Month: July 2016

Ninth Circuit Affirms Substantial Prenda Sanctions

Somehow I missed this unpublished opinion from June 2016 in which the 9th Circuit affirmed substantial sanctions against the three Prenda attorneys, John Steele, Paul Hansmeier and Paul Duffy. (Duffy passed away in 2015). The District Court found that the three attorneys engaged in vexatious litigation and awarded sanctions based on the inherent authority of the court. The sanctions were affirmed in an unpublished opinion.

The main argument on appeal is that the Prenda lawyers did not receive sufficient notice that the district court would sanction them. The Ninth Circuit disagreed, explaining:

Appellants were also afforded an opportunity to be heard at both the first and second hearings and were allowed to submit responsive briefs. Finally, the district court made a finding of bad faith. Judge Wright found, inter alia, that the Prenda Principals “demonstrated their willingness to deceive not just this [c]ourt, but other courts where they have appeared,” and “borrow[ed] the authority of the [c]ourt to pressure settlement.”Because the Prenda Principals received the due process protections to which they were entitled—notice, the opportunity to be heard, and a finding of bad faith—the district court did not abuse its discretion in awarding $40,659.86 in compensatory attorney’s fees and costs.

The District Court ordered that the fees on appeal be doubled, with a portion used to compensate the defendant in the lawsuit and a portion to go to the Court. The District Court also required the Prenda lawyers to post an additional bond on appeal to cover the other side’s costs on appeal. The Ninth Circuit affirmed all the sanctions and the increased appeal bond. It explained:

The district court did not abuse its discretion in ordering the Prenda Principals to post additional bond to cover Doe’s attorney’s fees on appeal. The district court had ample reason to do so. The Prenda Principals have engaged in abusive litigation, fraud on courts across the country, and willful violation of court orders. They have lied to other courts about their ability to pay sanctions. See Lightspeed Media, 761 F.3d at 71. They also failed to pay their own attorney’s fees in this case. Considering the Prenda Principals’ tactics throughout this case, it was not an abuse of discretion to increase the bond amount to cover the projected cost of attorney’s fees on appeal.

In sum, the Prenda lawyers have the distinction of having sanctions awards against them affirmed by the Seventh Circuit and Ninth Circuit within the span of 30 days. Given the abusive conduct that the Prenda lawyers engaged in, I can understand the sanctions award. The federal courts concluded that the Prenda lawyers were using the power of the court to extort money from individual defendants. The federal courts also concluded that the Prenda Lawyers misrepresented facts to the courts. Given the findings, it is hard to believe that we will ever see another set of cases as egregious as these.

Source: INGENUITY 13 LLC v. Doe, Court of Appeals, 9th Circuit 2016 – Google Scholar

7th Circuit Continues To Beat Up Prenda Lawyers Steele and Hansmeier

In 2014, the Seventh Circuit affirmed section 1927 sanctions against John Steele, Paul Hansmeier and Paul Duffy, three lawyers who made up Prenda Law. Prenda was, at one time, involved in the enforcement of copyright claims against those who allegedly downloaded pornographic materials from the internet without paying for them.

In 2013, the Prenda lawyers were sanctioned by the district court in the amount of $261,025.11. They appealed and the sanctions were affirmed by the Seventh Circuit. 761 F.3d 699. The district court then held more proceedings as the defendant attempted to collect the sanctions award.

Paul Duffy, considered the leader of the group, passed away in 2015.

His colleagues did not pay the sanctions award. Rather they claimed they lacked sufficient funds to pay the sanctions award. Discovery later showed that the Hansmeier and Steele transferred funds out of their own names to entities that they controlled. The District Court then held Hansmeier and Steele in contempt and they again appealed.

The court discusses the statements by Steele and Hansmeier as to their ability to pay and how the discovery process caused the District Court to impose contempt sanctions:

At the hearing on February 13, 2014, the Attorneys insisted that they could not pay the sanctions. The district court ordered them to produce financial statements prepared by certified public accountants; they did so, submitting the statements in camera. On February 19, the district court denied Steele’s January 30 motion to quash Smith’s subpoenas. On March 3, JPMorgan again requested a court-stamped copy of the motion to quash. Duffy sent it, but failed to disclose that the motion had been denied.

