Bureaus Investment Group #1, LLC v. Stewart

Filing 254

MEMORANDUM OPINION AND ORDER that the 245 MOTION for Attorney Fees and Costs under 28 U.S.C. 1927 is DENIED; further ORDERING that plf's 247 request for briefing schedule is DENIED as moot, as further set out in order. Signed by Chief Judge William Keith Watkins on 6/30/16. (djy, )

IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF ALABAMA
EASTERN DIVISION
ALLIE J. STEWART,
Plaintiff,
v.
MARK CHAMBLESS, et al.,
Defendants.

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CASE NO. 3:10-CV-1019-WKW
[WO]

MEMORANDUM OPINION AND ORDER
Before the court is the Motion for Attorney Fees and Costs Under 28 U.S.C.
§ 1927 (Doc. # 245), which was filed by Aristotle Sangalang (“Sanglang”) and the
Estate of Burton A. Slotky (“Slotky”)1 and has been fully briefed. (Docs. # 246,
249, and 250.) Upon careful consideration, the motion will be denied.
I. JURISDICTION AND VENUE
Subject-matter jurisdiction is exercised pursuant to 28 U.S.C. § 1331, 15
U.S.C. § 1692 et seq., and 28 U.S.C. § 1927. Sangalang and Slotky contested
personal jurisdiction in a previous motion to dismiss (Doc. # 192), but the claims
against them were dismissed for lack of standing (Doc. # 244). The parties do not
contest venue.
1

Plaintiff also named Michael Slotky, the son of the late Burton Slotky, as a defendant.
For the sake of simplicity, and because Michael Slotky did not participate in the motion for fees
and costs, The Estate of Burton A. Slotky can be referred to simply as “Slotky” in this
memorandum opinion and order.

II. STANDARD OF REVIEW
District courts have both inherent and statutory authority to sanction attorney
misconduct. Under 28 U.S.C. § 1927, where counsel engages in misconduct that
multiplies the proceedings, the court may sanction the attorney by requiring that he
personally satisfy the excess costs, attorneys’ fees, and expenses flowing from his
actions. To impose this sanction, the court must find (1) that counsel engaged in
“unreasonable and vexatious conduct,” (2) that this conduct multiplied the
proceedings, and (3) that the amount of the sanction bears a financial nexus to the
cost associated with the excess proceedings. Peterson v. BMI Refractories, 124 F.3d
1386, 1396 (11th Cir. 1997).
Attorney conduct rises to the level of unreasonable and vexatious only where
it is so egregious that it constitutes “bad faith” conduct. Amlong & Amlong, P.A. v.
Denny’s, Inc., 500 F.3d 1230, 1239 (11th Cir. 2007). Whether counsel acted in bad
faith turns not on his subjective intentions, but rather on the objective reasonableness
of the conduct. Id. Though reckless pursuit of a frivolous claim may be sufficient
to support sanctions under § 1927, an attorney’s mere negligence is not. Id. at 1242
(citing Schwartz v. Million Air, Inc., 341 F.3d 1220, 1225 (11th Cir. 2003)).
Sanctions are appropriate under § 1927 only where counsel’s egregious, bad faith
conduct evidences willful or reckless abuse of judicial process. Id.

2

III. BACKGROUND
This litigation has a storied past. The circumstances giving rise to it have been
recounted ad nauseam in previous opinions and orders (see, e.g., Doc. # 244, at 5–
13), but the background relevant to this § 1927 motion for fees and costs must be
briefly discussed.
The controversy originated as a debt collection action.

After Bureaus

Investment Group Portfolio No. 1, LLC filed suit against Plaintiff Allie J. Stewart
(“Stewart”) in state court,2 Stewart, by and through her attorney Charles Lorant
(“Lorant”), filed counterclaims.

She alleged that Bureaus Investment Group

Portfolio No. 1, LLC misrepresented its name and legal status to coerce her into
paying the debt. She sought recovery under the Fair Debt Collection Practices Act
(“FDCPA”), 15 U.S.C. § 1692 et seq., and under various state law theories of
liability.
Bureaus Investment Group Portfolio No. 1, LLC eventually removed the
action to federal court. There was no question that Stewart owed an outstanding
debt, but she maintained that the Bureaus entities went about collecting their debts
in an unlawful manner. Stewart brought the action on behalf of herself and other
2

