Schaffner v. United States Trustee
Filing
18
MEMORANDUM OPINION: This Court AFFIRMS IN PART and REVERSES IN PART . This matter is REMANDED to the U.S. Bankruptcy Court for the Eastern District of Ky for proceedings consistent with this Memorandum Opinion. Signed by Judge William O. Bertelsman on 11/29/2012.(TJZ)cc: COR, Charles H. Schaffner via U.S. Mail
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
NORTHERN DIVISION
AT COVINGTON
CIVIL ACTION NO. 2012-167 (WOB)
CHARLES SCHAFFNER
APPELLANT
VS.
MEMORANDUM OPINION
UNITED STATES TRUSTEE
APPELLEE
This matter is before the Court on Appellant Charles
Schaffner’s appeal from an Order of the United States
Bankruptcy Court for the Eastern District of Kentucky
granting the United States Trustee’s motion for sanctions
against Appellant.
The Court heard formal oral argument on this matter on
October 11, 2012.
Having heard the parties, and having
reviewed this matter thoroughly, the Court now issues this
Memorandum Opinion.
Factual and Procedural Background
The material facts in this matter are undisputed.
Appellant, Charles Schaffner, is a member of the Kentucky
Bar and a sole practitioner with a law office in Covington,
Kentucky.
In 2010, Appellant resumed practicing bankruptcy law
after approximately twenty years of handling primarily
criminal and personal injury cases.
To assist him,
Appellant enlisted one Leonard Bickers, a former client and
convicted felon, who professed to have experience in the
area.
Bickers’s partner, Ed Lucas, was also involved.
Appellant was aware that both Bickers and Lucas had been in
trouble with other federal courts stemming from their
activities as bankruptcy petition preparers.
Appellant provided Bickers with space in Appellant’s
Covington office building, accessible by a separate
entrance to which Bickers and Lucas had a key.
Appellant
also gave Bickers use of Appellant’s electronic court
filing (“ECF”) account and business credit card.
This
enabled Bickers to file bankruptcy petitions under
Appellant’s signature but without Appellant’s involvement,
review, or approval.
Appellant agreed to pay Bickers $100
for each bankruptcy case filed, although he occasionally
paid him more.
Between 2010 and 2011, Appellant’s office
filed forty-five bankruptcy cases in this District.
Due to personal problems, Appellant spent little time
in his office beginning in late 2010.
At some point,
Bickers began defrauding clients by accepting fees for
their bankruptcy filings and pocketing the money.
also undisputed that numerous requirements of the
Bankruptcy Code were not followed with respect to
2
It is
Appellant’s bankruptcy clients and their cases.
Errors in
the preparation and filing of pleadings resulted in serious
adverse consequences to Appellant’s clients, including
actual and threatened dismissals of their cases.
Further, no accurate records were kept of the money
collected from Appellant’s clients; the clients were not
given proper receipts for the fees they paid; and client
funds were not deposited into a trust account as required
under the applicable ethical rules.
In the Spring of 2011, Appellant became aware of
problems in his bankruptcy cases, and he scheduled a
meeting with Bickers.
Prior to this meeting, however,
Bickers and Lucas fled and absconded with the computer
containing the bulk of Appellant’s bankruptcy clients’
information, including sensitive information such as social
security numbers and birth dates.
Around the same time, as a result of complaints about
Appellant’s cases from bankruptcy panel trustees in the
Covington division, the United States Trustee filed a
motion to examine Appellant regarding his bankruptcy
practice.
That motion was granted and an examination of
Appellant was conducted on May 26, 2011.
On June 25, 2011, the United States Trustee moved for
sanctions against Appellant in forty-three cases on the
3
basis of various violations of the rules of the Kentucky
Supreme Court, the Bankruptcy Code, and the Federal Rules
of Bankruptcy Procedure.
(Doc. 23).1
The motion for sanctions was scheduled for a hearing
on July 19, 2011, but Appellant requested a continuance on
several grounds, one of which was that he needed time to
retain counsel.
(Doc. 26).
Appellant’s motion was
granted, and the hearing was reset for August 9, 2011.
(Doc. 31).
In the meantime, Appellant filed a pro se
response to the motion for sanctions on August 1, 2011.
(Doc. 34).
The bankruptcy court held an initial hearing on August
9, 2011 (Doc. 35), at which time Appellant represented that
he had obtained counsel, Robert Rapier.
