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Fitzpatrick v. Law Solutions Chicago, LLC

United States District Court, E.D. Tennessee, Knoxville

March 21, 2018

MICHAEL H. FITZPATRICK, TRUSTEE, Plaintiff,
v.
LAW SOLUTIONS CHICAGO, LLC, et al., Defendants. MICHAEL H. FITZPATRICK, TRUSTEE, Plaintiff,
v.
LAW SOLUTIONS CHICAGO, LLC, et al., Defendants.

          MEMORANDUM OPINION AND ORDER

          J. RONNIE GREER UNITED STATES DISTRICT JUDGE

         Finding that there were common questions of law and fact, this Court previously ordered these two civil cases[1] consolidated. The matters currently before the Court are two motions to dismiss, [Lead case, doc. 20 and Member case, doc. 21]. The defendants[2] who have been served process in the Lead case have filed a motion to dismiss plaintiff's[3] complaint pursuant to Federal Rules of Civil Procedure 12(b)(6) and 12(b)(2) for (1) failure to state a claim and (2) lack of personal jurisdiction over defendants Doe and Heuser, [Lead case, doc. 20]. The defendants in the Member case have also filed a motion to dismiss plaintiff's complaint pursuant to Federal Rules of Civil Procedure 12(b)(6) and 12(b)(2) for (1) failure to state a claim and (2) lack of personal jurisdiction over defendants Solis, Brown, and Sheehan, [Member case, doc. 21]. The plaintiffs have responded to both motions, [Lead case, doc. 27 and Member case, doc. 23], and replies have been filed, [Lead case, doc. 32 and Member case, doc. 28]. The matters are ripe for review. Given the minimal variation between the parties' briefing for both of these motions, this Court will consider them simultaneously and refer to any difference of fact or argument as needed. For the reasons that follow, both of the defendants' motions, [Lead case, doc. 20 and Member case, doc. 21] will be GRANTED and both of these cases will be DISMISSED.

         I. BACKGROUND

         These two consolidated cases involve a similar set of circumstances which occurred within a reasonably close timeframe. As required when this Court considers a motion to dismiss for failure to state a claim, the facts recited herein are taken from the complaints, “exhibits attached to the complaint[s], public records, items appearing in the record of the case[s] and exhibits attached to the defendant[s'] motion to dismiss so long as they are referred to in the complaint and are central to the claims contained therein….” Rondigo, LLC, v. Township of Richmond, 641 F.3d 673, 680 (6th Cir. 2011) (quoting Bassett v. Nat'l Collegiate Athletic Ass'n, 528 F.3d 426, 430 (6th Cir. 2008)). For purposes of these two motions to dismiss for failure to state a claim, the Court accepts the plaintiffs' allegations as true. See Bassett v. Nat'l Collegiate Athletic Ass'n, 528 F.3d 426, 430 (6th Cir. 2008).

         The defendant Law Solutions Chicago LLC d/b/a UpRight Law LLC (“UpRight Law”) is a national law firm which specializes in representing clients considering bankruptcy. All of the individually named defendants are either licensed attorneys associated with the firm or non-attorney staff employees who assist with the legal operations of UpRight Law. While UpRight Law maintains an office in Chicago, Illinois, it advertises its services to potential clients outside of the state through the internet. Typically, out-of-state potential clients who contact UpRight Law via the telephone will initially speak with non-attorney staff in the Chicago office before their call is transferred to an attorney. After the initial consultation, UpRight Law will then turn the client's case over to be handled by a partner attorney in the appropriate jurisdiction for representation.

