Kallen et al v. United States Trustees Office

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WO
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF ARIZONA
Candace Kallen, et al.,
Appellants,
v.
United States Trustees Office,
Appellee.
No. CV-25-00074-TUC-RCC
ORDER
Appellants Candace Kallen and My Arizona Lawyers, LLC (collectively
“Appellants” or “Firm”) appeal from a February 3, 2025 Order from the United States
Bankruptcy Court for the District of Arizona (“Bankruptcy Court”). Appellants filed an
Opening Brief on May 23, 2025 (Doc. 13), Appellee United States Trustee filed a Response
on June 27, 2025 (Doc. 17), and Appellants filed a Reply on July 7, 2025 (Doc. 20). Oral
argument was held on December 8, 2025. For the following reasons, the Court will affirm
the Bankruptcy Court’s February 3, 2025 Order.
I. FACTUAL AND PROCEDURAL BACKGROUND
Kallen is the sole owner of My Arizona Lawyers. (Doc. 18 at 153.) Appellants’
practice covers multiple areas of law, including family, criminal, estate planning, and
personal injury. (Id.) Appellants’ bankruptcy practice is predominantly comprised of
Chapter 7 and Chapter 13 cases. (Id.) EZLegal, LLC (“EZLegal”) is a third-party financing
firm owned by Katherine Keisel. (Doc. 13 at 10.) EZLegal lends money for legal fees. (Id.)
///
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a. The Fee Sharing Arrangement
The business agreement between Appellants and EZLegal began around April 2021.
(Doc. 18 at 154.) EZLegal would finance bankruptcy cases for Appellants’ debtor-clients
who were unable to pay Appellants’ fee. (Doc. 13 at 10.) The parties acknowledge that
none of the terms of their business agreement, including the fee sharing arrangement, were
in writing. (See Doc. 19 at 286.) The fee sharing arrangement had three different iterations,
each with slight differences. (Doc. 13 at 11.)
The first iteration of the fee sharing arrangement was implemented from
approximately April 2021 to October 2022. (Doc. 19 at 286.) EZLegal advanced 75% of
the $3,000 Attorney Flat Fee to the Firm and, in exchange, EZLegal had the “right to collect
and retain the full Attorney Flat Fee from such debtor-clients.” (Id. at 287.) EZLegal also
had the option to return defaulted debtor accounts to the Firm. (Id.)
The second iteration of the fee sharing arrangement began around October 2022.
(Id.) This version was a verbal modification where EZLegal paid the Firm 62% of the
$3,000 Attorney Flat Fee and, in exchange, EZLegal had the right to collect and retain the
full Attorney Flat Fee from debtor-clients. (Doc. 13 at 11.) EZLegal stopped returning
defaulted debtor-client accounts. (Doc. 19 at 287.) EZLegal also retained 38% of the
Attorney Flat Fee. (Id. at 287–88.)
The third iteration of the fee sharing agreement began in March 2023 and continued
until the Order to Show Cause (“OSC”) was issued (id.), after which Kallen terminated the
entire business relationship with EZLegal (Doc. 18 at 58). Here, EZLegal and Appellants
continued their 62% / 38% fee sharing arrangement. (Doc. 19 at 288.) However, EZLegal
began requiring debtor-clients to execute the Promises to Pay form. (Id.) This made debtor-
clients directly bound to EZLegal for the full amount of the Attorney Flat Fee. (Id.) The
Promises to Pay stated that debtor-clients were borrowing funds directly from EZLegal,
were required to pay the Attorney Flat Fee, and were also obligated to repay the principal
balance. (Id.)
b. The Retention Agreements and Promises to Pay
Under the third iteration, there were three documents debtor-clients were required
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to sign before retaining Appellants for their services: the Pre- and Post-Petition Retention
Agreements and the Promises to Pay. The Pre-Petition Retention Agreement gave debtor-
clients two options: (1) to pay $2,500 upfront for filing a bankruptcy petition, and to retain
Appellants for after-filing services; or (2) to pay $3,000 later and the Firm would represent
the debtor-client for pre-petition filing and services, but would only continue to assist with
after-filing services upon the signing of the Post-Petition Retention Agreement. (Doc. 18
at 25.) The Retention Agreements both stated that any additional work would be at the
Appellants’ discretion at a rate of $300 per hour, plus $150 per hour for paralegal time. (Id.