The court
thereafter issued a formal order for Appellant to show
cause why he should not be sanctioned for the conduct
described in the Trustee’s motion, such sanctions
potentially to include disbarment from practice before the
United States Bankruptcy Court for the Eastern District of
Kentucky; disgorgement of fees paid; civil penalties;
and/or payment of costs and attorneys’ fees.
1
(Doc. 36).
The bankruptcy court consolidated the motion in all cases under case
No. 10-21632. (Doc. 28). Record citations are to the bankruptcy court
docket.
4
The court then scheduled a full evidentiary hearing for
September 29, 2011.
On September 26, 2011, Appellant filed another motion
to continue on the grounds that he had retained new counsel
who needed additional time to prepare.
(Doc. 56).
The
court denied that motion because Appellant had previously
represented that he had retained counsel, but that counsel
never entered an appearance, and the counsel he now stated
had been retained also did not file the motion for
continuance on his behalf or otherwise appear.
(Doc. 59).
The evidentiary hearing thus proceeded as scheduled.
At the conclusion of the hearing, the bankruptcy court
granted the Trustee’s motion from the bench, stating on the
record its findings of fact and conclusions of law.
67 at 127-141).
(Doc.
The next day, the court entered an order
incorporating those findings and directing Appellant: (1)
to pay the debtors in the forty-three cases a total of
$72,848, to be halved if paid within sixty days; (2) to pay
another client $2,600 for attorneys’ fees the client
incurred in obtaining substitute counsel; and (3) to pay
$5,000 in civil penalties.
(Doc. 64).
The court further
permanently prohibited Appellant from practicing in the
United States Bankruptcy Court in the Eastern District of
Kentucky.
(Id.).
5
This appeal followed.2
Analysis
A.
Standards of Review
The bankruptcy court’s findings of fact, including the
amount of damages awarded as sanctions, are reviewed under
the clearly erroneous standard.
940, 944 (6th Cir. 2007).
In re DSC, Ltd., 486 F.3d
A finding of fact is clearly
erroneous when, although there is evidence to support it,
the reviewing court on the entire evidence is left with the
definite and firm conviction that a mistake has been
committed.
Id. (citations omitted).
The bankruptcy court’s legal conclusions are reviewed
de novo.
Finally, the bankruptcy court’s imposition of
sanctions is reviewed for an abuse of discretion.
Wingerter, 594 F.3d 931, 936 (6th Cir. 2010).
In re
An abuse of
discretion occurs only when the court relies on clearly
erroneous findings of fact or when it improperly applies
the law or uses an erroneous legal standard.
In re Murray,
Inc., 392 B.R. 288, 296 (B.A.P. 6th Cir. 2008) (citation
omitted).
This Court asks whether a reasonable person
could agree with the bankruptcy court’s decision; if
2
Appellant’s original notice of appeal was untimely, but this Court, in
a prior appeal, permitted his appeal to go forward. See Schaffner v.
U.S. Trustee Covington Civil Case No. 12-24 (Doc. 17, July 6, 2012).
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reasonable persons could differ as to the issue, then there
is no abuse of discretion.
B.
Id.
Application to this Appeal
The Court has reviewed this matter carefully,
including thoroughly reading the transcript of the
evidentiary hearing before the bankruptcy court.
The Court
also had the benefit of hearing Appellant during two oral
arguments in this appeal.
Having done so, the Court
concludes that the bankruptcy court did not abuse its
discretion in granting the Trustee’s motion for sanctions
against Appellant.3
It is important to stress that Appellant does not
contest the underlying facts of this matter, as found by
the bankruptcy court.
He concedes the fraud by Bickers
and, importantly, concedes that this fraud occurred at a
time when his oversight of his law practice was cursory, at
best.4
As he stated to this Court, the myriad violations of
the Bankruptcy Code and Rules occurred on his “watch.”
3
As an initial matter, while Appellant argues that the bankruptcy court
improperly failed to apply the “clear and convincing” standard of
proof, this is patently incorrect because the bankruptcy court
explicitly held the Trustee to that standard. (Doc. 67 at 129)
(“According to the law in this circuit and other circuits, because of
the egregiousness of the conduct alleged and the severity of the
sanctions sought by the U.S. Trustee against Mr. Schaffner, the U.S.
Trustee must prove by clear and convincing evidence that Mr.
Schaffner’s conduct should be sanctioned.”) (emphasis added).
