Court: District Court, E.D. Tennessee; March 21, 2018; Federal District Court
The court, led by Judge J. Ronnie Greer, previously consolidated two civil cases due to common legal and factual questions. Currently, it addresses two motions to dismiss: one from the Lead case and one from the Member case, both invoking Federal Rules of Civil Procedure 12(b)(6) for failure to state a claim and 12(b)(2) for lack of personal jurisdiction. Defendants in both cases have moved for dismissal, which the plaintiffs have opposed, and replies have been filed. The court will review both motions simultaneously due to the similarities in the arguments presented.
The background involves a national law firm, Law Solutions Chicago LLC (d/b/a UpRight Law), which specializes in bankruptcy representation. The firm advertises its services online and handles calls from potential clients nationwide, initially through non-attorney staff before transferring to licensed attorneys. In the Lead case, plaintiff Annette Haynes, a Tennessee resident, contacted UpRight Law about bankruptcy on December 7, 2015. Her inquiry was first handled by non-attorney George Doe, who provided encouragement regarding bankruptcy and assured her she could retain her truck. Her call was subsequently transferred to Austen Heuser, an Illinois-licensed attorney who is not authorized to practice in Tennessee, who offered legal advice and negotiated a representation fee for a Chapter 7 bankruptcy.
The court has determined that both motions to dismiss will be granted, resulting in the dismissal of both cases.
Jessica Odgie, a non-attorney employee of UpRight Law, contacted the plaintiff after an initial call to follow up. She advised the plaintiff to cease payments on unsecured debts and outlined the implications of a bankruptcy discharge, confirming a fee of $1,685.00 for a Chapter 7 bankruptcy representation. The plaintiff's case was later assigned to Grace Gardiner, a licensed attorney in Tennessee, who was based in Knoxville. The plaintiff, residing outside Knoxville, had to travel for case preparations, primarily handled by Gardiner's assistant, Judy Lovely, also a non-attorney. During their interactions, Lovely incorrectly advised the plaintiff that she needed to file for Chapter 13 bankruptcy due to her income, despite the plaintiff having signed a retainer for Chapter 7. An additional retainer for Chapter 13 was required, which the plaintiff did not sign; she alleges UpRight Law falsified her signature on this agreement. The transition to Chapter 13 also involved an extra fee of $1,315.00, bringing the total payments to UpRight Law to $1,900.00 before filing. The plaintiff met Gardiner for the first time at the creditors' 341 meeting on March 23, 2016, and claims she was not informed about court attendance requirements. Gardiner failed to file necessary documents, resulting in sanctions from the bankruptcy court and a five-year suspension from practice. UpRight Law later agreed to return the $1,900.00 in fees. The plaintiff subsequently hired another law firm to proceed with her bankruptcy.
In a similar case, Pamela Hagstrom contacted UpRight Law for bankruptcy assistance on March 1, 2016. Non-attorney Angelo Solis provided advice on Chapter 7 and Chapter 13 options, negotiating a fee of $1,535.00, of which $1,200.00 was paid prior to filing. A follow-up call from Jacob Brown, an Illinois attorney not licensed in Tennessee, instructed her to stop payments on unsecured debts and provided further advice on bankruptcy implications.
Brown advised the plaintiff about the possibility of filing a Chapter 7 bankruptcy petition and provided guidance on a related state court lawsuit. Subsequently, the plaintiff's bankruptcy case was assigned to attorney Grace Gardiner in Tennessee, who miscalculated the plaintiff's income, mistakenly determining that she was ineligible for Chapter 7 bankruptcy. Consequently, the plaintiff was advised to file a Chapter 13 bankruptcy petition, incurring an additional attorney fee of $1,456.00, which prompted her to request a refund. Matt Sheehan, a non-attorney from UpRight Law, contacted the plaintiff and suggested that Chapter 13 would allow her to pay a fraction of her debt and purchase a new car, leading to her agreement to file for Chapter 13 on April 18, 2016. Gardiner was subsequently suspended from practicing in the relevant bankruptcy court, and UpRight Law refunded $1,200.00 of the fees previously paid by the plaintiff, who then hired a different law firm for her bankruptcy needs.
