JEFF BOHM,
Bankruptcy Judge.
I. Introduction
On April 22, 2005, Randy W. Williams, the
Chapter 7 Trustee (the Trustee) for this case, filed a Motion to Show Cause
requesting this Court to inquire whether the relationship among Select, BLG,
and Craig: (1) involves unauthorized fee splitting; (2) fails to adequately
disclose the true nature of the representation of the Debtor; and (3) involves
the unauthorized practice of law. On July 20, 2005, the United States Trustee
(U.S.Trustee) filed a response requesting this Court to order Select, BLG, and
Craig to disgorge all fees received from the Debtor, pay all costs incurred by
the Trustee for the investigation of this matter, and pay any other sanctions
this Court may deem appropriate. The purpose of this Memorandum Opinion is to
address these issues and others relating to them.
II. Findings Of Fact
The facts, either as stipulated to or
admitted by counsel of record, or as adduced from the testimony of the
witnesses and introduction of exhibits, in chronological order, are as follows:
1. The Debtor works as a janitor for the
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[2004 examination at 4, In
re Zuniga, No. 05-33416-H4-7 (S.D.Tex. July 13, 2005).] Indeed, at the
hearing on the motion to show cause, an interpreter had to be present to assist
the Debtor in giving testimony.
2. The Debtor was married on June 1, 2004.
Prior to her current marriage, the Debtor lived with a man for eighteen years
to whom she was never formally married. [2004 examination at 16.] Together, the
couple purchased the Debtor's current residence at
3. In July 2004, overwhelmed by credit card
debt and struggling to make payments on her home equity loan and mortgage, the
Debtor responded to a Spanish television advertisement by Select, aired on
Hispanic television stations in the
4. After running a
credit report and determining that the Debtor was not eligible for any of its
programs, Select then recommended that the Debtor file for bankruptcy and
solicited payment towards this end. [2004 examination at 7.] The Debtor
provided Select with a voided check, and between August 2, 2004 and September
7, 2004, Select made four direct deductions from the Debtor's checking account
totaling $1,199.00. [
5. Select sent the Debtor a packet FN1, dated August 2, 2004,
that “welcomed” her to its program. Additionally, the letter stated that Select
was “confirming and verifying” the Debtor's “inscription” to its program.
[Select packet, Trustee Ex. 2.] The packet contained a pamphlet entitled “A New
Opportunity, Bankruptcy,” as well as a copy of the worksheet Select's employees
filled out when the Debtor originally called Select. [
FN1. The packet Select sent to the Debtor was written in Spanish. A significant portion of the packet was translated using an on-line translation tool, http://dictionary.reference.com. The website specifically notes that it cannot provide a perfect translation but should be adequate to convey the general sense of the original.
6.
Only upon receipt of the full $1,199.00 did Select inform the Debtor that her
case had been referred to BLG. [2004 examination at 8.] Select then transferred
the $1,199.00, plus the financial information which the Debtor had provided to
Select, to BLG, a law firm which occupies a suite within the same
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as: 332 B.R. 760, *769)
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3:58 FN2, 4:40.] Select directly
transferred the Debtor via telephone to BLG, and the Debtor spoke with two
paralegals, who promised the Debtor that BLG would send her the paperwork
relating to her bankruptcy. [2004 examination at 9-10.]
FN2. Citations to the Show Cause Hearing are references to the FTR recordings.
7. J. Arthur Bernal (Bernal), president and owner of BLG,
testified that a debtor who falls out of or does not qualify for one of
Select's programs is automatically referred to his firm. [Show Cause Hearing at
4:39.] He could not account for how Select arrived at the figure of $1,199.00
for BLG's services. [
8. Bernal is licensed to practice law in the State of California
and the United States Bankruptcy Court, Central District of California.
[Bernal's Responsive Declaration.] Bernal is not licensed to practice law in
the State of
9. On October 19, 2004, BLG entered into an Attorney Referral
Agreement (Referral Agreement) with Craig to retain him as local counsel for
bankruptcy cases in
FN3 for the “legal services
of the lawyer [J. Arthur Bernal]”, as well as forms concerning the Debtor's
financial condition. [BLG packet, Trustee Ex. 3.]
FN3. See supra, note 1.
11. The Debtor's contract with BLG stated that Bernal would
prepare and file her bankruptcy petition and attend the § 341 meeting of
creditors. It also authorized Bernal to contact and use the services of local
lawyers in the state in which the bankruptcy would be filed. [BLG packet,
Trustee Ex. 3.]
12. The Debtor signed
the contract, filled in her financial information to the best of her ability,
and returned all documents to BLG. [2004 examination at 10.] Subsequently, the
Debtor had several telephone conversations with a paralegal at BLG named
Corina. During these conversations, Corina solicited information from the
Debtor in order to complete the forms concerning the Debtor's financial
condition. [Show Cause Hearing at 4:03]; [2004 examination at 10-11.]
13. BLG informed the
Debtor that she needed to attend the § 341 meeting of creditors and that Craig
would *770
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serve as her local
counsel and attend this meeting with her. [2004 examination at 24.] BLG
arranged for the Debtor to meet with Craig and gave her instructions to Craig's
office. [
14. Craig is not
admitted to practice law in the Southern District of Texas. Moreover, due to
some prior issues undisclosed in this case, when Craig was initially admitted
to practice law in the State of
FN4. Jesus
Barrientos (Case No. 05-33417) and Dominga Ramos (Case No. 05-33885). At the
Show Cause Hearing, Bernal indicated that Ms. Andrea Vasquez, an attorney from
15. Because Craig lacked the software to draft the Debtor's
Chapter 7 bankruptcy petition, Schedules, and SOFA, an attorney with BLG
prepared these documents.FN5 [Show Cause Hearing at
3:59.] The BLG attorney used the information provided directly by the Debtor to
BLG, along with the Debtor's financial data that Select had transferred to BLG.
[
FN5. Bernal indicated a Mr. Juan Onofrey, an attorney employed by BLG, actually prepared the documents.
FN6. The
Southern District of Texas does not have a Local Rule 2090-1. This rule is
promulgated by the United States Bankruptcy Court for the Central District of
California, LBR 2090-1 (May 3, 2004).
16. The Debtor met with Craig two times before Craig filed her
bankruptcy petition, Schedules, and SOFA. [2004 examination at 12.] At their
initial meeting, the Debtor signed the documents related to her bankruptcy. [
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court filing fees. [
17. The Debtor testified
that she spent much more time discussing her bankruptcy with the paralegals at
BLG than with Craig. [2004 examination at 29.]
18. On March 7, 2005,
the Debtor filed a voluntary petition for Chapter 7 bankruptcy with this Court.
Craig signed the petition as the Debtor's attorney. [Ex. 1 of Trustee Ex. 4.]
19. On “Schedule A-Real
Property,” the Debtor indicated that she has a one-half interest in the
residence at 182 Glaze Brook,
20. On “Schedule
F-Creditors Holding Unsecured Nonpriority Claims,” the Debtor did not list her
current, non-debtor husband. [Ex. 1 of Trustee Ex. 4.]
21. On her SOFA, under
question “9. Payments related to debt counseling or bankruptcy,” the Debtor
identified herself as the “payor” of $500.00 to Craig and $699.00 to J. Arthur
Bernal. Under question “16. Spouses and Former Spouses,” the Debtor checked the
box marked “None.” [Ex. 1 of Trustee Ex. 4.]
