United States District Court, E.D. Texas, Sherman Division
MEMORANDUM OPINION AND ORDER
AMOS
L. MAZZANT UNITED STATES DISTRICT JUDGE
Pending
before the Court are: (1) Sea Wasp, LLC's Motion for
Sanctions (Dkt. #144); (2) Sea Wasp, LLC's Opposed Motion
to Disqualify Gary Schepps as Counsel for Domain Protection,
LLC (Dkt. #162); (3) Sea Wasp, LLC's Second Motion for
Sanctions Against Gary Schepps (Dkt. #189); and (4) Sea Wasp,
LLC's Motion to Supplement its Opposed Motion to
Disqualify Gary Schepps as Counsel for Domain Protection, LLC
(Dkt. #282). Having considered the motion and the relevant
pleadings, the Court finds that each Motion is DENIED save
Sea Wasp, LLC's Second Motion for Sanctions Against Gary
Schepps (Dkt. #189) which is GRANTED in part and DENIED in
part and Sea Wasp, LLC's Motion to Supplement its Opposed
Motion to Disqualify Gary Schepps as Counsel for Domain
Protection, LLC (Dkt. #282) which is GRANTED.
BACKGROUND
The
underlying facts of the present Motions, and indeed this
entire action, are needlessly complicated.[1] At the outset,
the Court notes that each party is attempting to litigate
matters not before the Court. That a number of appeals where
taken up to the Fifth Circuit in prior cases by Schepps or
that Jeffrey Baron brought a conspiracy claim against Domain
Protection, Katz, and others is irrelevant. The only facts
that the Court will consider are the facts that concern the
present action and those that go directly to the validity of
current representation. Those facts are as follows.
On June
18, 2018, Schepps filed the present action against Sea Wasp
on behalf of Domain Protection (Dkt. #1). Domain Protection,
through Schepps, claimed, in its first complaint, that Sea
Wasp was liable for interference with contract, civil
conspiracy, and conversion for impermissibly placing an
executive lock on its Domain Names (Dkt. #1). Further, Domain
Protection alleged that Sea Wasp was liable under the Texas
Theft Liability Act and Stored Communications Act for the
same conduct (Dkt. #1). This was not Schepps first time
litigating over the Domain Names, however. Prior to the
present action, Schepps represented Jeffrey Baron, Quantec,
LLC, and Novo Point, LLC in matters involving rights to the
Domain Names (“Initial Proceeding”) (Dkt. #162).
Schepps then represented Plaintiffs Chris Payne, Domain
Protection, LLC, Domain Vault, LLC, and Lisa Katz in a
subsequent action in the Bankruptcy Court for the Eastern
District of Texas against Baron, Quantec, and Novo Point
(“Bankruptcy Proceeding”). The Bankruptcy
Proceeding also concerned a dispute over ownership rights and
control to the Domain Names. Upon discovery of Schepps'
former representation of Baron, Quantec, and Novo Point in
the Initial Proceeding, Judge Brenda Rhoades, immediately
disqualified Schepps from further representation of Katz and
Domain Protection in the Bankruptcy Proceeding. In re
Payne, No. 16-41533 (Bankr. E.D. Tex. Dec. 11, 2018). As
Judge Rhoades opined, the two proceedings were substantially
related, and thus it was improper for Schepps to continue his
representation. Id.[2]
Schepps
now represents Domain Protection in the present action for
the very Domain Names which were in dispute in the former two
actions. Baron, Quantec, Novo Point, and Katz are not parties
here, however. Indeed, each of Baron and Quantec's
attempts to intervene have been denied by the Court (Dkt.
#15; Dkt. #52; Dkt. #224). Rather, this action concerns
Domain Protection's allegations against Sea Wasp and
Individual Defendants Gregory Faia and Vernon Decossas.
