SO ORDERED. SIGNED August 29, 2018. ROBERT SUNMERHAYS UNITED STATES BANKRUPTCY JUL UNITED STATES BANKRUPTCY COURT WESTERN DISTRICT OF LOUISIANA LAKE CHARLES DIVISION IN RE: HENRY G. HOBBS, JR., Acting United States Trustee for Region 5, Plaintife MISCELLANEOUS PROCEEDING VERSUS No, 16-00201 CHRISTIAN D. CHESSON; CHRISTIAN D. CHESSON, {A Professional Law Corporation) , Defendants REASONS FOR DECISION ‘The United states Trustee (the “Trustee”) brought this action against Christian D. Chesson ("Chesson”) and Christian D. Chesson (A Professional Law Corporation) ("Chesson Law Offices” and, together th Chesson, “Defendants”) asserting that Defendants impersonated clients filing Chapter 13 cases during statutorily mandated pre-filing credit counseling briefings and filed false credit counseling verifications with the court. The court took the case under advisement following a trial on the merits. After considering the record and the parties’ briefs and arguments, the court rules as follows. OVERVIEW OF THE CASE The Trustee alleges that employees of Chesson Law Offices impersonated debtors during mandatory online credit counseling briefings and that Chesson and his staff knowingly filed false credit counseling verifications in at least eleven (11) Chapter 13 cases filed in the Lake Charles Division of the Western District of Louisiana from July 2014 through April 2016. The result of Defendants’ conduct, according to the Trustee, is that the debtors in these eleven cases were ineligible debtors and this fact was fraudulently concealed from the court. An individual who intends to file for relief under the Bankruptcy Code must first complete a “briefing” from an “approved budget and credit counseling agency” during the 180 days prior to filing a bankruptcy petition. 11 U-9.C, § 109(h). Section 109(h) requires that this briefing outline “the opportunities for available credit counseling,” and that it assists an individual contemplating bankruptcy to perform “a related budget analysis.” 11 U.S.C. § 109(h). An individual who does not complete thisrequirement prior to filing for relief under the Bankruptcy Code is not an eligible debtor. Id. While courts differ over whether ineligibility under this provision is jurisdictional, the consensus is that the failure to comply with this credit counseling requirement mandates dismissal of the case. See Adams v. ame. (In-re Zarnel), 619 F.3d 156, 166-71 (2% Cir. 2010) [section 109(h) is not jurisdictional); In xe Mitrano, 409 B.R. 812 (E.D. Va. 2009) (failure to comply with section 109(6) requires dismissal and a bankruptcy court-absent “extraordinary circumstances”--has no discretion to excuse non-compliance with the credit counseling requirement). Credit counseling agencies are reviewed and approved by the United States Trustee’s Office. 11 U.S.C. § 111(b). United States Trustee regulations provide that approved credit counseling services may provide the briefings required by section 109(h) in person, or by phone or internet. If provided by phone or internet, these regulations require the agency to verify the identity of the individual receiving the briefing. 28 C.F.R. § 58.20(h). For each of the eleven cases covered in the Trustee’s complaint, Defendants used Abacus Credit Counseling Agency (“Abacus”), @ Trustee approved agency. Section 521(b) of the Bankruptcy Code requires an individual debtor to file a certificate - the “Individual Debtor’s Statement of Compliance with Credit Counseling Requirement” (the “credit Counseling Verification”) - with the bankruptcy petitionattesting under penalty of perjury that the the 180 days p petition. See Official Form hibit D. The trustee contends tha’ Chesson and his staf: Credit Counseling Verifications in the following eleven cases: Trustee contends that during - July 28, 2014 through april 8, 2016 impersonated individual debtors dv ng t counseling briefings, and then prepared and filed credit counse: verifications ted that the debtors had comp: the briefing ing their cases. According to the Trustee, these debtors were n: t present when the cred t counseling briefing occurred The Trustee presented testimony m debtors in each of the eleven cases stat ng that they did not participate in a credit ‘this was the form and requirement in place when the eleven ue were filed.counseling briefing prior to Defendants filing their bankruptcy cases. The Trustee also presented testimony from Defendants’ past and present employees with respect to credit counseling. Three of Chesson’s former employees testified that they completed the credit counseling briefings for the debtors without any involvement by the debtors prior to the filing