22. In the “Statement
Pursuant to Rule 2016(b),” Craig listed compensation paid or agreed to be paid
by the Debtor to him as an “unpaid balance due and payable” of $1,199.00. The
pre-printed 2016(b) Disclosure shows that Craig will provide or has provided:
(a) analysis of the financial situation, and rendering advice and assistance to
the Debtor in determining whether to file a petition under Title 11 of the
United States Code; (b) preparation and filing of the Petition, Schedules,
Statement of Financial Affairs and other documents required by the Court; and
(c) representation of the Debtor at the meeting of creditors. Attached to this
document, Craig included the California Local Bankruptcy Rule 2090-1 form. On
this form, to identify the services he agreed to render, Craig checked a box
marked “Represent the Debtor at the 341(a) Meeting”; he did not check the box
marked “Prepare and file the Petition and Schedules.” Craig signed both of
these forms. [Ex. 1 of Trustee Ex. 4, also Docket No. 1.]
23. The § 341 meeting of
creditors was held on April 4, 2005. Craig represented the Debtor at this
meeting. However, prior to the meeting, BLG instructed the Debtor to bring her
own translator FN7. [2004 examination at
24.]
FN7. Bernal testified that Craig was supposed to provide a translator. Because the Debtor testified that during a phone conversation she had with BLG, BLG instructed the Debtor to bring her own translator, this Court can only assume that Craig was either unwilling or unable to find a translator for the Debtor.
24.
At the § 341 meeting, the Trustee requested that Craig amend question “9.
Payments related to debt counseling or bankruptcy” on the SOFA and the
“Statement Pursuant to Rule 2016(b).” [Show Cause Hearing at 4:07.] Bernal
testified that his firm, BLG, made these amendments and then sent the documents
to Craig for filing with this *772
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Court. [
26. On July 13, 2005,
the Trustee and U.S. Trustee conducted a Rule 2004 oral examination of the
Debtor. The Debtor was not represented by counsel at this examination. [2004
examination at 4.] The Debtor testified that two individuals at BLG-Corina, one
of the legal assistants, and an attorney with BLG-told her she was not required
to attend the 2004 examination or the show cause hearing in this Court. [
27. On July 20, 2005,
the U.S. Trustee filed a response to the Trustee's motion. The U.S. Trustee
requested that this Court disgorge the fees received by Select, BLG, and Craig,
require them to pay all costs incurred by the Trustee in investigating this
matter, and assess any other appropriate sanctions. [Response of the
28. On July 20, 2005, a
hearing was held on the Trustee's motion to show cause and the U.S. Trustee's
response.
29. Bernal testified
that his firm, BLG, is willing to disgorge all fees paid by the Debtor and to
reimburse the Trustee for all of his costs resulting from this investigation.
[Show Cause Hearing at 4:01.] The Trustee's costs include: court reporter fees
(service and transcript) of $357.94, a witness fee paid to the Debtor for her
appearance at the Rule 2004 examination of $45.00, and attorney fees totaling
$1,620.00 (8.1 hours at $200.00 per hour) paid to Allison Bynam, an associate
with the law firm of Thompson Knight, for her assistance in this matter. The
Trustee's costs total $2,022.94. [
III. Conclusions of Law
[1]
[2]
[3]
“Attorneys who practice
before a bankruptcy court must not only concern themselves with the obligations
set forth in the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure
(the Bankruptcy Rules), but also with the application of state ethical rules.” In
re van Dyke, 296 B.R. 591, 594
(Bankr.D.Mass.2003) ( quoting In
re Soulisak, 227 B.R. 77, 80
(Bankr.E.D.Va.1998) (footnote omitted)).
The Local Rules of the United States District Court for the Southern District
of Texas (the DLR) incorporate the disciplinary rules of the State of
A. Violations of the Bankruptcy Code and Federal Rules of Bankruptcy Procedure
[4]
Any attorney representing a debtor in a Chapter 7 bankruptcy case
is required *773
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to report all compensation
paid or agreed to be paid for services rendered.FN8 11 U.S.C. § 329
(2005). Additionally, Bankruptcy Rule 2016(b) requires full disclosure
of compensation paid to the debtor's attorney. Fed. R. Bank.
P.2016(b) (2005). Bankruptcy Rule 2016(b) states that “[e]very attorney for a debtor ... shall file and
transmit to the United States trustee ... the statement required by § 329 of the [Bankruptcy] Code including whether the attorney has
shared or agreed to share the compensation with any other entity.”
FN8. 11 U.S.C. § 329(a) states, “Any attorney representing a debtor in a case under this title, or in connection with such a case, whether or not such attorney applies for compensation under this title, shall file with the court a statement of the compensation paid or agreed to be paid, if such payment or agreement was made after one year before the date of the filing of the petition, for services rendered or to be rendered in contemplation of or in connection with the case by such attorney, and the source of such compensation.”
[5]
In the case at bar, there was no initial disclosure of Select's
involvement with the Debtor or BLG. [Findings of Fact, ¶¶ 21, 24] The Debtor
originally contacted Select's offices, which are located in
Further, BLG and Craig
failed to accurately disclose the compensation, which is required to be filed
with the court under Bankruptcy Rule 2016(b). [Findings of Fact, ¶ 22.] The 2016(b) Disclosure that Craig
filed inaccurately stated that he had not yet received payment from the Debtor
and that $1,199.00 was due from the Debtor. [
B. Violations of the Bankruptcy Local Rules
[6]
Bankruptcy Local Rule
1002(b) requires that all
petitions show “an alphabetized mailing list of all creditors showing their
complete names and addresses, including zip codes.” Bankruptcy Local Rule
1002(b) (Jan. 1, 1993),
available via the United States District Court and Bankruptcy Court, Southern
District of Texas website at http://www.txs.uscourts.gov. Subsequently, this
same Rule states, “When there is a nondebtor spouse, *774
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as: 332 B.R. 760, *774)
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the list of creditors shall include the complete name and address,
including zip code of the nondebtor spouse...”
[7]
The mailing list filed by Craig fails to comply with Bankruptcy
Local Rule 1002(b). First, the Debtor's spouse was not included on the list of
creditors. [Findings of Fact, ¶ 20.] Second, the Debtor and her attorneys were
listed near the end of the mailing list, after the creditors. Moreover, the
Debtor's attorneys were listed before the Debtor. Craig was hired by Bernal to
represent the Debtor as local counsel. [Findings of Fact, ¶ 9.] It is this
Court's view that all counsel of record-and certainly local counsel-should be
familiar with and adhere to the various local rules and procedures of this
District. Craig's conduct demonstrates a patent lack of knowledge and
familiarity with the Bankruptcy Local Rules.FN9
FN9. This Court's conclusion about Craig should not be construed as excusing BLG's ignorance of these local rules.
C. Violations of the Local Rules of the United States District Court for the Southern District of Texas
[8]
[9]
[10]
Bankruptcy Local Rule 1001(e) states that admission, designation,
and discipline of attorneys practicing before the Bankruptcy Court for the
Southern District of Texas (the Bankruptcy Court) are governed by the Southern
District Local Rules. Bankruptcy Local Rule 1001(e) (Jan.1, 1993).
Specifically, DLR 83.1 addresses the admission to practice in the District
Court for the Southern District of Texas (the District Court). See DLR
83.1 (May 1, 2000), available via the United States District and Bankruptcy
Court, Southern District of Texas website at http://www.txs.uscourts .gov.
According to this particular local rule, an attorney must apply for admission
to practice before the District Court and, hence, the Bankruptcy Court. DLR
83.1.C. There are two ways an attorney may gain admission to practice in the
courts of the Southern District of Texas: (1) file a written application and
obtain approval with the clerk of court issuing a Certificate of Admission.
