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Domain Protection, LLC v. Sea Wasp, LLC

United States District Court, E.D. Texas, Sherman Division

November 19, 2019

DOMAIN PROTECTION, LLC, Plaintiff,
v.
SEA WASP, LLC, ET. AL. Defendants.

          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 ...

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