Law: Federal Rule of Civil Procedure 37(a)(5)
Case: Premier Capital, LLC v. Larry Bryan (AP)
Underlying Bankruptcy Case: In re Larry Bryan
Pictured: Thomas H. Curran, managing partner at Thomas H. Curran Associates, LLC and lead attorney for Premier Capital
Introduction
On the 27th of September, 2022, the United States District Court for the Southern District of Florida (the “District Court”) entered an order affirming the United States Bankruptcy Court for the Southern District of Florida’s (the “Bankruptcy Court”) previous “Order Liquidating Discovery Sanctions Awards” [ECF 147] and associated Final Judgments [ECF 148, 149] entered on August 12, 2021.[1]
In the Adversary Proceeding challenging the Debtor’s discharge in the underlying bankruptcy proceeding (the “AP”), the Bankruptcy Court found that Premier Capital was entitled to an award of attorney’s fees and other reasonable costs totaling $16,442.05, associated with three motions to compel filed during the discovery process in the AP. The motions to compel were filed after the debtor and certain insiders failed to promptly and completely reply to Premier Capital’s initial discovery requests. The appeal addressed whether there was validity and fairness in the sanctions imposed on the debtor and his insiders by the Bankruptcy Court.[2]
Relevant Factual Background
Larry Bryan (the “Debtor”) filed a voluntary chapter 7 bankruptcy petition in 2018 claiming, under the penalty of perjury, that he had no interest in any assets whatsoever, and owed only a single unsecured debt, to Premier Capital. Shortly between his bankruptcy proceeding being dismissed due to his failure to submit proper documentation to the Court, and then being reinstated, the Debtor amended his schedules to include an interest in a residence, multiple bank accounts, and numerous entities in which he held a current or future interest. The Debtor also amended his schedules to show an inexplicable increase in his debt owed to Premier Capital of approximately $933,000.00. [3]
Even after the Debtor’s amendments to his schedules, changing his sworn testimony in nearly every aspect, the Debtor still, again under the penalty of perjury, omitted crucial facts regarding his financial affairs. In denying the Debtor’s request for discharge, the Bankruptcy Court made it clear that the Debtor’s repeated omissions in his bankruptcy schedules and statement of financial affairs were deliberate and unacceptably intended to defraud his creditors.
Objections to discharge are to be liberally construed in favor of the debtor. But even with that liberal construction, only the “unfortunate and honest debtor” is entitled to a discharge. Larry Bryan does not fall into this category. He is a well-educated and sophisticated insurance professional with years of experience assisting clients with life insurance, estate planning, and irrevocable insurance trusts and other “different entities,” who was trying to avoid paying a judgment held by Premier Capital. Yet despite his sophistication, he conveniently “forgot” to disclose material information about his finances and assets – not once, not twice, not even three times. No, by the time of trial, Larry Bryan was on his Fourth Amended Schedules – meaning the fifth set of schedules he signed under penalty of perjury and filed with the Court.[4]
Not only was the Debtor misrepresenting his assets during his bankruptcy proceeding, but he also behaved fraudulently before he even filed his chapter 7 petition.
Although the standard of proof at trial was only preponderance of the evidence, Premier Capital proved by clear and convincing evidence that Larry Bryan made pre and post-petition fraudulent transfers, and concealed assets from Premier Capital pre-petition and from Premier Capital and the Trustee post-petition. Premier Capital also proved with clear and convincing (indeed, overwhelming) evidence that the Debtor made numerous false oaths and accounts – to the point that he was on his Fourth Amended Schedules, signed under penalty of perjury, as of the trial. This point is not taken lightly.[5]
In light of the Debtor’s fraudulent concealment of his many assets from creditors, both before and after his bankruptcy petition, the Bankruptcy Court entered a judgment in favor of Premier Capital and refused to discharge the Debtor. In addition to denying discharge to the Debtor, the Bankruptcy Court also awarded discovery sanctions to Premier Capital pursuant to Federal Rule of Civil Procedure 37(a)(5) (“Rule 37”) against the Debtor and his insiders, including his wife, his estate planning attorney and several family run business entities.[6] Following the docketing of the final judgment, the Debtor, along with his wife, attorney and multiple insider Bryan family entities (the “Bryan Entities”), filed an appeal to the United States District Court challenging the validity and amount of the discovery sanctions awarded to Premier Capital.