On March 20, 2014, Smith filed a renewed motion for contempt based on the Attorneys’ financial statements, their representations to the court, and discovery interference with regard to JPMorgan. The district court held all three attorneys in contempt on March 24, 2014, and ordered them to pay the defendants $26,102.58, an amount equal to ten percent of the original sanctions award. That day, Smith issued eight new third-party subpoenas to the Attorneys’ financial institutions.

On April 4, 2014, the district court stayed the contempt order pending the Attorneys’ appeal. On April 11, Steele told Smith’s counsel that he had informed the subpoenaed third parties that “the action ha[d] been stayed and the subpoenas must be withdrawn.” This was untrue: the stay order did not apply to the subpoenas. That fact, however, did not stop Steele on April 16 from faxing a copy of the stay order to Sabadell United Bank and stating that the matter was stayed. Two days later, Smith moved for sanctions against Duffy and Steele for obstructing discovery.

On April 21, 2014, Hansmeier moved to quash Smith’s March 24 subpoenas. The Attorneys’ third-party financial institutions continued to withhold production. On July 31, 2014, we decided Lightspeed I, upholding the sanctions and contempt orders against Hansmeier, Duffy, and Steele.

On October 20, 2014, the district court denied Hansmeier’s April 21 motion to quash. On November 12, 2014, the court held a hearing on Smith’s motions for renewed contempt and discovery sanctions. It denied them on November 18. In the interim, Smith received Sabadell’s response to his March 2014 subpoena. It revealed that over the course of January and February 2014—just before and after the show-cause hearing at which he had claimed to be insolvent—Steele had withdrawn $355,627.83 from a Sabadell account he shared with his wife. Smith filed a motion for reconsideration on December 15, 2014, pointing to this new evidence justifying sanctions.

In February 2015, Smith received TCF Bank’s documents, which included evidence that Hansmeier had control over an entity named Monyet LLC, and records of transfers related to Monyet’s Scottrade account. The records showed that Hansmeier had transferred $316,250.00 out of the Monyet account between the time when fees were itemized and the showcause hearing. This amount was far more than the sanctions owed under the district court’s order—the same sanctions that Hansmeier had claimed he could not pay.

On June 5, 2015, the district court granted Smith’s motion for reconsideration, awarding Smith (1) reasonable discovery costs and (2) contempt sanctions of $65,263.00. It ordered the contempt sanctions paid by July 15, 2015. On July 2, Smith itemized $94,343.51 in discovery costs. The court ordered that the latter costs be apportioned equally between Steele and Duffy. The Attorneys filed their notice of appeal from the discovery sanctions on July 6; they filed their notice of appeal of the contempt sanction on August 6.

There have been several significant developments since Hansmeier and Steele filed their notices of appeal. On July 13, 2015, Hansmeier filed for bankruptcy in Minnesota. The district court had ordered Steele and Duffy to pay discovery costs before August 10, 2015. On the appointed day, Steele wired $47,171.75 (his half of discovery sanction) and $65,000.00 (all but $263 of the contempt sanction) to the district court. Duffy’s portion never arrived; he died that very day. On December 3, 2015, Hansmeier’s bankruptcy was converted to Chapter 7.

Hansmeier’s appeal was dismissed because his bankruptcy trustee did not authorize it.

Steele’s appeal dealt with two issues. First, the Seventh Circuit affirmed the sanction for discovery costs incurred by the Defendant. The Court affirmed the finding that Steele’s conduct was “vexatious” and “obstructive.”

As to the second issue, the contempt sanction, Steele successfully appealed. He argued that the sanction was criminal rather than civil and that he was entitled to the additional due process safeguards for criminal contempt.The Seventh Circuit agreed that the sanction was punitive rather than compensatory because it was not tied to any cost incurred by the Defendant. The case was remanded to the District Court to conduct further hearings on the contempt sanction issue.

Edward X. Clinton, Jr.