at 25, 28.) Debtor-clients would also have to pay a flat fee of $350 per item for
Reaffirmations. (Id.) The Retention Agreements also stated that all payments would be
made to Appellants, who would then pay the lender, EZLegal. (Id. at 29, 33.) The Post-
Petition Retention Agreement also stated that debtor-clients would face a 19.99% annual
interest rate in the event of a default. (Id. at 36.) If the debtor-clients did not sign the Post-
Petition Retention Agreement, they could either represent themselves or hire another
attorney. (Id. at 25, 32.)
Debtor-clients were told that they were required to sign the Promises to Pay for
continued post-petition representation. (Doc. 19 at 288.) The Promises to Pay allowed
EZLegal to recover the “full amount of the Attorney Flat Fee.” (Doc. 13 at 13.) The
Promises to Pay provided that the debtor-clients would borrow the funds from EZLegal to
cover the $3,000 Attorney Flat Fee. (Doc. 18 at 38.) Debtor-clients were then directly
obligated to repay EZLegal the principal balance in 12 monthly installments at 0% interest.
(See Doc. 18 at 38; see also Doc. 19 at 288.) The fee sharing arrangement was not stated
in any of the Retention Agreements. (Doc. 19 at 299.) The Promises to Pay also featured
an astounding 300% annual interest rate “or the maximum rate allowed by law” in the event
of a default. (Doc. 18 at 40.) The Promises to Pay did not disclose that Appellants were
accepting $1,860 (62%) in full satisfaction of the Attorney Flat Fee owed or that EZLegal
would retain $1,149 (38%) of the $3,000 Attorney Flat Fee. (See id.)
c. The Order to Show Cause
This Appeal arose from a hearing held on December 12, 2023, regarding Kallen’s
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Attorney Disclosures in one of her debtor-client’s petitions. (Doc. 13 at 9.) When asked
about whether she communicated with most of her debtor-clients, Kallen tentatively
responded that she does regarding the specifics of their cases, but she does not advise them
about the content or terms of the Retention Agreements. (Doc. 18 at 12.) She continued
that if they had questions, they would have to reach out to outside counsel. (Id.) Kallen
confirmed that she and “staff in her office” drafted the Retention Agreements (id. at 10),
that additional work would cost $300 per hour (id. at 13–14), that the debtor-clients became
directly obligated to EZLegal (id. at 14–18), and that there was a high default interest rate
of 300% in the Promises to Pay (id. at 19). On April 16, 2024, Judge Brenda M. Whinery
issued the OSC, which required Appellants to show cause as to why the Bankruptcy Court
should not: (1) void all Post-Petition Retention Agreements before it “on the basis that they
violate the Bankruptcy Code and the Local Rules for the United States Bankruptcy Court
for the District of Arizona”; (2) order the disgorgement of all fees paid pursuant to or
otherwise attributable to the Post-Petition Retention Agreements; and/or (3) bar Appellants
from practicing before the Bankruptcy Court “given what appear to be extensive violations
of the Bankruptcy Code, and given the structure and conflicts of interest inherent to her
Firm’s financing arrangement with EZ Legal Fees.” (Id. at 49.) The OSC further
established that this would be a “miscellaneous proceeding.” (Id.)
Appellants responded to the OSC on May 8, 2024. (Doc. 19 at 333.) In it, Appellants
noted that they were no longer working with EZLegal or any other third-party lender. (Doc.
