Kodish further testified that she filed her own Chapter 13 case in Akron on June 6, 2002 seeking to reorganize her finances. She filed a skeleton or incomplete filing. Among other things, the filing did not include a proposed Chapter 13 plan or the schedules that would have disclosed her real property, personal property, current income, and current expenses. A few months later, the Akron Bankruptcy Court dismissed her case because she did not file the required forms and schedules. Ms. Kodish testified that at about that time, she owed about $300,000.00 in unspecified consumer and trade debt and potentially owed approximately $200,000.00 more under unspecified guarantees. She also owed about $5,000.00 — $6,000.00 in unspecified taxes. With respect to other liabilities, Ms. Kodish testified that she is a defendant in several lawsuits, but did not identify the suits, the courts in which they are pending, the nature of the disputes, any possible defenses or an assessment of her potential liability.
Ms. Kodish has continued her private practice, which focuses on representing debtors in bankruptcy cases, from the date of the May 22, 2002 Order through the hearing date. From June through September 2002, she filed about 40 new bankruptcy cases for clients that resulted in her receiving a total of $25,400.00 in fees, with agreements to receive an additional $18,500.00 in fees over time. Additionally, during this same time frame, she received fee payments from the Cleveland Chapter 13 Trustee in the amount of $7,173.25 representing fees due and payable in various confirmed Chapter 13 cases. Ms. Kodish testified further that she paid her criminal defense counsel somewhere between $5,000.00 and $8,000.00 (the testimony was somewhat contradictory) during the time period at issue.
A word of explanation is in order about fees paid to debtor's counsel in Chapter 13 bankruptcy cases. The lawyer is required to file a Disclosure of Compensation paid or promised to be paid by or on behalf of the debtor. FED. R. BANKR. P. 2016(b). Counsel must apply for fees and have the application approved by the Court before receiving payment. 11 U.S.C. § 330; FED. R. BANKR. P. 2016(a). In a typical Chapter 13 case, counsel is paid in one of three ways: (1) by a lump sum payment before the case is filed, which retainer is earned when the Court approves the fees (generally through an order confirming the debtor's plan of reorganization); (2) a retainer, followed by an additional fee paid over the life of the Chapter 13 plan through the Chapter 13 trustee's office; or (3) no retainer, with the whole fee paid through the plan. Over the last several years, the Court has reviewed numerous Chapter 13 cases filed by Ms. Kodish. Her fee is generally a total of $1,200.00, with $300.00 paid as a retainer and the balance paid through the plan.
As noted above, the UST argued alternatively that if Ms. Kodish is now unable to pay, it is at least in part attributable to her own actions. The evidence on this point relates to funds held at one time in Ms. Kodish's client escrow account. As noted above, the retainer issue has been ongoing since April 17, 2001. See footnote 1. On September 10, 2001, following a status conference on this issue, the Court ordered Ms. Kodish "to deposit at least $2,500.00 into her IOLTA account in the Debtor's name, representing part of the retainer paid by the Debtor, and is to file a statement that she has done so on or before September 28, 2001." (Docket 126; emphasis in the original). Ms. Kodish complied. Later, however, Ms. Kodish withdrew the money from her IOLTA account without Court authority and gave it to a third party, Alfred Edwards. The IOLTA account, which is her only client escrow account, has a current balance of $100.00. Ms. Kodish did not explain her actions at the hearing.
IV.
Having reviewed all of the evidence and considered the testimony of the witnesses, the Court concludes that Ms. Kodish did not prove "categorically and in detail" that she was and is unable to pay the $10,000.00, or any part of it, called for by the Court's Order. The evidence proved that Ms. Kodish could have paid at least $2,500.00 of the amount from her IOLTA account, but for her own inexplicable action in taking the money out of the account and giving it to a third party. Ms. Kodish argued that the earlier order directing her to deposit this $2,500.00 is irrelevant because it was not the subject of the contempt motion. This argument assumes that the $2,500.00 withdrawal is only relevant if the UST is asking that Ms. Kodish be held in contempt based on her unauthorized withdrawal. That is inaccurate. The withdrawal is relevant to show that Ms. Kodish could have complied, at least in part, with the Order to deposit $10,000.00 with the Clerk had she not removed the money from her escrow account.
With respect to her current financial situation, Ms. Kodish provided only cursory information. She did not even prove that she is insolvent. Although she argued that filing her Chapter 13 case proved insolvency, it does not; the filing of a petition in the circumstances of this case only proved that she tried to get relief under the bankruptcy laws.
