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Lendus, LLC v. Goede

Court of Chancery of Delaware

December 10, 2018

LENDUS, LLC, Plaintiff,

          Date Submitted: December 4, 2018

          Stephen L. Caponi and Matthew B. Goeller, of K&L GATES LLP, Wilmington, Delaware, Attorneys for Plaintiff.

          Richard M. Beck and Sean M. Brennecke, of KLEHR HARRISON HARVEY BRANZBURG LLP, Wilmington, Delaware; OF COUNSEL: Clifford A. Wolff, of WOLFF LAW, Fort Lauderdale, Florida; David K. Stein, of BRICKER & ECKLER, of Columbus, Ohio, Attorneys for Defendants.

          John G. Harris, of BERGER HARRIS LLP, Wilmington, Delaware, Attorney for Non-Parties David K. Stein and Bricker & Eckler LLP.



          It is a rare case, fortunately, where this Court must become involved in adjudicating meaningful motions for sanctions based on lawyer misconduct. To quote the wise words of Vice Chancellor Laster, counsel should "think twice, three times, four times, perhaps even more" before seeking sanctions.[1] That is not to say, however, that this Court does not take seriously its responsibility to oversee the conduct of attorneys practicing before it. While most inappropriate conduct by attorneys is the province of disciplinary counsel, in the rare case where the conduct of counsel endangers the administration of justice toward those litigating here, this Court must act. This, I think, is one such case.

         It is worth pointing out that Court rules and the Delaware Rules of Professional Conduct constitute the limits of behavior, and are not practice guidelines. The norms of civility and candor expected of Delaware lawyers are not only a part of the heritage of practice cherished by our bar, but are essential to the administration of justice. In other words, Delaware practitioners, whether indigenous or pro hac vice, should respect these norms because they are good and right; when they do not, the courts must enforce them because they are indispensable to our ability to perform the core functions of a justice system.

         Judges are lawyers. We understand the pressures and frustrations of practice. It is no pleasure to criticize the practice of others, none of our own eyes being timber-free. Nonetheless, when gamesmanship and incivility become a drag on justice, we must act.

         Below, I discuss cross-motions for sanctions. Only the Plaintiff's motions are substantial. The Defendants are represented by counsel licensed to practice in the state of Ohio. Their attorney, David K. Stein, appears here as a courtesy extended to him to practice pro hac vice at the recommendation of, and with the assistance of, Delaware counsel. His behavior has fallen short of that expected of counsel practicing before the Bar of the Supreme Court of the State of Delaware. Two fundamental principles are thus put in tension: the right of litigants, consistent with the rules limiting practice in Delaware, to have the attorney of their choosing; and the principles of justice alluded to above. Here, I find, the latter must control. Some of the alleged misconduct involves collateral litigation in other jurisdictions; that, I address by reference to the disciplinary counsel of the appropriate jurisdiction. With respect to misconduct in this litigation, I find it appropriate to grant Mr. Stein's motion to withdraw his admission pro hac vice, and to refer the matter to disciplinary counsel for its review.

         I. BACKGROUND

         A. The Parties and Relevant Non-Parties

         Plaintiff LendUS, LLC is a mortgage lender, servicer, and seller of residential mortgages that is licensed to operate in forty states.[2] It is incorporated in Delaware and has a principal place of business in Alamo, California.[3]

         Defendant John Goede is a former LendUS employee.[4] He is also the founder of American Eagle Mortgage Co., LLC.[5] He came to work for LendUS as part of LendUS's merger with American Eagle Mortgage's parent company in 2017.[6]Thereafter, he was an officer within LendUS, and was partly responsible for overseeing all of the American Eagle division's operations and personnel.[7]

         Defendant John Schrenkel is a former LendUS employee.[8] He was a senior executive at American Eagle, and he joined LendUS as part of LendUS's merger with American Eagle's parent company in 2017.[9] Thereafter, he was an officer within LendUS and, along with Defendant Goede, was responsible for overseeing all of the American Eagle division's operations and personnel.[10]