The entity that brought the state court collection action initially, and erroneously,
identified itself as Bureaus Investment Group # 1, LLC. It is now clear that Bureaus Investment
Group Portfolio No. 1, LLC is the true name of that entity. This entity is part of a larger network
of entities under the umbrella of The Bureas, Inc. and Bureaus Investment Group, LLC. (See Org.
Chart, Doc. # 244, App. A.) The entities making up this network will be referred to collectively
as the “Bureaus entities.”
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similarly situated debtors, though the class was never certified. Over time, she began
adding other Bureaus entities and individuals as defendants. Sangalang is a former
vice-president and current president of the The Bureaus, Inc., the “master servicer”
under whose umbrella Bureaus Investment Group Portfolio No. 1, LLC operated.
Slotky was a part-owner of both the Bureaus, Inc. and Bureaus Investment Group,
LLC, another umbrella entity with sole ownership of Bureaus Investment Group
Portfolio No. 1, LLC. (See Org. Chart, Doc. # 244, App. A.)
Over the course of this protracted litigation, Stewart amended her complaint
three times. She proposed the third iteration in response to a motion to dismiss (Doc.
# 140). In addition to adding new claims and theories of liability, Stewart’s proposed
third amended complaint joined Sangalang and Slotky as defendants, alleging they
were personally responsible for the alleged misrepresentations giving rise to FDCPA
liability. Stewart was not allowed to file the third amended complaint in the form in
which she initially proposed it. She was, however, granted leave to file a third
amended complaint, but with the caveat that the new pleading would only be allowed
if she redrafted it in accordance with certain suggested revisions. In its June 2, 2014
Memorandum Opinion and Order (Doc. # 157), the court addressed the portions of
the proposed amended complaint that were subject to revision, making specific
findings relevant to the joinder of Sangalang and Slotky.

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The Memorandum Opinion and Order first noted that Stewart could “plead
and proceed under a theory that the officers, directors, shareholders, managers, or
members” of the Bureaus entities were liable for the wrongful acts of the entities.
(Doc. # 157, at 19.) It further noted that Bureaus Investment Group Portfolio No. 1,
LLC had no employees, indicating that it might be under the complete control of
Sangalang and Slotky. (Doc. # 157, at 24.)
The court determined that adding Sangalang and Slotky would be neither
futile nor prejudicial. In finding that Stewart could join Sangalang and Slotky as
defendants, the Memorandum Opinion and Order noted that an individual defendant
like Sangalang or Slotky might be liable for the alleged misconduct of the various
Bureaus entities. It noted, for example, that it was “plausible that responsibility
ultimately rests with the officers, directors, shareholders, managers, or members” of
The Bureaus, Inc. or Bureaus Investment Group, LLC. (Doc. # 157, at 41.) The
Memorandum Opinion and Order directed that the third amended complaint should
be drafted to include factual allegations relating to the allegedly fraudulent actions
of Sangalang and Slotky. (Doc. # 157, at 46–47.)
In response to these findings, Stewart, by and through Lorant, filed the nowoperative Third Amended Complaint. (Doc. # 173.) The new pleading named
Slotky and Sangalang as defendants, alleging that they were liable individually for
any actions taken on behalf of the Bureaus entities. Sangalang and Slotky then
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moved to dismiss the third amended complaint on several grounds. (Docs. # 190
and 192.) In its November 24, 2015 Memorandum Opinion and Order, the court
found that Stewart’s claims against Sangalang and Slotky were due to be dismissed,
pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure, for lack of
standing.3 (Doc. # 244, at 22–31.) Sangalang and Slotky then filed this Motion for
Attorneys’ Fees and Costs Under 28 U.S.C. § 1927. (Doc. # 245.) In their brief in
support of the motion (Doc. # 246), Sangalang and Slotky argue that Lorant’s
conduct was unreasonable and vexatious, resulting in multiplication of the
proceedings. Lorant filed a response (Doc. # 249), and Sangalang and Slotky filed
a reply (Doc. # 250).
IV. DISCUSSION
In their motion for fees and costs, Sangalang and Slotky contend that Lorant
took actions amounting to bad faith, resulting in unreasonable multiplication of the
proceedings. Pursuant to § 1927, they seek to recover attorneys’ fees and costs
attributable to their efforts to have the claims against them dismissed. A thorough
review of the record reveals that Lorant’s conduct does not warrant sanctions under