Regarding jurisdiction, the Court consolidated two cases and ordered the parties to submit briefs on whether it should abstain from hearing them. Despite having original jurisdiction over cases related to bankruptcy under 28 U.S.C. 1334, the Court determined that abstaining would adversely affect the pending bankruptcy proceedings and the administration of justice. Thus, it chose to retain jurisdiction over the consolidated cases. The Court also addressed the defendants' motion to dismiss based on a lack of personal jurisdiction, indicating that this matter would be examined first as it could be decisive for many claims against the named defendants.
Defendants argue that asserting personal jurisdiction over them in Tennessee would violate traditional fair play and substantial justice standards as outlined in International Shoe Co. v. State of Washington. They contend that their contacts with Tennessee are merely random and do not constitute purposeful availment. In contrast, plaintiffs cite Burger King Corp. v. Rudzewicz and World-Wide Volkswagen Corp. v. Woodson to support their claim that the defendants have purposefully availed themselves of the court's jurisdiction by practicing law in Tennessee. Both parties acknowledge that the cases are related to Chapter 11 bankruptcy proceedings, governed by the Federal Rules of Bankruptcy Procedure, which aim to align practices in bankruptcy courts and district courts.
Federal Rule of Bankruptcy Procedure 7004 establishes a three-part test for personal jurisdiction: proper service of the defendant, the case being under or related to the Bankruptcy Code, and the exercise of jurisdiction being consistent with U.S. law. The court clarifies that personal jurisdiction in this case is not governed by the International Shoe standards due to its original subject matter jurisdiction over bankruptcy-related cases, as stipulated in 28 U.S.C. 1334(b). Furthermore, Rule 7004 permits nationwide service of process in adversary proceedings, allowing the Sixth Circuit's precedent to override International Shoe limitations when federal statutes allow for such service beyond state boundaries.
The court establishes that personal jurisdiction over defendants Doe, Heuser, Solis, Brown, and Sheehan is based on their sufficient contacts with the United States as a whole, rather than any specific state, with reference to the case United Liberty Life Ins. Co. The court confirms that all defendants were properly served through personal service in both the Lead and Member cases, as outlined in relevant docket entries. The defendants did not contest the adequacy of the service of process, leading the court to conclude that the first requirement of personal jurisdiction is met.
All parties acknowledge that the lawsuits are related to a Bankruptcy Code case, fulfilling the second requirement for personal jurisdiction. Regarding the third requirement, while the court notes that the minimum contacts argument could have been close had it been sitting in diversity, it finds no statutory or constitutional barriers to exercising jurisdiction over the defendants. The defendants, residing and working in Illinois, have sufficient minimum contacts with the United States. Consequently, the court determines that it possesses personal jurisdiction over them, resulting in the denial of the defendants' motion to dismiss for lack of personal jurisdiction.
Defendants seek dismissal of plaintiffs' claims under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim. This rule permits dismissal of pleadings that do not present a claim for which relief can be granted. A valid complaint must include a "short plain statement" demonstrating entitlement to relief, as mandated by Federal Rule of Civil Procedure 8(a)(2). In evaluating a motion to dismiss, the court must view allegations favorably for the plaintiff and accept factual claims as true; disbelief in allegations does not justify dismissal.
Defendants argue that the complaints lack allegations of loss resulting from their actions, rendering all claims substantively insufficient. They contend that the complaints fail to provide adequate facts for claims of unauthorized practice of law by UpRight Law’s staff and attorneys. Additionally, they assert that negligence per se claims are insufficient because the relevant statute does not support such claims, plaintiffs have not demonstrated injury as fees were refunded, and the complaints do not show violations of the cited statute. For professional negligence claims, defendants argue that plaintiffs have not identified damages or shown a breach of professional care standards, and further assert that these claims are barred by the statute of limitations.
In the Lead case, defendants challenge fraud claims, asserting they lack allegations of intent to defraud, do not meet pleading particularity requirements, and fail to demonstrate resulting damages. Plaintiffs counter that their complaints adequately state viable claims, highlighting that the phone calls referenced indicate unauthorized practice of law. They argue that the defendants’ fee refunds do not negate liability and assert that actual damages have been sufficiently alleged. Plaintiffs maintain that their negligence per se and legal malpractice claims are adequately pleaded and not time-barred. The plaintiff in the Lead case insists that the fraud claim is also sufficiently stated and should not be dismissed.