18 at 58.) Appellants contended that they received the full $3,000 Attorney Flat Fee directly
from EZLegal, with a net of $2,662 after paying the filing fee. (Id. at 59.) Appellants did
not seek reimbursement for the filing fee. (Id.) Appellants continued that they were not
privy to the interactions between their debtor-clients and EZLegal, and that they performed
all agreed-upon services reasonably and diligently. (Id. at 59, 60.) Further, Appellants
argued that there was “no contractual agreement between MyAZ and EZLegal,” and that
they did not intentionally seek to violate the Bankruptcy Code. (Id. at 60.)
There were eight hearings in total related to this OSC, four of which will be detailed
below. (See Doc. 19 at 334, 336–37, 339, 341–44.) Prior to the first hearing, Judge Whinery
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issued a similar OSC against another attorney, Ruth Ann Ambs, for her financing
arrangements with EZLegal and her referral arrangement with Want a Fresh Start, LLC.
(Id. at 8, n. 13.) In the first OSC hearing on May 15, 2024, Judge Whinery asked whether
Appellants used the referral services of Want a Fresh Start, owned by Daniel Richter,
Katherine Kiesel’s husband. (Doc. 18 at 65–66.) Appellants’ counsel, Randy Nussbaum,
indicated that Appellants had no relationship with the entity or Richter. (Id.)
The U.S. Trustee noted two concerns in the hearing. The first was that Kallen had
been subject to OSCs in other bankruptcy matters before Judge Daniel P. Collins for not
filing motions on behalf of her clients, which included the 38 cases listed in the OSC issued
by Judge Whinery. (Id. at 69–70.) The second was that many of the debtor-clients had
“negative disposable income” and did not “appear to have the ability to make these post-
petition payments” that were required under the Post-Petition Retention Agreements. (Id.
at 70.) The Bankruptcy Court ordered Appellants to disclose all documents related to any
financing agreements for cases that were financed by EZLegal between May 15, 2022, to
May 15, 2024 (“Lookback Period”). (Id. at 72; Doc. 19 at 280.)
Next, in the June 10, 2024 hearing, Appellants’ counsel Nussbaum stated that the
fee sharing arrangement was “different than what is disclosed in the pleadings,” and that
the case lists filed by Appellants contained inconsistencies and discrepancies. (Doc. 18 at
107–08, 144–45.) This was the first instance of misrepresentation to the Bankruptcy Court.
There were discrepancies between the case list provided by Appellants and EZLegal’s case
list. (Id. at 145.) There were also gaps of missing cases from May 15 to May 31, 2022, and
January 11 to January 17, 2024. (Id. at 114.) The parties revealed in this hearing that there
was a 62% / 38% fee sharing arrangement between EZLegal and Appellants. (Id. at 108,
110.) The parties also confirmed that there were no written versions of this arrangement.
(Id. at 112–13.) The Bankruptcy Court then ordered Appellants to provide the Retention
Agreements for all cases filed within the Lookback Period. (Id. at 114.) The Court also
imposed interim sanctions, which prohibited Appellants from filing any new Chapter 7
Bankruptcy cases in the District of Arizona, unless (1) Appellants obtained wet signatures;
(2) Appellants paid the fee in full prior to the filing of the petition or the Firm financed
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without an outside lender; (3) the fees were less than $1,860 per case; and (4) Appellants
fully complied with a Stipulated Order signed by Judge Collins. (Id. at 147.)
However, the Bankruptcy Court discovered in a July 23, 2024 hearing that two
attorneys who were still associated with the Firm had created a new law firm by the name
of Atlas Law just three days after the Court imposed its restrictions. (Id. at 161, 163–64,
203.) In addition, neither party had supplied the Bankruptcy Court with the necessary
documentation, such as a fully amended case list. (See id. at 170–71, 203.) The Bankruptcy
Court noted that it was not the Court’s responsibility to figure out how many cases were
within the Lookback period. (Id. at 171.) Although EZLegal and the U.S. Trustee had
reached a settlement agreement in this miscellaneous proceeding, because of the
Bankruptcy Court’s concern about compliance, it stated it would not consider any proposed
settlements unless the parties filed a certification of compliance with the June 10, 2024
Order. (Id. at 168, 203.) The Bankruptcy Court reimposed its original sanction prohibiting
Appellants from filing any Chapter 7 Bankruptcy cases. (Id. at 204.)