Despite Baron and Quantec's absence from the present
action, Conrad Herring- counsel to Baron and Quantec-filed a
Motion to Disqualify Gary Schepps (Dkt. #66) through his
capacity as an officer of the court. Herring claimed that
Schepps could not represent Domain Protection here as the
present lawsuit was contrary to the interests of his former
clients, Baron and Quantec (Dkt. #66). The Court denied
Herring's Motion after finding that Herring lacked
standing to challenge Schepp's representation (Dkt.
#197). Specifically, the Court found that Herring was not one
of the parties Schepps had formerly represented and thus,
even as an officer of the court, Herring could not challenge
Schepps' representation (Dkt. #197). Sea Wasp now makes
the same, and additional, arguments that Herring made to
disqualify Schepps from representing Domain Protection. Sea
Wasp additionally utilizes the same, and again additional,
arguments to attempt to levy sanctions against Schepps for
his representation of Domain Protection. The additional
arguments can be characterized as pre-filing conduct and
post-filing conduct.[3] The Court begins with the pre-filing
conduct.
Sea
Wasp relies upon the testimony of Katz at the May 31
deposition to illustrate the pre-filing conduct that Schepps
engaged in. The testimony of Katz is as follows. Katz and
Schepps have been friends since they attended law school
together at Texas Wesleyan Law School (Dkt. #175, Exhibit A).
In 2011, Schepps secured a job for Katz-who had not passed
the bar- as a manager for Quantec and Novo Point, LLC (Dkt.
#175, Exhibit A). Katz salary was projected to be
approximately $180, 000 a year (Dkt. #175, Exhibit A). In her
role as a manager for Quantec and Novo Point, Katz did not
complete time records (Dkt. #175, Exhibit A). Katz claims
that she is owed $1.62 million for her work since 2011 with
Quantec and Novo Point-an amount she claims she has yet to be
paid (Dkt. #175, Exhibit A). Further, Katz alleges that
Schepps has not been paid for his role with Quantec and Novo
Point either (Dkt. #175, Exhibit A). On February 28, 2014,
Judge Sam Lindsay appointed Katz to hold Quantec's 59,
000-plus Domain Names (Dkt. #175, Exhibit A). Katz admits
that she was serving in a fiduciary role to Quantec following
her appointment (Dkt. #175, Exhibit A).
In
early 2014, following Katz' appointment, Chris Payne,
Schepps, and Katz had a “back-room meeting” which
resulted in the decision to create a “liquidation
vehicle” (Dkt. #175, Exhibit A). The liquidation
vehicle would be used to sell Quantec's domain names to
pay back Schepps, Payne, Rasansky, Katz, and other creditors
for, among other things, attorneys' fees and backpay
(Dkt. #175, Exhibit A). A liquidation vehicle was opted for
by Payne, Schepps, and Katz because Quantec's assets were
allegedly being threatened by creditors who were planning to
put Quantec into bankruptcy (Dkt. #175, Exhibit A). Thus,
using a liquidation vehicle to transfer Quantec's assets
out of Quantec would protect those assets from other
creditors (Dkt. #175, Exhibit A). The most active member in
implementing the liquidation vehicle idea from the
“back-room meeting” was Schepps (Dkt. #175,
Exhibit A). That liquidation vehicle became Domain Protection
(Dkt. #175, Exhibit A).
The
structure and implementation of Domain Protection is relevant
for these motions. Katz is Domain Protection's manager
and sole employee (Dkt. #175, Exhibit A). As its manager,
Katz testified that she could not identify Domain
Protection's “business address, phone number, fax
number, sign, office furniture, website, or other indicia of
ordinary business” (Dkt. #162). Katz further testified
that Schepps: “drew up the papers to set up Domain
Protection”; “handled Domain Protection's
corporate registration”; “drew up the contract
that transferred the Quantec domain names to the
‘liquidation vehicle,' Domain Protection”;
and acted as “Domain Protection's lawyer and
effective decision-maker on all legal matters” (Dkt.