In filing their appeal, the Bryan Entities raised three issues for the District Court to review:
(1) whether the Bankruptcy Court abused its discretion in finding that Premier Capital was entitled to an award of attorneys’ fees under Rule 37(a)(5)(A) for the three motions to compel;
(2) whether the Bankruptcy Court abused its discretion in awarding a total of $16,442.05 for the three motions to compel; and
(3) whether the Bankruptcy Court erred in awarding Premier Capital sums it ‘incurred’ under Rule 37(a)(5)(A) when its counsel admitted to working on a contingent/flat-fee arrangement.[7]
Through this appeal, the Bryan Entities unsuccessfully sought to vacate the Bankruptcy Court’s order awarding discovery sanctions to Premier Capital, LLC.
U.S. District Court’s Decision and Reasoning
(a) Premier Capital Was Entitled to Discovery Sanctions.
The District Court affirmed the decision of the Bankruptcy Court finding that Premier Capital was entitled to reimbursement from the Bryan Entities of attorneys’ fees and other reasonably related expenses incurred in filing their motions to compel, pursuant to Rule 37(a)(5)(A). In making this decision, the District Court considered the three exceptions that would free the Bryan Entities from having to reimburse Premier Capital for the costs associated with the motions to compel: “(i) the movant filed the motion before attempting in good faith to obtain the disclosure or discovery without court action; (ii) the opposing party’s nondisclosure, response, or objection was substantially justified; or (iii) other circumstances make an award of expenses unjust.” [8]
Finding that (1) Premier Capital made a good faith attempt to obtain the discovery requested from the Bryan Entities before the motions to compel were filed, (2) that the Bryan Entities did not have a justified reason for failing to comply with Premier Capital’s discovery requests, and (3) the award of sanctions was not unjust, the District Court affirmed the Bankruptcy Court’s order that Premier Capital was entitled to the reimbursement of the reasonable costs associated with filing multiple motions to compel. [9]
(b) The Bankruptcy Court’s Previously Awarded Sanctions Were Reasonable.
After it established that Premier Capital was entitled to an award of discovery sanctions, the District Court further held that the Bankruptcy Court’s previous award of sanctions under Rule 37 was reasonable in light of the Bryan Entities behavior throughout the discovery process. In making this decision, the court used its own expertise[10] and an application of the lodestar method. Use of the lodestar method on its own produces a sanction amount that holds a strong presumption of reasonableness.[11] In addition to using the lodestar method, the Bankruptcy Court conducted further analysis of the sanctions sought by Premier Capital and chose to reduce them by only $3,542.50. This analysis and subsequent modification established that the Bankruptcy Court imposed fair and reasonable monetary sanctions against the Debtor.[12]
(c) Attorneys’ Fees Can Be Awarded No Matter What Payment Arrangement Is in Place.
Finally, in ruling in favor of Premier Capital, the District Court rejected the Bryan Entities argument that attorneys’ fees could not be awarded as discovery sanctions because Premier Capital employed its attorneys using a contingent/flat-fee arrangement. The District Court clarified that sanctions are awarded not only to provide a remedy to the paying party, but also as a deterrent of similar behavior by others.[13] This means that a party entitled to receive reasonable costs and attorneys’ fees spent in bringing a motion to compel can receive those funds regardless of the fee arrangement in place between the prevailing party and its attorneys – the payment agreement that a party has with its attorneys should not be considered when evaluating an award of reasonable attorneys’ fees.[14]
What is the impact?
