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In re Frantz

United States District Court, D. Idaho

August 31, 2016

In re Marin D. Frantz and Cynthia M. Frantz, Debtors.
MARTIN D. FRANTZ, an individual and CYNTHIA M. FRANTZ, an individual, Appellees. IDAHO INDEPENDENT BANK, an Idaho corporation, Appellant, Bk Case No. 11-21337-TLM


          Edward J. Lodge United States District Judge

         Pending before the Court is the above-entitled matter is Appellants Martin and Cynthia Frantz's appeal from the September 14, 2015 decision (Dkts. 1-1; 5-4, ER 461-501) of the United States Bankruptcy Court for the District of Idaho awarding partial sanctions to Appellee Idaho Independent Bank. Having fully reviewed the record herein, the Court finds that the facts and legal arguments are adequately presented in the briefs and record. Accordingly, in the interests of avoiding further delay, and because the Court conclusively finds the decisional process would not be aided by oral argument, this matter shall be decided on the record before this Court without oral argument.


         Appellants Martin and Cynthia Frantz (“Appellants”) appeal United States Bankruptcy Judge Terry L. Myers' decision awarding sanctions against them and their attorney based upon improper litigation tactics in an adversary proceeding commenced against Appellants by Appellee Idaho Independent Bank (“IIB”). Specifically, the decision assessed $49, 477.46 against Appellants and their attorney, Jonathon Frantz, jointly and severally, for filing motions to disqualify IIB's counsel and expert witnesses (“DQ Motions”) shortly before trial. The Bankruptcy Court determined the DQ Motions were meritless and were filed in bad faith to delay trial, to increase litigation costs, and to concomitantly increase the potential of settlement. (Dkt. 5-4, ER 494.)[1]

         Appellants filed a bankruptcy case in October 2011 (U.S. Bankruptcy Court, District of Idaho, BK-11-21337-TLM) (“Bankruptcy Case”). The Bankruptcy Case stayed state court proceedings in which IIB was pursuing a collection action against Appellants. On August 23, 2013, IIB commenced an adversary proceeding against Appellants to except Appellants' debts to IIB from discharge due to purported conversion and fraud. (U.S. Bankruptcy Court, District of Idaho, ADV-13-07024-TLM) (“Adversary Proceeding”). Although they originally obtained experienced bankruptcy counsel, Appellants ultimately selected their son, Jonathon Frantz (“Attorney Frantz”) to represent them as co-counsel in both the Bankruptcy Case and the Adversary Proceeding. In an effort to control costs, Attorney Frantz eventually became Appellants' lead attorney in the Adversary Proceeding. (Dkt. 5, ER 36.)

         With the participation of all counsel at a December 2013 pretrial conference, Judge Myers set trial in the Adversary Proceeding to commence a year later, on December 1, 2014. (Dkt. 5-4, ER 466.) This trial setting was “longer than the norm in this district, ” but was ordered due to the complicated nature of the case. (Dkt. 5, ER 58-59.) The pretrial scheduling order was modified in February, June and August of 2014 to adjust certain discovery and disclosure deadlines, but the December 1, 2014 trial date was not changed. (Dkt. 5-4, ER 466.)

         On October 3, 2014, Appellants sought to continue the trial to allow more time for the disclosure of expert witnesses. IIB opposed the motion. Although Appellants and IIB vehemently disagree about the purpose of the Motion to Continue and the underlying details regarding both parties' expert witness disclosure obligations, such dispute is not relevant to the instant appeal.[2] However, the Motion to Continue also contained vague allegations regarding the potential disqualification of IIB's counsel, Hawley, Troxell, Ennis & Hawley, LLP (“HT”).

         In the Motion to Continue, Appellants alleged “Mr. Frantz has recently discovered that he, through his former attorneys, hired a partner at [HT] to act as an expert witness in 2009 regarding issues surrounding…[an] asset listed on the Frantzes financial statements, which statements are a primary subject of this litigation.” (Dkt. 5, ER 37.) Specifically, Mr. Frantz hired HT partner Merlyn Clark as an expert witness on the subject of professional malpractice in a 2009 state court lawsuit Mr. Frantz brought against his former attorneys, Witherspoon Kelley.