Count One addresses the unauthorized practice of law (UPL) by the defendants, as alleged by the plaintiffs under Tennessee law. The relevant statutes, including Tenn. Code Ann. 23-3-101 and related provisions, prohibit individuals from practicing law without a valid license. The law allows a private cause of action for individuals who suffer losses due to unlawful conduct as defined in Tenn. Code Ann. 23-3-112(a)(1).
The definition of "practice of law" includes acting as an advocate, preparing legal documents, or providing legal services. "Law business" encompasses advising on legal matters for compensation and soliciting clients for such services. The Tennessee Supreme Court has established that non-attorney actions constituting UPL must require the professional judgment of a lawyer.
The plaintiffs claim that members of UpRight Law, particularly defendant George Doe, engaged in UPL by providing advice over the phone regarding bankruptcy filings. Specific allegations include soliciting the debtor to choose a bankruptcy chapter, advising on the necessity of filing for bankruptcy, informing the debtor about retaining property through bankruptcy, and promoting UpRight Law's services for filing the case.
The Lead case alleges that George Doe transferred a phone call to Austen Heuser, an Illinois-licensed attorney not permitted to practice in Tennessee. Heuser is accused of engaging in unauthorized legal practice by soliciting and negotiating representation fees, advising the debtor on bankruptcy chapters, and promoting UpRight Law's services. Similarly, Judy Lovely is accused of advising the debtor on Chapter 7 and Chapter 13 filing requirements. The Member case mirrors these allegations, focusing on different individuals. Angelo Solis, a non-attorney staff member, is accused of negotiating fees and advising the debtor on bankruptcy strategies. Jacob Brown, an Illinois attorney, faces similar accusations regarding payment advice and bankruptcy filings. Matt Sheehan, another non-attorney staff member, is charged with advising the debtor on fees and Chapter 13 specifics. Both cases assert that these actions are attributable to UpRight Law, as the defendants acted within the scope of their employment, implicating the firm in unauthorized legal practice.
Defendants argue that plaintiffs' claims for unauthorized practice of law (UPL) are deficient because they fail to identify a "loss" necessary to support a claim under Tennessee Code Annotated 23-3-112(a)(1). They highlight that fees paid by debtors have been disgorged, suggesting that without actual loss, the claims should be dismissed. In response, plaintiffs assert that the refunding of fees does not eliminate defendants' liability and cite the statute's provision for treble damages to emphasize that such an interpretation would undermine the statute's intent to penalize UPL. Plaintiffs claim to have incurred other damages from defendants' actions, including inadequate representation.
The Court acknowledges that while the complaints do not explicitly state the fees were disgorged, plaintiffs do not dispute this fact. It concludes that since the fees have been disgorged, they do not constitute a "loss" under the statute. The Court further notes that case law, specifically Gant v. Santa Clarita Laboratories, supports the notion that a full refund negates the existence of an ascertainable loss required for legal relief. Consequently, the Court agrees with defendants that the disgorged fees cannot be considered a loss, thus precluding treble damages. The complaints also mention damages related to fees paid to both UpRight Law and the Law Offices of Mayer and Newton.
Neither party provided authority on whether fees for retained counsel qualify as "loss" under Tennessee Code Annotated 23-3-112(a)(1). The plaintiffs did not demonstrate how these fees represent a loss from the defendants' unauthorized practice of law (UPL). The court concluded that such fees do not constitute a compensable loss, as compensatory damages aim to restore the plaintiff to their original state. Allowing recovery for these fees would exceed what the plaintiffs would receive if the original fees had not been returned. The court characterized the plaintiffs' claims as mere legal conclusions without factual support, referencing *Bell Atlantic Corp. v. Twombly*. Additionally, although UpRight Law may be liable for employee actions, the lack of alleged losses undermined the plaintiffs' argument against them for UPL. Consequently, all UPL claims in the Member case were dismissed, and the defendants' motion to dismiss was granted for Count I.