         A. Lead Case: Annette Harris Haynes

         On December 7, 2015, Annette Haynes, a Tennessee resident, contacted UpRight Law via telephone to inquire about filing for bankruptcy relief. Her call was initially answered by defendant George Doe, who is a non-attorney staff employee of UpRight Law. During this initial phone conversation, Doe, who is not licensed to practice law, encouraged her to pursue bankruptcy and affirmed that she would be allowed to keep her truck through the bankruptcy. Shortly thereafter, the plaintiff's call was transferred to Austen Heuser, a member of the Illinois bar and licensed attorney for UpRight Law. Heuser is not licensed to practice law in the state of Tennessee. During their phone conversation, Heuser provided legal advice to the plaintiff regarding Chapter 7 and Chapter 13 forms of bankruptcy relief, and negotiated a fee of $1, 685.00 to undertake representation of the plaintiff in a Chapter 7 bankruptcy case.

         At some time after the initial call was completed[4], Jessica Odgie, another non-attorney staff employee of UpRight Law, initiated a call with the plaintiff, following up on the previous call that had been made earlier that day. Odgie instructed the plaintiff to stop all payments on unsecured debts, and offered other legal advice with respect to the effects of a bankruptcy discharge. Odgie confirmed the fee of $1, 685.00 for the representation of a Chapter 7 bankruptcy proceeding.

         Sometime afterwards, UpRight Law referred the plaintiff's case to Grace Gardiner, a partner attorney licensed to practice law in the state of Tennessee, who is based in Knoxville, Tennessee. Gardiner was assigned the plaintiff's case to file the Chapter 7 bankruptcy in the state of Tennessee. Gardiner had an assistant, Judy Lovely, who is not an attorney. The plaintiff did not live in Knoxville herself, and therefore was required to make trips to Knoxville for the preparation of her case, most of which, she claims, was handled by Lovely. The plaintiff met with Lovely and discussed the requirements to file a Chapter 7 bankruptcy case, and Lovely advised the plaintiff that she would actually be required to file a Chapter 13 due to her income level. Although the plaintiff had signed a retainer agreement for representation for a Chapter 7, an additional retainer agreement was required for a Chapter 13. The plaintiff never signed the Chapter 13 agreement, and alleges that UpRight Law “cut and pasted” the plaintiff's signature from the prior Chapter 7 retainer agreement to the Chapter 13 agreement without the plaintiff's consent.[5]

         Furthermore, the change to a Chapter 13 filing required an additional $1, 315.00 retainer fee. Before her case was filed, the plaintiff had paid $1, 900.00 to UpRight Law. The plaintiff met her attorney, Grace Gardiner, face to face for the first time at the 341 meeting of creditors on March 23, 2016. The plaintiff claims she was never advised that she would have to attend court in Knoxville for the 341 meeting of creditors.[6] Furthermore, Gardiner had failed to file a number of required documents in the plaintiff's Chapter 13 case, which ultimately led to sanctions by the bankruptcy court. Gardiner's improper handling of the plaintiff's bankruptcy case resulted in her suspension from practice in the United States Bankruptcy Court for the Eastern District of Tennessee for five years.

         After Gardiner was sanctioned, UpRight Law agreed to disgorge the $1, 900.00 of fees that the plaintiff had paid prior to the filing of the Chapter 13 bankruptcy petition. The plaintiff subsequently hired another law firm to complete her bankruptcy case.

         B. Member Case: Pamela Jo Hagstrom

         The facts of the Member case are very similar. On March 1, 2016, Pamela Hagstrom contacted UpRight Law via telephone to inquire about filing for bankruptcy relief. Angelo Solis, a non-attorney staff employee of UpRight Law, answered the plaintiff's call initially. During the conversation, Solis provided advice on both Chapter 7 and Chapter 13 forms of bankruptcy relief, and solicited the plaintiff to use UpRight Law's legal services. He represented to the plaintiff that she would be able to file a Chapter 7 bankruptcy petition, and advised her as to the implications of a discharge, the effects of a reaffirmation agreement, the proper way to handle a related state court lawsuit, and the effects bankruptcy would have on the plaintiff's credit score. Solis negotiated a fee of $1, 535.00 for the representation of the plaintiff in her Chapter 7 bankruptcy case, of which the plaintiff agreed to pay $1, 200.00 before the bankruptcy petition was filed.