4
Appellant testified that he was “lucky” if he was in the office ten
hours a week. (Doc. 67 at 100).
7
Further, while Appellant protests that he was merely
an unknowing victim of a wayward employee, the detailed
findings of the bankruptcy court – based on Appellant’s own
testimony and on that of several of his clients -- reveal
Appellant’s blatant disregard for his clients’ interests
and his own professional obligations.
For example, although Appellant argues that the
bankruptcy court made no “finding” of bad faith, in fact,
the court found that Appellant personally took steps to
deliberately mislead the bankruptcy court and the Trustee
in his clients’ cases.
(Doc. 67 at 134).
Appellant does
not contest this finding.
The court further found that Appellant was sorely
deficient in, among other areas: his understanding of
bankruptcy law, including basic yet mandatory requirements
regarding client contracts and disclosures; his management
of his office, including oversight of Bickers and
maintenance of fundamental records and controls; his
involvement with and advice to his clients, most of whom
never met him until their first court appearance; and his
handling of client funds, to the extent that there were not
even records of the amount of fees paid or deposited into
Appellant’s account.
8
The bankruptcy court summarized this evidence as
follows:
Mr. Schaffner’s conduct brings disgrace to the
profession. His claims of remorse and victimization
ring hollow where once on notice of the dereliction of
others, he took no genuine remedial steps whatsoever.
He did nothing to protect his clients’ privacy once
Mr. Bickers’ conduct became fully known to him and as
a result his clients’ privacy has been compromised by
the taking of the computer containing his clients’
birth date and social security numbers.
Even after the issuance of the show cause order in
August and continuing through the days leading up to
this evidentiary hearing, Mr. Schaffner seems
incapable of complying with simple court orders and
has continued to violate the trust that his clients
and the Court have placed in him. Mr. Schaffner has
essentially trafficked in his law license and in his
ability to effect[] electronic filings in this Court.
(Doc. 67 at 138-39).
Given the undisputed facts, this
Court finds the bankruptcy court’s summary, while harsh, to
be accurate.
As to errors of law, Appellant does not contend that
the bankruptcy court made any when it concluded that the
above evidence constituted numerous violations of the
Bankruptcy Code and Rules, as well as the Rules of the
Supreme Court of Kentucky.
(Doc. 67 at 136-38).
At oral argument, Appellant, who represents himself,
stated that he was blameless because it was Bickers who
defrauded the clients and was responsible for the
deplorable conditions that resulted.
9
Of course, this argument is without merit because an
attorney has an ethical duty to know what is going on in
his office and is responsible to his clients to assure that
their matters are professionally and ethically handled.
See SCR 3.130(5.3); Crawford v. Kentucky Bar Ass’n, 364
S.W.3d 185, 186-88 (Ky. 2012); Kentucky Bar Ass’n v. Mills,
318 S.W.3d 89, 92 (Ky. 2010).
Appellant’s final argument is that the award of
sanctions should be reversed because the bankruptcy court
refused to allow him time to appear with counsel.
Given
this record, the Court finds no merit to this argument.
As
the Trustee notes, Appellant stated to the bankruptcy
court: “I don’t think it’s necessary for him to be here as
my counsel.”
(Doc. 67 at 3).
Moreover, because the above
facts are undisputed, and because the bankruptcy court gave
Appellant every opportunity to testify on his behalf, the
Court does not believe that the involvement of counsel
would have resulted in a materially different record.
All that remains, then, is Appellant’s argument that
the nature and amount of sanctions levied are improper.
to disbarment, the Court concludes, based on the above
facts, that disbarment was not only appropriate but
necessary to protect Appellant’s current and prospective
bankruptcy clients.
10
As
Further, the amount of the sanctions was based on the
clients’ fees as set forth in the bankruptcy court filings
and is not an abuse of discretion.
The Court concludes, however, that the effective
doubling of the monetary sanctions was clearly erroneous
and an abuse of discretion, given that Appellant’s clients
are to be made whole through the disgorgement of their
reported fees and that Appellant is now prohibited from
appearing in the bankruptcy court in this district.
The
sanctions are sufficient without the doubling.
Therefore, this Court thus AFFIRMS IN PART AND
REVERSES IN PART.
This matter is REMANDED to the United
States Bankruptcy Court for the Eastern District of
Kentucky for proceedings consistent with this Memorandum
Opinion.
This 29th day of November, 2012.
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