United States District Court, Eastern District of Tennessee, Greenville
FRED M. LEONARD, JR., Appellant,
RDLG, LLC, Appellee.
J. RONNIE GREER UNITED STATES DISTRICT JUDGE
The appellant, Fred M. Leonard, Jr. (“Leonard” or “appellant”), appeals an order of the United States Bankruptcy Court for the Eastern District of Tennessee, Greeneville Division (“bankruptcy court”) deciding appellee’s motion for partial summary judgment and appellant’s motion for summary judgment. The appellant also appeals the bankruptcy court’s order granting RDLG, LLC’s (“RDLG” or “appellee”), motion for voluntary dismissal on the remaining claims after the bankruptcy court’s entry of its order deciding the summary judgment motions. This Court entered an Order dismissing the appellant’s appeal on March 31, 2015. This Memorandum Opinion explains the reasoning for that ruling.
RDLG owned a multiple acreage development in McDowell County, North Carolina (the “property”). Leonard owned and controlled two companies, RPM Group, LLC and its affiliated brokerage, RPM Group Brokerage, LLC (the LLCs collectively “RPM”). RDLG alleged that RPM and its representatives, including Leonard, fraudulently induced RDLG to enter into a Marketing Agreement (“the Agreement”) with RPM for RPM to market the property and conduct a Sale Event. RPM and Leonard misrepresented that a Sale Event could produce $72, 500.00 average lot sale price; however, Leonard knew that the Sale Event would produce an average lot price of about $30, 000.00 to $40, 000.00. RPM and Leonard misrepresented the success they could obtain through the Sale Event by referring RDLG to previous sale results which purportedly generated mass lot sales at high average lot sale prices when in fact those sales generated much lower sales volume at much lower prices. Leonard directed RDLG to Dexter Hubbard, a developer of one of those prior lot sales. Hubbard was one of Leonard’s associates and could have profited from RPM’s Sale Event in this case.
The Marketing Agreement provided that if the Sale Event generated enough proceeds to reimburse the entire advertising budget, RPM would begin to earn commission on any proceeds generated above that amount regardless of the average lot sale price and regardless of whether RDLG lost money from the Sale Event. Thus, even if the Sale Event only generated an average lot sale price of $30, 000, RPM would be fully reimbursed for its portion of the advertising budget and could have made hundreds of thousands of dollars in commissions.
RDLG incurred great expense preparing for the Sale Event, which was a complete failure. As a result, on September 17, 2010, RDLG filed suit in the United States District Court for the Western District of North Carolina (the “district court”) against Leonard, RPM, and four other individuals. RDLG alleged in the suit that it was damaged by the fraud, sought rescission of the agreement, and asserted claims for fraudulent misrepresentation, negligent misrepresentation, civil conspiracy, and unfair trade practices under North Carolina law.
The defendants filed an answer and an amended answer. They mostly denied the allegations and asserted affirmative defenses. They conducted some discovery and attempted to mediate. After that failed, they conducted more discovery. Then the parties consented to have the United States Magistrate Judge decide the case. The court scheduled trial for October 15, 2012. On September 6, 2012, the court entered a pretrial order. It directed the parties to appear at a pretrial conference on October 3, 2012, and ordered them to comply with certain other requirements. The pretrial order warned that the failure to comply with its directives could result in the imposition of sanctions.
On September 30, 2012, two business days before the scheduled October 3, 2012 pretrial conference, Leonard’s and RPM’s attorneys, Terri Lankford and Seth Neyhart, filed motions to withdraw as counsel and postpone the pretrial conference “so that Defendants can initiate bankruptcy proceedings.” Counsel also stated that they had not communicated with their clients since one month earlier. Lankford represented that she was scheduled to be out of the country on the day of the pretrial conference.
The magistrate judge denied the motions on October 1, 2012, and opined that the motions were designed to delay the trial. Further, the magistrate judge warned Lankford and Neyhart that the failure to appear at the pretrial conference would result in the court finding counsel in contempt. The next day, Lankford filed a declaration, stating that she was already out of the country when she received the court’s October 1 order. She further stated that it would be impossible for her to be physically present at the pretrial conference. Lankford stated in a sworn declaration that:
On September 4, 2012, . . . Defendant Fred Leonard stated that he would be filing bankruptcy personally and on behalf of both corporations.
. . . .
Defendant Leonard then specifically asked me to not inform the Court [of their intent for her to withdraw as counsel] 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 court held the pretrial conference. Attorney Neyhart appeared on Leonard’s and RPM’s behalf, but he was completely unprepared. Leonard also attended; however, Lankford did not attend. As a result, counsel for RDLG orally moved for entry of sanctions pursuant to Federal Rule of Civil Procedure 16(f).
On October 5, 2012, the court addressed RDLG’s oral motion in an order and stated that the order also addressed Leonard’s and RPM’s and their counsel’s conduct sua sponte. The court concluded that Attorney Neyhart had been “wholly unprepared for 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 comply with the pretrial order by failing produce an exhibit list and that although the defendants had filed a trial brief and jury instructions, as ordered, both documents had been largely copied from documents filed by RDLG. Based on these deficiencies, as well as Lankford’s failure to attend as ordered, the court concluded that sanctions were warranted under Rule 16(f). The court ordered Leonard, Lankford and Neyhart to pay RDLG’s attorney fees in preparing for and attending the pretrial conference; ordered Leonard and RPM to pay $2, 500 each as sanctions pursuant to Rule 16(f)(1)(C) for the conduct of their counsel; ordered Lankford to pay $5, 000 pursuant to Rule 16(f)(1)(A) and (C), and ordered Neyhart to pay $2, 500 pursuant to Rule 16(f)(1)(B) and (C). The court directed that the sanctions be paid to the Clerk of the Court within five days of the order, on October 10, 2012. Furthermore, the court advised them 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.”
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 and for the purpose of delaying the case, and to prevent the trial from going forward. The court stated, “Such conduct by both Defendants and their counsel constitutes an assault on the integrity of this court” and “made a mockery of the judicial process. Such abuses of the judicial process must be sanctioned in order to protect the integrity of the federal court system.” 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.” The court further stated 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 on October 11, 2012, to show cause why they should not be further sanctioned under Rule 11. It did not state that Leonard could not attend.
On October 10, 2012, Leonard filed a petition for bankruptcy relief under chapter 7 in the bankruptcy court. He failed to pay the sanctions to the district court despite his Schedule B indicating that he had enough money on hand to pay the sanctions as of the date of the bankruptcy filing. That same day, RDLG filed a suggestion of bankruptcy with the district court, regarding Leonard’s personal bankruptcy filing.
On October 11, 2012, the district court conducted the show cause hearing regarding attorneys Lankford and Neyhart. On October 24, 2012, the court entered an order stating that Rule 11 sanctions against attorneys Lankford and Neyhart were not warranted. Still, the court concluded Leonard and RPM should be sanctioned under both Rule 16 and the inherent power of the court. The court referenced its oral ruling that it had apparently made on at the show cause hearing. The court noted Leonard’s and RPM’s failure to pay the monetary sanctions and its previous warning that such failure would result in a default judgment. It found that Leonard and RMP had “plotted and schemed to delay and undermine the trial in this matter.” The court further stated that they had “manipulated counsel into believing that all three Defendants would take bankruptcy in this matter prior to the Pretrial Conference in this case when, ...