RDLG, LLC v. Leonard (In re Leonard)
| Decision Date | 14 March 2014 |
| Docket Number | Adv. Pro. No. 13-5002,No. 12-51821,12-51821 |
| Parties | In re FRED M. LEONARD, JR., Debtor. RDLG, LLC, Plaintiff, v. FRED M. LEONARD, JR., Defendant. |
| Court | United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Eastern District of Tennessee |
__________
Marcia Phillips Parsons
CHIEF UNITED STATES BANKRUPTCY JUDGE
MEMORANDUMAPPEARANCES:
Ross R. Fulton, Esq.
Rayburn Cooper & Durham, P.A.
Attorney for Plaintiff
David J. Fulton, Esq.
Scarborough, Fulton & Glass
Attorney for Plaintiff
Jonathan R. Bunn, Esq.
Law Offices of Jonathan R. Bunn
Attorney for Defendant
Marcia Phillips Parsons, Chief United States Bankruptcy Judge. In this adversary proceeding, the plaintiff RDLG, LLC seeks a determination of nondischargeability under 11 U.S.C. § 523(a)(2)(A), (a)(4), and (a)(6) against the debtor Fred M. Leonard Jr. Presently before the court is RDLG's motion for partial summary judgment as to its § 523(a)(2)(A) claim,1 and Leonard's motion as to all nondischargeability counts. In its motion, RDLG asserts that the default judgment entered in a pending federal district court action against Leonard collaterally estops him from relitigating the fraud issues in this nondischargeability proceeding. In response, Leonard argues that the judgment is void because it was entered post-petition, in violation of the automatic stay, and alternatively, that the necessary elements of collateral estoppel are not present. In his summary judgment motion, Leonard asserts that the complaint in this adversary proceeding fails to set forth sufficient facts to support findings of nondischargeability under § 523(a)(2)(A), (a)(4), and (a)(6), and that the undisputed material facts in this case establish that he is entitled to a judgment in his favor. As discussed hereafter, because the court concludes that the default judgment which was entered as a Federal Rule of Civil Procedure 16(f) sanction against Leonard was not subject to the automatic stay and that collateral estoppel otherwise applies, RDLG's motion for partial summary judgment as to § 523(a)(2)(A) will be granted, and Leonard's motion as to this count will be denied. Additionally, Leonard's summary judgment motion will be granted as to RDLG's § 523(a)(4) claim and denied as to its § 523(a)(6) claim. This is a core proceeding. See 28 U.S.C. § 157(b)(2)(I).
On September 17, 2010, RDLG filed suit in the United States District Court for the Western District of North Carolina against Leonard, four other individuals, and two limited liabilitycompanies allegedly controlled and owned in part by Leonard, RPM Group, LLC and its affiliated brokerage, RPM Group Brokerage, LLC (the LLCs collectively "RPM"). The parties' dispute pertained to a multiple acreage development in McDowell County, North Carolina owned by RDLG (the "Property"). RDLG alleged in the complaint that RPM and its representatives, including Leonard, fraudulently induced RDLG to enter into a marketing agreement with RPM to market the Property and conduct a Sale Event by numerous misrepresentations regarding RPM's prior land marketing experience, its capabilities, and the achievable sale price of Property lots. RDLG alleged in the suit that it was damaged by the fraud, sought recision of the agreement, and asserted claims for fraudulent misrepresentation, negligent misrepresentation, civil conspiracy, and unfair trade practices under North Carolina law.
The defendants in that action filed an answer and an amended answer, largely denying the allegations in the complaint and asserting affirmative defenses. After the commencement of discovery, a failed mediated settlement conference and more discovery, the parties consented to having the dispute resolved by a United States Magistrate Judge, who scheduled trial for October 15, 2012. Approximately six weeks before the scheduled trial date, the court on September 6, 2012, entered a pretrial order directing the parties to appear at a pretrial conference on October 3, 2012, and to comply with certain other requirements including the exchange of exhibits, the submission of proposed jury instructions, and the filing of pretrial briefs. The pretrial order warned that the failure to comply with the court's directives could result in the imposition of sanctions.