This approval allows an attorney to practice at all times in the Southern
District of Texas; or (2) obtain permission from the judge before whom the case
or adversary proceeding is pending. This approval allows an attorney to serve
as attorney-in-charge, or as an attorney assisting the attorney-in-charge, in a
specific case or adversary proceeding until its completion.FN10
FN10. Generally referred to as practicing pro hac vice, an un-admitted attorney may ask for leave of the adjudicating court to represent a client in a case on a one time basis.
[11]
Neither Craig nor Bernal has been admitted to practice in the
Southern District of Texas. [Findings of Fact, ¶¶ 8, 14.] Bernal is licensed to
practice law in the State of
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practice pro hac vice in this pending Chapter 7 case.FN11
FN11. A review of the dockets of the other two cases that Craig currently has pending in the Bankruptcy Court indicates that he also has not filed an application to practice pro hac vice in those pending Chapter 7 cases. [See Findings of Fact, ¶ 14 and footnote 4.]
Craig's participation in this case is particularly egregious
because of the history of his law license. When Craig was first admitted to
practice law in
[Show Cause Hearing at
5:21.] Additionally, when this Court asked Craig why he had not applied for
admission to the Southern District, he responded, “At the current moment, the
State Bar of Texas has issued me a probationary license which precludes me from
obtaining a federal license.” [
I have been told that I
do not have to file a pro hac vice motion for every case necessarily
that is filed in federal court. [In] some of my federal cases that I have
represented people in bankruptcies, I have filed a motion, but because of that
information that I have acquired, I did not file one in this particular case.
[
FN12. See supra note 10.
[12]
[13]
Bernal and Craig's conduct may merit action under the disciplinary
rules of the United States District Court. The conduct of attorneys in the
Southern District of Texas is governed by the Southern District Local Rules of
Discipline (Rules of Discipline); these rules set forth in Appendix A. DLR
83.1.L (May 1, 2000). Any lawyer appearing before the District Court, and hence
the Bankruptcy Court, “confers disciplinary jurisdiction upon the court under
these rules.” DLR, Appendix A, Rule 7 (Oct. 10, 1996). Violations of the
disciplinary rules serve as grounds for disciplinary action. DLR, Appendix A,
Rule 1.B (Oct. 10, 1996). These disciplinary rules do not limit the judges'
inherent powers over lawyers who practice before them. DLR, Appendix A, Rule 10 (Oct. 10, 1996). See also DLR, Appendix A, Rule 5A FN13 and 5B (Oct. 10.1996).FN14 Not *776
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only may Bernal and
Craig's practice in the bankruptcy court subject them to disciplinary action
under the local rules, they both have actually committed the unauthorized
practice of law.
FN13. Rule 5A. Charges that any lawyer of this bar has engaged in conduct, which might warrant disciplinary action, shall be brought to the attention of the court by a writing addressed to the chief judge with a copy to the clerk of court. This Court will submit a letter, in writing, to the Chief District Judge for the Southern District of Texas, notifying him of the actions of BLG and Craig.
FN14. Rule
5B. Upon receipt of a charge, the chief judge shall refer any non-frivolous
charge to a district judge for review to determine whether further disciplinary
proceedings should be held. The reviewing judge shall notify the charged lawyer
of the charges made and give that lawyer an opportunity to respond.
D. Violations of the
N15
FN15. In
[14]
[15]
The minimum standard of
conduct for any attorney appearing before this Court is set forth in the Texas
Disciplinary Rules. DLR, Appendix A, Rule 1.A; see also Resolution
Trust Corp. v. Bright, 6 F.3d 336, 341
(5th Cir.1993) (“[A] federal court may
... hold attorneys accountable to the state code of professional conduct.”) “An
appearance by a lawyer before the court, by writing or in person, confers
disciplinary jurisdiction upon the court under these rules.” DLR, Appendix A,
Rule 7 (Oct. 10, 1996). Both Bernal and Craig appeared before this Court in
person at the July 20, 2005 hearing. Moreover, by filing the bankruptcy
petition, both Bernal FN16 and Craig FN17 made an appearance before this Court.FN18 Therefore, *777
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the Texas Disciplinary Rules govern both Bernal and Craig.
Additionally, Texas Disciplinary Rule 8.04 specifically states “[a] lawyer
shall not: (1) violate these rules, ... or do so through the acts of another,
... (3) engage in conduct involving dishonesty, fraud, deceit or
misrepresentation; ... or (12) violate any other laws of this state relating to
the professional conduct of lawyers and to the practice of law.” Tex. Disciplinary R. Prof'l Conduct 8.04.FN19 By their acts, both Bernal and Craig violated several Rules of
Professional Conduct.
FN16. Bernal
testified that he was not directly involved in the Debtor's case and that a Mr.
Juan Onofrey, an attorney at BLG, physically prepared the documents. Show Cause
Hearing (July 20, 2005). However, Bernal testified that Mr. Onofrey did so
under Bernal's direction. Show Cause Hearing (July 20, 2005). Bernal is the
president and sole owner of BLG and therefore has certain responsibilities as a
partner or supervising lawyer. Specifically, his responsibilities are as
Rule 5.01. Responsibilities of a Partner or Supervisory Lawyer.
A lawyer shall be subject to discipline because of another lawyer's violation
of these rules of professional conduct if:
a) The lawyer is a partner or supervising lawyer and orders, encourages, or
knowingly permits the conduct involved; or
b) The lawyer is a partner in the law firm in which the other lawyer practices,
is the general counsel of a government agency's legal department in which the
other lawyer is employed, or has direct supervisory authority over the other
lawyer, and with knowledge of the other lawyer's violation of these rules
knowingly fails to take reasonable remedial action to avoid or mitigate the
consequences of the other lawyer's violation.
Tex.
Disciplinary R. Prof'l Conduct 5.01, reprinted
in Tex. Gov't Code Ann., tit. 2, subtit. G, app. A, art. 10, § 9 (Vernon
2005). Therefore, any reference to BLG or violations committed by BLG are also
references to Bernal and violations committed by Bernal.
FN17. DLR 11
requires a party to “designate an attorney-in-charge” on first appearance and
“[s]igning the pleading effects designation”. DLR 11.1. In the case at bar,
Craig signed the petition as the Debtor's attorney. Therefore, Craig is the
attorney-in-charge.
FN18. The DLR
provide that “[a]n appearance by a lawyer before the court, by writing, or in person, confers disciplinary jurisdiction upon the court under these DLR
rules.” DLR Appendix A, Rule 7 (emphasis added.) The Fifth Circuit has recently
said “[a] party makes a general appearance whenever it invokes the judgment of
the court on any question other than jurisdiction.... ‘[in] determining whether
conduct is sufficient to be considered a general appearance, the focus is on
affirmative action that impliedly recognizes the court's jurisdiction over the
parties.’ ” Maiz
v. Virani, 311 F.3d 334, 340
(5th Cir.2002) citing Jones
v. Sheehan, Young, & Culp. P.C., 82 F.3d 1334, 1340-41 (5th Cir.1996).
Indeed, the Fifth Circuit has interpreted “appearance” broadly enough to
encompass informal acts and has thus found that “appearance” may occur without
a party having gone so far as to file documents in the record. See Sun
Bank of Ocala v. Pelican Homestead and Savings Association, 874 F.2d 274, 276 (5th Cir.1989).
Directly on point, the Tenth Circuit specifically states that “[a]ttorneys who
authorize their names to appear on filed papers have entered an appearance.”
10th Cir., Cir. R. 46.1 (Jan. 1, 2003). Other courts have held that significant
participation by an attorney constitutes an appearance. See Pumphrey
v. K.W. Thompson Tool Co., 62 F.3d 1128 (9th Cir.1995); see also E.F.
