U. S. Trustee v. Darren Delafield

57 F.4th 414

• Court: Court of Appeals for the Fourth Circuit
• Decided: January 11, 2023
• Docket: 21-1632
• Status: Published

Opinion

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PUBLISHED

UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT

No. 21-1632

U. S. TRUSTEE,

Plaintiff – Appellee,

v.

DARREN THOMAS DELAFIELD,

Defendant – Appellant,

and

UPRIGHT LAW, LLC; LAW SOLUTIONS CHICAGO, LLC; JASON ROYCE ALLEN; KEVIN CHERN; EDMUND SCANLAN; SPERRO, LLC; JOHN CARTER MORGAN, JR., PLLC; JOHN C. MORGAN,

Defendants,

ANDRIAN SHANNON WILLIAMS; TIMOTHY JAMES WILLIAMS, JR.,

Respondents.

Appeal from the United States District Court for the Western District of Virginia, at Roanoke. Michael F. Urbanski, Chief District Judge. (7:20-cv-00714-MFU)

Argued: October 25, 2022 Decided: January 11, 2023

Before KING and QUATTLEBAUM, Circuit Judges, and M. Hannah LAUCK, United States District Judge for the Eastern District of Virginia, sitting by designation. USCA4 Appeal: 21-1632 Doc: 37 Filed: 01/11/2023 Pg: 2 of 12

Affirmed by published opinion. Judge Quattlebaum wrote the opinion, in which Judge King and Judge Lauck join. Judge King wrote a concurring opinion.

ARGUED: Darren Thomas Delafield, LAW OFFICE OF DARREN DELAFIELD, PC, Roanoke, Virginia, for Appellant. Sumi Kay Sakata, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee. ON BRIEF: Ramona D. Elliott, Deputy Director/General Counsel, P. Matthew Sutko, Associate General Counsel, Executive Office for United States Trustees, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C.; John P. Fitzgerald III, Acting United States Trustee, Region 4, Margaret K. Garber, Assistant United States Trustee, W. Joel Charboneau, OFFICE OF THE UNITED STATES TRUSTEE, Roanoke, Virginia, for Appellee.

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QUATTLEBAUM, Circuit Judge:

A bankruptcy court imposed sanctions against Darren Thomas Delafield. After the

district court affirmed those sanctions, Delafield appealed, asserting the sanctions order

violated his due process rights. To be sure, a lawyer facing suspension or disbarment is

entitled to notice of the charges for which such discipline is sought and an opportunity to

be heard on those issues. Nell v. United States, 450 F.2d 1090, 1093 (4th Cir. 1971). But

our review of the record reveals that Delafield was afforded sufficient process. Thus, we

affirm.

I.

The sanctions arose from an adversary proceeding in the bankruptcy court brought

by the United States Trustee against Delafield, UpRight Law LLC, Sperro LLC and other

defendants. J.A. 1. UpRight is a Chicago-based bankruptcy legal services company that

operates through a nationwide network of “local partners.” J.A. 679–80. After Delafield

signed a partnership agreement with UpRight, he filed more than 30 bankruptcy cases as a

partner. J.A. 682–83.

The United States Trustee’s complaint sought sanctions for Delafield’s

representation of UpRight clients Timothy and Andrian Williams. J.A. 691. The Trustee

alleged the Williamses participated in Upright’s New Car Custody Program (“NCCP”).

UpRight operated the NCCP through a partnership with Sperro, a separate company in the

repossession industry. J.A. 7–9. Through the program, UpRight purported to assist clients

that needed to surrender possession of their cars by offering Sperro’s services. But in

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practice, UpRight actually just funneled bankruptcy clients to Sperro. Then, Sperro, for no

legitimate reason other than to generate profits for itself, took custody of debtors’ cars and

towed them to lots in Nevada, Mississippi or Indiana—where mechanic’s liens or storage

liens can trump first liens in certain circumstances. 1 J.A. 687.

Sperro earned money in one of two ways. First, it charged “excessive hookup,

towing and storage fees that[, according to the bankruptcy court,] were completely

unnecessary.” J.A. 687. Second, sometimes creditors abandoned their interests in the car

rather than pay the excessive fees to recover the car. In those situations, Sperro auctioned

the car and retained the proceeds. Id.

In exchange for funneling bankruptcy clients into the NCCP, Sperro paid UpRight’s

clients’ attorney’s and filing fees. So UpRight’s fees were paid by a company that

fraudulently generated towing charges and paid them by forcing the sale of cars at the

expense of the lenders who held the first liens.