In the Lead case, the plaintiff claimed travel expenses incurred to meet with a defendant, asserting these would not have arisen if UpRight Law had disclosed another defendant's location. The defendants contended that these expenses were not causally linked to the UPL allegations, and the plaintiff failed to argue their relevance. The court noted that the failure to inform a debtor about her attorney's location does not constitute UPL under Tennessee law. Thus, even if the plaintiff incurred these travel expenses, they could not be considered a "loss" related to UPL. As a result, the Lead case also failed to state a claim for relief regarding UPL, leading to the dismissal of all such claims against the defendants. The court found no need to evaluate other arguments presented by the defendants regarding actions not constituting UPL.
The opinion does not address certain remaining arguments, refraining from ruling on their merit. In Count Two, the plaintiffs allege negligence per se against the defendants. Tennessee adheres to a common-law standard of conduct, which requires individuals to act as a "reasonable person under similar circumstances." Besides this standard, the Tennessee General Assembly can create legal duties either by establishing a duty with a civil cause of action or by enacting a penal statute from which courts can derive a civil duty. The negligence per se doctrine applies when a penal statute is interpreted to establish a standard of care, making deviation from it negligent. To prove negligence per se, it must be shown that the statute was intended to protect a particular class of individuals and that the injured party belongs to that class. The doctrine does not create a new cause of action but rather relies on existing statutes to define a reasonable standard of care. Courts consider various factors to determine the applicability of negligence per se, including whether the plaintiff is within the statute’s protected class, the type of injury, the clarity of the statute's requirements, and whether the violation directly caused the injury. A prima facie case of negligence per se requires proof that the defendant violated a relevant statute aimed at protecting a person or the public.
The injured party must belong to the class of individuals the statute aims to protect and demonstrate that the defendants' negligence was the proximate cause of their injuries. In Bennett v. Putnam County, the court highlighted that the plaintiffs' allegations against the defendants under Tennessee Code Annotated § 23-3-101 et seq. were vague, lacking specificity in identifying which statute was violated. A broad interpretation could imply violations of all statutes listed, but the court is not obligated to accept the plaintiffs' general assertions. Even if the complaints were interpreted broadly to allege negligence per se for all penal statutes in the cited code, they failed to establish a valid claim except for Tennessee Code Annotated § 23-3-103.
The complaints asserted that the defendants violated this statute concerning the unauthorized practice of law, but the defendants moved to dismiss on three grounds: (1) the statute does not support a negligence per se claim; (2) any damages claimed were not suffered as they were disgorged; and (3) the facts do not demonstrate a violation of the statute. The defendants contend that the statute is primarily administrative, thus not suitable for a negligence per se claim. The plaintiffs counter that the statute is intended to protect the public from unlicensed attorneys, but the court must first ascertain whether the statute sets a standard of care. For a negligence per se claim, it is insufficient for a plaintiff to assume that a statutory violation inherently supports such a claim; the statute must explicitly establish a standard of care. Tennessee courts have indicated that if a statute imposes only administrative requirements without defining a standard of care, a violation of such will not support a negligence per se claim.
Tennessee Code Annotated § 23-3-103 prohibits the practice of law without a valid license but does not establish a standard of care necessary for a negligence per se claim. Citing Talley v. Danek Medical, Inc. and King v. Danek Medical, Inc., the court emphasizes that violations of statutes imposing administrative requirements, like the Food, Drug, and Cosmetic Act, lack the substantive content to support such claims. The court distinguishes this statute from others recognized as establishing a standard of care, such as those concerning the serving of alcohol to minors. The plaintiffs argue that the statute serves a public protective function; however, they fail to provide supporting case law or demonstrate how the licensing requirement imposes a defined standard of care. Consequently, the plaintiffs’ negligence per se claims are insufficiently pleaded, as they do not adequately allege that the defendants' actions caused an injury, which is a necessary element for such claims under Tennessee law.
Without any demonstrated injury, the plaintiffs' negligence per se claims fail to establish a valid claim for relief, leading to the dismissal of these claims against all defendants in both cases. In regard to Count Three, the plaintiffs assert a professional negligence claim against specific defendants, requiring proof of five elements: duty owed, breach of duty, damages suffered, causation of damages, and proximate cause. The claims vary between the Lead case, which implicates both UpRight Law and Gardiner, and the Member case, which solely implicates UpRight Law.