         Non-party David K. Stein is an attorney who is licensed to practice in Ohio, Florida, the United States District Court for the Northern and Southern Districts of Ohio and the Eastern District of Michigan, and the United States Court of Appeals for the Sixth Circuit.[11] Mr. Stein is admitted to practice pro hac vice in this case. Mr. Stein does not represent the Defendants solely for purposes of this action; per the Plaintiff, he was also involved in facilitating the events at issue in this litigation, the Defendants' departure from LendUS and their subsequent employment with Supreme Lending.[12] As part of this case, LendUS sought to depose Mr. Stein about his knowledge of LendUS employees leaving to work for Supreme Lending. Because Mr. Stein is an attorney in this matter, and his involvement as a witness would bear on his ability to continue in his role as counsel, I granted the Defendants' Motion for a Protective Order on November 15, 2018.[13] I reasoned that the Defendants' ability to choose their counsel outweighed LendUS's need to depose Mr. Stein, in light of the fact that the information Mr. Stein possessed could be obtained elsewhere.

         Non-party Bricker & Eckler LLP is a law firm in Ohio, of which Mr. Stein is a Partner.[14]

         B. Relevant Facts

         1. The Underlying Litigation

         LendUS filed this action on March 30, 2018.[15] Its Complaint brought three counts: breach of contract, breach of fiduciary duty, and tortious interference with contract.[16] Because this is a fledgling suit and there is relatively little record evidence, and because the underlying litigation is only marginally relevant to the current sanctions motions, I will merely summarize the relevant facts and allegations of this action, as laid out in the Complaint.

         LendUS alleges that while the Defendants were employed with LendUS, they were responsible for managing and overseeing approximately three hundred employees within LendUS's American Eagle division.[17] In 2017, LendUS investigated financial irregularities within American Eagle and concluded that the irregularities were likely the result of intentional misconduct.[18] LendUS ultimately confronted the Defendants about the irregularities in early 2018.[19] LendUS submits that at around the time of the confrontation, the Defendants began meeting with another mortgage lender, Supreme Lending, "to explore the possibility of Supreme Lending acquiring most if not all of the people and assets of the [American Eagle] division."[20]

         The Complaint further alleges that the Defendants decided to join Supreme Lending, and thereafter, they set out on a campaign to recruit American Eagle division employees to move to Supreme Lending, in violation of certain contractual covenants.[21] LendUS caught wind of the Defendants' purported behavior.[22] It terminated Goede and Schrenkel for cause on March 30, 2018, the same day that it filed the Complaint.[23]

         As the suit progressed, the parties engaged in prolific motion practice. A significant point of disagreement was whether, under the relevant contractual terms, Delaware or Florida had jurisdiction over the litigation. On October 30, 2018, a Federal District Court in Florida decided that the case should proceed in Delaware.[24]Significant to the issues here is that the proceedings in this matter are bifurcated; predicate issues, relating to Count II of Plaintiff's Complaint, have proceeded on an expedited track, and that phase of the litigation is scheduled for trial on January 28, 2019 through February 1, 2019.[25] The extent to which discovery was also to proceed on a bifurcated basis is relevant to some of the issues involved in the sanctions motions, described below.

         2. LendUS's First Motion for Sanctions

         LendUS first filed a Motion for Sanctions on October 15, 2018. That Motion alleges that David K. Stein, while representing the Defendants in this matter, engaged in improper conduct in regard to David Berry, a LendUS employee. Specifically, LendUS claims that Mr. Stein, on behalf of the Defendants, filed a separate indemnification action against Mr. Berry in Ohio.[26] LendUS claims that this Ohio action was "entirely baseless" and was "used only as a vehicle to obtain ex parte discovery related to this litigation."[27] Per the recitations in LendUS's Motion, the Defendants sought to depose Mr. Berry, and told him that if he appeared for the deposition, the case against him would be dismissed.[28] Mr. Berry was deposed, without an attorney, by the Defendants' counsel, Mr. Stein.[29] The Defendants did not notify LendUS that Mr. Berry was to be deposed.[30] Afterward, the Ohio action was voluntarily dismissed without prejudice.[31]