1 To understand first liens on vehicles, assume John Smith wants to buy a car. The car costs $10,000 but Smith only has $5,000. Smith borrows $5,000 from ABC Finance. So, Smith uses his $5,000 and the $5,000 he borrowed from ABC Finance to buy the car. Smith agrees to pay back ABC Finance over time. ABC Finance can complete paperwork that gives it a “first lien” on the car that Smith buys. That allows ABC Finance, if Smith does not repay the loan, to repossess the car and sell it to recover the money it loaned.

As for mechanic’s and storage liens, assume the car that ABC Finance loaned Smith money to buy breaks down and needs to be towed. XYZ Towing agrees to tow it. But, if Smith cannot pay the tow bill, XYZ Towing can assert a lien to cover the costs of what it is owed for towing the car. That allows it to force the car to be sold to pay the towing bill. But even though XYZ Towing can force a sale of the car, ABC Finance, which has the first lien, gets paid first. And many times, the vehicle is not worth enough to pay back ABC Finance, much less XYZ Towing. But in Nevada, Mississippi or Indiana, things work differently. In those states, mechanic’s and storage liens, depending on the circumstances, can force the sale of the car without a judicial determination that first liens are paid first. 4 USCA4 Appeal: 21-1632 Doc: 37 Filed: 01/11/2023 Pg: 5 of 12

The United States Trustee’s complaint alleged Delafield learned about the NCCP

through an email from UpRight. J.A. 7. The email provided that for debtors to qualify for

the program, they must want to file for Chapter 7 bankruptcy and have a vehicle,

motorcycle, boat, truck or other property—with no equity and a value more than $5,000—

that they are willing to surrender. Id. The email also stated that “[i]mmediately upon

placing the vehicle in Sperro’s custody, Sperro will remit the entire legal fee plus filing fee

to UpRight Law on client’s behalf.” Id.

The complaint alleged that Delafield filed the Williamses’ Chapter 7 bankruptcy

petition after he learned of the NCCP and their participation in the program. J.A. 7, 15, 17–

18. It asserted that when asked about the NCCP at the Williamses’ meeting of creditors,

Delafield explained that Sperro paid the Williamses’ legal fees, denied knowledge of why

it did so and deflected questions about the NCCP. J.A. 16.

The complaint alleged that Delafield’s participation in the NCCP amounted to

unethical and illegal conduct. J.A. 19. It cited the provisions of the Bankruptcy Code

Delafield allegedly violated. J.A. 18–22. And among other sanctions, it sought a minimum

of $5,000 in civil penalties from Delafield and an order prohibiting him from practicing

before the bankruptcy court. J.A. 21.

Ultimately, the bankruptcy court held a four-day trial. 2 J.A. 669. In addition to

information about the NCCP, the United States Trustee introduced evidence about

2 The trial involved claims against Delafield, UpRight and other individual defendants. While Sperro was a named defendant, it did not file a response or appear in the action. J.A. 669. 5 USCA4 Appeal: 21-1632 Doc: 37 Filed: 01/11/2023 Pg: 6 of 12

UpRight’s practices for onboarding clients. When a potential client reached out to UpRight,

its “client consultants” were encouraged to use hard sell tactics, as documented in

UpRight’s “Sales Play Book.” J.A. 673–74. For example, the Sales Play Book

recommended the following responses if a potential client said “I need to talk to my

Wife/Husband”: “I agree, and you should, but if your husband/wife is anything like mine,

he/she never tells me no when I really need or love something, and I never tell him/her no”

or “[b]etter to ask for forgiveness than ask for permission, so let’s get you going right

away.” J.A. 673. The Sales Play Book also advised consultants to make “now or never”

offers. J.A. 673. The complaint alleged—and the bankruptcy court confirmed—that

nonlawyer client consultants provided potential clients with legal advice, despite

UpRight’s instruction that they should not do so. J.A. 9, 674.

The United States Trustee also introduced evidence about Delafield’s conduct once

a conflict of interest arose between the Williamses and UpRight. The conflict arose when

the United States Trustee issued subpoenas to the Williamses. J.A. 697. The United States

Trustee introduced evidence that UpRight, through another of its attorneys, “used heavy

handed tactics, including text messages, to try and get the Williamses to sign conflict

waivers.” J.A. 697. These waivers could have allowed UpRight to assert the attorney-client

privilege on behalf of the Williamses and shielded UpRight’s files from discovery. J.A.

697. The United States Trustee introduced evidence that Mr. Williams called the Trustee

and advised he “did not want to sign [a conflict waiver];” that Upright also sent the

Williamses a conflict waiver letter suggesting that the Williamses’ discharge might be at

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issue; and that Mr. Williams said Delafield told him that “if [he] did not sign the [conflict]

waiver that he would be solely looking out for himself only.” J.A. 698.

Following the trial, the bankruptcy court ordered Delafield to pay $5,000 to the

Williamses and revoked his privileges to practice before the bankruptcy court for one year.