Source: LIGHTSPEED MEDIA CORPORATION v. Smith, Court of Appeals, 7th Circuit 2016 – Google Scholar

Effort to Sanction United States Under Rule 30(b)(6) Fails

Rule 30(b)(6) allows a party to serve a deposition notice on an organization and the organization must tender a witness who can answer questions. The party serving the notice sets forth the issues it will cover in the deposition and the responding party is required to identify and produce a witness who has knowledge of said matters.

In this case, the United States tendered a Rule 30(b)(6) witness, but the plaintiff claimed that the witness was a “Know Nothing Witness” who did not provide useful information. The court rejected that argument and denied the sanctions motion and explained:

Plaintiff alleges that Mr. Whitaker was not prepared for his RCFC 30(b)(6) deposition. When asked to explain how he had prepared for the RCFC 30(b)(6) deposition, Mr. Whitaker stated that he had seen the list of plaintiff’s RCFC 30(b)(6) deposition topics only the day before his deposition, and that, in order to familiarize himself with the topics, he looked at each one of the admissions and the spreadsheets produced by defendant in discovery. Mr. Whitaker also testified that he had not thoroughly reviewed the contract between Securiforce and DLA Energy before his deposition.

Plaintiff points to different statements made by Mr. Whitaker during his RCFC 30(b)(6) deposition to demonstrate that the “government’s designated witness, Mr. Whitaker, had no firsthand knowledge concerning the specified topics and had undertaken no investigation as to what was `reasonably known to the organization.'” Specifically, Mr. Whitaker testified that he had no personal knowledge as to whether fuel was delivered to any of Securiforce’s sites between September 7, 2011 and October 24, 2011, and that his knowledge regarding specific fuel deliveries was based on the information contained in the spreadsheets that were produced to plaintiff in July 2013. When asked about the process for ordering and delivering fuel in Iraq, however, Mr. Whitaker articulated a developed understanding of this process and its nuances, including how the process could be different based on the source of the fuel. Furthermore, Mr. Whitaker was able to testify to the information contained in defendant’s response to interrogatory 16, including the data systems used to compile the spreadsheets.

The transcript of Mr. Whitaker’s deposition demonstrates that he offered a thorough knowledge of the spreadsheets prepared by DLA and previously turned over to plaintiff. The spreadsheets purportedly captured the fuel deliveries to the Securiforce Department of State sites in Iraq during the relevant time period according to defendant’s information when the spreadsheets were prepared. Mr. Whitaker stated that he was familiar with the various databases listed on the spreadsheets, including “DLA Energy’s fuels enterprise server, DLA Energy’s defense fuel, automated management system, and DLA Energy’s automated voucher examination and dispersing system” and was able to explain the systems to plaintiff’s counsel when asked. The dialogue contained in the deposition transcript indicates that Mr. Whitaker could speak intelligently about the information contained in the spreadsheets. Mr. Whitaker answered many questions posed by plaintiff’s counsel about specific, detailed information contained in the spreadsheets based on his ability to decipher the spreadsheets. Specifically, Mr. Whitaker could read the codes used in the spreadsheets to identify countries of origin, invoice numbers, billing codes, delivery sites, delivery dates, funding codes, stock numbers, fuel quantities, and fuel grades. Mr. Whitaker’s knowledgeable deposition testimony about the spreadsheets and fuel deliveries in Iraq indicates that he was prepared to discuss a broad range of the topics plaintiff included in the RCFC 30(b)(6) deposition notice based on the information contained in DLA Energy’s records.

It is clear from Mr. Whitaker’s deposition testimony that, although he could not provide specific details for all of plaintiff’s counsel’s questions, he testified about information reasonably known by the government, based on DLA Energy’s records, and was responsive to a significant portion of plaintiff’s identified RCFC 30(b)(6) topics. Because Mr. Whitaker testified knowledgably about the DLA-prepared spreadsheets, and the information contained therein, his deposition testimony as a RCFC 30(b)(6) witness was not such that he was, as alleged by plaintiff, a “No-show” witness. Moreover, it would be hard to argue that only one witness could have testified to DLA Energy headquarters’ records and whether onsite deliveries in the conflict theater of Iraq actually occurred, as well as to possible fuel deliveries by the Army. The government offered to provide additional RCFC 30(b)(6) witnesses, and identified possible further witnesses, but plaintiff declined to depose any additional witnesses who could speak to the onsite fuel deliveries in Iraq. Instead, plaintiff chose to file its motion for sanctions and seek monetary compensation.