         Idaho Rule of Professional Conduct 1.9 instructs that a lawyer who has formerly represented a client in a matter shall not, thereafter, represent another person in the same or a substantially related matter in which that person's interests are materially adverse to the interests of a former client, unless the former client gives informed consent confirmed in writing. Appellants and IIB disputed whether Mr. Frantz hired Mr. Clark solely as a testifying expert on the subject of professional malpractice, or, as Appellants contended, as a consulting attorney expert on the issue of damages in the prior litigation.[3] If Mr. Clark was hired solely as a testifying expert, as IIB contended, then no attorney-client relationship between HT and Mr. Frantz was formed and HT's representation of IIB was not improper. Appellants responded that Mr. Clark, even if initially hired as an expert witness, became a consulting attorney expert when he reviewed confidential information and provided opinions on damages in the state court litigation. In their Motion to Continue, Appellants argued they needed additional time “to discover what confidential information HT possesses that relates to those substantial elements of IIB's claims and what course of conduct is appropriate to resolve such breach.” (Id., ER 38.)

         At a hearing on October 20, 2014, the Motion to Continue was denied. During the hearing, Judge Myers noted that HT had already responded to the issue discussing Mr. Clark's role as a prior expert for Mr. Frantz in its opposition to the Motion to Continue, and had cited legal authority explaining why such representation did not constitute an attorney-client relationship or a basis for disqualification of HT in the Adversary Proceeding. (Id., ER 71-72.) Judge Myers questioned Attorney Frantz about why the disqualification issue couldn't be dealt with during the October 20, 2014 hearing. (Id., ER 72-73.) Attorney Frantz responded that he needed more time to investigate what confidential information had been provided to Mr. Clark during the prior litigation. (Id., ER 72-75.) After denying the Motion to Continue, Judge Myers stated, “if there is going to be an issue regarding Mr. Merlyn Clark and the-their allegation at present of conflict, then that will be filed before the end of this month and it will be set for hearing.” (Id., ER 88.) Appellants filed the first of three disqualification motions on October 31, 2014.

         In the first disqualification motion, Appellants claimed the following ethical violations: (1) in 2009, HT, through Mr. Clark, had an alleged attorney-client relationship with Mr. Frantz; (2) IIB was using confidential information obtained by Mr. Clark (and thus, by HT) in the pursuit of its fraud claims against Appellants; and (3) IIB had engaged an expert, Rand Wichman, (“Mr. Wichman”) who had also worked for Mr. Frantz as a consultant in the past, and who was also impermissibly using confidential information obtained through his prior relationship with Mr. Frantz in his expert report for IIB. (Dkt. 5-1, ER 94-113.) On November 6 and 7, 2014, Appellants also filed two motions to disqualify IIB's expert witnesses. The November 6, 2014 disqualification motion sought to disqualify Wichman, claiming the improper use of confidential information. (Id., ER 167-72.) The November 7, 2014 disqualification motion sought to disqualify IIB's resolve experts, claiming they were retained experts that were not properly disclosed. (Id., ER 196-201.) The October 31, November 6 and November 7 Motions to Disqualify shall be referred to collectively hereinafter as “DQ Motions.” On November 17, 2014, the DQ Motions were argued before Judge Myers. During the hearing, Appellants repeatedly contended an evidentiary hearing was necessary in order to prove Mr. Frantz provided Mr. Clark with confidential information relevant to IIB's claims against him, and that HT should thus be disqualified from representing IIB. (Dkt. 5-3, ER 232-260.) After considering the briefing and oral argument regarding the DQ Motions, Judge Myers determined “the showing by defendants in their submissions was less than compelling or even preponderating and [was] not then adequate to justify granting the motions.” (Dkt. 5-4, ER 507.) However, because denying the DQ Motions “on a burden of proof type basis and on a then inadequate showing would leave a cloud hanging over the entire case and hanging over [IIB's] law firm, ” and due to the serious nature of the ethical violations alleged, Judge Myers “reluctantly” vacated the December 1, 2014 trial setting and scheduled the DQ Motions for an evidentiary hearing. (Id., p. 508.)