of their cases. The Trustee also introduced records from Abacus, including transcripts of the credit counseling sessions and time records for the eleven cases here. The Trustee contends that these records support the testimony of Defendants’ former employees and clients that the clients did not actually participate in the required credit counseling briefings. Defendants deny that their staff impersonated debtors in credit counseling sessions. They contend that the testimony of the former clients and former employees is not credible. They suggest that the testimony of these former clients was influenced by other lawyers who are their competitors. Defendants further contend that, even if his staff impersonated clients in these eleven cases, they were not aware of this practice and would not have condoned it. The Trustee also contends that Defendants violated 11 U.S.C. § 528{a) by not executing a written contract with their clients within five (5) business days in seven (7) of the eleven cases here and by not providing those clients with a copy of the executed andson did not completed contract. Specifically, Ches contracts in these cases. Chesson contends that his signature on eco! acts was not required for the contracts to be “fully executed” within the meaning of se on 528(a). He also contends a contract is not a material requirem that provision as required to s wpport disgorgement under 11 U $ 526(c) ( JURISDICTION The court has jurisdiction over the matters asserted in this adversary proceeding pursuant to 26 . §§1334 and 157(a). This matter is a core proceeding in which this court may enter a final order pursuant to 28 U.S.C. §157(b) (2) (I) and The following Reasons for Decision shall c institute the court’s findings of fact usions of law. OVERVIEW OF THE TRIAL RECORD A. Testimony of Former Clients. d testimony from the debtors and joint the 11 cases. A total of 15 debtors testified of the in a creditcounseling briefing from Abacus prior to the filing of their cases. (1 Trial Transcript ("Tr. Trans.”) 138, 165, 190, 199, 231, 262, 266-67, 283-85, 306-07, 331, 333-34, 347-48, 3536, 375-76, 382, 392, 396, 408-09, 411; 2 Tr. Trans. 15, 22, 45-46, 59, 194, 202). When these former clients were shown copies of the transcripts from their credit counseling sessions provided by Abacus, they testified that they did not provide any of the responses reflected nor were they present when Defendants’ employees entered those responses. (1 Te, Teans. 139-40, 165-67, 191, 193-94, 231-33, 267-69, 285-86, 307-09, 334-36, 348-51, 376, 392-93; 2 Tr. Trans. 16-18, 47-49, 194-97). Several of the briefings included an online quiz at the end of the briefing. For these sessions, the debtors testified that they did not take the quiz or input the responses reflected on the transcript. (1 Tr. Trans. 168-69, 195-96, 235-36, 309-10, 336, 351, 378, 2 Tr. Trans. 197-98). Defendants challenge the credibility of all of the former clients who testified at trial by pointing to their signed credit counseling verifications attesting that they had completed the credit counseling briefing, and also to their testimony at the Section 341 creditor meetings. Bach credit counseling verification states, above the signature line, that “I certify under penalty of perjury that the information provided above is true and correct.” (Def. Exh. 6). Each of the former clients who testified at trialsigning the verifi fons. (1 Tr. 142, 184-85, 214, 295, 328, 343, 363, 386, 402, 411; 2 Tr. Trans. 21, 37, During their Section 341 cred. x meetings, each debtor was questioned on whe! er they had read all of their bankruptcy pleadings and whether these pleadings were true and correc! Transcripts of these Section 341 meetings sho at at lea: seven £ the testifyin former clients answered this question i sees SE se ess i) EEE 216-19, 257-60; 2 Tr. Trans Def. Ex! + Nos. SA, 5B, 5D) These debtors were not, however, specifically questioned about credit counseling. Chesson contends that these false verifications and fals stimony in the Section 341 meetings undermines the edibility of the former clients who testified at tr estimony of these former ndants also contend that the clients was in @ by two bankruptcy attorneys who are ors of Che: nts’ Post-Trial Brief at 3 41) n of the former clients who testified at trial became ban WM 2c bree of the ts ptcy clients of R Lay ing former clients were laterrepresented by MMP Defendants contend that MM and MMMM ere rivals who have attempted to undermine his practice.‘ Defendants point to e-mails showing thet alleged in the communicated with the Trustee about the fact: Trustee’s complaint in this case.