Hutton & Co. v. Brown, 305 F.Supp. 371 (S.D.Tex.1969) (holding that nonresident attorney's assistance to Houston attorney and Houston
client was sufficient to establish jurisdiction over nonresident attorney for
disciplinary purposes, even though no formal appearance was entered). The
weight of these decisions is persuasive, and therefore this Court holds that
the significant participation of BLG and Bernal constitutes an appearance in
this Court.
FN19. All
citations to the Texas Disciplinary Rules are reprinted in the Tex. Gov't Code
Ann., tit. 2, subtit. G, app. A, art. 10, § 9 (Vernon 2005).
1.
(a) practice law in a
jurisdiction where doing so violates the regulation of the legal profession in
that jurisdiction; or
(b) assist a person who
is not a member of the bar in the performance of activity that constitutes the
unauthorized practice of law.
Tex.
Disciplinary R. Prof'l Conduct 5.05.
In Texas, the practice
of law is defined as:
(a) [T]he preparation of
a pleading or other document incident to an action or special proceeding or the
management of the action or proceeding on behalf of a client before a judge in
court as well as a service rendered out of court, including the giving of
advice or the rendering of any service requiring the use of legal skill or
knowledge, such as preparing a will, contract, or other instrument, the legal
effect of which under the facts and conclusions involved must be carefully
determined.
(b) The definition in
this section is not exclusive and does not deprive the judicial branch of the
power and authority under both this chapter and the adjudicated cases to
determine whether other services and acts not enumerated may constitute the
practice of law.
Tex.
Gov't Code Ann. § 81.101(a)(b) (Vernon 2005).
Did BLG, Bernal and
Craig violate section 81.01(a) or (b) or both? A case from
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attorneys made the
changes at the request of local counsel and sent the documents back to local
counsel.
In assessing these
facts, the court in Babies concluded:
The operation of the
Chicago Attorneys' referral program shows plainly that they intended to provide
legal services to residents of
a. Bernal and BLG
[16]
Like the attorneys in Babies, the Debtor was referred to
BLG, an out-of-state law firm, after she contacted a credit counseling service
and was told that she did not qualify for one of its programs. [Findings of
Fact, ¶¶ 3, 6.] BLG counseled the Debtor on the phone, and then sent her forms
to complete and the Contract to sign that stated the Debtor “contracts the legal
services of the lawyer [J. Arthur Bernal.]” [Findings of Fact, ¶¶ 10, 12.] The
Contract also stated that Bernal would prepare and file the bankruptcy petition
as well as represent her at the § 341 meeting of creditors. [Findings of Fact,
¶ 11.] Also like the debtors in Babies, the Debtor filled out the forms
and returned the packet to BLG. [Findings of Fact, ¶ 12.] The only difference
in the case at bar is that the Debtor completed the forms with the assistance
of Spanish-speaking paralegals at BLG. [
Bernal defends BLG's
actions by stating that Select, a national company, refers clients from “many
states” to his law firm and his office simply screens and qualifies them before
contacting local counsel in the client's home state. [Bernal's Responsive
Declaration at 2, ¶ 5, In re Zuniga, No. 05-33416-H4-7 (S.D.Tex. May 12,
2005).] However, by “collecting the necessary information required for
bankruptcy” and “explaining what bankruptcy does and how it works,” [ id. ¶ 6.] BLG was “hold[ing] themselves out as being ready, willing and able to
provide legal services to residents” of
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as: 332 B.R. 760, *779)
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Tex. Gov't *779
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(Cite
as: 332 B.R. 760, *779)
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Code Ann. § 81.101(a) (Vernon
2005). BLG selected the Texas exemption rather than the federal exemption
[Findings of Fact, ¶ 15],FN20 the legal effect of
which most certainly requires careful determination. BLG made decisions based
on
FN20. Bernal
testified that after BLG had prepared the “petition, forms and documents” and
selected the exemptions, the actual choice of exemptions “would be in
consultation with Mr. Craig.” [Show Cause Hearing at 4:12-13.] When asked
directly if it was the recommendation of his firm that Ms. Zuniga use the
FN21. This
Court also notes that
FN22. See
also Birbrower v.
Superior Court, 17 Cal.4th 119, 70 Cal.Rptr.2d 304, 949 P.2d 1, 5 (Cal.1998) (practice of law includes giving legal advice and preparing legal documents;
one may practice law in California although not physically present in the state
by advising a California client on California law in connection with a
California legal issue.)
b. Local Counsel Craig
[17]
As discussed supra, Craig is a probationary licensed member of State Bar of Texas, but he is not
admitted to the Southern District of Texas and did not seek permission of this
Court to appear pro hac vice. [Findings of Fact, ¶ 14.] Craig filed the
bankruptcy petition prepared by BLG, signed the petition as attorney of record,
and appeared at the § 341 meeting of creditors as Debtor's counsel. [Findings
of Fact, ¶¶ 18, 23.] Additionally, Craig entered into a contract with BLG that
specifically stated the arrangement was for a “qualified bankruptcy attorney”
and that Craig would be responsible for “represent[ing] the client until
discharge of the client's bankruptcy, subject*780
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to the client's payment
for any additional services ....” [Findings of Fact, ¶ 9.] [Telefax letter from
Bernal to Craig (Oct. 19, 2004).] Craig “[rendered] a [service] out of court”
that “require[ed] the use of legal skill or knowledge ... the legal effect of
which under the facts and conclusions involved must be carefully determined.” Tex.
Gov't Code Ann.
§ 81.101(a) (Vernon 2005). Additionally, a judge has the “power and authority
... to determine whether other services and acts not enumerated may constitute
the practice of law.” Tex.
Gov't Code Ann.
§ 81.101(b) (Vernon 2005). Therefore, even if Craig did not prepare the
documents, signing his name as the Debtor's attorney and filing documents with
the Bankruptcy Court, without properly verifying the information contained in
those documents, constitutes the practice of law. Craig was practicing law in
the Southern District of Texas without leave of the District Court or this
Court and therefore violated DLR 83.1K. Thus, he engaged in the unauthorized
practice of law. See also Tex.
Code Gov't § 81.101(a)(b) (Vernon 2004), Tex.
Disciplinary R. Prof'l Conduct 5.05.
2.
Texas Disciplinary Rule
1.03 states that:
(a) A lawyer shall keep
a client reasonably informed about the status of a matter and promptly comply with
reasonable requests for information.
(b) A lawyer shall
explain a matter to the extent reasonably necessary to permit the client to
make informed decisions regarding the representation.
Tex.
Disciplinary R. Prof'l Conduct 1.03.
[18]
Neither Craig nor Bernal
kept the Debtor reasonably informed about the status of her bankruptcy.
Additionally, they failed to explain the applicable law and procedures to the
extent reasonably necessary to permit her to make informed decisions regarding
her disclosures, her options, her choices and later the status of her case. The
Debtor works as a janitor for the
The Debtor first spoke
to BLG after she finished making her payments to Select, which was on September
7, 2004. [Findings of Fact, ¶ 6.] BLG did not send her the necessary paperwork
until November 8, 2004, two months after she finished making her payments.
[Findings of Fact, ¶ 10.] The Debtor's dire financial situation prompted her to
contact Select after watching its television commercial, but the paperwork to
begin the process was not sent to the Debtor until well after the attorney's
fee had been paid. Bernal stated he did not know why two months went by before
the paperwork was sent to the Debtor. [Show Cause Hearing at 4:59.] If Bernal
himself did not know the status, it is not likely the Debtor was kept
reasonably informed.