#162) (summarizing the May 31 deposition of Katz). The
foregoing actions, along with the conduct described in Dkt.
#192 and Dkt. #261, which was allegedly committed by Sea
Wasp, led to the present lawsuit. This leads the Court back
to the recent past for Sea Wasp's second additional
argument-i.e., Schepps alleged post-filing conduct.
As
previously stated, Schepps filed this lawsuit on June 18,
2018 (Dkt. #1). After Schepps filed this lawsuit, Schepps
provided the Court with a Certificate of Interested Persons
(Dkt. #4). The Certificate named Domain Protection, LLC; Sea
Wasp, LLC; Gregory G. Faia; and Vernon H. Decossas as the
persons who had a financial interest in the outcome of the
proceeding (Dkt. #4). Notably, the Certificate did not name
Katz or Schepps, a fact that Sea Wasp now claims requires
Schepps disqualification (Dkt. #162). The parties then
continued into discovery which brings the Court to the
present Motions.
On
April 23, 2019, “Sea Wasp wrote Schepps for deposition
dates for Plaintiff and Lisa Katz by May 8” (Dkt.
#189). Schepps responded that he would provide the deposition
dates (Dkt. #189, Exhibit C). After no deposition dates were
provided, however, Sea Wasp unilaterally sent out deposition
notices for Katz and Plaintiff for May 2 and May 3,
respectively (Dkt. #189). Schepps did not object to these
notices, or the eventual subpoenas that were provided to
Katz, until May 1 (Dkt. #189). Following Schepps eventual
objection, Katz refused to appear on both May 2 and May 3
(Dkt. #189). This led to a hearing before the Court. On May
3, 2019, the Court ordered the parties to set the Rule
30(b)(6) deposition of Lisa Katz by the following week.
Following the inability of the parties to agree on matters
surrounding the 30(b)(6) deposition, the Court then ordered
that the deposition be held on May 31, 2019. The Court then
granted in part and denied in part Plaintiff's Motion for
Protective Order (Dkt. #131) thus creating the topics for the
deposition (Dkt. #149). The Court also granted Sea Defendant
Sea Wasp's Motion to Compel Production of Documents from
Domain Protection, LLC (Dkt. #148). On May 28, 2019, the
Court ordered Defendant to appear in Sherman as noticed for a
period of 7 hours to complete the deposition. On June 3,
2019, after a dispute at the deposition of Katz, a Hotline
Order was entered which ordered that the parties either
complete the deposition as scheduled or determine a mutually
agreeable time to reconvene and complete the deposition (Dkt.
#156). Since the imposition of that Hotline Order, the
deposition of Katz has yet to resume. Indeed, following the
Hotline Order, another subpoena had been sent to Katz for a
deposition on June 19, 2019 (Dkt. #189). Schepps again
responded that “Ms. Katz will not be attending a
deposition on the 19th” (Dkt. #189, Exhibit K). The
Court has since intervened and again ordered that the
deposition be finished by November 19, 2019 (Dkt. #263).
The
allegations related to Schepps prior representation as well
as his pre- and post-filing conduct have led to the five
current motions. First, Sea Wasp filed: (1) Sea Wasp's
Opposed Motion for Leave to Exceed Page Limit of its Motion
for Sanctions (Dkt. #143); (2) Sea Wasp, LLC's Motion for
Sanctions (Dkt. #144); and (3) Sea Wasp, LLC's Second
Motion for Sanctions Against Gary Schepps (Dkt. #189). Domain
Protection opposes each of Sea Wasp's Motions (Dkt. #157;
Dkt. #205). The arguments made in support of, and against,
each of the Motions are as follows:
• Schepps “has a personal financial stake in the
outcome, as Plaintiff was formed as a “liquidation
vehicle” to secure and pay his creditor claims”;
o The assertion that Schepps has a financial stake in the
outcome is unsupported by the record and “whatever
Domain Protection ultimately desires to do with its assets is
not the business of Sea Wasp and is not an element of or
defense to any claim asserted in this suit.”