On September 30, 2012, two business days before the scheduled October 3, 2012 pretrial conference, the attorneys representing Leonard and RPM, Terri Lankford and Seth Neyhart, filed motions to withdraw as counsel and postpone the pretrial conference "so that Defendants can initiate bankruptcy proceedings." As further cause for the motions, counsel stated that their communication with their clients had ceased a month earlier and Lankford represented that she was scheduled to be out of the country on the date of the pretrial conference.2
The court denied the motions to withdraw and postpone the pretrial conference in an order entered October 1, 2012. The court opined that the last-minute motions were designed to delay the trial and warned that the failure of either Lankford or Neyhart to appear at the pretrial conference would result in the court finding counsel in contempt. The next day Lankford filed a declaration advising that she was already out of the country when she received notice of the court's October 1 order, and that it would be impossible for her to be physically present at the pretrial conference. In apparent response to the court's criticism regarding the timing of the motions, Lankford stated in a sworn declaration, inter alia, that:
On September 4, 2012, . . . Defendant Fred Leonard stated that he would be filing bankruptcy personally and on behalf of both corporations.
. . . .
Defendant Leonard agreed that it was unnecessary for me to continue to represent him as he had new representation whom [sic] were going to enter a notice of appearance with this Court.
. . . .
Defendant Leonard then specifically asked me to not inform the Court until September 28, 2012, because he and his other attorney's [sic] believed that it would severely prejudice him in the resolution of other legal matters, including but not limited to, the execution of a refinance on Defendant's home, the sale of that home, the negotiation of federal tax liens, the settlement negotiation of another litigation matter, the execution of current and pending business deals, and the resolution of an investment conflict.
. . . .
I informed Defendant multiple times during the month of September that I needed to file the Motion to Withdraw and was told that I needed to wait until Defendants' bankruptcy was filed which I was assured would be before the end of the month.
On October 3, 2012, the district court held the pretrial conference as scheduled. Attorney Seth Neyhart appeared at the conference on behalf of Leonard and RPM, as did Leonard personally. Ms. Lankford did not attend. At the conclusion of the pretrial conference, counsel for RDLG orally moved for entry of sanctions pursuant to Federal Rule of Civil Procedure 16(f).
Two days later, on October 5, 2012, the court entered an order addressing RDLG's oral motion and stating that it was considering the conduct of defendants Leonard and RPM and their counsel sua sponte. The court stated in the order that attorney Neyhart had been "wholly unpreparedfor the pretrial conference and had no knowledge of the case," resulting in the pretrial conference being "largely a waste of time and resources." The court further found that Leonard and RPM had failed to produce an exhibit list as previously ordered and that although the defendants had filed a trial brief and jury instructions, both documents had been largely copied from documents filed by RDLG. Based on these deficiencies, as well as the failure of Ms. Lankford to attend the pretrial conference as ordered, the district court concluded that sanctions under Rule 16(f) were warranted against Leonard and RPM and their counsel. The court ordered Leonard, Lankford and Neyhart to pay RDLG's attorney fees in preparing for and attending the pretrial conference, and ordered Leonard and RPM to pay $2,500 each as sanctions pursuant to Rule 16(f)(1)(C) for the conduct of their counsel. The court also sanctioned Lankford $5,000 pursuant to Rule 16(f)(1)(A) and (C) and Neyhart $2,500 pursuant to Rule 16(f)(1)(B) and (C). The court directed that the specified sums be paid to the clerk of the court within five days of the order, and advised that the failure to timely comply "will result in the Court striking the answer of Defendants and entering default judgment against Defendants and/or the instigation of contempt proceedings against counsel."3
In addition to the referenced Rule 16(f) basis for sanctions, the court also stated in the October 5, 2012 order that sanctions were being imposed pursuant to the inherent power of the court to sanction conduct that constituted an abuse of the judicial process. The court concluded that Leonard and RPM and their counsel had filed the motions to withdraw and to continue the pretrial conference in bad faith, as a means of delaying the case, and to prevent the trial from going forward. According to the court, "[s]uch conduct by both Defendants and their counsel constitutes an assault on the integrity of this court" and The court again warned Leonard and RPM "that any future dilatory conduct will result in the Court striking their Answers and entering default judgment against them." Lastly, the court observed that additional sanctions against attorneys Lankford and Neyhart pursuant to Federal Rule of Civil Procedure 11 may be required, and directed counsel to appear before the court for a hearing onOctober 11, 2012, to show cause why they should not be further sanctioned under Rule 11.
On October 10, 2012, the day that payment of the monetary sanctions was due, Leonard filed a petition for bankruptcy...
To continue reading
Request your trial