Reznick v. UST (In re DA & AR Hospice Care, Inc.) 2023 WL 6939858 (9th Cir. BAP 10/20/23)

The following is a case update written by Hale Andrew Antico, Chief Counsel of Antico Law Firm, analyzing Reznick v. UST (In re DA & AR Hospice Care, Inc.), 2023 WL 6939858, a recent case of interest:

SUMMARY

In Reznick v. UST (In re DA & AR Hospice Care, Inc.) 2023 WL 6939858 (9th Cir. BAP 10/20/23), the Bankruptcy Appellate Panel for the Ninth Circuit (“BAP”) held that debtor’s attorney in a corporate Chapter 11 case filed the bankruptcy in bad faith, committed fraud on the court, and violated Rule 11.

To view the opinion, click here.

FACTS

At its core, this is a power struggle over corporate control which led an attorney into the deep waters of Rule 9011 and sanctions from a disciplinary panel.

This tale of corporate intrigue gone very wrong involves a company named NobleQuest Health Foundation, Inc. with an affiliated hospice named DA & AR Hospice Care, Inc (“Hospice”). Ailene Rivera sat on the boards of both companies: NobleQuest and Hospice.

Enter Michael Reznick, an attorney retained by NobleQuest, but seemingly with his eyes on Hospice. In late 2021, Reznick placed Rivera on administrative leave, and via other entities represented by Reznick, sued her for fraud and embezzlement. In December 2021, Reznick filed a Chapter 11 petition on behalf of NobleQuest. The bankruptcy was dismissed for incomplete schedules.

Also that December, Reznick filed a Chapter 11 bankruptcy for the real plum – Hospice – and signed the petition as its attorney. In that same petition, a Dr. Hargrove-Brown signed the petition as its President.  This skeletal petition was also deficient and headed for dismissal.

Before the deadline to cure or face dismissal for the Hospice bankruptcy, it just so happened that the case had a scheduled 341(a) meeting. Both Reznick and Hargrove-Brown appeared for the debtor, and both made damning statements at the 341(a) that indicated they were not knowledgeable about Hospice or its operations.  About a week later, the Hospice case was also dismissed for failure to cure the deficiencies. Reznick’s problems were just beginning. 

The United States Trustee (UST) filed an Order to Show Cause (“OSC”) directed at both Reznick and Hargrove-Brown. In it, they were asked to explain why the Hospice bankruptcy wasn’t a bad faith filing, why Reznick shouldn’t be referred to a disciplinary panel for filing a fraudulent case, and other directives.

The UST pointed to, in part, the inability of both Reznick and Hargrove-Brown to explain even the most basic facts about the Hospice business at its 341(a), and the testimony and re-emergence of the embattled board member and state court defendant Ms. Rivera.

The scorned Rivera provided to the UST the Hospice business records, corporate documents, and a declaration to the UST that she was president of Hospice and owned 50% of its stock.

Seizing upon the evidence, the UST argued to the bankruptcy court that Reznick should be referred to a bankruptcy disciplinary panel under Local Bankruptcy Rule 2090-2(b) for initiating fraudulent bankruptcy cases, and the UST invoked Rule 9011 for sanctions.

In response, Reznick provided evidence of many things and presented multiple theories of defense, and attempted to discredit Rivera, but ignored the UST’s assertions that he knew he didn’t have authority to file the petition.

Hargrove-Brown then flipped on Reznick. Hargrove-Brown stated in her declaration that she was led to believe that the NobleQuest board voted to merge its constellation of companies, including Hospice, and that she was the President of the new consolidated entity. She then provided a post petition April 2022 email between her and Reznick in which Reznick admits multiple times that he did not know even the most basic information about Hospice.

The bankruptcy court had heard enough. It found that Reznick lacked an objectively reasonable basis for believing that Hargrove-Brown, and not Rivera, was the authorized representative of Hospice.  It further found he lacked an objectively reasonable basis that he himself was authorized to file the petition. It then ruled that Reznick violated Rule 9011 and committed fraud on the court. The court referred him to a disciplinary panel, which agreed with the bankruptcy court’s recommendations.

Reznick appealed the bankruptcy court’s OSC order. The BAP affirmed.