The U.S. Trustee then filed a Motion to Examine Fees Paid, Disgorge Fees, and
Impose Sanctions Against Candace Kallen and My Arizona Lawyers, PLLC. (Id. at 207.)
The U.S. Trustee noted that Appellants had not fully complied with the Court’s June 10,
2024 Order: Appellants failed to file an amended case list, the Retention Agreements, or
the financing agreements in all cases filed within the Lookback Period. (Id. at 209.) The
U.S. Trustee argued that Appellants’ actions demonstrated that they “did not fully
understand the nature of the improprieties at issue.” (Id. at 217.) For example, the Trustee
stated that My Arizona Lawyers disregarded the Bankruptcy Court when two affiliated
attorneys left the firm and began litigating bankruptcy cases under the newly formed firm
Atlas Law. (Id. at 210.) In addition, Appellants failed to disclose the use of a third-party
financer and made contradictory representations about the details of their fee sharing
arrangement. (Id. at 215.) Furthermore the U.S. Trustee noted that it appeared that petitions
had never been reviewed by the debtor-clients. (Id. at 216–17.) Further, the U.S. Trustee
noted that Appellants’ filings were often untimely, and that both debtor-clients and
bankruptcy trustees had notified the U.S. Trustee of problems with the Firm, including
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failing to meet with clients, using nonlegal professionals to provide legal advice, and being
consistently late in producing documents. (Id. at 220.) The U.S. Trustee requested full
disgorgement of fees paid within the Lookback period, penalties under 11 U.S.C. §
526(c)(5)(B), and sanctions under the Bankruptcy Court’s inherent powers and authority
under 11 U.S.C. § 105. (Id.)
Appellants responded, stating that (1) their fee was reasonable; (2) any violations of
the Bankruptcy Code, Local Rules, and/or Federal Rules of Bankruptcy Procedure were
inadvertent; (3) they would actively work to comply in the future; (4) they worked
diligently for their debtor-clients; and (5) the proposed sanctions and remedies would be
unduly harsh. (Doc. 19 at 282.)
d. October 16, 2024 Trial
A one-day trial was held on October 16, 2024. Kallen had become self-represented
after attorney Nussbaum had withdrawn. (Id. at 340–42.) Before trial, Kallen told Judge
Whinery that Richter had filed a lawsuit against the Judge and that Kallen was unsure how
the lawsuit would affect the hearings that day. (Id. at 9.) “The complaint concerned a sua
sponte order to show cause Judge Whinery issued against [Ruth Ann Ambs], the financer
EZLegal, and Want a Fresh Start.” (Doc. 13 at 26.) Judge Whinery responded that “[i]t
does not” and that there had been “no motion filed,” and “to [her] knowledge, it doesn’t
[have an] impact on these proceedings today.” (Doc. 19 at 9–10.)
In the trial, Kallen was questioned about the nature of the Retention Agreements,
and how they contradicted the Promises to Pay and Kallen’s prior admissions to the
Bankruptcy Court; her continued violations of the Bankruptcy Code and Local Rules; and
her noncompliance with both Judge Whinery and Judge Collins’ orders. (See e.g., id. at
17–18, 20–21, 27–28, 34–42, 44–46, 81–83 100–102.) The Bankruptcy Court took the
matter under advisement and had the parties file post-trial briefs before issuing its Order
on February 3, 2025. (Id. at 283.)