3

In their 12(b)(1) motion to dismiss, Sangalang and Slotky launched a factual attack on
the court’s subject-matter jurisdiction. Specifically, they argued that Stewart did not have standing
to sue them, submitting declaration testimony establishing that they did not make the alleged
misrepresentations at issue in Stewart’s claims. Stewart failed to produce evidence rebutting this
testimony, and her factual allegations were insufficient to support the application of the alter ego
theory. (See Doc. # 244, at 24–25.) The claims against Sangalang and Slotky were dismissed on
this basis.
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the statute. As they relate particularly to Sanglang’s and Slotky’s involvement in
this case, Lorant’s actions do not amount to bad faith conduct. See Amlong, 500
F.3d at 1239.
Sangalang and Slotky identified a number of actions that, in their view,
unreasonably multiplied the proceedings. They first contend that Lorant represented
them as central figures in the debt collection activities of the Bureaus entities when
he knew that they played only minor roles in Stewart’s debt collection lawsuit.
Sangalang and Slotky further represent that Lorant brought class claims on Stewart’s
behalf without her knowledge and failed to notify her of Defendants’ offer of
judgment. They argue that Lorant knew that it was John Hedges, Legal Manager of
The Bureaus, Inc., and not Sangalang and Slotky, who authorized the debt collection
suit against Stewart. They finally note that, in response to the motions to dismiss,
Lorant failed to adduce evidence rebutting the declaration testimony of Sangalang
and Slotky. Taking these various claims together, the essential question is whether
Lorant acted unreasonably by proceeding with his claims against Sangalang and
Slotky without sufficient legal or factual basis.
Under the circumstances, Lorant had reason to believe that Stewart’s
individual claims against Sangalang and Slotky were potentially viable. It is true, as
Sangalang and Slotky note, that an attorney unreasonably multiplies the proceedings
where he continues to prosecute claims when it is clear that there is “no claim to be
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had” against the defendants. See Conner v. BCC Fin. Mgmt. Servs., Inc., 597 F.
Supp. 2d 1299, 1305 (S.D. Fla. 2008). It was far from clear to Lorant, however, that
his claims against Sangalang and Slotky would not survive. The court found that
these individual claims were potentially viable in its June 2, 2014 Memorandum
Opinion and Order. And the evidence available to Lorant could lead a reasonable
attorney to believe that he had colorable individual claims.
The June 2, 2014 Memorandum Opinion and Order (Doc. # 157) addressed in
full the propriety of joining Sangalang and Slotky.

In several ways, after

consideration of Defendants’ opposing arguments, it endorsed Lorant’s decision to
do so. The Memorandum Opinion and Order noted that it was clear that Stewart
could proceed under the theory that the officers and shareholders of the Bureaus
entities might be liable by operation of the alter ego theory. (Doc. # 157, at 19.) It
further pointed out that, even though Stewart did not have specific knowledge
regarding how Sangalang and Slotky might have been involved in the debt collection
suits and the alleged wrongdoing, she still had reason to believe they might be liable
for the relevant misrepresentations. (Doc. # 157, at 41.) It concluded that adding
claims against Sangalang and Slotky would be neither futile nor prejudicial, and that
proposed allegations regarding their liability were at least plausible. (Doc. # 157, at
46–47.)

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It cannot be said, in view of these previous findings, that Lorant acted
unreasonably or vexatiously in adding claims against Sangalang and Slotky in the
Third Amended Complaint. The decision allowing Lorant to file the Third Amended
Complaint would lead any reasonable attorney to think that doing so was not only
permissible, but that doing so was in his client’s best interests. If these findings
made anything clear, it was not that there was “no claim to be had” against Sangalang
and Slotky. Conner, 597 F. Supp. 2d at 1305. On the contrary, the Memorandum
Opinion and Order indicated that these claims might succeed.
Even absent the court’s concurrence that it would be appropriate to join
Sangalang and Slotky, a reasonable attorney in Lorant’s position still could have
continued with these claims in good faith based on the evidence available to him.
Whether or not Lorant knew that John Hedges signed the document authorizing the
initial suit against Stewart,4 he did have information fairly suggesting that Sangalang
and Slotky were involved, in their capacities as officer and owner, respectively, in
the debt collection operations of the Bureaus entities. The evidence available to