BLG did provide the
Debtor with a translator who was familiar with the bankruptcy process, but they
never met with her face-to-face [Findings of Fact, ¶¶ 6,12]; counseling
step-by-step bankruptcy procedures took place over the phone and via mail, a
difficult, if not entirely unprofessional, approach. The Debtor herself stated
that she was not clear about everything because talking over the phone was not
the *781
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(Cite as: 332 B.R. 760, *781)
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|
same as talking
face-to-face. [Show Cause Hearing at 3:43.]
BLG also filled out the
bankruptcy petition, but did not correctly fill out the Schedules, SOFA or the
2016(b) Disclosure. [Findings of Fact, ¶¶ 15, 20-22, 24.] When Craig had the
Debtor sign these incorrect forms, which he represented to the Court that he
had reviewed, the Debtor was signing documents that she could not read or
understand. Moreover, she was executing the documents under penalty of perjury.
Additionally, BLG told the Debtor her appearance at the 2004 examination was
not necessary and to disregard letters and notices she had received, including
the hearing on the U.S. Trustee's motion to show cause. [Findings of Fact, ¶
26.] BLG told the Debtor the matter was “closed” and “done” and she did not
have to do anything else. [2004 examination at 27.] If the Debtor had followed
BLG's advice, she could have been sanctioned by this Court.
Craig was unable to keep
the Debtor reasonably informed because he had no way of communicating with her.
The Debtor speaks only Spanish; Craig speaks only English. [Findings of Fact,
¶¶ 1, 16.] He did not arrange for a translator to be physically present during
their meetings at his office. [Findings of Fact, ¶¶ 16.] A translator at BLG's
office in
3.
[19]
Texas Disciplinary Rule 1.04 FN23 prohibits lawyers from
collecting unconscionable fees. Tex.
Disciplinary R. Prof'l Conduct 1.04(a)(b). A fee is unconscionable if it is unreasonable.
FN23. Rule 1.04 was amended by the Texas Legislature on Jan. 28, 2005 and was effective as of March 1, 2005. Because the conduct in the case at bar concerning the collection of fees occurred prior to the amendment, the earlier version applies.
[20]
The fee received by both Bernal and Craig was unreasonable.
Neither attorney had the “skill requisite to perform the legal service
properly.”
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(Cite as: 332 B.R. 760, *782)
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|
District of California
and practicing bankruptcy there, has little, if any, experience practicing
bankruptcy in the Southern District of Texas.FN24 The inaccuracies in
Debtor's petition, Schedules, SOFA, and the 2016(b) Disclosure drafted by BLG,
plus the use of the California form, underscores BLG's lack of familiarity with
the rules of the Southern District of Texas.
FN24. During the show cause hearing, Bernal stated he had been taking out of state referrals from Select for less than a year.
One purpose of obtaining local counsel is to retain someone
familiar with the local rules of a given jurisdiction. A diligent bankruptcy
attorney, familiar with the local rules, would have recognized the errors in
the Debtor's petition and the extraneous California Local Rule 2090-1 form.
Unfortunately, Craig's only experience in bankruptcy matters is in this case
and two cases similar to this one. [Findings of Fact, ¶ 14.] Craig was woefully
unfamiliar with the local rules when he filed the pleadings on behalf of the
Debtor. The California Local Rule 2090-1 form that Craig erroneously filed is a
prime example of his ignorance. See [Ex. 1 of Trustee Ex. 4.] At the
show cause hearing, Craig stated that he filed this form because it was
“optional” and he was being cautious by including it. [Show Cause Hearing at
5:19.] The form may well be optional in the Central District of California, but
it is not required or optional in the Southern District of Texas.
Because of Craig's lack of skill and experience, the Debtor was not as well
served as she should have been. Indeed, due to Craig's errors-and BLG's
errors-the Debtor had to undergo a 2004 examination on July 13, 2005 and appear
in this Court on July 20, 2005.
Disciplinary Rule
1.04 also requires lawyers
to communicate the basis of their fee to their clients when they have not
regularly represented the client. Tex. Disciplinary R. Prof'l Conduct 1.04(c). In addition, this Rule
explicitly prohibits fee splitting unless the fee is split in proportion to the
services performed by each lawyer; made with a forwarding lawyer; or made
between lawyers who assume joint responsibility for the client's
representation, but only with the written agreement of the client. Tex. Disciplinary R. Prof'l Conduct 1.04(f)(1). Rule
1.04 also requires the
lawyer to advise the client of the fee splitting arrangement. Tex. Disciplinary R. Prof'l Conduct 1.04(f)(2).
[21]
Proportionality of splitting the $1,199.00 fee: Craig and BLG entered into a Referral Agreement but such agreement
does not shed light on the division of services to determine if the fee was
proportional to each parties' respective duties. This agreement states that
Craig would be responsible for preparing and filing the petition, Schedules,
and SOFA, and representing debtors at § 341 meeting of creditors. These are the
same services Bernal stated he would provide in the Contract with the Debtor.
[Trustee Ex. 3, In re Zuniga, No. 05-33416-H4-7 (S.D.Tex. July 20, 2005)
]. The Referral Agreement further states that BLG will only be providing
“limited services... such as gathering information necessary to prepare the
bankruptcy petition, collecting creditor information, and budget and financial
information.” See [Telefax letter from Bernal to Craig, (Oct. 19, 2004)
]. If BLG's services were indeed so limited, it would be odd for BLG to keep
the majority of the fee, see In re Babies, 315 B.R. at 794; yet, BLG kept $699.00 of the $1,199.00 fee paid by the Debtor.
BLG's actual fee of $699.00 was disproportionate to the limited services
described in the Referral Agreement.
*783
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|
(Cite as: 332 B.R. 760, *783)
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|
[22]
[23]
Forwarding lawyer: A forwarding lawyer refers a case to another attorney and
receives a fee for such a referral. See, e.g., Kuhn, Collins, &
Rash v. Reynolds, 614 S.W.2d 854 (Tex.Civ.App.-Texarkana 1981, writ ref'd n.r.e.). Typically, a forwarding attorney does not maintain involvement
in the case. See id., (identifying one attorney as the forwarding
attorney and the other attorney as the one handling the case). In the case at
bar, BLG assisted the Debtor after the paperwork had been sent to Craig,
amended the petition after the meeting of creditors, and gave advice regarding
letters and notices the Debtor received. BLG maintained involvement in this
[24]
Written Agreement: The Fifth Circuit
recently held that a statement authorizing one attorney to “associate other
[a]ttorney or [a]ttorneys as they may desire,” without identifying that other
attorney or setting out the fee splitting arrangement, does not meet the
requirements of Disciplinary Rule
1.04(f)(1)(iii). Stone v. Thomas ( In re Wright), 138 Fed.Appx. 690, 695-96 (5th Cir.2005). In the case at bar, this Court finds that the requirements of Rule
1.04(f)(1)(iii) were not satisfied. The
Contract, which the Debtor signed, does not mention Craig by name; it only
states that BLG will “contact and use the services of local counsel.” [Findings
of Fact, ¶ 11]; Disciplinary Rule
1.04(f)(1)(iii) requires a written
agreement with the client for this type of fee splitting arrangement. However,
BLG told the Debtor, over the phone, whom that local counsel would be and did
not obtain the necessary written agreement. [Findings of Fact, ¶ 13.]
4.
(a) A lawyer shall not
knowingly:
(1) make a false
statement of material fact or law to a tribunal;.
Tex.
Disciplinary R. Prof'l Conduct 3.03.