e. The Bankruptcy Court’s February 3, 2025 Order
In its February 3, 2025 Order, the Bankruptcy Court found that Appellants had
“engaged in a clear and consistent, years-long pattern and practice of violating material
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provisions of the foregoing sections of the Bankruptcy Code and Rules intended to protect
consumer debtors, and of violating Arizona’s Rules of Professional Conduct,” and had
consistently lied to the Court. (Doc. 19 at 298–99, 300.) The Bankruptcy Court found that
based on consistent misrepresentations, all Retention Agreements “in all EZ Legal
Financed Cases, as set forth on the Case List, are void, and that Ms. Kallen and her Firm
are liable for all fees and charges paid by such debtors.” 1 (Id. at 300 (citing 11 U.S.C. §§
329, 526(c)(1), 526(c)(2)(A), 526(c)(2)(C); Fed. R. Bankr. P. 2016; In re Park-Helena
Corp., 63 F.3d 877 (9th Cir. 1995); In re Basham, 208 B.R. 926 (9th Cir. BAP 1997), aff’d
sub nom. In re Byrne, 152 F.3d 924 (9th Cir. 1998).) The Bankruptcy Court also found that
“full disgorgement of all fees that have been paid by debtors in the EZ Legal Financed
Cases” was appropriate. (Doc. 19 at 300.)
In addition to voiding the agreements, the Bankruptcy Court ordered Appellants to
disgorge $1,644,566.00 to the Clerk of Court, remove all negative credit notations related
to the Retention Agreements from debtor-clients’ credit reports; and refrain from filing any
future bankruptcy petitions in the District of Arizona for two years. (See id. at 302–303.)
II. STANDARD OF REVIEW
The district court may review the bankruptcy court’s orders. 28 U.S.C. § 158(a)(1).
Conclusions of law are reviewed de novo, while findings of fact are reviewed under the
clearly erroneous standard, meaning there is a “serious thumb on the scale for the
bankruptcy court.” U.S. Bank Nat. Ass’n ex rel. CWCapital Asset Mgmt. LLC v. Vill. at
Lakeridge LLC, 583 U.S. 387, 394 (2018); see also SVP Fin. Servs. Partners LLLP v. Sky
Fin. Inv. LLC, 588 B.R. 528, 533 (D. Ariz. 2018), aff’d sub nom. Silverman as Tr. of Stanley
C. Silverman Revocable Tr., dated Aug. 6, 2006 v. Birdsell, 796 F. App’x 935, 937 (9th
Cir. 2020). A factual finding is clearly erroneous when the court is “left with the definite
and firm conviction that a mistake has been committed[.]” SVP, 588 B.R. at 533 (citing In
re Greene, 583 F.3d 614, 618 (9th Cir. 2009)). Otherwise, “the court must accept the
bankruptcy court’s findings of fact . . . .” Id. The district court must review the evidence
1 The Case List included 39 cases before Judge Whinery and over 800 cases before other
judges in the Bankruptcy Court. (Doc. 19 at 300, 304–23.)
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on the record in the light most favorable to the prevailing party. See In re Jake’s Granite
Supplies LLC, 442 B.R. 694, 698–99 (D. Ariz. 2010).
The court reviews the award of sanctions for abuse of discretion. Chambers v.
NASCO, Inc., 501 U.S. 32, 55 (1991). The “bankruptcy court abuses its discretion if it bases
a decision on an incorrect legal rule, or if its application of the law was illogical,
implausible, or without support in inferences that may be drawn from the facts in the
record.” In re Avon Townhomes Venture, No. BAO NC-11-1068-HDOD, 2012 WL
1068770, at *5 (B.A.P. 9th Cir. Mar. 29, 2012), aff’d, 575 F. App’x 715, 716 (9th Cir.
2014) (citing United States v. Hinkson, 585 F.3d 1247, 1261–63 (9th Cir. 2009)).
III. DISCUSSION
Appellants assert that the Bankruptcy Court erred because (1) Judge Whinery only
had subject matter jurisdiction over the 39 cases before her; (2) it did not have the inherent
authority, nor authority under 11 U.S.C. § 105(a), which grants power to the court, to
impose sanctions; (3) Appellants did not violate any restrictions on debt relief agencies
under 11 U.S.C. § 526(c)(2); (4) the sanctions imposed were excessive; and (5) Judge
Whinery should have recused herself under 28 U.S.C. § 455(a). (Doc. 13 at 10.) Each of
these arguments are addressed in turn.
a. Subject Matter Jurisdiction
“The existence of subject matter jurisdiction is a question of law reviewed de novo.”