J.A. 669, 726. The bankruptcy court sanctioned Delafield for his relationship to UpRight’s

NCCP and its client onboarding practices. The bankruptcy court determined that the

purpose of the NCCP was to “prime secured lenders” and “hold their collateral hostage,”

with UpRight and Sperro benefitting from the lenders’ losses. J.A. 687. The court further

found that UpRight’s client consultants “engaged in numerous instances of providing

impermissible legal advice to potential clients, albeit alleged violations of Upright’s

policies, and some of it was just outright wrong, such as advising clients to hide collateral

or leave certain debts off their schedules.” J.A. 725. The court noted consultants’

“overreaching conduct is not surprising[,]” given the “pressure to hit sales and commission

targets.” Id.

The bankruptcy court also found that Delafield violated Virginia Rules of

Professional Conduct 5.1 and 5.3. J.A. 723–24. The court recognized that Delafield did not

design or implement the NCCP program. Nor did he himself engage in UpRight’s unsavory

onboarding practices. But the court held that under Rule 5.1(c)(1), a lawyer is responsible

for another lawyer’s conduct if he “orders or, with knowledge of the specific conduct,

ratifies the conduct involved[.]” Va. Rule of Prof. Conduct 5.1(c)(1). Because Delafield

filed the Williamses’ case with knowledge that they had participated in the NCCP and

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knowledge of how the NCCP worked, the bankruptcy court found that he ratified the

conduct in violation of Rule 5.1(c)(1). J.A. 724.

Further, the bankruptcy court noted that Delafield “professed ignorance about much

of what the sales people did 3 and how the cases were handled in Chicago.” J.A. 725–26.

Despite that, citing Rule 5.3, 4 the court concluded that Delafield “should have known more

about all of these matters.” J.A. 726.

In addition to UpRight’s conduct, the bankruptcy court cited Delafield’s individual

actions in the Williamses’ case as a basis for sanctions. Namely, the court found that he

“attempted to deflect any questions regarding [the NCCP] by the Trustee and [creditor’s]

counsel to an unidentified ‘senior attorney’ at UpRight for further explanation, professing

ignorance as to the relationship between Sperro and UpRight.” J.A. 692. The court found

such statements were “less than forthcoming.” J.A. 723. It also found that Delafield filed

an amendment to the Williamses’ bankruptcy petition without obtaining a wet signature or

their permission. J.A. 723. And the court found that Delafield acted inappropriately “when

it appeared he had a conflict of interest when the [NCCP] came to light . . . .” J.A. 723.

3 For example, one UpRight salesperson advised the Williamses to keep their car hidden from their creditor until Sperro could pick it up. J.A. 690. 4 Rule 5.3(a) requires a “partner or lawyer who individually or together with other lawyers possesses managerial authority in a law firm shall make reasonable efforts to ensure that the firm has in effect measures giving reasonable assurance that the person’s conduct is compatible with the professional obligations of the lawyer.” 8 USCA4 Appeal: 21-1632 Doc: 37 Filed: 01/11/2023 Pg: 9 of 12

II.

Delafield claims the bankruptcy court’s sanctions order, which the district court

affirmed, violated his due process rights. 5 Whether a litigant was afforded due process is a

legal question that is reviewed de novo. Kirk v. Comm’r of Soc. Sec. Admin., 987 F.3d 314,

320 (4th Cir. 2021). Delafield asserts that the bankruptcy court imposed sanctions “for

which no advance notice was given, and for which an incomplete hearing was held.”

Appellant Op. Br. 32. In advancing this argument, he contends the United States Trustee’s

complaint was deficient. More specifically, he argues that the bankruptcy court sanctioned

him for violating the Virginia Rules of Professional Responsibility, which were not

identified in the complaint, and for attempting to convince the Williamses to waive any

conflict of interest, which is post-complaint conduct that was never added through an

amended complaint. He also argues that, as a “shotgun” pleading, the complaint provided

him insufficient detail to allow him to prepare a defense. Appellant Op. Br. 35–36.

Delafield’s arguments on appeal implicate our decision in Nell v. United States, 450

F.2d 1090 (4th Cir. 1971). There, the complaint against a lawyer who was suspended only

provided notice “that a proceeding of some kind was to be held” and that there were

concerns of lawyer misconduct. Id. at 1093. Also, the only relief sought in that complaint

5 Delafield also complains that the order is not supported by the record. “In reviewing the judgment of a district court sitting in review of a bankruptcy court, . . . we review the bankruptcy court’s legal conclusions de novo, its factual findings for clear error, and any discretionary decisions for abuse of discretion.” Copley v. United States, 959 F.3d 118, 121 (4th Cir. 2020). Our review of the record reveals no error in the bankruptcy court’s factual findings, nor do we find that the bankruptcy court abused its discretion in sanctioning Delafield.

