In re Cook

610 B.R. 852

IN RE: Charles V. COOK, Sr., Debtor.

Case No: 14 B 36424

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Signed December 17, 2019

Attorney for Trustee: Jeffrey S. Snell, United States Department of Justice, Office of the United States Trustee, 219 South Dearborn Street, Room 873, Chicago, Illinois 60604

Attorney for Debtor: David M. Menditto, Law Solutions Chicago LLC, d/b/a Upright Law LLC, 79 W. Monroe St., Chicago, Illinois 60603

MEMORANDUM OPINION

The Honorable LaShonda A. Hunt, United States Bankruptcy Judge This matter is before the court for ruling following an evidentiary hearing on motions for sanctions and examination of fees filed by Patrick S. Layng, the United States Trustee for Region 11 ("UST"), against Law Solutions Chicago LLC d/b/a Upright Law LLC ("Upright"), Jason Allen ("Allen"), Kevin Chern ("Chern"), and David Gallagher ("Gallagher").¹ Allen and Chern were principal owners/managers of Upright; Gallagher was the Upright attorney who represented debtor Charles V. Cook, Sr. ("Cook") in this chapter 7 proceeding. The UST alleges that Upright engaged in a pattern and practice of inaccurate disclosures of Federal Debt Collections Practices Act (FDCPA) litigation in violation of 11 U.S.C. § 526, and that Allen, Chern, and Gallagher provided deficient legal services to Cook. Respondents concede that pertinent details about pending and settled FDCPA lawsuits were omitted from bankruptcy schedules and statements in multiple cases—including this one—but nonetheless assert that sanctions are not warranted. Following protracted discovery, a three-day trial was conducted. The parties subsequently filed post-trial submissions. This decision constitutes the court's findings of fact and conclusions of law under Fed. R. Civ. P. 52(a), made applicable by Fed. R. Bankr. P. 7052. For the reasons that follow, sanctions will be imposed as set forth herein.

BACKGROUND ²

Jason Allen purchased Law Solutions Chicago LLC ("LSC")³ around July 2010. (Stip. ¶ 47). At that time, LSC had two attorneys and focused exclusively on representing bankruptcy debtors in the Chicago market. (Id. ). Prior to the LSC acquisition, Allen practiced consumer bankruptcy law for four years, preparing petitions for thousands of debtors; and he managed several of his former law firm's satellite offices. (Id. ¶¶ 101–02). As LSC President and Chief Operating Officer, Allen eventually expanded operations to Illinois, Michigan, Indiana, and Arizona. He left the firm in July 2018. (Stip. ¶¶ 48, 92, 103; Jason Allen Tr. Test., Dec. 19, 2018, Dkt. #148 at 143–44).

In October 2013, Kevin Chern became the Managing Partner at LSC; he had purchased 70% of the firm's shares, leaving Allen with about a 30% ownership interest. (Stip. ¶¶ 49, 91; Allen at 143). Chern brought to the business twenty years of experience as a consumer bankruptcy lawyer, law firm manager, and operator of an online marketing company. (Stip. ¶ 99). Around the same time that Chern joined LSC, the firm expanded its practice to include representation of clients as plaintiffs in suits brought under the FDCPA and similar state statutes (the "FDCPA Practice"). (Id. ¶ 50). Upright Litigation LLC was subsequently formed in March 2014; a few months later, LSC began to operate under the names "Upright Law" or "Upright Law LLC." (Id. ¶¶ 51, 53). Allen and Chern managed both entities—Upright Litigation and Upright Law—in the same physical office space as LSC. (Id. ¶¶ 52, 55). For purposes of this matter, the parties agree that Upright Litigation and Upright Law can be treated as one in the same. (Id. ¶ 54).

Chern described Upright as one of the largest consumer bankruptcy firms in the United States, with approximately 100 employees in Chicago and 350 partner attorneys across the country. (Kevin Chern Tr. Test., Dec. 18, 2018, Dkt. #147, ("Chern, Day 1") at 153–54). By the end of 2018, Upright had filed over 34,000 bankruptcy petitions. (Id. at 154). The FDCPA practice ended in late 2015/early 2016 due to unprofitability. (David Leibowitz Tr. Test., Dec. 20, 2018, Dkt. #149, at 22). Annual revenues at Upright steadily increased from $18.8 million in 2016 to $28 million in 2018. (Ryan Galloway Tr. Test., Dec. 20, 2018, Dkt. #149, at 192–94). With Allen's departure, Chern holds a 99% membership interest in the firm. (Chern, Day 1 at 148). Chern continues to manage day-to-day operations of the business, but he also appointed a management committee to develop policies and procedures for the firm. (Id. at 149–51). Some changes have been implemented as a result of various sanctions motions filed against Upright. At issue here is the appropriate redress for the firm's admitted past failures to fully disclose FDCPA litigation in bankruptcy filings.