Detailed proof could have been offered in a number of different ways, basically focusing on itemizing income, expenses, assets, and liabilities. As an experienced bankruptcy practitioner, Ms. Kodish certainly knows what is needed to paint a complete financial picture. In fact, her day-to-day legal practice representing individual bankruptcy debtors requires her to analyze financial situations in detail and reduce them to writing. Yet, for reasons that were not offered to the Court, she chose not to provide her own detailed financial information at the hearing. Significantly, she did not explain why she failed to make even partial payments under the Order, particularly when she had income. Neither did she explain why she withdrew the $2,500.00 from her client escrow account that was earmarked for this case. The Court finds her explanation for failing to comply with the Order to be vague and unsatisfactory, actually raising more questions than it answered. The factual conclusion is inescapable that Ms. Kodish has simply chosen to devote whatever financial resources she has to other matters, all the while ignoring the Court Order. The Court finds that Ms. Kodish failed to prove her defense. The Court further finds, therefore, that Ms. Kodish is in civil contempt of court.
V.
Upon a finding of civil contempt, the UST argues that Ms. Kodish should be incarcerated to coerce her into complying with the Court's Order:
In the case at bar, a highly experienced consumer bankruptcy attorney received a retainer in the amount of $10,000 approximately three years ago. She spent the retainer without a Court order. She filed a fee application, and then sought to withdraw it unconditionally. The Court imposed conditions on the withdrawal. Kodish continues to flout these conditions. This misconduct is offensive to the bankruptcy system.
Words have not been sufficient to convince attorney Kodish that she should do the right thing and remit funds to the Clerk of Courts. Standards of professional conduct, Court orders, and entreaties have been ignored. Additional fines may be appropriate but are not as strong as an incentive to comply as is imprisonment . . . as a time-honored remedy for civil contempt.
(UST Memorandum at 3) (Docket 207).
Having carefully observed Ms. Kodish's testimony during the October 14th hearing, the Court concludes that Ms. Kodish does not appreciate the seriousness of her acts and failures to act. Her manner at the October 14th hearing was at times flip, caustic, and confrontational. She did not show any remorse. She did not present any plan for honoring the Court's Order. Instead, her attitude was that she is being inconvenienced by this issue.
Despite all of these factors, the Court believes that it is appropriate to give Ms. Kodish one final opportunity to comply with the Court's Order before imposing sanctions. The Court, therefore, sets these additional dates:
On or before November 4, 2002, Ms. Kodish is to file these documents:
(1) A detailed financial statement of her income and expenses, both business and personal; a detailed statement of her assets and liabilities; and a detailed budget for her office and home; and
(2) a proposal for paying the $10,000.00, in installments if necessary, that is consistent with the budget.
On or before November 8, 2002, the UST is to file a position statement with respect to Ms. Kodish's payment proposal.
A hearing will be held on November 15, 2002 at 8:30 a.m. to consider the proposed payment plan and what sanctions, if any, are needed to coerce Ms. Kodish to comply with the Court's Order.
CONCLUSION
For the reasons stated, the UST's Motion for an order finding Joan Allyn Kodish in civil contempt is granted. Before imposing sanctions, however, the Court will give Ms. Kodish one final opportunity to comply with her obligations, as described above. A separate order will be entered reflecting this decision.
ORDER FINDING JOAN KODISH IN CIVIL CONTEMPT AND SETTING ADDITIONAL HEARING ON SANCTIONS
For the reasons stated in the Memorandum of Opinion filed this same date, the United States Trustee's motion to find Joan Kodish in civil contempt for failing to comply with this Court's May 22, 2002 Order requiring her to deposit $10,000.00 with the Clerk of the Bankruptcy Court is granted.
The Court will provide Ms. Kodish with one final opportunity to comply with the Court's Order before imposing any sanctions. To that end, these dates will apply:
On or before November 4, 2002, Ms. Kodish is to file these documents:
(1) A detailed financial statement of her income and expenses, both business and personal; a detailed statement of her assets and liabilities; and a detailed budget for her office and home; and
(2) a proposal for paying the $10,000.00, in installments if necessary, that is consistent with the budget.
On or before November 8, 2002, the UST is to file a position statement with respect to Ms. Kodish's payment proposal.
A hearing will be held on November 15, 2002 at 8:30 a.m. to consider the proposed payment plan and what sanctions, if any, are needed to coerce Ms. Kodish to comply with the Court's May 22, 2002 Order.