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was reopening of the judgment in the underlying case. Id. It did not indicate that the

proceedings would be expanded to include disciplinary proceedings. Id. Thus, the lawyer

in Nell was unaware he was facing suspension until the hearing actually occurred. Id. We

explained that due process “requires that disbarment or suspension proceedings be

preceded by adequate notice and an opportunity to prepare a defense.” Id. And we held the

lawyer in Nell was not afforded sufficient due process. Id.

Under Nell, Delafield was entitled to “notice and an opportunity to prepare a

defense.” Id. But unlike the lawyer there, Delafield received both notice and the

opportunity to prepare. The United States Trustee’s complaint provided detailed and

specific allegations of misconduct against Delafield, his law firm and his fellow partners

related to the NCCP. The complaint also specified the provisions of the Bankruptcy Code

that the Trustee alleged Delafield violated. And it accused Delafield of illegal and unethical

conduct regarding the NCCP. Finally, the complaint identified the exact sanctions that were

ultimately imposed against Delafield: a $5,000 fine and disbarment. True, as Delafield

notes, the complaint did not cite to the Virginia Rules of Professional Conduct that

Delafield was ultimately found to have violated. Identifying such rules is certainly

preferred in an action seeking suspension or disbarment. But this omission did not violate

Delafield’s due process rights. The complaint adequately notified Delafield of the conduct

for which he was being accused and the sanctions that were being sought.

Additionally, Delafield received an opportunity to prepare and present a defense.

He was afforded the opportunity to conduct discovery before trial. Then, at trial, Delafield

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presented evidence, cross-examined witnesses called by the United States Trustee and

made arguments before the bankruptcy court.

We are also unconvinced by Delafield’s claim that the bankruptcy court should have

ignored his post-complaint conduct in seeking conflict of interest waivers from the

Williamses. The bankruptcy court found the evidence related to the NCCP. The court

explained that it admitted and considered evidence of Delafield’s post-complaint

misconduct to rebut his arguments that he had taken corrective action after his initial

misconduct concerning the NCCP. J.A. 492–93. It found that obtaining waivers allowed

Delafield to assert the attorney client privilege to conceal information about the NCCP. Id.

Thus, the post-complaint conduct showed that, instead of correcting matters, Delafield

continued his misconduct related to the NCCP. Finally, Delafield was given the

opportunity to respond to the post-complaint conduct issues through his direct testimony

and post-complaint briefing. 6

For the foregoing reasons, we conclude that Delafield was afforded adequate due

process and we affirm the district court’s order.

AFFIRMED

6 Delafield also asserts that the $5,000 sanction imposed was criminal in nature, and that he was not given notice that any criminal sanction was to be sought. However, we find this argument unpersuasive, given that the sanction was designed to promote deterrence and compensate the Williamses. See In re Dyer, 322 F.3d 1178, 1192 (9th Cir. 2003) (holding penalties designed to coerce compliance are civil in nature). The bankruptcy court noted that Delafield had “a past disciplinary history . . . specifically designed to correct past practice deficiencies” and that it believed “lesser discipline would not be effective” here. J.A. 726. 11 USCA4 Appeal: 21-1632 Doc: 37 Filed: 01/11/2023 Pg: 12 of 12

KING, Circuit Judge, concurring:

I unreservedly concur in Judge Quattlebaum’s excellent opinion, which correctly

disposes of the issues presented here. I write separately to emphasize a salient point: a

legal precedent’s vitality is not determined solely by its age. Put most simply, even “old

law” — here, our 1971 decision in Nell v. United States, 450 F.2d 1090 (4th Cir. 1971) —

can be good law.

More than 50 years later, the principles enunciated in Nell not only remain

controlling, they make good sense. Writing for our Court, Chief Judge Haynsworth

explained that, in connection with lawyer sanctions, “[d]ue process . . . requires that [such]

proceedings be preceded by adequate notice and an opportunity to prepare a defense.” See

Nell, 450 F.2d at 1093. Those venerable principles constitute the heart of “due process” in

our American legal system.

Against this backdrop, my friend Judge Quattlebaum’s opinion aptly recognizes that

the Nell principles are applicable in situations like this. Surprisingly, in all the proceedings

underlying this appeal, the Nell decision was relegated to obscurity — neither the lawyers

nor the courts acknowledged its existence. * By Judge Quattlebaum’s opinion, we correct

that oversight. Perhaps this correction can serve as an important reminder: decades-old

precedent can be pertinent and controlling.

With great respect, I am honored to concur.

* The Nell decision was not mentioned in the lower courts or in the appellate briefs. It was, however, pointed out to the appellate lawyers by our panel prior to oral argument.