In the Lead case, Annette Haynes alleges the defendants breached their duty of care during her bankruptcy proceedings by advising her to file a more expensive Chapter 13 petition, failing to supervise staff, not informing her about attending a 341 meeting, neglecting to acquire necessary signatures, and not making required disclosures prior to filing. She claims these breaches resulted in economic damages. The defendants argue that the claims lack viable damages and that the alleged actions do not deviate from the standard of care. The legal duty of care owed by attorneys is established, and Tennessee law requires that attorneys employ a reasonable degree of care and skill in their representation. The Tennessee Supreme Court clarifies that the standard of care for legal malpractice may differ from the Code of Professional Responsibility, focusing instead on the specific duties owed to clients based on the circumstances of representation.
The Code provides guidance on lawyers' obligations to clients, as referenced in *Lazy Seven Coal Sales, Inc. v. Stone. Hinds, P.C.* The plaintiff alleges that defendants Gardiner and UpRight Law owed a duty to the debtor in bankruptcy proceedings, and the court finds that the pleading standard for establishing this duty has been met. To determine if a lawyer breached their duty, the standard is the degree of care, skill, and diligence typical of attorneys in the same jurisdiction, as established in *Horton v. Hughes*. The court concludes that the allegations against Gardiner could indicate a breach of duty, with sufficient facts presented in the complaint. However, there are no allegations of UpRight Law committing acts that breach their duty of care or being liable for Gardiner's negligence, leading to the granting of the motion to dismiss Count Three against UpRight Law.
In legal malpractice cases, a nexus between negligence and injury must be established. The Tennessee Supreme Court identifies three categories of recoverable attorney fees: initial fees for negligent services, corrective fees for remedial actions taken, and litigation fees for prosecuting malpractice claims. The plaintiff claims damages from Gardiner's negligence, including fees to UpRight Law and another law firm. These damages do not fall into the recoverable categories: fees to UpRight Law have already been returned, and fees to the subsequent firm were not corrective, as they were for completing the bankruptcy process. Additionally, the plaintiff did not assert suffering any litigation fees in the malpractice case. Consequently, the plaintiff's claim in Count Three is dismissed for failure to state a valid claim for relief.
The defendants' motion to dismiss Count Three in both the Lead and Member cases is granted regarding the professional negligence claim against defendant Gardiner. In the Member case, the allegations differ slightly, asserting that UpRight Law engaged in professional negligence by advising debtor Hagstrom to file for Chapter 13 instead of the less expensive Chapter 7, failing to file necessary schedules and forms, not securing required signatures, and neglecting to make disclosures mandated by 11 U.S.C. § 527. The damages claimed are similar to those in the Lead case, focusing on fees paid to UpRight Law and later to the Law Offices of Mayer and Newton.
However, the Member case lacks any allegations that UpRight Law breached its duty of care, as the claims are solely directed at Gardiner. There are no assertions in the complaint or supporting briefs indicating UpRight Law's liability for Gardiner's actions. Although the Member case mentions negligence by the defendants, it still fails to hold UpRight Law accountable for Gardiner's alleged negligence. Furthermore, the complaint does not establish any compensable injury, as the fees paid to UpRight Law have been returned, and those to Mayer and Newton are not recoverable as attorney fees. Therefore, Count Three in both cases is dismissed for failure to state a claim.
As an alternative dismissal reason, the defendants argue that the statute of limitations applies to the negligence claims. However, since the claims are insufficiently pleaded, the court does not address these arguments, making no ruling on statute of limitations issues. Additionally, in the Lead case, the plaintiff alleges a fourth claim of fraud, asserting that the defendants misrepresented the necessity of filing for Chapter 13 bankruptcy.
The complaint alleges that the defendant forged the debtor's signature on a Chapter 13 agreement to extract additional attorney fees, with knowledge that the representation was false. The defendants counter that the fraud claim is inadequate because: (1) it lacks specific facts showing that Lovely intentionally misrepresented the plaintiff's eligibility for Chapter 7 relief; (2) it does not meet the particularity requirement of Federal Rule of Civil Procedure 9(b) due to reliance on "information and belief" pleading; and (3) it fails to demonstrate that the plaintiff suffered any damages from the alleged fraud. The plaintiff asserts that her claims are valid, stating that Lovely's representation regarding her Chapter 7 eligibility was an intentional misrepresentation, evidenced by the forgery of her signature.
