Prenda (Mostly) Loses Again; Court Says 'We Warned You To Stop Digging, But You Still Did'

from the first-rule-of-holes dept

Here's a quick lesson in reading judicial opinions. If this is how the ruling on your appeal starts out, things did not go well:

When last we considered John Steele and Paul Hansmeier’s challenges to contempt sanctions imposed on them, we gave them some friendly advice: stop digging.... Apparently they did not realize that we meant what we said. Hoping to avoid paying additional sanctions, they dissembled to the district court and engaged in discovery shenanigans.

And, yes, this is the latest in the still ongoing Prenda saga. Specifically, this is the appeal in the Lightspeed case, one of a few "main" cases where Team Prenda (John Steele, Paul Hansmeier and the late Paul Duffy) got completely slammed by courts for lying and other dishonest and sketchy behavior. Prenda lost big back in 2013, but kept lying. The judge then slapped them with huge fees. On appeal, the 7th Circuit smacked Prenda down again, and (as you probably surmised from above) explained the "rule of holes" to Prenda:

The first rule of holes, according to an old saying, is to stop digging. The two appeals before us bring that to mind, for reasons that will become apparent.

The case went back to the lower court, where the judge hit Team Prenda with sanctions for its behavior, including contempt, and then added on attorneys' fees for good measure.

Because Steele and Hansmeier can't help themselves, they appealed again, leading to this latest ruling. Believe it or not, Steele actually may be temporarily happy with this latest ruling as he actually won on one point (but may lose even bigger in the long run). Still, the court is clearly not happy with either Steele or Hansmeier. It does note that since Hansmeier has filed for a (highly questionable) bankruptcy, he cannot pursue the appeal and thus his appeal is dismissed out of hand.

Steele's appeal, however moves forward. And he still mostly loses and the court doesn't miss opportunities to slam Steele:

Steele offers only the weak argument that Smith should have obtained and submitted this evidence earlier, and that Smith’s lack of diligence should cut off this line of inquiry.... This approach has little but chutzpah—a quality that Steele and his compatriots have long demonstrated—going for it. To begin with, it was Steele and Hansmeier’s actions that prevented Smith from obtaining the necessary evidence in time for the November 12, 2014 hearing. (Indeed, Steele and Hansmeier maintained at the hearing that Smith should receive no further discovery because he already had all the relevant documents in his possession.) Steele’s misrepresentations and Hansmeier’s motion to quash delayed Sabadell’s production regarding Steele’s finances until November 17, 2014. The district court denied Smith’s motion the next day. Meanwhile, Smith first sought discovery regarding Monyet from TCF Bank on March 24, 2014. Because of Hansmeier’s second motion to quash and initially incomplete production, Smith was unable to obtain it until February 2015.

Steele nonetheless says that Smith should have found the relevant documents earlier because Monyet’s existence was “public record” in 2010, and the relevant documents were attached as exhibits to a debtor’s exam in a Minnesota bankruptcy case in June and July 2014. The fact that Monyet’s existence was public record is of little import: Smith had no reason to know of its existence, let alone any way to know of Hansmeier’s control of the company or the transfers Hansmeier made from its Scottrade account. Moreover, Smith was not a party to the Minnesota bankruptcy case. The district court did not abuse its discretion in granting Smith’s motion to reconsider.

The court notes that the sanctions on Steele are "easy to justify" given "Steele's entire pattern of vexatious and obstructive conduct."

And that included deliberately seeking to hide his and Hansmeier's money just as the sanctions were being ordered:

This was the very time when Steele and Hansmeier were emptying accounts they controlled of sums vastly in excess of the sanctions they owed. This was obviously egregious behavior, and a flat violation of the district court’s order. Their actions necessitated Smith’s litigation over their ability to pay the sanctions. Smith’s compensable expenses reasonably reached back to his first round of third‐party subpoenas, issued on January 16, 2014, as the district court found.

The one point that Steele won on, however, was on the contempt fine. Steele had argued that it was issued as a form of criminal contempt, rather than civil contempt, and there are different standards there. After looking it over, the appeals court appears to reluctantly agree.

Examining the nature of Steele’s fine and its justification, we are convinced that it falls on the criminal side of the line. It was an unconditional fine that did not reflect actual costs caused by the attorneys’ conduct. The district court justified the fine of $65,263.00 solely by reference to the attorneys’ “contemptuous statements in court.” This number, the court commented, was “twenty‐five percent of Judge Murphy’s original sanction.” It added that a “pattern is purposefully developing whereby the contemnors could find their way back to the full sanction … for their original wrongdoing if they continue their misdeeds before this Court.” This justification most naturally supports a fine meant to vindicate the authority of the court and deter future misconduct, not an award designed to be compensatory or coercive.

It is also telling that the amount of the fine was not connected to any cost imposed on either Smith or the district court. The court meant instead to punish past behavior and to deter future contemptuous conduct. Nor was the fine tied to any specific future action. While Lightspeed I found a fine quantified without reference to billing statements to be a civil contempt, the fine there “corresponded to attorneys’ fees and costs incurred by defendants during the course of litigating the contempt motion.” ... That is not the case here: the district court said nothing about Smith’s costs. It had taken care of the costs attributable to the separate discovery sanctions in a separate part of its order.

Of course, this small victory may be short-lived:

We make no comment on what type of contempt Smith may wish to seek, whether the court might re‐consider the possibility of civil contempt, or whether criminal contempt could be justified once the proper procedures are followed. We are confident that the district court will take a fresh look at these questions in light of this opinion.

This issue actually came up during the original appeal, when the judges on the 7th Circuit, somewhat incredulously, asked the lawyer representing Steele and Hansmeier if he was really asking for the courts to consider if Steele and Hansmeier had committed criminal acts when it had already focused solely on civil ones. And, now, Steele, at least may find himself in a deeper hole because of this. That's what happens when you keep digging.

Filed Under: 7th circuit, anthony smith, copyright troll, john steele, paul hansmeier, rule of holes
Companies: lightspeed, prenda, prenda law