         In a second deposition-this time as part of the present litigation and with LendUS's counsel present-Mr. Berry stated that in his first deposition, the same attorney (Mr. Stein) had previously asked him some of the same questions; that is, in the first deposition, Mr. Stein had asked Mr. Berry questions relating to the LendUS litigation.[32] LendUS contends that this line of questioning sought disclosure of privileged information in violation of the Delaware Rules of Professional Conduct.[33] Among other things, LendUS requests the Court to sanction the Defendants and Mr. Stein, to prohibit the use of Mr. Berry's deposition, to prohibit Mr. Stein from contacting any current or former LendUS employees, to take steps to identify all improper conduct by Defense counsel, and to award LendUS reasonable fees and expenses associated with its Motion.[34]

         In their Opposition to the Motion, the Defendants assert that the allegations in the Ohio litigation were meritorious.[35] They also assert that neither Mr. Stein nor the Defendants violated the Delaware Rules of Professional Conduct because Mr. Berry did not have the right to speak for LendUS; thus, his deposition was not an improper ex parte deposition.[36]

         3. The Defendants' First Motion to Compel and for Sanctions

         Shortly after LendUS filed its first Motion for Sanctions, the Defendants filed a Motion to Compel and for Sanctions on October 19, 2018. It, too, related to the Berry Depositions. The Defendants' Motion alleges that "anytime [sic] Defendants' counsel sought to explore Berry's knowledge of the facts underlying the allegations in the Complaint, Plaintiff's counsel inappropriately shut down questioning."[37] The Defendants argue that the Plaintiff's counsel attempted to improperly use attorney-client privilege to prevent discovery of relevant facts.[38] The Defendants seek an order compelling LendUS to produce Mr. Berry for deposition, requiring Mr. Berry to testify on the topics that he had previously been instructed not to discuss, and awarding the Defendants their fees associated with the motion.[39]

         4. LendUS's Second Motion for Sanctions

         LendUS filed a second Motion for Sanctions on November 8, 2018. In that Motion, LendUS alleges that on September 7, 2018, Mr. Stein filed suit in Florida against another LendUS employee, Rachel Brillhart May, seeking over $150, 000 in damages for her purported failure to repay a loan.[40] According to LendUS, an intermediary told Ms. May that if she immediately quit her position with LendUS, the suit would be dismissed.[41] LendUS also alleges that Mr. Stein has continued to improperly contact current and former LendUS employees about the present litigation, without disclosing that contact to LendUS.[42]

         In its second Motion for Sanctions, LendUS requests that Mr. Stein be disqualified from further involvement in this litigation.[43]

         In its Opposition, the Defendants assert that this Court has no authority to make determinations regarding the May lawsuit, because it is not relevant to, nor does it interfere with, the present litigation.[44] They also argue that LendUS's statements regarding Mr. Stein's communications with LendUS employees are false and misleading, and that sanctions are inappropriate.[45]

         5. The Perel Deposition

         On November 14, 2018, LendUS's counsel sent a letter to "inform the Court of recent unacceptable conduct by Defendants' pro hac vice counsel, David K. Stein," concerning a deposition taken the previous day.[46] On November 13, 2018, the Defendants had deposed Michael Perel, a LendUS employee, regarding events relevant to this lawsuit. LendUS's letter highlighted several instances of Mr. Stein's unprofessional conduct that occurred during the Perel Deposition.[47] LendUS transmitted to the Court a copy of the deposition transcript, as well as a video recording.

         It is worth pointing out what apparently led to Mr. Stein's frustration at the deposition. As described above, this matter has been bifurcated, with issues arising from a single count of the Complaint proceeding on an expedited schedule. Accordingly, Mr. Caponi, representing the Plaintiff, instructed the witness not to testify regarding issues outside the scope of the portion of the action that had been expedited. Mr. Stein believed all matters relevant to the litigation, writ large, were fair game. This was a good faith dispute, which should have been resolved by counsel or, failing that, through referral to the Court. Unfortunately, Mr. Stein took another approach.