* 30th ME sere included on Defendants’ witness list, but were not called as witnesses at trial. Finally, Defendants challenge the credibility of several of the former client witnesses on the grounds that their testimony demonstrated a lack of recollection of relevant events,‘ that their testimony was inconsistent with what happened in their cases,’ and, in one case, a former client stated that she was unaware why her bankruptcy case was dismissed; she later admitted that it was dismissed because she had failed to file tax returns or pay sales taxes for a business.’ Defendants also point to testimony by Shellie Shortt that her bankruptcy pleadings, including the Credit (0 RRR Sas OE NA SE ag “2 Tr. Trans. 285-86, 335-36; Def. Exh. Nos. 1, ‘Def. Exh. Nos. 1, 2. 1 Tr, Trans. 143-44, 159-60, 197, 230, 239, 246, 291, 300; 2 Tr. Trans. 29-34, 63-65. 2 Tr. Trans. 338; 1 TR. Trans. 245-51; 2 TR. Trans. 178. ‘1 ar. Trans. 358, 362-63.Counseling Verification, were not fully explained to her. Defendants point to testimony by MNMMMMMco-debtor husband, il WM «Ghat the documents they signed were explained to them. (1 Tr. Trans, 400-06, 412, 422, 416). With respect to Defendants point to trial testimony with respect to signing a contract ith MINNIE and her knowledge bout the status of her social security disability application. (2 Tr. Trans. 200, 207-14) . B. Tes: ef Chesson’ s Former Em; S. The Trustee presented the testimony of four former employees of Defendants: (1) Mary Lejeune worked as a bankruptcy paralegal from October 2013 through December 2014; (2) Haleigh Turner assisted with bankruptcy cases from January 2015 through February 2016; (3) Misty Bailey assisted with bankruptcy cases for most of 2016; and (4) nd Domingue assisted with bankruptcy cases from October 2013 through January 2016. Lejeune, Turner, and Bailey all testified that they completed credit counseling briefings for clients while employed by Defendants without the clients being present. Lejeune testified that Defendants’ seni: paralegal, Karla Latour, and other employees instructed her to complete the briefings without the clients being present. Lejeune testified that she selected uniform answers to security questions that she used for 1 debtors and inputted each client’s financial 0einformation without the client being present during the Abacus briefings. (1 Tr. Trans. 57-59, 60-64). Lejeune testified that she “clicked” through the Abacus counseling sessions and participated in the online “chat sessions” used to ensure that the debtors participated in the briefings. (1 Tr. Trans, 62-64). Miss Lejeune testified that she completed credit counseling briefings without the client being present in approximately 80% of the cases that she handled. (1 Tr. Trans. 65-66). Turner and Bailey provided similar testimony about completing credit counseling briefings on behalf of clients without their participation. (1 Tr. Trans. 22-23, 27-28, 96-98, 102-09). Both testified that Carla Latour and other employees instructed them to complete the briefings for the clients without their participation. (1 Tr. Trans. 27-28, 96-98). Both also testified that they used uniform answers to the security questions. Turner testified that she completed briefings without clients present over 100 times during the period she was employed by Chesson. (1 Tr. Trans. 33-34). Bailey testified that Karla Latour instructed her to “just get it done” and “don’t take too long” with respect to the credit counseling briefings. (1 Tr. Trans. 98). Bailey testified that Latour met with the bankruptcy staff after the office was notified of an investigation of their credit counseling practices, and instructed all of the employees to require that clients be present “11+during credit counseling briefings, (1 Tr. Trans. 97-99). Bailey testified that, prior to this point, she completed briefings in approximately 80% of the cases she handled. (1 Tr. Trans. 108). The fourth former employee, Brandi Domingue, testified that credit she did not have any involvement in assisting clients with counseling until the last several months of her employment with Chesson. (2 Tr. Trans. 71-73). After that point, she was involved with exedit counseling for Chapter 7 clients, but not Chapter 13 cases, she testified that Chapter 13 credit counseling was handled by Lejeune and other employees. ‘The Trustee, however, examined ail thet she seat to [II WR =< ice of MN sone 0 the former Chapter 13 clients who testified that he did not participate Domingue on a December 2, 2014 in his credit counseling briefing. (1 Tr. Trans. 