Tesla Motors, Inc. v. Balan, 134 F.4th 558, 560 (9th Cir. 2025) (quoting United States. v.
Peninsula Commc’ns, Inc., 287 F.3d 832, 836 (9th Cir. 2002)). Subject matter jurisdiction
means “the court’s statutory or constitutional power to adjudicate the case.” Steel Co. v.
Citizens for Better Env’t, 523 U.S. 83, 89 (1998). Subject matter jurisdiction can never be
forfeited or waived. United States v. Cotton, 535 U.S. 625, 630 (2002).
i. 28 U.S.C. §§ 1334(b) & 157
The Bankruptcy Court has jurisdiction over “all civil proceedings arising under title
11 or arising in or related to cases under title 11.” 28 U.S.C. §§ 1334(b), 157 (emphasis
added). “Proceedings ‘arising under’ title 11 involve causes of action created or determined
by a statutory provision of the [Bankruptcy Code].” In re Wilshire Courtyard, 729 F.3d
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1279, 1285 (9th Cir. 2013) (citation omitted). “‘[R]elated to’ jurisdiction, is an
exceptionally broad category encompassing virtually any matter either directly or
indirectly related to the bankruptcy case.” In re GACN, Inc., 555 B.R. 684, 693 (B.A.P. 9th
Cir. 2016).
First, the Bankruptcy Court had jurisdiction over this miscellaneous proceeding
because it “related to” Appellants’ actions in the 887 bankruptcy cases.
ii. 28 U.S.C. § 137(a)
The bankruptcy court retains “broad equitable power” to “issue any order, process,
or judgment that is necessary or appropriate to carry out the provisions of this title.” 11
U.S.C. § 105(a). The business of a court shall be divided among its judges as provided by
the rules and orders of the court. 28 U.S.C. § 137(a). Judges, however, often rule, issue
orders, or transfer cases between themselves. See Marshall v. Marshall, 721 F.3d 1032,
1040 (9th Cir. 2013) (“[J]udges are vested with ‘inherent’ authority to transfer cases among
themselves ‘for the expeditious administration of justice.’”) (quoting United States v.
Stone, 411 F.2d 597, 598 (5th Cir. 1969) (per curiam)).
Here, Appellants argue that because Judge Whinery did not transfer all cases
involving EZLegal that were not before her to herself, that she lacked the jurisdiction to
issue any orders in all but 39 of the 887 cases. (Doc. 13 at 34.) The Court disagrees. First,
Appellants misunderstand the Bankruptcy Court’s power to transfer cases under § 137(a).
It simply describes how cases are divided between judges in the same court. As all 887
cases were bankruptcy cases filed within the District of Arizona, then the Bankruptcy Court
has jurisdiction over them. Furthermore, although this matter stemmed from a bankruptcy
proceeding already in progress, the Bankruptcy Court—within its § 105(a) powers—
initiated this case as a miscellaneous proceeding to review Appellants’ misconduct, which
spanned multiple cases over a two-year period. While the OSC in this case may have
affected the remaining open cases assigned to other judges at the time, it had become its
own case. (Doc. 33 at 2.) Judge Whinery noted she had ordered Appellants to file the
financing agreements in EZLegal’s cases because her colleagues had taken an interest in
the miscellaneous proceeding since it included many cases on their dockets. (Doc. 18 at
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178.)
Regardless of whether Judge Whinery transferred the cases to her, she had
jurisdiction to issue the OSC order and order the filing of the fee sharing arrangements in
the bankruptcy cases not before her to carry out the bankruptcy provisions.
b. Inherent Authority
Appellants argue that the Bankruptcy Court lacked inherent authority to sanction
because there was no “intentional misconduct.” (Doc. 13 at 23.)