The District Court clarified, and affirmed, the proper application of Rule 37(a)(5) in a few important ways. First, after this decision by the District Court upholding the sanctions awards issued by the Bankruptcy Court, it is clear that litigants in Adversary Proceedings run a significant risk of discovery sanctions by engaging in discovery malfeasance in the United States Bankruptcy Court for the Southern District of Florida. In practice, this should encourage the cooperation of litigants throughout bankruptcy and related adversary proceedings so as to avoid incurring unwelcome expenses, in the form of discovery sanctions.
Second, the District Court provided an example of how “reasonable” sanctions could be calculated once they are deemed proper under Rule 37(a)(5). Specifically, the Court stated that the lodestar method of calculating sanctions carries with it a strong presumption of reasonableness. Paired with some additional analysis by the court awarding the sanctions, the lodestar method yielded a sanction amount considered to be fair under Rule 37. This methodology can act as a practical guide for litigants and guidance for courts in determining fair sanctions and lends some consistency and predictability in the awarding of discovery sanctions.
Finally, the District Court made it clear that sanctions that include attorneys’ fees can be imposed against a recalcitrant party regardless of the fee agreement the recipient party has with its legal counsel. Even when the recipient counsel is engaged on a flat-fee arrangement, they are still entitled to the reasonable cost of attorneys’ fees that would have accompanied the required motion to compel. This ruling eliminates any perceived “safe harbor” for litigants where they might envision that they could escape paying attorneys’ fees as a sanction when their adversaries employ their attorneys on a contingent/flat-fee basis. This decision informs that no such absolute safe harbor exists.
[1] Bryan et al v. Premier Capital, LLC “Corrected Order on Bankruptcy Appeal” [ECF 28]
[2] Id.
[3] Premier Capital, LLC v. Larry Bryan “Findings of Fact and Conclusions of Law” [ECF 145]
[4] Ibid.
[5] Id.
[6] Premier Capital LLC v. Larry Bryan “Final Judgment” [ECF 245]
[7] Bryan et al v. Premier Capital, LLC “Corrected Order on Bankruptcy Appeal” [ECF 28]
[8] Fed. R. Civ. P. 37(a)(5)(A)(i)-(iii)
[9] Bryan et al v. Premier Capital, LLC “Corrected Order on Bankruptcy Appeal” [ECF 28]
[10] Id. citing (R. (DE [21]) at 230) (“In evaluating a claim for attorney’s fees, the Court, itself being an expert on this subject, ‘may consider its own knowledge and experience concerning reasonable and proper fees and may form an independent judgment.’”) (citing In re TLFO, LLC, 571 B.R. 880, 887 (Bankr. S.D. Fla. 2017)
[11] Smith v. Atlanta Postal Credit Union, 350 Fed. Appx. 347, 349 (11th Cir. 2009) (quoting Pennsylvania v. Del. Valley Citizens’ Council for Clean Air, 478 U.S. 546, 565 (1986)); see also Perdue v. Kenny A., 559 U.S. 542, 554 (2010) (noting a “‘strong presumption’” of reasonableness that attaches to a lodestar calculation of attorneys’ fees)
[12] Premier Capital LLC v. Larry Bryan “Order Liquidating Discovery Sanctions” [ECF 147]
[13] Id. citing Usherson v. Bandshell Artist Mgmt., No. 19-CV-6368 (JMF), 2020 WL 3483661, at *20 (S.D.N.Y. June 26, 2020), aff’d in part sub nom. Liebowitz v. Bandshell Artist Mgmt., No. 20-2304, 2021 WL 2620416 (2d Cir. June 25, 2021)
[14] Nat’l Laws. Guild v. Attorney Gen., 94 F.R.D. 616, 618 (S.D.N.Y. 1982); see also, Mintz Fraade L. Firm, P.C. v. Brady, No. 19-CV-10236 (JMF), 2021 WL 621206, at *6 (S.D.N.Y. Feb. 17, 2021)