190). In this e~ nail, IE ©-mailed: “Brandi, we don’t want to miss out on any steps here. We received letters of solicitation for debtor education, (second course) that they are saying is required. Can you tell me if this is required and is [sic] so what was the first course? Thank you, (Trustee Exh, 37 at 35). Domingue responded: “We have already completed this course for you. If it is from a company called Sage, please disregard.” Id. (emphasis added) Domingue had no explanation for what she had -12-Defendants’ first challenge the credibility of these former employees on the grounds that they had admitted to suborning perjury by completing and filing falsified Credit Counseling Verifications. With respect to Lejeune, Defendants elicited testimony that she had worked as a bankruptcy paralegal before working for Defendants and was familiar with the credit counseling process. (1 Tr. Trans. 55, 68, 70-71). Lejeune testified on cross-examination that she knew the clients were signing the verification under penalty of perjury. Id. Bailey and Turner likewise conceded that they knew that clients were signing the verification under penalty of perjury. (1 Tr, Trans. 118-19, 122- 25, 50). Bailey testified that she had received an oral assurance from the U.S. Trustee that she would not be prosecuted if she agreed to testify. (1 Tr. Trans. 118-19). Bailey also testified that no such agreement was reduced to writing and that there had been no discussions to finalize any formal agreement with the Trustee in advance of her testimony. Id. Defendants also point to testimony that they argue shows inconsistencies in testimony of these former employees with respect to the extent to which attorneys met with clients and other office procedures. (1 Tr. Trans. 35-40, 76-78, 142, 170, 197, 297, 316- 17, 353-54; 2 Tr. Trans. 96, 106, 224, 233-34, 262). -13+c timony of. yn’ s Cur: loyees . Chesson’s current senior bankruptcy paralegal, Karla Latour, testified that she has worked for Chesson’s firm since 2006, and works directly with Chesson and Wade Kelly. (2 Tr, Trans. 105-6). Latour testified that Chesson’s office coordinated online credit counseling briefings. (2 Tr. Trans. 113-117). She testified that employees would sit with clients and assist them in personally completing the credit counseling briefing. (Id.). Beginning in 2013, however, Latour testified that she did not participate in any of these briefings. (Id.). She also testified that she did not train employees on credit counseling; instead, they trained each other, (Id Latour testified that had she known that clients were not participating in the briefings and that Credit Counseling Verifications were false, she would have reported this to Chesson or Wade Kelly. (2 Tr. Trans, 176). She testified that she never instructed any of Defendants’ employees to impersonate debtors during online credit counseling briefings. (Id.}. D. Mestimony of Chris Chesson. Chris Chesson testified that he had no involvement in credit counseling briefings or in preparing the verifications signed by the clients in the cases at issue here. He testified that he never instructed Latour or any other employee to take credit counseling briefings for debtors or to file false Credit Counseling Teverifications. (2 Tz. Trans. 334-35). Chesson also testified about efforts by NN co hor his practice and his reputation, (Tr. Trans. 335-37). For example, Chesson cites e-mails sent by Casey to the Trustee disparaging Chesson and suggesting that Chesson may try to influence the testimony of potential witnesses. (Def. Exh. Nos. 1, 2). E. Testimony of Wade Kelly. Wade Kelly testified that he has served as counsel in Chesson’s firm since 2006. He and Chesson split the fees from bankruptcy clients 50-50 after deductions for staff and office expenses. (2 Tr. Trans. 222-23). Kelly was not involved in the initial interviews of clients or credit counseling briefings during the period at issue in his case. Kelly testified that he reviewed documents prepared by Chesson’s staff as well as financial documents provided by clients. (2 Tr. Trans. 226). He would also draft a plan in Chapter 13 cases. (L: .). Filings with the court, however, were filed und: Chesson’s electronic signature and his ECF login and password. (2 Tr. Trans. 307). The Trustee’s complaint does not allege that Mr. Kelly was involved in the filing in the record of e false pleadings, nor is there any evidence of his involvement. F, Credit Counseling Records. The Trustee further introduced records from the Abacus credit counseling service reflecting briefings that were purportedly -15-completed in the eleven cases at issue here. According to the Trustee, these records support the testimony of Lejeune, Turn and Bailey that they created un m answers to sec such as “what is your city of the” and qu individual households. These records show that the answer “Lake Charles” was typically provided an answer to the security question “wh; is your city of birth?” even though five of the mer clients who testified were not born in Lake Charles and testified that they never provided “Lake Charles” as the answer to any security question. (1 Tr. Trans. 