4th Circuit: RDLG, L.L.C. v. Leonard- Default Judgment as Sanction

Summary:

RDLG filed suit against Leonard alleging a pattern of fraudulent activity. Attorneys Lankford and Neyhart entered appearances for Leonard and were still attorneys-of-record when the district court set a pre-trial conference for October 3, 2012. On September 30, 2012, Lankford and Neyhart filed a motion seeking to both continue the October 3rd hearing and also to withdraw as counsel, due to both a lack of communication and payment from Leonard. Lankford had waited to file such motion because Leonard had indicated that he intended to file bankruptcy on September 28th, which would have precluded the October 3rd hearing. Lankford also indicated that she would be in Puerto Rico on October 3rd.

The district court denied to motion on October 1, 2012, and ordered the attorneys to appear at the hearing on October 3rd or be held in contempt. Lankford filed a declaration stating that she had already left for Puerto Rico, but she would appear telephonically, with Neyhart and Leonard present in person.

At the October 3rd hearing, neither Leonard nor counsel were prepared, having anticipated /hoped that a bankruptcy would have been filed. Neyhart further indicated that a conflict of interest had arisen with Leonard, but a further continuance to clarify such was denied. RDLG then moved for sanctions due to the lack of preparation, seeking a default judgment pursuant to Rules 16(f)(1)(B) and 37. Subsequently, on October 5, 2012, the district court held that Leonard and his attorneys had “made a mockery of the judicial process” and ordered that by October 10, 2012, Leonard was to pay $2,500 in sanctions, with Neyhart also paying $2,500 and Lankford $5,000. Failure to pay such fines would result in entry of a default judgment. The district court ordered a further hearing for October 11, 2012, to determine if additional sanctions were justified.

Leonard did not pay the $2500 fine on October 10th, instead filing for personal bankruptcy. Lankford and Neyhart did pay their fines and appeared at the October 11th hearing, but without Leonard present. Finding that no further sanctions were needed regarding the attorneys, the district court found that Leonard’s failure to pay justified striking of his answer and entry of default.

This resolved liability, but a determination of damages required a jury trial. Leonard requested that the jury be instructed that actual damages be limited to the amounts obtained from RDLG, but the district court declined such instruction. The jury ultimately awarded damages in the amount of $500,580.36.

Leonard appealed, challenging both the entry of the default judgment as violating due process and the jury instruction.

The Court of Appeals held that while a default judgment cannot granted as a sanction “without first giving notice of … intent to do so and without affording an opportunity for a hearing.” Ford v. Alfaro, 785 F.2d 835, 840 (9th Cir. 1989.) , Leonard had been afforded ample warning of this consequence for failing to pay the fine.

As to the jury instruction, Leonard’s requested instructions were derived from In re Rountree, 4789 F.3rd 215 (4th Cir. 2007), which involved whether a tort judgment was excepted from discharge in bankruptcy. Finding that the determination of the amount of damages here was not, despite the pending bankruptcy, a bankruptcy issue but instead solely a state law question, the Court found Leonard’s requested instructions irrelevant as any discharge questions were reserved for the bankruptcy court.

Commentary:

It is absolutely unclear how on October 11th, one day after Leonard filed bankruptcy, the district court entered a default judgment. 11 U.S.C. § 362(a)(1) stays any “continuation … judicial action … against the debtor….” Any requirement by Leonard to pay the $2,500 fine was similarly stayed by 11 U.S.C. § 362(a)(6).

For a copy of the opinion, please see:

RDLG, L.L.C. v. Leonard- Default Judgment as Sanction

 

RDLG v. Leonard- Sanctions Excepted from Stay

6th Cir.: RDLG v. Leonard- Sanctions Excepted from Stay

About

1. Bachelor of Arts degree in English Literature from Washington University, 1993. 2. Juris Doctor degree from George Washington University, 1996. Admissions to Practice of Law: North Carolina Bar, 1996. Federal District Courts for the Eastern and Middle Districts of North Carolina. Specialty Certification: North Carolina State Bar: Certified as a Specialist in Consumer Bankruptcy. Areas of Practice: Practice limited to consumer and business debtor bankruptcy law, 1998 to present. Memberships: National Association of Consumer Bankruptcy Attorneys (NACBA). North Carolina Academy of Trial Lawyers (NCATL). North Carolina Bar Association, Bankruptcy Section. Lectures prepared and presented: North Carolina Academy of Trial Lawyers seminar on bankruptcy; Topic: Counseling the Consumer Debtor Prior to Court - C.Y.A. Forms to Help 'Gird They Loins'; 2001. Middle District Bankruptcy Seminar; Topic: Preparing Chapter 13 Plans; 2002. NACBA National Convention; Topic: Efficient Office Practices; 2003. NACBA National Convention; Topic: Chapter 7 vs. Chapter 13 Debates; 2004. Middle District Bankruptcy Seminar; Topic: Chapter 7 & 13 Hot Issues; 2004. Positions held: NACBA National Convention; Convention Chair; 2008. NACBA National Convention; Panel Moderator: Topic: Basic Bankruptcy Issues; 2008. NACBA National Convention; Panel Moderator; Topic: Chapter 13-Disposable Income and Other Issues; 2007. NACBA National Convention; Panel Moderator; Topic: Representing Members of the Military and Their Families; 2007. NACBA, Member of National Board of Directors, 2006 to present. NCATL, Chair of the Bankruptcy Section, 2003 to 2007. NACBA, Chair of the North Carolina Section, 2003 to 2007. NC Bar Association, Bankruptcy Section, Bankruptcy Council Member, 2004 to present.

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2 comments on “4th Circuit: RDLG, L.L.C. v. Leonard- Default Judgment as Sanction
  1. Ed Boltz says:

    Answering my own question- the Bankruptcy Court for the Eastern District of Tennessee held in the above decision that contempt sanctions are a “non-statutory” exception to the automatic stay and that this sanction was also permitted under 11 U.S.C. § 362(b)(4) as an exercise by a governmental unit, viz. the District Court, of its police and regulatory power.

  2. Ed Boltz says:

    And the bankruptcy court was affirmed by the 6th Circuit, with that opinion also attached.

    Not sure why the 4th Circuit opinion did not mention any of this.

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