         After a two-day evidentiary hearing in which seven witnesses testified, the Bankruptcy Court entered an oral ruling on December 10, 2014 denying each of the DQ Motions. (Id., ER 503-23.) Judge Myers held the facts and law presented during the hearing established Mr. Clark and Mr. Frantz had not had an attorney-client relationship. (Id., p. 514.) In so holding, Judge Myers found Mr. Clark's “clear and direct” testimony proved that his role in the malpractice litigation was solely that of a testifying expert witness. (Id., ER 511.) Moreover, Mr. Clark testified credibly that he did not review any of Mr. Frantz's confidential information through his role as an expert witness, and that he had also warned Mr. Frantz's former attorneys that any information he received would be subject to discovery in the state court litigation and should not be provided to him. (Id.) During the evidentiary hearing, Regina McCrea, one of Mr. Frantz's attorneys in the state court litigation, also testified. She stated that Mr. Clark was hired as an expert to establish and later testify to the standard of care in attorney representation. (Id., ER 512.) Judge Myers determined Ms. McCrea's testimony was not inconsistent with that of Mr. Clark, and that such testimony showed Mr. Clark had not been a consulting expert in the malpractice litigation, and that he had not entered into an attorney-client relationship with Mr. Frantz. (Id., ER 512-513.) Finally, Mr. Frantz also testified during the evidentiary hearing, but could not offer any firsthand knowledge of the facts and did not provide any probative testimony as to what type of information Mr. Clark had received. (Id., ER 513-14.) Judge Myers accordingly concluded IIB's analysis of the facts and law was supported by the record and that Mr. Clark acted solely as a testifying expert witness. As such, an attorney-client relationship was not created and there was no basis to disqualify HT under IRPC 1.9. (Id., ER 514.)

         Judge Myers also denied the Frantz's request to disqualify IIB's expert witnesses. With respect to disqualification of the resolve experts, Judge Myers reviewed the written submissions and ruled from the bench that the motion to disqualify the resolve experts was denied. (Dkt. 7-1, EER 18, 20.) With respect to Mr. Wichman's prior role as an expert for Mr. Frantz, Judge Myers determined Appellants “failed to establish that the scope and extent of Wichman's involvement went into the specific areas that he now evaluates as [IIB's] expert.” (Dkt. 5-4, ER 515.) After considering the standard for disqualifying hired experts, Judge Myers determined Appellants failed to meet their burden to establish both that they had a confidential relationship with Mr. Wichman, and that they had disclosed confidential information to Mr. Wichman that was relevant to the current litigation. (Id., ER 516-519.)

         Moreover, Judge Myers also noted Mr. Wichman contacted Mr. Frantz in 2011 to inform him that IIB had retained him to review the status of the relevant development project and that “Mr. Frantz expressed not only his consent, but his opinion that it would be a good thing for him to have Mr. Wichman educate [IIB] and prove an accurate picture of the development.” (Id., ER 520.) Judge Myers noted this consent raised a couple of concerns, one being the delay from 2011 until the November, 2014 disqualification motion claiming concerns over confidentiality or a side switching experts. (Id.) The other issue concerned, as Judge Myers explained:

the nature of the information that Mr. Wichman could provide regarding the development. Mr. Frantz testified that he limited his approval of Wichman's involvement only to discussion of lot line adjustments. But I find Mr. Wichman's testimony of the discussions more credible. Frankly, if Mr. Frantz wanted to have his cake and eat it too, by allowing Wichman to educate IIB on the development but simultaneously restrict him from mentioning or commenting on other aspects of the development, a fine line to be sure, then Mr. Frantz was required to make that demarcation clear and unambiguous. He did not do so and if it was a concern it is one that certainly ripened years ago.


         Judge Myers ultimately held, “[b]ased on the evidence presented I conclude there's no basis to disqualify Mr. Wichman as [IIB's] expert… And because Wichman is not disqualified, the attendant motion to disqualify [HT], based on the retention of Wichman, would also be and will also be denied.” (Id., ER 521.) Finally, in denying each of the DQ Motions on November 17, 2014, Judge Myers noted such motions, “could well be viewed as strategic rather than meritorious and designed solely to gain the relief that the failed motion to continue the trial didn't achieve.” (Id., p. 506.)

         Due to the Court's calendar, trial could not be reset until the end of May 2015. On May 1, 2015, Appellants signed a Waiver of Discharge (“Waiver”) as to all of their creditors, including IIB. On May 20, 2015, the Court approved the Waiver as to all creditors, and, as a result, vacated the trial in the Adversary Proceeding, as all of IIB's fraud claims were moot since no debts would be discharged. (Dkt. 5-4, ER 469.)

