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counsel that he had informed the subpoenaed third parties that “the action ha[d] been stayed and the subpoenas must be withdrawn.”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.