         On March 3, 2016, Jacob Brown, a member of the Illinois bar who is not licensed to practice law in the state of Tennessee, initiated a follow-up call to the plaintiff, during which he instructed her to stop all payments on unsecured debts, and offered advice regarding the effects of a bankruptcy discharge. Brown also reiterated to the plaintiff that she would have no problem filing a Chapter 7 bankruptcy petition, and voiced his advice regarding a related state court lawsuit.

         Sometime later, the plaintiff's bankruptcy case was referred to Grace Gardiner, a licensed attorney in the state of Tennessee, to prepare and file the appropriate forms for the Chapter 7 bankruptcy case in Tennessee. Gardiner apparently miscalculated the plaintiff's income for determining the means test, and incorrectly determined that the plaintiff was not eligible to file a Chapter 7 bankruptcy petition. Contrary to the attorney's understanding, the plaintiff was eligible to file a Chapter 7 petition. However, as a result of this miscalculation, the plaintiff was told that she would be required to file a Chapter 13 bankruptcy petition, which resulted in an additional $1, 456.00 attorney fee.

         This increase in price prompted the plaintiff to request a refund. After the plaintiff's request, Matt Sheehan, a non-attorney staff employee for UpRight Law, contacted the plaintiff via telephone to attempt to salvage the situation. During their conversation, Sheehan told the plaintiff that she would only be paying a fraction of her debt under a Chapter 13, advised her that she could buy a new car in a Chapter 13, and stated that this bankruptcy filing was more advantageous than a Chapter 7 filing. Ultimately, the plaintiff agreed, and on April 18, 2016, a Chapter 13 petition for relief was filed.

         Subsequently, Gardiner was suspended from practicing in the United States Bankruptcy Court for the Eastern District of Tennessee. UpRight Law disgorged the $1, 200.00 of fees that plaintiff had paid prior to the filing of her petition, and thereafter, the plaintiff retained a different law firm to complete her bankruptcy.

         II. DISCUSSION

         After consolidating these two cases, this Court ordered the parties to submit briefs regarding their position on the issue of this Court's abstaining from hearing these cases. Although this Court has original jurisdiction over all cases “arising in or related to cases under title 11, ” it may “in the interest of justice, or in the interest of comity with State courts or respect for State law, [] abstain[] from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.” 28 U.S.C. § 1334. As outlined in the complaints, these lawsuits are brought under this Court's jurisdiction because the allegations “are related to, arise in, and arise under the pending Chapter 7 bankruptcy case[s].” [Lead case, doc. 1 at PageID # 1 and Member case, doc. 1 at PageID # 1].

         Both of the parties submitted argument that this Court should retain jurisdiction and authority over these two lawsuits rather than exercising the power of permissive abstention available under 28 U.S.C. § 1334(c)(1).[7] The Court agrees with the parties that even though the claims asserted in these lawsuits are uniquely state law claims, the exercise of permissive abstention in this case is unwarranted and would likely have an adverse effect on the administration of the pending bankruptcy proceedings as well as the efficient administration of justice.[8]Therefore, this Court will retain jurisdiction over these two consolidated cases. The parties' briefing between these two lawsuits is almost identical, and therefore will generally be considered simultaneously.

         A. Rule 12(b)(2)/LACK OF PERSONAL JURISDICTION

         Given that the defendants have moved to dismiss all counts of the complaints against all defendants, this Court will first address the question of personal jurisdiction, as is may potentially be dispositive as to the claims against many of the named defendants. The defendants move to dismiss the plaintiffs' claims on the basis that this Court lacks personal jurisdiction over defendants Doe and Heuser in the Lead case and defendants Solis, Brown, and Sheehan in the Member case. In support of these motions, the defendants seemingly rely upon the standards set out in International Shoe Co. v. State of Washington, 326 U.S. 310 (1945), by arguing that it would offend traditional notions of fair play and substantial justice to hale these particular defendants into the present forum.[9] The defendants claim that any contacts these defendants had with the state of Tennessee “was at most random, fortuitous, and attenuated and does not rise to the level of the [sic] purposeful availment.” [Lead case, doc. 21 at PageID # 142 and Member case, doc. 22 at PageID # 147].