[25]
BLG and Craig made false
statements of material fact to this Court. The 2016(b) Disclosure inaccurately
represents that the fee would be paid to Craig and he would share the fee with
Bernal. [Ex. 1 of Trustee, Ex. 4.] However, Craig was aware that Bernal would
be collecting the fee and remitting a portion to him. [Findings of Fact, ¶ 9.]
Moreover, Craig represented that the $1,199.00 had not been paid as of March 7,
2005, but the Debtor's bank statements show that Select had deducted the full
amount by early September 2004. [Findings of Fact, ¶ 4,6.] Additionally, Craig
submitted the California Local Rule 2090-1 form, which states he is limiting
his representation of the Debtor to the § 341 meeting of creditors. [Findings
of Fact, ¶ 22.] Yet, the 2016(b) Disclosure represents that he will render, or
has rendered, much more than just representation at the § 341 meeting of
creditors.
[26]
Texas Disciplinary Rule 3.03 applies even if BLG and Craig's actions can be characterized as
omissions. Tex.
Disciplinary R. Prof'l Conduct 3.03, comment 2, (“There are circumstances where failure to make a
disclosure is the equivalent of an affirmative misrepresentation.”) In the case
at bar, the U.S. Trustee brought to Craig's attention the omission of Select's
involvement on the Debtor's SOFA. [Findings*784
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|
(Cite as: 332 B.R. 760, *784)
|
|
of Fact, ¶ 24.] Although
Craig contacted BLG for an amended SOFA, which BLG in fact prepared and sent to
Craig, he never filed the amended SOFA.FN25 [
FN25. Craig's testimony regarding his not having filed the amended SOFA and 2016(b) statement was as follows: he did not file the amended documents because, after discussions with BLG, he, or he and someone at BLG, concluded that filing the amended SOFA was not necessary. [Show Cause Hearing at 5:18.]
Additionally, Craig knew or should have known of the requirements
for practicing in the Southern District of Texas, but he failed either to
follow them, or he chose to ignore them. See [Show Cause Hearing at
5:20.] Perhaps he hoped this Court would: (1) assume he was admitted and not
inquire into his status; or (2) gloss over his non-admitted status and allow
him to practice in any event. In either case, Craig cannot say he had a good
faith belief that this Court would not require him to be admitted in the
Southern District of Texas. It is an affirmative requirement. Even if other
courts have allowed Craig to practice without being admitted and without
obtaining pro hac vice status, Craig did not obtain such an exception
from this Court. Craig failed to disclose his non-admitted status, and this
omission constituted an affirmative misrepresentation.
5. Rule 7.02. Communications Concerning a Lawyers Services
(a) A lawyer shall not make
a false or misleading communication about the qualifications or the services of
any lawyer or firm. A communication is false or misleading if it:
(1) contains a material
misrepresentation of fact or law, or omits a fact necessary to make the
statement considered as a whole not materially misleading;
...
(5) designates one or
more specific areas of practice in an advertisement in the public media or in a
written solicitation unless the advertising lawyer is competent to handle legal
matters in each such area of practice.
Tex.
Disciplinary R. Prof'l Conduct 7.02.
[27]
[28]
On his website FN26, Craig represents his
firm as practicing in the area of bankruptcy law. He represents as follows:
FN26. This Court takes judicial notice of the information available on BLG and Craig's websites. In re AgriBioTech Sec. Litig., CV-S-990144, 2000 U.S. Dist. Lexis 5643, at *4 (D.Nv. March 6, 2000) ( citing Modesto Irrigation Dist. v. Pacific Gas & Elec. Co., 61 F.Supp.2d 1058, 1066 (N.D.Cal.1999), rev'd on other grounds, 54 Fed.Appx. 882 (9th Cir.2002), summary judgment granted on remand by, 309 F.Supp.2d 1156 (N.D.Cal.2004)).
Here at our firm, we strive to make your experience
a positive one. We are a full-service firm with many experienced
attorneys who specialize in a variety of areas. We are here to help you
with a wide range of legal needs.
We've included information on this site about our firm's
history, our lawyers, and our fees. We look forward to
working with you.
Dion A. Craig, Esq.,
http://www.oglawayer.com (last visited July 28, 2005) (emphasis added).
Laypersons, not understanding that a lawyer would have to be admitted to
practice in the Southern District of Texas, would easily and quite reasonably*785
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|
(Cite as: 332 B.R. 760, *785)
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|
believe that Craig, or
one of his associates, would be able to represent them in bankruptcy matters.
However, Craig is listed as the only attorney under “Lawyer Profiles,” so the
use of the plural, “we” and “our,” is confusing and misleading. Also, because
Craig is the only attorney listed under “Lawyer Profiles,” a layperson could be
misled into believing that Craig himself is qualified; however, as discussed supra, Craig is not admitted in the Southern District of Texas and therefore may not
undertake representation of any debtor in any bankruptcy court in this
District.
BLG states that it has a
“National Network of Attorneys” who are “ready to work for you in the
preparation and presentment of your bankruptcy petition.” Bernal Law Group,
Inc., http://www.bernallawgroup.com/Service.htm (last visited July 28, 2005).
This communication gives laypersons a false impression that BLG is authorized
to practice law in a number of jurisdictions.FN27 As discussed above,
this is not the case, at least not in the Southern District of Texas. While
this Court does not issue an opinion regarding other jurisdictions, BLG may not
represent to the public that it is able to practice law in the Southern
District of Texas without first being admitted to do so.
FN27. Indeed, BLG's website lists its hours for different time zones. Bernal Law Group, Inc., h ttp://www.bernallawgroup.com/ContactUs.htm (last visited July 28, 2005).
[29]
All in all, by virtue of
their respective violations of Texas Disciplinary Rules
8.04, 5.05, 1.03, 1.04, 3.03, and 7.02, both Craig and BLG have exhibited a blatant disregard for the
ethical standards to which an attorney should adhere in the practice of law.
The overall conduct of Craig, Bernal and Bernal's law firm, BLG, raises serious
concerns. The Debtor was entitled to competent and diligent representation.FN28 With the recent publicity of professionals implicated in
corporate scandals FN29, lawyers must vigilant in adhering to the ethical standards of
their profession.
FN28. This is
an affirmative requirement for attorneys practicing in
(a) A lawyer shall not accept or continue employment in a legal matter which
the lawyer knows or should know is beyond the lawyer's competence, ...
...
(b) In representing a client, a lawyer shall not:
(1) neglect a legal matter entrusted to the lawyer; or
(2) frequently fail to carry out completely the obligations that the lawyer
owes to a client or clients.
(c) As used in this Rule, “neglect” signifies inattentiveness involving a
conscious disregard for the responsibilities owed to a client or clients.
FN29. See
K.C. Goyer, Nancy
Temples' Duty: Professional Responsibility and the Arthur Andersen Verdict, 18 Geo J. Legal Ethics 261 (2004) (discussing the professional responsibilities of lawyers).
6. Select Financial Solutions
[30]
A bankruptcy court may hear and determine all cases and core
proceedings under Title 11. 28 U.S.C. § 157(a)
and (b) (2005). Select's initial solicitation of the Debtor was the sine qua
non of the case at bar. Its representatives informed the Debtor that her
only option was bankruptcy, then sent her information regarding bankruptcy, and
subsequently transferred the Debtor to BLG from its office. [Findings of Fact,
¶¶ 4,6.] This Court feels compelled to review Select's involvement in this
particular bankruptcy.
[31]
A credit services organization must register with the Texas
Secretary of State before conducting business in this state. Tex.
Fin. Code Ann.
