Slip Opinion
Bankr. N.D. Ala.2018Background
- The Bankruptcy Administrator (BA) settled two adversary proceedings against UpRight Law, LLC (and affiliated entities) and local attorney Mariellen Morrison over a scheme where third parties (Sperro/Fenner) seized and towed debtors’ vehicles to pay filing/attorney fees, exposing debtors to civil/criminal risk.
- Settlement (effective Sept. 13, 2016) required defendants to (a) pay $50,000, (b) refrain from filing new cases in the district for six months (with exceptions), and (c) provide, without extra charge, certain legal services to clients who had retained them before March 21, 2016 (excluding adversary representation).
- Post-settlement, defendants filed multiple chapter 7 cases for clients retained before March 21, 2016 but used Attorney Disclosures and Retention Agreements that again excluded services the Settlement required them to provide without additional fees.
- The BA moved for contempt, disgorgement, sanctions, civil penalties, and filing bars; the court held hearings, found the post-settlement disclosures were false/misleading and violated the Settlement, and treated the omissions as intentional and part of a pattern.
- Court concluded defendants violated 11 U.S.C. § 526 and Rule 9011 (and § 707(b)(4)(B) authority) and exercised § 105(a) power to enforce its order; it imposed $150,000 in civil penalties, ordered disgorgement/refunds to debtors, and suspended/revoked filing privileges (UpRight 18 months; Morrison 60 days).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether post‑settlement Attorney Disclosures that excluded services violated the Settlement and statutes | BA: Disclosures were false/misleading, breached Settlement, violated §526 and Rule 9011; justify penalties and disgorgement | Defendants: Settlement didn’t require retrofitting disclosures for yet‑to‑be‑filed cases; no extra fees were ever actually charged, so no harm | Court: Disclosure language misled debtors and violated Settlement/statutory duties; civil penalties and disgorgement warranted |
| Whether BA must prove actual charge or debtor reliance/harm | BA: Harm shown by misleading disclosures and chilled access to services; actual monetary charge not required | Defendants: Without proof clients were charged or declined services, no violation | Court: Actual charge not necessary; misrepresentation and pattern suffice to impose penalties |
| Proper remedies available (civil penalties, disgorgement, filing bans) | BA: Seek disgorgement, civil penalties, extended filing bans and contempt | Defendants: Remedies excessive; BA should have policed filings; sanctions unwarranted | Court: §526, §707 and §105 empower disgorgement, penalties, and filing suspension; imposed $25,000 per case, refunds, and filing revocation/suspension |
| Credibility/intent finding — innocent oversight vs. deliberate noncompliance | BA: Defendants intentionally maintained exclusionary business model despite Settlement | Defendants: Oversight; later amended disclosures; charitable motives for business model | Court: Defendants acted with reckless/intentional disregard; amendments were self‑serving and too late; pattern shows bad faith |
Key Cases Cited
- Ford Motor Credit Co. v. Owens, 807 F.2d 1556 (11th Cir. 1987) (conversion of collateral can render liability nondischargeable)
- Wolfson v. Equine Capital Corp. (In re Wolfson), 56 F.3d 52 (11th Cir. 1995) (willful and malicious injury supports nondischargeability under §523(a)(6))
- Jove Engineering, Inc. v. I.R.S., 92 F.3d 1539 (11th Cir. 1996) (each party must police its own compliance with court orders)
- United States v. Coady (In re Coady), 588 F.3d 1312 (11th Cir. 2009) (denial of discharge for concealment of assets under §727(a)(2)(A))
- Kane v. Cessna Aircraft Co., 755 F.3d 1285 (11th Cir. 2014) (knowing breach of clear contractual obligation may constitute willful and malicious injury)