         The plaintiffs respond to the defendants' personal jurisdiction argument, citing Burger King Corp. v. Redzewicz, 471 U.S. 462, 475 (1985) and World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286 (1980) as the standard for determining this Court's jurisdiction over defendants Doe and Heuser in the Lead case and defendants Solis, Brown, and Sheehan in the Member case. The plaintiffs assert that these defendants have “personally availed themselves to the jurisdiction of this court by engaging in the practice of law within this state.” [Lead case, doc. 27 at PageID # 222 and Member case, doc. 23 at PageID # 164].

         All parties agree that both of these cases are related to proceedings filed under Chapter 11 of the United States Code.[10] The Federal Rules of Bankruptcy Procedure govern the procedure in cases arising under title 11 of the United States Code. See Fed. R. Bankr. P. 1001. This case is considered an adversary proceeding under the Federal Rules of Bankruptcy Procedure because it is a “proceeding to recover money or property”; such proceedings are “governed by the rules of [] Part VII” of the Federal Rules of Bankruptcy Procedure. See Fed. R. Bankr. P. 7001. These rules were designed to govern the procedural aspects of litigation involving bankruptcy related matters, and are based on the premise that, to the extent possible, practice before the bankruptcy courts and the district courts should be relatively the same.[11]

         Federal Rule of Bankruptcy Procedure 7004 provides that

[i]f the exercise of jurisdiction is consistent with the Constitution and laws of the United States, serving a summons or filing a waiver of service in accordance with this rule or the subdivisions of Rule 4 F.R.Civ.P. made applicable by these rules is effective to establish personal jurisdiction over the person of any defendant with respect to a case under the Code or a civil proceeding arising under the Code, or arising in or related to a case under the Code.

Fed. R. Bankr. P. 7004(f). In essence, personal jurisdiction under this Rule is a three-part test: (1) the defendant must be properly served pursuant to this Rule; (2) the case is one under the Bankruptcy Code, or is a civil proceeding arising under the Bankruptcy Code or arising in or related to a case under the Bankruptcy Code; and (3) the exercise of jurisdiction is consistent with the Constitution and laws of the United States.

         Contrary to the parties' assertions, this Court's exercise of personal jurisdiction over these defendants is not subject to the standards set out in International Shoe, because this Court is not sitting in diversity.[12] Rather, as stated above and as agreed by both parties, [13] this Court has retained jurisdiction over these cases in accordance with its original subject matter jurisdiction over any and all proceedings arising in or related to a case under title 11 of the United States Code, pursuant to 28 U.S.C. § 1334(b).

         In adversary proceedings, Federal Rule of Bankruptcy Procedure 7004 authorizes personal service of “[t]he summons and complaint and all other process except a subpoena . . . anywhere in the United States.” Fed.R.Bankr.P. 7004(d). The Sixth Circuit has repeatedly held that, when Congress provides for service of process beyond the territorial limits of the state in which the district court sits-such as a federal statute which provides for nationwide service of process-the strictures of International Shoe do not apply. See Haile v. Henderson Nat'l Bank, 657 F.2d 816, 824, 826 (6th Cir. 1981); United Liberty Life Ins. Co. v. Ryan, 985 F.2d 1320, 1330 (6th Cir. 1993). Rather, in these instances, “the question becomes whether the party has sufficient contacts with the United States, not any particular state.” United Liberty Life Ins. Co., 985 F.2d at 1330 (6th Cir. 1993) (emphasis added) (quoting Haile, 657 F.2d at 824, 826). Therefore, an exclusive inquiry into the defendants' contacts with the forum state-Tennessee-is inapposite.