I. Development of the FDCPA Practice

David Levin ("Levin") joined Upright on June 9, 2014, as partner and head of Consumer Rights Litigation. (Stip. ¶ 56; David Levin Tr. Test., Dec. 20, 2018, Dkt. #149, at 69, 71). Levin recalled the firm having only a few pending FDCPA cases and motions for violations of the automatic stay or discharge injunction at that time. (Levin at 71). His role was to manage and expand the consumer protection litigation practice and implement processes for handling those matters. (Id. at 70–71). Levin left Upright in January 2016; shortly thereafter, the litigation group disbanded. (Id. at 97, 99). But he estimated that during his two-year tenure, Upright filed at least a few hundred consumer protection claims nationally. (Id. at 92, 124–25).

Levin worked closely with David Leibowitz ("Leibowitz"), who had joined the firm a few months earlier to run the litigation practice. (Leibowitz at 4–5, 16–18). Leibowitz has held various titles at LSC, including General Counsel, Chief Legal Officer, and Senior Legal Advisor.⁴ (Stip. ¶ 93). Since Leibowitz was an experienced chapter 7 Trustee in the Northern District of Illinois, he assumed responsibility for the bankruptcy-related litigation matters while Levin oversaw the FDCPA cases. (Leibowitz at 17, 51–52; Levin at 71–72). Upright had a bankruptcy group that operated separately from the litigation team; and, although housed in the same office, was supervised by Allen and Chern. (Levin at 76, 79; David Gallagher Tr. Test., Dec. 18, 2018, Dkt. #147, at 24–25).

David Gallagher was hired by Upright as a senior bankruptcy associate in November 2013. (Stip. ¶¶ 77–78). Like Allen and Chern, Gallagher already had several years of consumer bankruptcy experience; consequently, he filed the majority of Upright's bankruptcy petitions. (Id. at ¶¶ 80–81; Gallagher at 20). Gallagher was eventually promoted to partner in July 2018, but he voluntarily left the firm four months later, just prior to this matter going to trial. (Gallagher at 22). Gallagher explained that the bankruptcy group used BKSN, a case management software system, to track its bankruptcy cases until February 2015 when the firm switched to SalesForce, a different software system. (Id. at 57–58). He believed that the existence of FDCPA litigation was to be notated in BKSN with a flag or in SalesForce via a specific entry in the notes. (Id. at 36, 110–11). In contrast, the litigation group used Clio, another case management software system, to track the required steps for each matter. (Levin at 81–82). Levin testified that alerting the bankruptcy department about a possible FDCPA claim was not one of the listed tasks in Clio and that he did not have regular access to BKSN or SalesForce since he did not work on bankruptcy cases. (Id. at 81–82, 104–05). Instead, Levin understood from Chern that litigation paralegal Brandy Elliott ("Elliott") would make specific notations in the bankruptcy software system once Upright had been retained for an FDCPA litigation matter, in order to alert the bankruptcy attorney to contact Levin's department to discuss the potential claim before filing a petition. (Id. at 78–79, 83, 95, 103).

Chern similarly testified that the policy and procedure in 2014 was for a litigation paralegal to notate the client's customer relationship management record with a flag to indicate Upright's representation on a consumer protection claim. (Chern, Day 1 at 213). Additionally, Chern stated, FDCPA attorneys were supposed to directly email the bankruptcy attorney, and both Levin and Leibowitz were aware of this fact. (Id. ). But Levin said he was never told to email the bankruptcy group. (Levin at 95–96). Likewise, Leibowitz could not recall any specific requirement for the litigation group to either make notations in bankruptcy software or email the assigned bankruptcy attorney about a case. (Leibowitz at 26–28).

However, Leibowitz did specifically raise with Chern the need to ensure that potential litigation claims were properly disclosed in bankruptcy filings, as Upright had many consumer protection case leads coming in from paralegals talking to bankruptcy clients. (Id. at 44–45). Consequently, in the spring of 2014, Leibowitz suggested that Upright begin generically disclosing a potential FDCPA claim on every debtor's schedules. (Stip. ¶ 60). This "Every Case Practice" was based on Leibowitz's belief that a possible FDCPA claim should be listed as an asset in every bankruptcy case, whether such a claim was known to exist or not, since Upright was always attempting to identify such claims. (Id. ). The possible claim would then be scheduled as fully exempt. (Stip. ¶ 60). Upright bankruptcy filings by Gallagher reflected consistent application of the practice from March through June of 2014. (Stip. ¶ 62; UST Tr. Ex. 97-1). But after case trustees throughout the United States took issue with the scheduling of claims that had not been verified, the practice was discontinued around June 2014. (Stip. ¶¶ 60–61).

Upright advertised the FDCPA Practice in publications such as the Consumer Bankruptcy Journal, the official publication of the National Association of Consumer Bankruptcy Attorneys. (Stip. ¶ 59)....