Bankruptcy courts have “inherent authority” to sanction “bad faith” or “willful
misconduct.” In re Rainbow Mag., Inc., 77 F.3d 278, 284 (9th Cir. 1996). The bankruptcy
court’s inherent power is “derived wholly from statute.” Id. To impose sanctions under its
inherent authority, the court must make “an explicit finding of bad faith or willful
misconduct.” In re Dyer, 322 F.3d 1178, 1196 (9th Cir. 2003). “A court may levy fee-
based sanctions when a party has acted in bad faith, vexatiously, wantonly, or for
oppressive reasons, delaying or disrupting litigation, or has taken actions in the litigation
for an improper purpose.” Fink v. Gomez, 239 F.3d 989, 992 (9th Cir. 2001) (quoting
Chambers, 501 U.S. at 45–46)). Moreover, a court may impose sanctions through its
inherent authority when it finds, “[w]illful actions, including recklessness when combined
with an additional factor such as frivolousness, harassment, or an improper purpose. . . .
[A]n attorney’s reckless misstatements of law and fact, when coupled with an improper
purpose . . . .” Id. at 994.
First, the Bankruptcy Court need only find bad faith or willful misconduct, which it
did. (Doc. 19 at 299–300.) The Bankruptcy Court found that Kallen had made statements
“that she knew or reasonably should have known to be false and/or misleading” and that
“Ms. Kallen and her Firm’s position that their inadequate disclosures and violations of the
Bankruptcy Code and Federal Bankruptcy Rules were merely inadvertent to be totally
disingenuous and self-serving.” (Id. at 300.)
But regardless, this Court finds Appellants’ misconduct was intentional. During
each interaction, Appellants continually misrepresented or omitted information related to
the details of the fee sharing arrangement between themselves and EZLegal and made
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material misrepresentations about the details of the contract terms to their debtor-clients.
Therefore, the Bankruptcy Court had the inherent authority to sanction Appellants.
i. 11 U.S.C. § 105
Next, Appellants argue that because the Bankruptcy Court “did not seek to remedy
violations of a specific court orders (instead seeking to remedy alleged violations of
bankruptcy rules), sanctions under § 105 were inappropriate.” (Doc. 20 at 5.)
There is a difference between the “civil contempt power” 11 U.S.C. § 105(a) and
the inherent sanctioning authority. Dyer, 322 F.3d at 1196. Section 105(a) “allows a court
to remedy a violation of a specific order . . . . The inherent sanction authority allows a
bankruptcy court to deter and provide compensation for a broad range of improper
litigation tactics.” Id. (citing Fink, 239 F.3d at 992–93).
Appellants argue that the Bankruptcy Court’s § 105(a) authority would only apply
had they violated a court order. It is clear that Appellants violated the Bankruptcy Court’s
June 10, 2024 Order when representatives of the Firm opened Atlas Law to continue
practicing bankruptcy cases three days after the Order had been put in place, and when
Appellants did not provide an amended case list. (See Doc. 18 at 161, 163–64, 203.)
Further, Appellants continued to violate Judge Collins’ stipulated order for failure to appear
on behalf of their debtor-clients by not responding to motions. (See id. at 69, 124; Doc. 19
at 100–02.)
Even if Appellants had not violated court orders, the language of both statute and
caselaw permit courts to sanction to prevent the abuse of process. See 11 U.S. § 105(a);
Rainbow, 77 F.3d at 284. The record shows Appellants continuously left out information
and provided multiple misrepresentations regarding the details of the Retention
Agreements and the case list. For example, when asked about the financing arrangement
between Appellants and EZLegal, Appellants initially told the Bankruptcy Court that the
Firm received the $3,000 directly from EZLegal. (Doc. 18 at 59.) The apportionment of
the $3,000 Attorney Flat Fee between Appellants and EZLegal was not originally disclosed
to the Bankruptcy Court, nor to the debtor-clients. (Doc. 19 at 294.) The Appellants also
failed to file supplemental information and certain disclosures either in a timely manner or
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in full compliance with the Bankruptcy Court’s orders. (Id. at 96–99, 294.) In fact,
Appellants consistently failed to meet deadlines throughout the proceedings. (Id.)