§ 393.101 (
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(Cite as: 332 B.R. 760, *786)
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|
1998 & Supp.2004). A
credit services organization is defined as,
[A] person who provides,
or represents that the person can or will provide, for the payment of valuable
consideration, any of the following services with respect to the extension of
consumer credit by others:
(A) improving a
consumer's credit history or rating;
(B) obtaining an
extension of consumer credit for a consumer; or
(C) providing advice
or assistance to a consumer with regard to Paragraph (A) or (B)
Tex.
Fin. Code Ann.
§ 393.001 (
[32]
[33]
An organization does not need to state it is a credit services
organization for Tex. Fin Code § 393 to apply. See, e.g., Lovick v. Ritemoney,
Ltd., 378 F.3d 433 (5th Cir.2004) (broker can be a credit services organization). Select's
television commercials target consumers with debt problems and urge them to
contact Select for relief from these woes. FN30 [Findings of Fact, ¶
3.] The Debtor was prompted to contact Select after viewing one of these ads. [
FN30. Tex. Fin.Code Ann. §
393.306 (
Additionally,
the materials Select sent to the Debtor indicate the services it provides
include obtaining credit and repairing credit. [Trustee Ex. 2.] Select
represents it can provide assistance to a consumer for improving his/her credit
history or rating; therefore, Select is a credit services organization.
However, Select is not registered to do business in the State of
[34]
Non-profit organizations under I.R.C. § 501(c)(3) are exempt from this requirement. Tex.
Fin. Code Ann.
§ 393.002 (
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|
(Cite as: 332 B.R. 760, *787)
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|
2005). Select is not,
therefore, exempt from the registration requirement of the Texas Finance Code.
[35]
In addition to registering with the Secretary of State, a credit
services organization is required to provide a disclosure statement to the
consumer that includes, inter alia, “a complete and detailed description
of the services to be performed by the organization for the consumer and the
total costs of those services” prior to the consumer's execution of a contract. Tex.
Fin. Code Ann.
§ 393.105(1) (
[36]
[37]
Select also deducted
$1,199.00 from the Debtor's bank account before rendering any service to the
Debtor. [Findings of Fact, ¶¶ 4-6.] Indeed, it appears that Select simply
pulled the Debtor's credit record and transmitted this data to BLG; Select
apparently did not perform any services for the Debtor. [
FN31. Tex. Fin.Code Ann. § 393.302 states, in full, “[a] credit services organization or a representative of the organization may charge or receive from a consumer valuable consideration before completely performing all services the organization has agreed to perform for the consumer only if the organization has obtained a surety bond for each of its locations or established and maintained a surety account for each of its locations in accordance with Subchapter E.” (footnote omitted). This statute allows an organization to charge prior to completing their services if, they have obtained a surety bond. Obtaining a surety bond is a condition precedent. No evidence was introduced at the show cause hearing that Select has a surety bond; therefore, Select cannot charge for its services prior to completing those services.
[38]
Select's welcome letter included a pamphlet regarding bankruptcy.
[Findings of Fact, ¶ 5.] This pamphlet, among other things, explains what
bankruptcy is, the differences between Chapter 7 and Chapter 13, the
differences between secured and unsecured debt, and what can be exempted.
[Trustee, Ex. 2.] Select prepared this pamphlet; its name is conspicuously
printed on the front.
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|
(Cite as: 332 B.R. 760, *788)
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|
was best suited for the
Debtor and providing the Debtor with a pamphlet that explains what bankruptcy
is and how it works, Select was engaged in the unauthorized practice of law.FN33
FN32. The pamphlet does state that the petition must be prepared by a lawyer.
FN33. See In re Nieves, 290 B.R. 370
(Bankr.C.D.Cal.2003) (bankruptcy petition preparer engaged in unauthorized practice of law when he
gave debtors advice on the differences between bankruptcy under chapter 7 and
chapter 13) ( citing In re Skobinsky, 167 B.R. 45, 50
(E.D.Pa.1994); In re Anderson, 79 B.R. 482, 485
(Bankr.S.D.Cal.1987)).
[39]
Through the Credit Repair Organizations Act, federal law also
governs Select's actions. 15 U.S.C.A. § 1679
(1998 & Supp.2005). Like the Texas Finance Code, § 1679 similarly prohibits certain
practices by credit services organizations.FN34 Specifically, §
1679b(b) prohibits a credit repair organization from charging or receiving
money before services are rendered. FN35 Moreover, § 1679c sets
forth, in detail, what is required in the disclosure statement. The required
disclosures were not included in the packet Select sent to the Debtor.
[Trustee, Ex. 2.] Select had printed a cancellation notice on the back of the worksheet
that states the Debtor may cancel the contract within three days of entering into the agreement. [Findings of Fact, ¶ 5.] However, § 1679c requires that the
cancellation period must be three days from the date it is signed. 15 U.S.C.A. § 1679c
(1998). Nonetheless, the Debtor did not sign a contract with Select;
rather, the agreement was entered into over the phone. [Findings of Fact, ¶ 5.]
This practice is also prohibited by § 1679. A written contract is required and
must include the terms and conditions of payment as well as a full and detailed
description of the services to be performed. 15 U.S.C.A. § 1679d
(1996). Select's documentation to the Debtor was lacking in all
respects. Therefore, Select's acts violated federal law in addition to
FN34. Section
1679 uses the term “credit repair organization” but the definition is
substantially the same. 15 U.S.C.A. §
1679a(3)(A) (1996) defines
credit repair organization as “any person who uses any instrumentality of
interstate commerce or the mails to sell, provide, or perform (or represent
that such person can or will sell, provide, or perform) any service, in return
for the payment of money or other valuable consideration, for the express or
implied purpose of-
(i) improving any consumer's credit record, credit history, or credit rating;
or
(ii) providing advice or assistance to any consumer with regard to any activity
or service described in clause (i); ....”
FN35. 15 U.S.C.A. §
1679b(b) (1996 & Supp.2005) states,
“[n]o credit repair organization may charge or receive any money or other
valuable consideration for the performance of any service which the credit
repair organization has agreed to perform for any consumer before such service
is fully performed.” (emphasis added).
E. Sanctions
[40]
[41]
[42]
[43]
[44]
An attorney may be
sanctioned pursuant to Federal
Rule of Civil Procedure 11 and Bankruptcy Rule
9011 as well as for
violations of the Disciplinary Rules of Professional Conduct. See Thomas
v. Sec. Svcs., Inc., 836 F.2d 866 (5th
Cir.1988), Resolution
Trust Corp. v. Bright, 6 F.3d 336 (5th
Cir.1993), DLR Appendix A, Rule
1A (Oct. 10, 1996). Sanctions under Rule
11 are mandatory. Thomas, 836 F.2d at 876. Additionally, a judge
has inherent power to sanction a party appearing before him or her. See,
e.g., DLR Appendix A, Rule
10 (Oct. 10, 1996), Chambers
v. NASCO, 501 U.S. 32, 111
S.Ct. 2123, 115 L.Ed.2d 27 (1991) (a judge has inherent power to sanction an attorney for bad faith
conduct). An attorney may also be sanctioned for conduct occurring outside the
courtroom. Chambers, 501 U.S. at 44, 111 S.Ct. 2123. Bankruptcy courts have broad leeway in forming an appropriate
sanction for unethical behavior.*789
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|
(Cite
as: 332 B.R. 760, *789)
|
|
Matter
of Prudhomme, 43 F.3d 1000, 1005
(5th Cir.1995).