         Upon simultaneously reviewing the deposition transcript and the video, it is clear to me that Mr. Stein took a hostile tone toward the Plaintiff's attorney, Steven L. Caponi, regarding Mr. Caponi's objections.[48] Mr. Stein repeatedly interrupted Mr. Caponi, and after one such interruption, he said to Mr. Caponi, "I really have seen enough and heard enough from you."[49] Mr. Stein questioned whether Mr. Caponi is, in fact, admitted to practice in Delaware[50] and whether he understands Delaware law.[51] Mr. Stein also referred to Mr. Caponi as "Egregious Steve"[52] and the "sovereign of Delaware"[53] throughout the deposition. Furthermore, Mr. Stein remarked, "Mr. Caponi, you don't get to create the rules. This is my deposition. I'm paying the court reporter. You don't create the rules."[54]

         Mr. Stein badgered and belittled Mr. Caponi in a manner that was neither relevant nor productive to the present lawsuit. For instance, after a break, Mr. Stein inquired, on the record, whether Mr. Caponi had washed his hands after using the restroom.[55] He also said to the deponent, Mr. Perel, that he was "talking [with] little words so that [Mr. Caponi] can understand."[56]

         This written recitation does not adequately convey the sarcasm and hostility that Mr. Stein expressed toward opposing counsel and the deponent. Beyond inappropriate words, Mr. Stein's unprofessionalism manifested through physical acts. The record reflects that Mr. Stein raised his hand and made yapping gestures toward Mr. Caponi while Mr. Caponi was speaking.[57] Mr. Caponi also relates that Mr. Stein "leaned across the table and [bared] his teeth" in an aggressive and exaggerated grimace while Mr. Caponi was speaking.[58]

         Mr. Stein similarly harassed the deponent, Mr. Perel. Like his treatment of Mr. Caponi, Mr. Stein often interrupted Mr. Perel during the deposition.[59] Mr. Stein tenaciously inquired about Mr. Perel's personal life, extending beyond what was relevant to the lawsuit. This included inquiring about the reasons that Mr. Perel's marriage ended in divorce, [60] as well as prolonged questioning on Mr. Perel's use of alcohol and drugs, despite Mr. Perel's repeated answers that he does not drink. For instance, Mr. Stein questioned:

Stein: The question is do you know whether there was litigation prior to [the Defendants'] termination?
Perel: I don't know.
Stein: You don't know?
Perel: Or recall.
Stein: Are you under the influence of any drugs or alcohol sitting here today?
Perel: No. Why?
Stein: Well, I'm asking the questions. So your answer is no. Is there anything that would harm or hinder your memory being able to answer truthfully here today?
Perel: I only speak the truth, so no.
Stein: Do you have a physical condition that prevents you from having the power of recall as to events that might have happened in 2018?
Perel: I have no issue with my memory if that's what you're asking me.
Stein: And you're not under the influence of any alcohol sitting here today?
Perel: No, I don't drink alcohol. I have [a medical issue].
Stein: When did you stop drinking alcohol?
Perel: I have never-I don't drink alcohol.
Stein: Never?
Perel: Yes. I have [a medical issue] . . . and I avoid alcohol at all costs.
Stein: Okay. Was that always the case while you were employed by RPM or LendUS?
Perel: Yes, that's always the case.
Stein: And you're not under the influence of any medication that would prevent your memory from working here today, are you?
Perel: No. . . . [61]

         Furthermore, on multiple occasions, Mr. Stein questioned Mr. Perel's truthfulness. In addition to the aforementioned questions about whether Mr. Perel was under the influence of any drugs or alcohol during the deposition, and his sarcastic inquiry into Mr. Perel's mental and physical capacity, Mr. Stein accused Mr. Perel of "making things up"[62] and lying under ...

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