• Schepps “is a fact witness to the things Katz
testified regarding the “liquidation vehicle” and
its justification, a justification vigorously disputed by
Dallas lawyers Jeff Rasansky and Chris Payne, making
Schepps' testimony critical at any hearing or trial
related to same”;
o The assertions are unsupported by the record and stale.
Further, Sea Wasp cannot challenge the validity of the
assignments as it lacks standing to do so. Thus, Sea Wasp has
“made no showing that Domain Protection's
Counsel's testimony is ‘critical' for any
purpose.”
• Schepps “has repeatedly obstructed efforts to
obtain Katz's deposition through misrepresentations,
baseless pleadings, and refusals to cooperate in the carrying
out of three orders by this Court for the Plaintiff's
deposition to proceed”;
o “Sea Wasp has failed to establish that any
representation made by Counsel for Domain Protection which
was erroneous.” Further, Sea Wasp failed to show any
knowing misrepresentations by Schepps, any pleading that was
baseless, or any Orders that Schepps has violated.
• Schepps “has evidently violated Judge Brenda
Rhoades' December 11, 2018 order prohibiting Schepps from
representing Katz by his filings and activity in the May 31
partial deposition of Katz”;
o “Sea Wasp misunderstands Hon. Bankruptcy Judge
Rhoades disqualification order. That order is applicable only
to the Payne Adversary proceedings where Jeff Baron is the
Plaintiff, suing Christopher Payne and his wife.”
• Schepps “has aided and abetted Katz's
answering questions under oath, including instructing answers
that do not involve claims of privilege”; and
o “Sea Wasp failed to show any specific question or
instruction, and has failed to show that the instruction was
not meritorious. Sea Wasp has likewise failed to show any bad
faith intention with respect to any specific question or
instruction.”
• Schepps “has misrepresented Katz's personal
representation by her son (he doesn't, that she would be
obtaining her own counsel (she hasn't), and acted as
personal counsel by conditioning her appearance at the
(personally) subpoenaed June 19 deposition on the basis of a
Sea Wasp waiver of any disqualification claims against
him”
o “Sea Wasp has failed to show any knowing misstatement
of any fact, at any time.” Further, “Counsel for
Domain Protection did not agree to undertake the personal
representation of Lisa Katz, and declined Sea Wasp's
invitation to do so.”
(Dkt. #189; Dkt. #205).
Sea
Wasp then filed Sea Wasp, LLC's Opposed Motion to
Disqualify Gary Schepps as Counsel for Domain Protection, LLC
(Dkt. #162) and Sea Wasp, LLC's Motion to Supplement its
Opposed Motion to Disqualify Gary Schepps as Counsel for
Domain Protection, LLC (Dkt. #282).[4] In its original Motion, Sea
Wasp requests an expedited hearing and argues that Schepps
should be disqualified pursuant to Texas Rule of Professional
Conduct 1.09(a)(3), 3.08, 1.12, or 1.08(h). Sea Wasp argues
that under 1.09(a)(3), Schepps is disqualified because he is
representing Domain Protection against a former client,
Quantec, in an adversarial proceeding that concerns the same
Domain Names. As to 3.08, Sea Wasp argues that Schepps is
impermissibly “scrambling roles” as both an
advocate and witness who can establish facts regarding Domain
Protection's “entitlement to Quantec's domain
names” (Dkt. #162). Sea Wasp also alleges that Schepps
is using Domain Protection as his alter ego to commit fraud
(Dkt. #162). Under 1.12, Sea Wasp claims that Schepps
interests “so domina[te]” Domain Protection that
there is an “untenable conflict between his interests
and the company's” (Dkt. #162). Finally, under
1.08(h), Sea Wasp claims that, even if Domain Protection is
not found to be an alter ego of Schepps, Schepps “has
an impermissibly large stake in this litigation” due to
an alleged proprietary interest (Dkt. #162).[5]
Domain
Protection opposes the disqualification of Schepps (Dkt.
