In the Matter of Lehtinen, 564 F.3d 1052 (9th Cir 2009)

Brief Summary
The United States Court of Appeals for the Ninth Circuit affirmed an order of the Ninth Circuit Bankruptcy Appeals Panel that would permit the U.S. Bankruptcy Court to suspend a lawyer from practice in that court. In a case of first impression in the Ninth Circuit, the court of appeals concluded that the Bankruptcy Court possesses the inherent authority to suspend and sanction a lawyer for acting in bad faith and with willful misconduct, although its authority should be exercised with restraint.

Complete Summary

Factual Background
California lawyer Jim G. Price represented Patricia Ann Lehtinen, the debtor in a Chapter 13 proceeding. The Ninth Circuit reported that Price’s conduct included failures to appear, providing material misinformation to the client, and a persistent attempt to push the client into using Price’s friend to issue a home improvement loan and to use Price himself as the broker for sale of her home.

At the initial § 341 meeting of the creditors, Price sent a contract attorney without telling Lehtinen that he would not attend. Price also did not appear at the confirmation hearing; rather, Lehtinen appeared alone. The Bankruptcy Court confirmed the bankruptcy plan. Price had agreed to appear in another court, even though he knew of the conflict, without having sought to continue either of the conflicting hearings.

The day after the confirmation hearing, and without checking on its outcome, Price sent Lehtinen a letter, which he characterized as a “mistake.” The letter stated that Lehtinen’s case had been dismissed, that he could re-file another case and help her sell her house, and that the bank could proceed with foreclosure.

Over the course of two, show cause proceedings, which covered the failure to appear at the confirmation hearing and the “mistake” letter, Lehtinen also sent a letter to the court stating that: 1) Price never informed her of the confirmation hearing date, which she learned about from the trustee; 2) Price also was a real estate broker who had pressured her to list her house for sale with his brokerage firm; and 3) Price had referred her to a friend for a home improvement loan, who had conditioned a loan on her engaging Price as the real estate broker for her house.

Procedural Background
The Bankruptcy Court suspended Price for three months from practice in that court and ordered him to disgorge his $1,500 fee to Lehtinen. The Bankruptcy Court’s order to show cause had pointed to a clear conflict of interest with respect to the loan and brokerage. The Bankruptcy Court’s ultimate order concluded that Lehtinen violated several provisions of the California Rules of Professional Conduct and the California Business & Professions Code. 
 
Price appealed, and the Ninth Circuit Bankruptcy Appeals Panel (BAP) held that the Bankruptcy Court possessed the authority to issue the sanctions and that Price had received due process. However, the BAP vacated the suspension and remanded the matter to the Bankruptcy Court for consideration of the ABA Standards in calibrating the discipline for Price.

Price appealed the BAP order to the United States Court of Appeals for the Ninth Circuit. The Ninth Circuit affirmed the BAP order. It held that Price had received due process. The Ninth Circuit held that the Bankruptcy Court possesses the inherent authority to sanction a lawyer who has acted in bad faith and with willful misconduct.

Legal Analysis
The Ninth Circuit confirmed that it had jurisdiction over this matter, which presented a pure legal question in a core proceeding in the bankruptcy. The Ninth Circuit reviews the award of sanctions for abuse of discretion.

Prior decisions of the Ninth Circuit had extended to the Bankruptcy Court the well-established inherent authority of federal courts to control admission to their bars, and to discipline lawyers who appear before them, even though the Bankruptcy Court is not an Article III court. The scope of that authority had since been limited by the Ninth Circuit. In what it characterized as a case of first impression in the circuit, the Ninth Circuit reexamined its prior case law and held that the Bankruptcy Court possesses the inherent authority to sanction a lawyer for acting in “bad faith” or with “willful misconduct.” 

The court rejected Price’s contention that his suspension was akin to criminal contempt and that it must be prosecuted with the procedural protections attendant on a criminal proceeding. The court also rejected Price’s contention that he had been deprived on the facts in this case of adequate notice and opportunity to be heard under federal constitutional due process.

The court reaffirmed that lawyer discipline is an investigation into lawyer conduct, which is neither a civil nor criminal proceeding, and that the purpose is to maintain the integrity of the courts and the profession, unlike criminal contempt wherein the purpose is punitive. The court further held that the bankruptcy judge had discretionary authority under that district’s local rules to impose appropriate sanctions itself, which it had done, or to refer the matter to the district’s standing disciplinary committee.

The Ninth Circuit concluded on the merits that the Bankruptcy Court had made the requisite findings of “bad faith” and “willful misconduct,” even though the lower court had not used those precise terms (instead having characterized the conduct as “outrageously improper, unprofessional and unethical under any reading of California’s ethical standards for attorneys”). Findings of conduct tantamount to bad faith will suffice. The Ninth Circuit left unanswered an open question in that circuit as to whether the finding must be supported by a preponderance of the evidence or by clear and convincing evidence.

The Ninth Circuit thus affirmed the BAP decision and held that the Bankruptcy Court possesses the inherent authority to sanction lawyers in that court. The Ninth Circuit cautioned that because of its “potency,” this power must be exercised with “restraint and discretion.” 

Significance of Opinion
There should not be a serious question about the impropriety of this lawyer’s conduct as found by the court, including the intentional failure to appear at the confirmation hearing, the “mistake” letter, and most importantly the home improvement loan and real estate brokerage conduct. The importance of the case rather lies in the Ninth Circuit’s affirmation of the Bankruptcy Court’s inherent authority to discipline lawyers who appear in that court, including suspension (and presumably disbarment) and disgorgement as sanctions.  

This alert has been prepared by Hinshaw & Culbertson LLP to provide information on recent legal developments of interest to our readers. It is not intended to provide legal advice for a specific situation or to create an attorney-client relationship.

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