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In re Wyatt & McAlister, PLLC

United States District Court, S.D. Mississippi, Northern Division

August 26, 2014

IN RE: WYATT & McALISTER, PLLC, Debtor,

ORDER

DANIEL P. JORDAN, III, District Judge.

This bankruptcy dispute is before the Court on Appellant Derek Wyatt's appeal of a November 7, 2013 Order of the United States Bankruptcy Court for the Southern District of Mississippi. In that Order, Bankruptcy Judge Edward Ellington ordered Wyatt to pay $31, 635.00 in sanctions for his bad-faith conduct. Appellee Mary E. McAlister has responded in opposition to the appeal. The Court, having fully considered the appeal record, the parties' submissions, and the applicable law, finds that the Bankruptcy Court's Order was proper and should be affirmed.

I. Facts and Procedural History

This appeal stems from the filing of a Chapter 7 bankruptcy petition for the law firm Wyatt & McAlister by Derek Wyatt. Derek Wyatt and Mary McAlister previously practiced law together in the firm Nutt & McAlister, PLLC. When David Nutt announced his desire to leave the practice of law, Wyatt and McAlister formed Wyatt & McAlister, PLLC on September 22, 2008.[1]

Wyatt and McAlister's working relationship deteriorated rather quickly, and on January 8, 2009, McAlister wrote Wyatt a letter, stating:

Based on your reaction to the email I sent to you yesterday morning, and on our subsequent conversation, it has become apparent that we can no longer work together, and that it is in each of our best interests to dissolve Wyatt & McAlister, PLLC as promptly as possible. Accordingly, I resign my employment as an attorney with Wyatt & McAlister, PLLC, effective Friday, January 9, 2009 at 5:00 p.m. My attorneys... are available to meet with you and/or your attorney at your convenience to work out a mutually agreeable voluntary dissolution of the PLLC, and a winding-up of its affairs. I am certain that you will agree it is in each of our best interests to dissolve Wyatt & McAlister, PLLC voluntarily, rather than one or both of us seeking a judicial dissolution. Until we can reach an agreement on dissolution, I will maintain my 50% equity interest in Wyatt & McAlister, PLLC, which includes an interest in all attorneys' fees that Wyatt and McAlister, PLLC may recover in connection with any current or future firm business.

McAlister Letter [9] at 3. One week later, Wyatt filed an application for judicial dissolution of Wyatt & McAlister in the Chancery Court of Madison County, Mississippi.

Over the following months, disputes arose over the ownership of various assets. In particular, Wyatt claimed that certain assets belonged to the firm, while McAlister insisted these assets were owned by Nutt & McAlister and/or other entities in which David Nutt owns interests. See In re Wyatt & McAlister, PLLC, No. 09-04354EE, 2010 WL 1709920, at *1-3 (Bkrtcy. S.D.Miss. April 23, 2010). The chancery court appointed a special master to hear the proceedings, but during its course other matters arose, including Wyatt's allegations of misconduct against McAlister. Before the special master could resolve the dissolution issues, Wyatt filed a petition for Chapter 7 bankruptcy on behalf of Wyatt & McAlister. Id. at *2. McAlister did not consent to the filing.

McAlister immediately filed a motion to dismiss the bankruptcy petition, contending that she and Wyatt each owned a 50% interest in the firm and that Wyatt did not have authority to file a petition on behalf of the firm without her approval. McAlister also sought monetary sanctions against Wyatt. The Bankruptcy Court bifurcated the dismissal and sanctions issues.

In response to the motion to dismiss, Wyatt defended his unilateral filing of the petition by arguing that McAlister-through her resignation letter-withdrew as a member of Wyatt & McAlister. But the Bankruptcy Court found that under the Mississippi Limited Liability Company Act, a member may withdraw from a PLLC only if the certificate of formation or the operating agreement so provides. See Miss. Code § 79-29-307(3) (Rev. 2009) ("Unless the certificate of formation or limited liability company agreement provides that a member has power to do so, a member has no power to withdraw from a limited liability company.") Wyatt & McAlister did not have an operating agreement, and the certificate of formation did not provide for the voluntary withdrawal of a member. See In re Wyatt & McAlister, PLLC, 2010 WL 1709920, at *6. Therefore, McAlister was still a member at the time the petition was filed, and her consent was necessary.[2] Id.

Following dismissal, Wyatt filed a motion for a new trial or to alter or amend the final judgment, which the Bankruptcy Court denied. Aggrieved, Wyatt appealed the dismissal order to the United States District Court for the Southern District of Mississippi, where District Judge Keith Starrett affirmed the dismissal and remanded the case for consideration of McAlister's motion for sanctions.

In a thorough, well-reasoned opinion, Bankruptcy Judge Ellington considered the three available routes to impose sanctions-Federal Rule of Bankruptcy Procedure 9011, 11 U.S.C. § 105(a), and the court's inherent power. Appeal Record [1-3], Sanctions Order [155] at 9-21. The Bankruptcy Court concluded that sanctions were not appropriate under Rule 9011 (for largely procedural reasons) but that it could impose sanctions under § 105 and the court's inherent authority if Wyatt acted in bad faith. Id. at 17-18.

On that issue, the Bankruptcy Court gave Wyatt the benefit of the doubt with respect to the decision to file the petition without authority, concluding that he "did not knowingly raise a frivolous argument." Id. at 20. But the court was less charitable with Wyatt's decision to purse the issue after dismissal:

However, after this Court entered its Dismissal Opinion on April 23, 2010, it should have been very clear to an experienced attorney like Wyatt that under Mississippi law, he did not have the legal authority to file the bankruptcy petition. As a licensed attorney with his vast experience, Wyatt was not an unsophisticated or uneducated participant in these proceedings. Wyatt knew W&M did not have an operating agreement, and he also was well aware that W&M's Certificate of Formation did not contain provisions for the voluntary withdrawal of a member. And yet, Wyatt moved this Court for a new trial and/or reconsideration of its Dismissal Opinion, and Wyatt appealed this Court's ruling in the Dismissal Opinion to the District Court. The Court finds that ...

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