4

The document in question is a “Verification and Authorization Form,” which can be found
in the record as an attachment to the brief in support of Sangalang’s 12(b)(2) and 12(b)(6) motions
to dismiss. (Doc. # 197-1, at 5.) According to Sangalang and Slotky, this document establishes
that Lorant was aware that it was John Hedges, and not them, who authorized the debt collection
suit against Stewart. The parties disagree about who introduced this document to the litigation and
the time at which Lorant became aware of it. Whether Lorant was aware of this document or failed
to disclose it is not dispositive of this motion for fees. The court’s statements regarding Stewart’s
leave to file a Third Amended Complaint and the other evidence available to Lorant show that his
conduct was not taken in bad faith.
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Lorant showed that Slotky had at least an advisory role in the daily operations of the
Bureaus entities, and that Sangalang had been directly involved in the initiation of
other Bureaus entities debt collection suits. In light of this information, it cannot be
said that Lorant had a clear indication that his claims against Sangalang and Slotky
would fail. See Conner, 597 F. Supp. 2d 1305. He had at least a plausible basis for
believing that discovery would reveal the information necessary to establish his
standing to sue them individually, and he proceeded under that reasonable notion.
When the time came for Lorant to respond to the motions to dismiss, which
raised a factual attack challenging the court’s subject-matter jurisdiction, he failed
to produce adequate evidence rebutting the declaration testimony of Sangalang and
Slotky. He also failed to adequately allege a factual basis for piercing the corporate
veil. (Doc. # 244.) But that the claims against Sangalang and Slotky eventually
failed to withstand these motions does not evidence egregious conduct amounting to
bad faith. See Amlong, 500 F.3d at 1239. As Lorant noted in his briefing on the
instant motion, at the worst, his shortcomings in responding to the motions to dismiss
amount to mere negligence. Even if it was clear that Lorant was negligent in
responding to the motion to dismiss—and it is not—negligent conduct is insufficient
to support sanctions under § 1927. See Benavides v. Miami Atlanta Airfreight, Inc.,
612 F. Supp. 2d 1236, 1242 (S.D. Fla. 2008); see also Gianna Enters. v. Miss World
(Jersey) Ltd., 551 F. Supp. 1348, 1360 (S.D.N.Y. 1982) (“Inartful pleading and
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ignorance of legal requirements do not amount to the intentional abuse of judicial
process that is the target of protective awards for attorneys’ fees.”).
The fact that Lorant proceeded with claims against Sangalang and Slotky in
an FDCPA class action does not render his conduct unreasonable. Sangalang and
Slotky, relying on White v. Goodman, 200 F.3d 1016 (7th Cir. 2000), argue that the
joinder of individual defendants in this type of action amounts to abusive conduct
warranting sanctions.

The circumstances giving rise to White, however, are

materially distinguishable from those at bar.
Raising the issue of sanctions sua sponte, the Seventh Circuit noted in White
that the joinder of individual defendants in FDCPA class actions “illustrates the alltoo-common abuse of the class action as a device for forcing the settlement of
meritless claims.” Id. at 1019. Sangalang and Slotky failed to note, however, that
the plaintiffs’ attorney in White joined the individual shareholder defendants without
even attempting to argue that there was a basis for piercing the corporate veil. As
the Seventh Circuit recognized before commenting on the abuse of the class action
device, the FDCPA “is not aimed at the shareholders of debt collectors operating in
the corporate form unless some basis is shown for piercing the corporate veil, which
was not attempted here.” Id. (emphasis added).
When Lorant drafted the Third Amended Complaint to include FDCPA
claims against Sangalang and Slotky, he did allege a basis for piercing the corporate
11

veil. Unlike the plaintiffs’ attorney in White, Lorant explicitly argued that individual
owners and officers of the Bureaus entities could be held liable by operation of the
alter ego theory. (See Doc. # 173, at 57–63.) To the extent Sangalang and Slotky
contend that Lorant abused the class action device by including FDCPA claims
against them, their arguments are without merit.
By naming Sangalang and Slotky as defendants and responding to their
motions to dismiss, Lorant did not unreasonably multiply the proceedings.
Sangalang and Slotky argue that the facts at bar are similar to those in Conner, in
which the court imposed sanctions on an attorney who failed to dismiss certain
defendants after it was clear that there was no viable claim against them. 597 F.
Supp. 2d at 1305.

In finding that the attorney unreasonably multiplied the

proceedings, however, the Conner court noted that the attorney asked for multiple
extensions of time to respond to motions, then failed to respond to the motions at all.
Id. at 1306.
As discussed above, it was far from clear to Lorant, at the time he filed the
Third Amended Complaint, that Stewart’s claims against Sangalang and Slotky
would be dismissed for lack of standing.