REASONING

The BAP noted that Reznick focused his appeal on what it called irrelevant and meritless arguments. He targeted Ms. Rivera, and he tried to raise new arguments on appeal. The BAP dismissed these points before getting to the heart of the case: the Reznick wrongdoing. 

Rule 9011

Rule 9011(b), as summarized by the BAP, states that when attorneys sign a bankruptcy petition, they are certifying they’ve conducted a reasonable inquiry, that the petition isn’t being presented for an improper purpose, and that it has a sufficient basis in law and fact. The BAP noted that “[a]n attorney who presents a petition without proper authorization by the debtor violates this rule.” Winterton v. Humitech of N. Cal., LLC (In re Blue Pine Grp., Inc.), 457 B.R. 64, 77 (9th Cir BAP, 2011).  Id. At *11.  

The BAP continued: “We need only decide whether Mr. Reznick had authority to file the bankruptcy petition on behalf of the Hospice.” Id. at *9. 

By signing the Hospice petition, Reznick certified he had undertaken reasonable inquiry on a number of items, which were later contradicted by Reznick’s admission he failed to perform due diligence on all of those same items.  In fact, the BAP found that Reznick admitted that he failed to perform due diligence to verify who had authority to sign the petition, did not know who owned or controlled the Hospice, and knew the information he had been given did not “pass the smell test.”  Id. At *11.  His signature on the petition and ongoing fighting for the viability of the petition was determined to be a violation of Rule 9011.

Fraud on the court

In reviewing the standard for fraud on the court, the BAP referred to the Ninth Circuit Court of Appeals in United States v. Sierra Pac. Indus., Inc., 862 F.3d 1157 (9th Cir, 2017). There, the BAP noted: “When considering fraud on the court, we must determine ‘whether it harmed the integrity of the judicial process. Fraud on the court must be an intentional, material misrepresentation. Thus, fraud on the court must involve an unconscionable plan or scheme which is designed to improperly influence the court in its decision.’ ” Id. at 1167-68.

Applying that rule, the BAP commented on the bankruptcy court’s finding that Reznick had no authority to file the bankruptcy petition. Further, it referred to the bankruptcy court’s finding that Reznick admitted he could not prove who owned the Hospice, despite being party with Hargrove-Brown signing the petition. The BAP then noted and dismissed what it called Reznick’s both irrelevant arguments and new arguments raised on appeal.

After presenting a number of factual findings, the BAP reviewed the evidence before it and concluded that the “record abundantly supports the bankruptcy court’s findings. Thus, it did not abuse its discretion when it determined that Mr. Reznick had committed fraud on the court and made false representations.”

AUTHOR’S COMMENTS

It is easy to dismiss this fact-specific tale of woe as something that really doesn’t concern the average practitioner. However, there are lessons here that can serve as warnings that letting our guards down or standards slip can have disastrous consequences.

It’s a good reminder for all attorneys signing petitions, proofs of claim, or pleadings that Rule 9011 carries obligations of due diligence. Things may seem routine or so similar to other situations that it may result in cutting corners, doing something “good enough,” with the result of missing major issues.

Further, we are to be zealous advocates for our clients, but that has limits. It’s useful to keep in mind that, as officers of the court, we are required to be truthful in our representations to the court. Judgment can be clouded when a dispute starts to get overheated and personal, or when it seems the control or fate of an entire corporation are at stake.  When a practitioner fails one of these obligations, it’s best to immediately remedy the error. As we see from this cautionary tale, the wrong thing to do is deny it, hide it, deflect from it, or make further misrepresentations to protect the initial miscues. That path of destruction can result in sanctions and disciplinary action. It hurts the attorney, other parties, the court, and ultimately the fair and effective administration of justice. Finally, this decision relied on application of well-settled Ninth Circuit law, as applied to the specific facts of this case. The BAP decision has not been appealed and is likely now final. 

These materials were written by Hale Andrew Antico, Chief Counsel of Antico Law Firm, representing consumer debtors in the Central District of California, and President of the Central District Consumer Bankruptcy Attorneys Association, with editorial contributions from ILC member Kathleen A. Cashman-Kramer, Of Counsel, Sullivan Hill Rez & Engel APLC.