         Having set out the correct legal standard for this Court's exercise of personal jurisdiction over these particular defendants, the Court now turns to the facts of these cases to determine whether such an exercise would be proper.

         Personal Jurisdiction Over Defendants Doe, Heuser, Solis, Brown, and Sheehan

         As to the first requirement, the record reflects that both Doe and Heuser were served process in this matter via personal service in the Lead case. See [Lead case, docs. 11 and 12]. In the Member case, defendants Solis, Brown, and Sheehan were all served process via personal service as well. See [Member case, docs. 11, 12, and 13]. Federal Rule of Civil Procedure 4, incorporated by Rule 7004 of the Federal Rules of Bankruptcy Procedure, allows for service to be made by delivering a copy of the summons and the complaint to the individual personally. Fed.R.Civ.P. 4(e). The affidavits included in docket entries 11 and 12 in the Lead case and entries 11, 12, and 13 in the Member case show that Doe, Heuser, Solis, Brown, and Sheehan were properly served process, and the defendants have not argued otherwise.[14] Given the record before the Court and the failure of the defendants to challenge the sufficiency of process or service of process in their motions to dismiss, the Court concludes that service of process was sufficient for all of these named defendants, and therefore part one of the test for personal jurisdiction is satisfied in both cases.

         The second requirement has been discussed above. All parties agree that both of these lawsuits are related to a case brought under the Bankruptcy Code.[15] Therefore, the Court finds the second part of the personal jurisdiction test satisfied as to both cases as well.

         Regarding the third requirement, any relevance that the defendants' minimum contacts argument may have to the question of personal jurisdiction would arise at this juncture. While the Court recognizes that if it were sitting in diversity, the facts relied upon by the plaintiffs in holding personal jurisdiction over these defendants may have presented a close call, the parties have not provided-nor has the Court found-any statutory or Constitutional impediments to this Court's exercise of personal jurisdiction over these defendants in these cases. As previously identified above, when nationwide service of process is authorized by a federal statute, this Court looks to the minimum contacts the defendants have with the United States as a whole. See Med. Mut. of Ohio v. deSoto, 245 F.3d at 567-68. Without question, Doe, Heuser, Solis, Brown, and Sheehan have sufficient minimum contacts with the United States. The defendants concede that Doe, Heuser, Solis, Brown, and Sheehan live and work in the state of Illinois. See [Lead case, doc. 21 at PageID # 140 and Member case, doc. 22 at PageID # 145]. The Court finds that such facts are indisputably sufficient to constitute minimum contacts with the United States. Therefore, an exercise of jurisdiction over these defendants would be consistent with the Constitution and laws of the United States. The third requirement of the personal jurisdiction test is satisfied as to all of these particular defendants.

         Having found that all of these defendants were properly served, that these cases are related to proceedings brought under Title 11 of the United States Code, and that the exercise of jurisdiction would not be inconsistent with the Constitution or any laws of the United States, the Court concludes that it has personal jurisdiction over defendants Doe, Heuser, Solis, Brown, and Sheehan. Therefore, the defendants' motion to dismiss all claims against these defendants for lack of personal jurisdiction will be DENIED.

         B. Rule 12(B)(6)/FAILURE TO STATE A CLAIM

         Additionally, the defendants argue that the plaintiffs' claims should be dismissed for failure to state a claim. Dismissal pursuant to Federal Rule of Civil Procedure 12(b)(6) eliminates a pleading or portion thereof that fails to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). Moreover, Federal Rule of Civil Procedure 8(a)(2) requires the complaint to contain a “short plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). A motion to dismiss under Rule 12(b)(6) requires the Court to construe the allegations in the complaint in the light most favorable to the plaintiff and accept all of the complaint's factual allegations as true. Meador v. Cabinet for Human Res., 902 F.2d 474, 475 (6th Cir. 1990). The Court may not grant a motion to dismiss based upon a disbelief of a complaint's factual allegations. See Lawler v. Marshall, 898 F.2d 1196, 1199 (6th Cir. 1995). However, the plaintiff must allege facts that, if accepted as true, are sufficient “to raise a right to relief above the speculative level, ” and to “state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 570 (2007); see also Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