1. Craig
[45]
Craig's conduct and behavior in this matter have been
unprofessional in almost every way imaginable. From his meetings with the
Debtor to his appearance in this Court, Craig has shown almost no inclination
to act according to the standards of ethical behavior. His practicing law in
this Court when he knew his probationary status prohibited him from doing so is
particularly egregious. For filing defective documents, for failing to file
amended documents, for violations of Disciplinary Rules, and for the
unauthorized practice of law, Craig is ordered to disgorge all fees paid to him
by Bernal and the Debtor ($500.00). Craig is further ordered to pay the sum of
$5,000.00 to this Court. Further, Craig must bring these payments to the show
cause hearing for Select (discussed below) and he is ordered to appear at this
hearing. One check shall be in the amount of $500.00 and be made payable to
Martha Lidia Zuniga. The other check shall be in the amount of $5,000.00 and
shall be made payable to the Clerk of Court. Both checks shall be cashier's
checks.
2. Bernal and BLG
[46]
Bernal and BLG's conduct and behavior have similarly been
irresponsible and shown a lack of prudence and judgment. Bernal misrepresented
to this Court that Select is a non-profit organization when, in fact, it is
not. Bernal/BLG selected the less favorable
FN36. The Debtor testified that she earns $8.50 per hour and had to take two days off of work to attend the 2004 examination and the show cause hearing.
FN37. This
amount should compensate the Debtor for approximate fuel and parking expenses
incurred by the Debtor.
3. Select
Select, and its
principal, Joseph A. Gomez, are required to appear in this Court and show cause
why they should not be sanctioned for Select's conduct described herein. The
hearing will be held on November 14, 2005 at 2:00 p.m., C.S.T., in Courtroom
600, 6th Floor,
IV. Conclusion
This matter highlights
three broad issues that are important for consumer credit*790
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|
(Cite
as: 332 B.R. 760, *790)
|
|
counseling firms and bankruptcy practitioners to consider: (1)
What role, if any, should credit counseling firms have in referring clients to
a specific lawyer for filing a bankruptcy petition? (2) Should the debtors' bar
be taking an assembly line approach in counseling prospective debtors and, if so,
at what point does the attorney in charge need to step in and confer
face-to-face with the client, instead of allowing his/her legal assistants to
handle communications over the telephone? (3) How much concern should an
attorney have for the plight of his/her client?
Ms. Zuniga's experience indicates that: (1) a referral to only one
firm is dangerous because the debtor is not provided with a choice of
attorneys, one of whom might be more appropriate than another, e.g., be able to
communicate with the debtor in the only language the debtor speaks; (2)
attempting to provide competent and reasonably swift legal advice on long
distance telephone calls is difficult, if not impossible; and (3) by attempting
to provide legal services on the phone rather than in face-to-face meetings,
the attorney never becomes personally acquainted with the client and therefore
never really appreciates the client's fears and concerns.
In the wake of the
passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,
it is vital that the bar and credit counseling services give serious
consideration to these issues. Credit counseling agencies will be more
prevalent under this new law, and their influence on prospective bankruptcy
filers will be stronger than ever; these agencies need to ensure they give
their clients several choices of law firms from which to select. Moreover, the
debtors' bar will have to pay close attention to the filing of pleadings under
the new law. Debtors' attorneys will have to spend as much time as it takes to
become well versed in their clients' financial condition and concerns about
their bankruptcy case. If they fail to do so, they will assuredly be in harm's
way.FN38
FN38. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, the debtors' bar will have more duties and may have personal financial exposure for breaching those duties.
Finally, the consumer debtors' bar will need to pay greater
attention-certainly more than was done in Ms. Zuniga's case-to the welfare of
their clients. If they do not, their clients might turn against them. Even if
their clients do not complain because they are too poor, too ignorant or too
scared, as is true in Ms. Zuniga's case, the courts may well impose sanctions sua
sponte. All in all, the debtors' bar will have to balance the business
needs of operating a law firm at a profit with the public need for capable,
competent and caring legal counsel. This Court cannot specifically define where
this balance lies; only each individual law firm can do so. This Court can only
conclude that in Ms. Zuniga's case, this balance was definitely not met.
ORDER GRANTING CHAPTER 7 TRUSTEE'S MOTION TO SHOW CAUSE AND UNITED STATES TRUSTEE'S REQUEST FOR ENTRY OF ORDER DISGORGING FEES AND OTHER SANCTIONS
On July 20, 2005, a hearing was held on the Chapter 7 Trustee's
Motion to Show Cause, and the Request of the United States Trustee for Entry of
Order Disgorging Fees and Other Sanctions. After reviewing the pleadings,
listening to the evidence, reviewing the exhibits, and considering the oral
arguments made by counsel, the Court finds that the Motion is *791
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(Cite
as: 332 B.R. 760, *791)
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meritorious
and should be granted. The Court further finds that the relief requested by the
United States Trustee is also appropriate and should be granted. It is
therefore:
ORDERED that Dion Craig (Craig) shall disgorge the $500.00 fee paid to
him for representing Martha Lidia Zuniga (the Debtor), and he shall deliver a
cashier's check in this amount to the Debtor; and it is further
ORDERED that Craig, as a sanction for his conduct in this case, shall pay
the Clerk of Court the sum of $5,000.00, and he shall deliver a cashier's check
in this amount to the Clerk of Court; and it is further
ORDERED that J. Arthur Bernal (Bernal) shall disgorge the $699.00 fee
paid to his law firm, of which he is the 100% owner, and he shall deliver a
cashier's check in this amount to the Debtor; and it is further;
ORDERED that Bernal shall pay the Debtor the sum of $136.00, representing
lost income as a result of the Debtor having to miss work for two days in order
to submit to a 2004 examination and to appear in court at the July 20 hearing,
and Bernal shall deliver a cashier's check in this amount to the Debtor; and it
is further
ORDERED that Bernal shall pay the Debtor the sum of $40.00, representing
the expenses incurred by the Debtor for gasoline in driving to the 2004
examination and to the Courthouse for the July 20 hearing and, additionally,
for parking at the Courthouse, and Bernal shall deliver a cashier's check in
this amount to the Debtor; and it is further
ORDERED that Bernal shall pay the Chapter 7 Trustee's law firm, Thompson
& Knight, LLP the sum of $2,022.94, representing the attorney's fees and
costs incurred by the Chapter 7 Trustee in conducting an investigation of the
representation provided by Bernal and Craig to the Debtor and, additionally, in
prosecuting the Trustee's Motion, and Bernal shall deliver a cashier's check in
this amount to the Trustee; and it is further
ORDERED that Bernal, as a sanction for his conduct and the conduct of
others at his law firm who are under his supervision, shall pay the Clerk of
Court the sum of $2,500.00, and he shall deliver a cashier's check in this
amount to the Clerk of Court; and it is further
ORDERED that the principal of Select Financial Solutions, Joseph A.
Gomez, shall appear in this Court and show cause why Select and/or he should
not be sanctioned for the conduct of Select's employees, including but not
limited to Joseph A. Gomez, described more specifically in this Court's
Findings of Fact and Conclusions of Law relating to the Trustee's Motion (which
is being entered on the docket simultaneously with the entry of this Order on
the docket); and it is further
ORDERED that the Show Cause
hearing with respect to Select shall be held on November 14, 2005 at 2:00 p.m.,
CST, in Courtroom 600, 6th Floor, Bob Casey Federal Building, 515 Rusk Avenue,
Houston, Texas; and it is further
ORDERED that Craig and Bernal
shall also appear at this hearing, and shall also produce and deliver the
cashier's checks described above; and it is further
ORDERED that if Gomez, Craig,
and/or Bernal fail to appear at this November 14 hearing, then this Court will
issue a bench warrant directing the U.S. Marshal to produce them in this Court.
Civil contempt may be brought against them with the possibility of
incarceration or money sanctions.