The elements required for a fraud claim include: (1) intentional misrepresentation of a material fact; (2) knowledge of the falsehood; (3) injury from reasonable reliance on the misrepresentation; and (4) the misrepresentation must relate to a past or present fact. The court finds that the complaint does not sufficiently allege fraud against any defendant. Even assuming the heightened pleading requirement was met and the defendants were aware of the false representation, the complaint fails to show any injury from reasonable reliance. Since the defendants allegedly returned the collected fees, the plaintiff was restored to her prior position, negating any injury. Consequently, the fraud claim was dismissed.
The court confirmed personal jurisdiction over certain defendants but ruled that all claims in both the Lead case and the Member case failed to state a valid claim for relief. Therefore, the defendants' motions to dismiss under Federal Rule of Civil Procedure 12(b)(2) were denied, while the motions to dismiss under 12(b)(6) were granted, resulting in the dismissal of all claims with prejudice.
Defendant Jessica Odgie has not appeared in the lead case associated with case number 3:17-CV-258. The memorandum opinion treats the two consolidated lawsuits as factually and legally similar, allowing for simultaneous reference to both plaintiffs. The "Trustee" represents the estates of Annette Harris Haynes and Pamela Jo Hagstrom, with "debtor" and "plaintiff" being interchangeable terms unless specified otherwise. The plaintiff's opposition to the defendant’s motion indicates a call initiated by a representative from UpRight Law, which conflicts with the complaint’s allegations. The Court assumes the sequence outlined in the complaint for this opinion. It confirms that the plaintiff did not sign the Chapter 13 retainer agreement and alleges that UpRight Law improperly used her signature. While the plaintiff's complaint includes claims of unauthorized practice of law, negligence, and fraud, the Court retains jurisdiction based on efficiency and the need for regulation of legal practice, as both cases were filed in this Court and cannot be remanded to state court. The defendants reference a prior case to assert personal jurisdiction over out-of-state defendants; however, the Court prioritizes binding precedent over persuasive authority in establishing legal standards. The opinion notes that federal statutes allowing nationwide service of process may alleviate the strict requirements of personal jurisdiction established in International Shoe Co. v. Washington.
A federal court, exercising personal jurisdiction over a U.S. citizen or resident through congressionally authorized nationwide service of process, does not infringe upon the individual's due process rights regarding extra-territorial jurisdiction. The plaintiff contends that the assessment of the debtor's ability to retain her truck during bankruptcy requires a licensed attorney's professional judgment. Allegations of unauthorized practice of law (UPL) against Jessica Odgie remain unresolved, as this defendant has not yet appeared in the case, and the parties have not specifically addressed her actions. The complaints indicate that the defendants agreed to refund certain fees, which the plaintiff argues would discourage recovery under the statute. The statute referenced, Tenn. Code Ann. 47-18-109, allows for a cause of action and potential treble damages for those suffering ascertainable losses due to unfair or deceptive practices. Notably, in a related case, Gant, the plaintiff's payment was refunded post-suit and after service of process. The complaints cite multiple penal statutes regarding unauthorized legal practice, including penalties for practicing law without a license (Tenn. Code Ann. 23-3-103), fee-splitting with unlicensed individuals (Tenn. Code Ann. 23-3-104), and false advertising as a lawyer (Tenn. Code Ann. 23-3-108). However, the plaintiffs do not assert violations of all these statutes, focusing instead on the claim of attempted unlicensed practice. The court will primarily reference Tenn. Code Ann. 23-3-103 in its analysis.
The Court establishes that the negligence per se claims are based on the civil cause of action defined in Tennessee Code Annotated § 23-3-112. Even if the negligence per se doctrine applied under § 23-3-103 to define a standard of care, the requirement for loss would align with the damages analysis related to the legislatively prescribed civil cause of action. The plaintiff's complaint incorporates all allegations against the defendants but specifically fails to assert that UpRight Law should be liable for the negligence of Gardiner, a licensed attorney in Tennessee. The professional negligence claim primarily attributes damages to Gardiner's actions without establishing any injury caused by UpRight Law's alleged negligence. Consequently, the Court finds the claim against UpRight Law insufficient. Furthermore, the Court's prior decision to grant additional time for serving defendant Odgie is noted, but given the overall failure to state a claim against any defendant, this ruling necessitates the dismissal of all claims against Odgie as well.