         The defendants argue that the complaints fail the pleading standard set out above, and therefore must be dismissed. To begin with, the defendants assert that the complaints fail to allege any facts which would establish that the plaintiffs suffered any loss as a result of the defendants' actions; without such a showing of loss, they argue, all of the claims within the complaints are substantively insufficient. Further, the defendants assert that the complaints do not allege sufficient facts to state claims of unauthorized practice of law against the staff employees or attorneys of UpRight Law. Additionally, the defendants argue that the claims for negligence per se are insufficient because (1) the statute upon which the claims are predicated cannot support negligence per se claims; (2) the fees were disgorged so the plaintiffs have not suffered any injury; and (3) the facts set out in the complaints fail to establish that the named defendants violated the cited statute. Regarding the professional negligence claims, the defendants assert that the plaintiffs have failed to identify any damage resulting from any actions of the defendants, and that even if there is damage, there is no showing that defendants breached the standard of professional care. The defendants also argue that the negligence per se and professional negligence claims are barred by the statute of limitations.

         The Lead case outlines a fourth cause of action for fraud. The defendants in the Lead case also assert that the fraud allegations are insufficient because the complaint does not allege any facts showing intent to defraud, does not satisfy the particularity requirement of pleading, and, in any event, does not allege facts establishing that the plaintiff suffered any damages as a result of the defendants' actions.

         The plaintiffs respond to the defendants' motions, arguing that the complaints sufficiently state viable causes of action against the defendants. First, the plaintiffs argue that the phone calls at issue in the complaints sufficiently show that the representations made by the defendants constituted the unauthorized practice of law. Further, the plaintiffs argue that the defendants' refund of the fees does not absolve them from liability as to their unauthorized practice of law claims, and that they have sufficiently alleged actual damages resulting from the defendants' conduct. Additionally, the plaintiffs argue that the negligence per se claims and the legal malpractice claims are all sufficiently pleaded and are not time barred by any statute of limitations. The plaintiff of the Lead case asserts that the claim for fraud is sufficiently pleaded, and therefore should not be dismissed.

         1. Count One: Unauthorized Practice of Law

         Both plaintiffs assert that each of the defendants individually engaged in activity which constitutes the unauthorized practice of law (“UPL”). Such activities are prohibited by Tennessee law. See Tenn. Code Ann. § 23-3-101, et seq. Tennessee provides a private cause of action for “[a]ny person who suffers a loss of money or property, real, personal or mixed, or any other article, commodity or thing of value wherever situated, as a result of an action or conduct by any person that is declared to be unlawful under § 23-3-103, § 23-3-104 or § 23-3-108.” Tenn. Code Ann. § 23-3-112(a)(1).

         Tennessee Code Annotated § 23-3-103 provides in pertinent part:

(a) No. person shall engage in the practice of law or do law business, or both… unless the person has been duly licensed and while the person's license is in full force and effect, nor shall any association or corporation engage in the practice of the law or do law business, or both. However, nonresident attorneys associated with attorneys in this state in any case pending in this state who do not practice regularly in this state shall be allowed, as a matter of courtesy, to appear in the case in which they may be thus employed without procuring a license, if property authorized in accordance with applicable rules of court, and when introduced to the court by a member in good standing of the Tennessee bar, if all the courts of the resident state of the nonresident attorney grant a similar courtesy to attorneys licensed in this state.

Tenn. Code Ann. § 23-3-103(a). The statute defines “practice of law” as:

the appearance as an advocate in a representative capacity or the drawing of papers, pleadings or documents or the performance of any act in such capacity in connection with proceedings pending or prospective before any court, commissioner, or referee or anybody, board, committee or commission constituted by law or having authority to settle ...

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