And the circumstances here are

distinguishable from those in Conner in that Lorant did not seek multiple extensions
before inexplicably failing to respond to Defendants’ motions. See id. The issues
raised in the motions to dismiss were varied and thorny, but Lorant and his associates
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managed to craft thorough and well-reasoned responses. Stewart did not ultimately
prevail on her claims, but this outcome does not counsel in favor of attorney
sanctions.
If anything multiplied the proceedings in this case, it was the convoluted
organizational structure under which the Bureaus entities operate. Under this multientity scheme of debt acquisition and collection, not even the legal manager for the
Bureaus entities could accurately identify the proper party plaintiff in Stewart’s debt
collection action. It was not Lorant who filed suit against Stewart under an erroneous
name. Nor did Lorant acquire a consent judgment on behalf of a non-existent entity.
These primary actions, which gave shape to the litigation as it currently exists, are
attributable to the Bureaus entities and the tangled web they weave. 5
Sangalang and Slotky make much of the potential economic evil that might
flow from frivolous FDCPA lawsuits, especially with respect to the inverse
relationship that exists between the costs of debt collection and the availability of
affordable consumer credit. (Doc. # 246, at 14–15.) If the Bureaus entities are truly
concerned about the availability of consumer credit and the dissipating buying power
of the everyman, they ought to check their own corporate records and verify the
names of their own legal entities before filing their next collection action. The

5

See SIR WALTER SCOTT, MARMION: A TALE OF FLODDEN FIELD canto VI, XVII (1808)
(“Oh, what a tangled web we weave, when first we practise to deceive!”).
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disingenuous nature of Sangalang’s and Slotky’s argument on this particular point
cannot be overstated. Whether or not Stewart sufficiently pleaded her claims in the
Third Amended Complaint, Lorant will not be held responsible for the roles that
corporate architecture and careless debt collection practices played in the
multiplication of these proceedings.
Nor did Lorant unreasonably multiply the proceedings merely by naming
Sangalang and Slotky as defendants. Sangalang and Slotky cite ATA Info. Servs.,
Inc. v. J.C.I., Inc., No. 89 C 9615, 1992 WL 122799 (N.D. Ill. May 26, 1992), for
the proposition that simply initiating an action amounts to unreasonable
multiplication of the proceedings. Leaving aside for the moment that this is an
unpublished case from a district court within the Seventh Circuit, a full reading of
that decision reveals the limitations of its findings. The ATA court found that the
addition of a party only amounts to unreasonable multiplication of the proceedings
where it is clear that the addition of the party was in error.
In ATA, it was apparent to all parties that the plaintiff had added a defendant
who was not even employed by or otherwise associated with the defendant entity at
the time of the events giving rise to the litigation. Id. at *2. Though the plaintiff’s
attorney received reliable information confirming that there was no basis for naming
this individual defendant, he filed an amended complaint that included claims
against the improper defendant. Id. The plaintiff amended the complaint a second
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time, again refusing to drop its claims against the individual defendant. Id. By
refusing to dismiss this defendant despite clear knowledge that the claims against
him were baseless, the attorney unreasonably multiplied the proceedings. Id. at *4.
It was not clear to Lorant at the time he filed the complaint that Sangalang and
Slotky were uninvolved in the collection of debts on behalf of the Bureaus entities.
As far as Lorant knew, both Sangalang and Slotky were employed by or held an
ownership interest in the Bureaus entities at the time that Bureaus Investment Group
Portfolio No. 1, LLC initiated the debt collection action against Stewart. The entity
that should have brought a debt collection action against Stewart, like its sister LLCs,
had no employees, indicating that the individual owners and officers might be
personally liable. The conduct at issue in this case is a far cry from the egregious
missteps found to have constituted unreasonable multiplication in ATA. See id.
Because Lorant’s conduct did not unreasonably or vexatiously multiply the
proceedings within the meaning of the statute, Sangalang and Slotky are not entitled
to relief under § 1927. The issue of the appropriate amount of fees and costs thus
need not be addressed.
V. CONCLUSION
It is ORDERED that the Motion for Attorney Fees and Costs under 28 U.S.C.
§ 1927 (Doc. # 245) is DENIED. It is further ORDERED that Plaintiff’s Request
for Briefing Schedule (Doc. # 247) is DENIED as moot.
15

DONE this 30th day of June, 2016.
/s/ W. Keith Watkins
CHIEF UNITED STATES DISTRICT JUDGE

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