191-92, 349, 377; 2 Tr. 47, 195; Trustee Exh. 1 10, 19, 22, 28, 31, 34). The Al us records also show answers to questions about debtor households that did not accurately reflect the household of the debtors who purportedly participated in the briefing. eg., Trustee Fxh. No, 28 at 5). Specifically Abacus transcript indicates that he responded that he did not have children despite the fact that he has a ten year old child. (2 Tr Trans. at 48). The Abacus records il oduced by the Trustee also reveal the length of each credit counseli: briefing: 9 minutes, 48 seconds 19 minutes, 54 seconds 8 minutes, 27 seconds 15 minutes, 28 seconds 1 day, 19 hours19 minu! 44 seconds 2 minutes, 21 seconds 5 hours, 34 minutes 15 minutes, 47 seconds 1 minutes, 12 seconds minutes, 2 seconds According to the Trustee, the times for most of the debtors in 11 cases at issue are much shorter than the average time Abacus estimates it would take compl uunseling briefing. Abacus records reflect an average to completion of approximately one hour. (Trustee Exh. Nos. 35, 39, and 29). In the case of MMMM, the Abacus briefing in the case filed by Chesson was completed in 29 minutes and 2 seconds, (Trustee Exh. he completed No. 28). when he refiled a case vith the same course in 49 minutes, 28 seconds ) G. Signed Credit Counseling Verifications. The Trustee also ii in seven of eleven cases here, Chesson’s st obtained the clients’ “wet si ni ves” on Credit Counseling Verificatior on dates prior to the dates that the Abacus credit counseling briefings actually took place. (See Trustee Exh. Nos. 11-12, 14-15, 20-21, 23-24, 26- ed and and 29-30). The Trustee contends that these pre-d; signed verifications reveal Defendants’ fraudulent scheme because the clients attested to having completed the briefings before they even occurred. -17-H. Client Contracts. The Trustee introduced exhibits that he contends show that Chesson failed to sign and execute client contracts in seven (7) of the eleven cases at issue. (Trustee Exh. Nos. 2, 5, 11, 14, 17, 23, 29). While these exhibits demonstrate that clients were provided with written contracts, the Trustee contends that these contracts did not comply with the requirements of 11 U.S.c. § 528(a) because Chesson did not sign the contracts, FINDINGS AND CONCLUSIONS A. The Burden of Proof The parties disagree on the Trustee's burden of proof. Defendants argue that a “clear and convincing” standard applies to the Trustee’s claims for monetary sanctions, disgorgement, and disciplinary sanctions. The Trustee concedes that the disciplinary relief requested in the complaint is subject to a clear and convincing standard. (Trustee’s Brief on the Burden of Proof at 3). The Trustee also acknowledges a split in case law over whether @ clear and convincing standard applies to monetary sanctions imposed under a court’s “inherent powers.” (Id. at 4). But, the Trustee argues that the claims for sanctions and disgorgement in Counts I through IV of the complaint are subject only to a “preponderance of the evidence” standard. A clear and convincing standard in a civil case is appropriate where “particularly eeeimportant individual interest or rights are at stake.” Grogan v Garner, 498 US 279, 286 (1991) (quoting Herman ¢ Macclean_v Huddleston, 459 US 375, 389, 90 (1983)). While the court agrees with the Trustee that a preponderance of the evidence standard applies in routine cases where a court reduces--or even orders disgorgement of--fees under 11 U.S.C. §§ 329-330, this is not a routine case. Given the extent of the sanctions requested in this case and the request for disciplinary action against Mr. Chesson, the relief requested by the trustee is punitive in nature and implicates particularly important individual interests or rights. The Trustee, therefore, must establish all of its claims for relief by clear and convincing evidence. B. Falsification of Credit cling Certificates. The court finds by clear and convincing evidence that Defendants filed false Credit Counseling Verifications with the court in the eleven cases covered by the Trustee’s complaint. Debtors from each of these eleven cases testified that they did not participate in a credit counseling briefing prior to filing th case. This testimony is consistent with