         On June 2, 2015, IIB filed its Motion for Sanctions requesting sanctions against Appellants and Attorney Frantz in the amount of $102, 040.27 (“Sanctions Motion”). (Id., ER 305.) IIB sought sanctions for a number of actions taken by Appellants and Attorney Frantz in the Adversary Proceeding, including filing the Motion to Continue on the eve of the discovery deadline and shortly before trial, filing the Disqualification Motion in bad faith after the Motion to Continue was denied, and filing the expert witness disqualification motions in bad faith. (Id., ER 305-324.) In its sanctions motion, IIB also noted Appellants had recently filed a lawsuit in state court alleging malpractice against HT based on the same facts and claims the Bankruptcy Court rejected when denying the DQ Motions. (Dkt. 5-3, ER 314, n. 2.)

         On June 12, 2015, IIB filed a Supplement to the Motion for Sanctions, submitting an e-mail Mr. Frantz sent to IIB on June 4, 2015 (“June e-mail”). (Dkt. 5-4, ER 541.) In the June e-mail, Mr. Frantz suggested the recently-filed malpractice case against HT “presented an opportunity not only for [Mr. Frantz] but for IIB and [HT] as well.” (Id.) Specifically, Mr. Frantz invited IIB to join the malpractice case against HT “to lead to a quicker and more lucrative settlement for IIB and [Mr. Frantz].” (Id.) Although the Bankruptcy Court had already rejected each of HT's purported ethical violations, Mr. Frantz suggested the malpractice lawsuit would allow HT to pay IIB out of its malpractice insurance, and that Mr. Frantz and IIB could structure a deal paying the first $4 million of the insurance funds to IIB in exchange for transferring the relevant development property to Mr. Frantz, with the remaining insurance proceeds split 50/50 between IIB and Mr. Frantz. (Id.)

         In addition to proposing the malpractice lawsuit could be used to leverage HT into a settlement, Mr. Frantz significantly noted: “the disqualification case was different than a malpractice case. We pursued the disqualification case as a probe so that [Appellants' malpractice attorney, Mr. Katz] could wrap his head around the issues and really understand what happened and to see how HT would defend themselves.” (Id., ER 542.) Notably, Attorney Frantz filed the DQ Motions before the Bankruptcy Court and the state court malpractice case against HT following Judge Myers' denial of the DQ Motions.

         The Bankruptcy Court held a hearing on the sanctions motion on June 15, 2015. (Dkt. 5-3, ER 378-414.) During his argument, Attorney Frantz addressed the June email, stating “[w]e went and found a nationally experienced attorney who does [malpractice cases] all over the country…you see from the e-mail that Mr. Katz thinks it's a great case, he's willing to take it on a contingency. I think that speaks volumes for what his opinion is about the case. And it spoke volumes to me as well, you know, as we're talking to him.” (Id., ER 399.)

         On September 14, 2015, the Bankruptcy Court entered an extensive oral ruling granting in part IIB's Motion for Sanctions and awarding IIB $49, 477.46 in fees and nontaxable costs associated with defending the DQ Motions. (Dkt. 5-4, ER 495.) After thoughtful explanation, the Bankruptcy Court denied each of the other basis for sanctions requested by IIB. (Id., ER 482-501.) However, Judge Myers was careful to note that the award of sanctions for the DQ Motions was grounded on the “entirety of the record, ” and Appellants' conduct throughout the proceeding. (Dkt. 5-4, ER 495.) Judge Myers noted, “[t]his Court has earlier and repeatedly expressed concern that the motions, objections and arguments advanced by debtors and their counsel could well be viewed as strategic rather than meritorious and spoke to strategic desires rather than principled ones.” (Id., ER 493.)

         In awarding sanctions against Appellants and Attorney Frantz for filing the DQ Motions, Judge Myers noted sanctions are appropriate to deter and provide compensation for a broad range of litigation tactics, including delaying or disrupting litigation and acting in the litigation for an improper purpose or for oppressive reasons. (Id., ER 493.) Judge Myers determined the DQ Motions were without merit and were filed in order to ...

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