#169). In its Response, Domain Protection argues that under
1.09, Domain Protection is appearing against Sea Wasp, not
Quantec, and thus Schepps is not appearing against a former
client (Dkt. #169).[6] Domain Protection continues that under
3.08, Schepps would be a corroborating witness, the facts
that Sea Wasp argues Schepps would corroborate are not at
issue here, and that disqualification of Schepps would work
substantial hardship on Domain Protection (Dkt. #169). Next,
Domain Protection contends that Sea Wasp's 1.12 argument
is insufficient because “Sea Wasp has not demonstrated
any way in which Domain Protection's Counsel is not
representing Domain Protection, as distinct from its
employees, members, or constituents” (Dkt. #169).
Domain Protection additionally contends that Sea Wasp has not
presented the Court with any authority supporting Sea
Wasp's argument that 1.12 may serve as a vehicle for
disqualifying opposing counsel (Dkt. #169). Finally, as to
Sea Wasp's 1.08(h) argument, Domain Protection argues
that this rule is not a basis for an opponent to disqualify
opposing counsel
The
Court will first address Sea Wasp's Motion to Disqualify
Gary Schepps as Counsel for Domain Protection, LLC (Dkt.
#162). Following that analysis, the Court will then determine
whether Schepps should be sanctioned for the alleged conduct
described in Sea Waps's remaining three Motions (Dkt.
#143; Dkt. #144; Dkt. #189).
LEGAL
STANDARD
I.
Disqualification
The
Fifth Circuit has “made clear that
‘disqualification cases are governed by state and
national ethical standards adopted by the court.'”
FDIC v. U.S. Fire Ins. Co., 50 F.3d 1304, 1311- 12
(5th Cir. 1995) (quoting In re Am. Airlines, Inc.,
972 F.3d 605, 610 (5th Cir. 1992)). In the Fifth Circuit,
when considering disqualification of an attorney, district
courts generally rely upon the following: (1) the local rules
in the district; (2) American Bar Association's
(“ABA”) Model Rules of Professional Conduct; (3)
the ABA's Model Code of Professional Responsibility; and
(4) the state rules of conduct. See Horaist v.
Doctor's Hosp. of Opelousas, 255 F.3d 261, 266 (5th
Cir. 2001); Ayus v. Total Renal Care, Inc., 48
F.Supp.2d 714, 714 (S.D. Tex. 1999). Beyond the various rules
and codes identified above, “[a] court should be
conscious of its responsibility to preserve a reasonable
balance between the need to ensure ethical conduct on the
part of lawyers appearing before it and other social
interests, which include the litigant's right to freely
chosen counsel.” Woods v. Covington Cty. Bank,
537 F.2d 804, 810 (5th Cir. 1976) (citing Emle Indus.,
Inc. v. Patentex, Inc., 478 F.2d 562, 564-65 (2d Cir.
1973)).
In the
Eastern District, “the standards of professional
conduct adopted as part of the Rules Governing the State Bar
of Texas shall serve as a guide governing the obligations and
responsibilities of all attorneys appearing in this
court.” Eastern District of Texas, Local Rule AT-2. In
Texas, disqualification is a “severe remedy.”
NCNB Tex. Nat'l Bank v. Coker, 765 S.W.2d 398,
399 (Tex. 1989). Motions to disqualify are subject to an
exacting standard both to protect a party's right to
counsel of choice as well as to discourage the use of such
motions as a “dilatory trial tactic.”