the testimony of Chesson’s former employees that they completed these briefings for the debtors without the debtors being present and then prepared and filed Credit Counseling Verifications that falsely stated that the debtors completed their briefings. It is also consistent with the -19-records of the Abacus Credit Counseling Service showing completion times for these debtors that were below the average time to complete the briefing. The testimony is also consistent with the evidence showing uniform (and inaccurate) answers to Abacus’ security questions. The court finds the testimony of Defendants former employees to be credible that they were instructed to complete credit counseling for debtors and to file Credit Counseling Verifications that falsely stated that the debtors had completed the briefings. The court further finds that Defendants senior paralegal, Karla Latour, was responsible for overseeing the pre-filing credit counseling process, and that she instructed the three former employees who testified to complete the briefings on behalf of debtors outside their presence. While the Trustee's complaint focuses on the eleven cases at issue, the court also finds, based on the testimony of these former employees, that this scheme resulted in the filing of false credit counseling verifications in other cases not identified by the Trustee. Specifically, Mary Lejeune testified that she completed credit counseling briefings without debtors present in approximately 80% of the cases that she handled. Similarly, Haleigh Turner testified that she had completed briefings well over 100 times during her employment by Defendants. (1 Tx. Trans. 33-34) Defendants challenge the credibility of the Trustee’s witnesses--both former clients and former employees--based on their ~20-roles in the scheme to file false Credit Counseling Verifications. He argues that the former clients’ testimony is not credible because they engaged in perjury by signing the written verifications under penalty of perjury and by falsely testifying at the Section 341 meetings. They contend that the former employees who testified are not credible because they suborned perjury by having the debtors sign falsified Credit Counseling Verifications. Defendants are correct that the individual debtors who testified are responsible for ensuring the accuracy of the pleadings they sign--including the Credit Counseling Verification--filed on their behalf. They cannot escape responsibility for the false verifications filed in their cases. But, Chesson glosses over the fact that these former clients are not trained lawyers and were looking to Chesson and his staff to guide them through the bankruptcy process and explain the meaning of the documents that they are signing. Given the consistency of the testimony of the fourteen former clients who testified to the key facts supporting the Trustee's case that they did not take credit counseling--and their reliance on Chesson’s staff to guide them through the process, the court finds their testimony credible. With respect to the former employees who testified, Chesson is also correct that they cannot escape responsibility in a scheme that resulted in the filing of at least eleven and likely more -21-false Credit Counseling Verifications with the court. Their testimony, however, is consistent in material respects with the testimony of the fourteen former clients, The testimony of Mary Lejeune, Haleigh Turner, and Misty Bailey is also consistent as to the key fact that they completed credit counseling briefings for clients and prepared and filed false Credit Counseling Verifications. Given the consistency of this testimony as to the key facts supporting the Trustee’s case, the court finds this testimony credible. Chesson also points to inconsistencies in the testimony of the former clients and former employees. These alleged inconsistencies do not overcome the credibility of the testimony on the key facts alleged by the Trustee. The inconsistencies identified by Defendants generally revolve around collateral, non-material facts. For example, Defendants point to testimony by Mary Lejeune that Chesson did not meet with clients during initial consultations, that she would sign Chesson’s name on pleadings, that she would often make legal decisions for clients, and that credit counseling appointments were not placed on office calendars. Defendants point to testimony by multiple witnesses that appears to contradict Lejeune’s testimony with respect to these aspects of the office’s procedures. But, these alleged contradictions do not go to the core material facts alleged by the Trustee with respect to the -22-