The case is interesting because it shows what work must be done by the party producing the Rule 30(b)(6) witness to make sure the witness knows what he is talking about. Source: SECURIFORCE INTERNATIONAL AMERICA, LLC v. US, Court of Federal Claims 2016 – Google Scholar

First Circuit Affirms Sanctions For Misstating the Law

The First Circuit Court of Appeals has affirmed an award of sanctions imposed where a lawyer misstated the law. Such sanctions are exceedingly rare. In this case, the bankruptcy court sanctioned David Baker for misstating the law in two briefs.

First, the court alludes to, but does not describe, other instances where Baker was sanctioned by courts.

Second, the court explains the decision to affirm the sanctions awards as follows:

On June 2, 2014, the bankruptcy court ordered Baker to show cause why he should not be sanctioned under Federal Rule of Bankruptcy Procedure 9011(b)(2). As grounds for its order, the court quoted from Paragraph 8 of Baker’s motion for sanctions against BOA, observing that the statement Baker made in that paragraph was not a correct statement of law and was not supported by the cases Baker cited therein. The bankruptcy court also pointed to Paragraph 12 of Baker’s objection to the Trustee’s motion to convert or dismiss, finding that Baker had “misquot[ed] the definition of cash collateral” and “misstat[ed] the law by claiming that the obligation of a debtor to obtain authority to use cash collateral applies only where the lien on cash is a consensual lien.

The bankruptcy court rejected Baker’s explanations on both counts. In re Hoover, No. 14-40478, 2014 WL 3893354, at *3 (Bankr. D. Mass. Aug. 6, 2014). Referring to Baker’s proffered benign reading of Paragraphs 8 and 9 as simply presenting an argument that the law should be modified to require a prompt filing of a motion for relief from the automatic stay, the court observed that the motion itself said “nothing of the kind” and that the proffered reading itself made “no sense” given what Paragraphs 8 and 9 actually said. Id. Referring to Baker’s claim that assets subject to non-consensual liens could not be “cash collateral,” the bankruptcy court found that the part of the definitional section of the applicable statute that Baker selectively omitted when directly quoting it in his objection was not only relevant to the point being made, but directly rebutted that point. Id. The court explained the difference between “paraphrasing” and “quoting” and found that Baker had “purported to quote a statutory definition,” but in doing so had “quot[ed] out of context part of a statute because quoting the statute in its entirety would have disproven his premise.” Id. The court also found that Baker’s legal analysis in support of his interpretation of § 363(a), while “beside the point,” was “absurd because the statute unambiguously states the opposite.” Id.

The bankruptcy court went on to observe that this conduct was not uncharacteristic of Baker. Id. at *4. It explained that on at least three prior occasions Baker had been sanctioned by different sessions of the court for conduct that included asserting frivolous defenses, advancing arguments contrary to express statutory provisions, and filing a meritless motion for sanctions. Id.

In fashioning an appropriate sanction in this case, the bankruptcy court observed that the “hefty” monetary penalties imposed on Baker in those prior cases had not deterred Baker from repeating such conduct. Id. at *5. The court thus decided to impose a non-monetary penalty “in the hope of effecting a more lasting behavioral modification.” Id. It ordered Baker to “enroll in and attend in person (not on-line) a one semester, minimum three credit-hour class on legal ethics or professional responsibility in an ABA accredited law school to be completed within 13 months of this order.” Id.

The Court of Appeals reviewed the sanction carefully and concluded that Baker was not mistaken, but that he had tried to mislead the court. It also noted that Baker has been sanctioned by other courts. (Again the allegations of prior sanctions are not described in the opinion). The court also noted that Baker is an experienced bankruptcy attorney.

While the legal issues raised are technical bankruptcy issues, the courts concluded that Baker was attempting to mislead. In conclusion, this is an unusual holding.

Source: IN RE HOOVER, Court of Appeals, 1st Circuit 2016 – Google Scholar