Id. “The party seeking disqualification bears
the burden of proving that disqualification is
warranted.” Frito-Lay North America v. Medallion
Foods, Inc., 2012 WL 12893877, at *1 (E.D. Tex. Oct. 24,
2012) (citing Koch Ref. Co. v. Boudreau, 85 F.3d
1178, 1181 (5th Cir. 1996). “[T]hat burden is
heavy.” U.S. v. Aleman, 2004 WL 1834602, at *1
(W.D. Tex. Aug. 12, 2004) (citing United States v.
Phillips, 952 F.Supp. 480, 482 (S.D. Tex. 1996)).
II.
Rule 37 Sanctions
Federal
Rule of Civil Procedure 37 authorizes sanctions for failure
to comply with discovery orders. A court may bar the
disobedient party from introducing evidence, or it may direct
that certain facts shall be “taken to be established
for purposes of the action.” Fed.R.Civ.P.
37(b)(2)(A)(i). Rule 37 also permits a court to strike claims
from the pleadings, and even to “dismiss the action . .
. or render a judgment by default against the disobedient
party.” Roadway Express, Inc. v. Piper, 447
U.S. 752, 763 (1980) (citation omitted); accord Fed.
R. Civ. P. 37(b)(2)(A)(v)-(vi). “Rule 37 sanctions must
be applied diligently both ‘to penalize those whose
conduct may be deemed to warrant such a sanction, [and] to
deter those who might be tempted to such conduct in the
absence of such a deterrent.”' Roadway
Express, 447 U.S. at 763-64 (citation omitted).
In
addition, Rule 37(b)(2) requires that any sanction be just
and specifically related to the particular claim that was the
subject of the discovery violation. See Compaq Comput.
Corp. v. Ergonome Inc., 387 F.3d 403, 413 (5th Cir.
2004) (citation omitted). Further, the penalized party's
discovery violation must be willful. See United States v.
$49, 000 Currency, 330 F.3d 371, 376 (5th Cir. 2003).
ANALYSIS
As
previously stated, there are four related motions seeking
sanctions against, or disqualification of, Gary Schepps. The
Court first addresses Sea Wasp, LLC's Opposed Motion to
Disqualify Gary Schepps as Counsel for Domain Protection,
LLC. The Court then addresses: (1) Sea Wasp's Opposed
Motion for Leave to Exceed Page Limit of its Motion for
Sanctions; (2) Sea Wasp, LLC's Motion for Sanctions; and
(3) Sea Wasp, LLC's Second Motion for Sanctions Against
Gary Schepps.
I. Sea
Wasp, LLC's Opposed Motion to Disqualify Gary Schepps as
Counsel for Domain Protection, LLC
As
previously stated, Sea Wasp seeks to disqualify Schepps
pursuant to Texas Rule of Professional Conduct 1.09(a)(3),
3.08, 1.12, or 1.08(h). The Court addresses each Rule in
turn.
i. Rule
1.09: Substantially Related Subject Matter
Rule
1.09(a) states:
(a) Without prior consent, a lawyer who personally has
formerly represented a client in a matter shall not
thereafter represent another person in a matter adverse to
the former client:
(1) in which such other person questions the validity of the
lawyer's services or work product for the former client;
(2) if the representation in reasonable probability will
involve a violation of Rule 1.05; or
(3) if it is the same or a substantially related matter.
Tex.
Disciplinary R. Prof'l Conduct 1.09(a). Rule 1.09(a)
provides distinct grounds for disqualification. Under
1.09(a)(3), one ground for disqualification is “if the
current matter is substantially related to the matters in
which the lawyer has represented the former client.”
In re Am. Airlines, Inc., 972 F.2d 605, 614
(5th Cir. 1992). The Fifth Circuit has determined that the
“substantial relationship” test, which is used in
cases involving prior representations, applies to Rule 1.09.
Id. Under the “substantial relationship”
test:
A party seeking to disqualify opposing counsel on the ground
of a former representation must establish two elements: 1) an
actual attorney-client relationship between the moving party
and the attorney he seeks to disqualify and 2) a substantial
relationship ...