Therefore, Appellants’ failures and continued disregard for disclosure constituted bad faith,
willful misconduct, and abuse of process that allowed Judge Whinery to impose sanctions
under 11 U.S.C. § 105(a) for violating a court order.
c. Legality of the Retention Agreements
Under Local Rule 9010-1(c)(1), an attorney who represents a debtor at the start of
their petition must represent the debtor in all matters, other than adversarial proceedings,
until their case is closed, or until the attorney requests withdrawal or is substituted.
Here, Appellants argue that the Bankruptcy Court’s sanctions were excessive
because (1) the Fee Sharing Arrangement was legal and (2) they did not violate 11 U.S.C.
§ 526(c)(2). (Doc. 13 at 35.)
However, the legality of the agreement is not the issue. The issues here are whether
(1) the Retention Agreements were properly within the requirements of the Bankruptcy
Code and Local Rule 9010-1(c)(1), and (2) the terms in the Retention Agreements were
consistent and properly explained to their clients.
Therefore, the legality argument is moot. The Court addresses the remaining issues.
d. Bankruptcy Requirements for Fee Agreements
1. 11 U.S.C. § 329
A “debt relief agency” is any person who provides any kind of bankruptcy assistance
to an assisted person in exchange for “money or other valuable consideration . . . .” 11
U.S.C. § 101(12A). Any attorney representing a debtor under Chapter 11 must file “a
statement of compensation paid or agreed to be paid” with the court. 11 U.S.C. § 329(a).
The compensation disclosure includes “the particulars of any fee sharing agreement.” Fed.
R. Bankr. P. 2016(b)(1). This is done through Bankruptcy Form 2030. See
https://www.uscourts.gov/forms-rules/forms/disclosure-compensation-attorney-debtor-0
(last visited Feb. 12, 2026).
Here, Bankruptcy Form 2030 falsely stated that Appellants were not sharing their
compensation with any other person outside of the firm. (Doc. 18 at 23.) Appellants argue
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that § 329 does not apply because it “only makes an attorney liable for excess charges.”
(Doc. 20 at 7.) Section 329 is not just about excess legal fees. It is the statutory requirement
for an attorney to disclose information about the fee paid, or to be paid, for their services.
11 U.S.C. § 329(a). Judge Whinery found that Appellants failed to abide by this rule by
not disclosing the fee sharing arrangement, the presence of a third-party lender, or the true
source or amount of compensation paid or to be paid, and the record supports it. (Doc. 19
at 299.)
Therefore, Appellants’ compensation disclosure violated § 329(a).
ii. Federal Rule of Bankruptcy Procedure 2016(b)
Appellants argue that Federal Rule of Bankruptcy 2016(b) is not a sanctions
provision. (Doc. 20 at 8.) To impose sanctions for the violation of this rule, Appellants
claim the Bankruptcy Court would have to rely on its inherent authority. (Id.)
Disclosure is required under Federal Rule of Bankruptcy Procedure 2016(b). Courts
have held that an attorney who fails to comply with those requirements “forfeits any rights
to compensation.” Basham, 208 B.R. at 930–31. “Once the bankruptcy court determines
that an attorney has violated § 329 and Rule 2016, the bankruptcy court has the authority
to order the attorney to disgorge all of his [or her] fees.” Id. at 31.
Here, as noted earlier, Appellants’ Form 2030 was not in compliance with Rule
2016(b). Judge Whinery found that Appellants had violated both § 329 and Rule 2016(b).
(Doc. 19 at 299.) Further, the Court has established that the Bankruptcy Court had inherent
authority to sanction.
Therefore, Appellants failed to comply Rule 2016(b) and the Bankruptcy Court was
well within its authority to request the full disgorgement of the fees.
iii. 11 U.S.C. § 526(c)(2)
A debt relief agency shall not “make any statement, or counsel or advise any assisted
person or prospective assisted person to make a statement in a document filed in a case or
proceeding under this title, that is untrue or misleading, or that upon the exercise of
reasonable care, should have been known by such agency to be untrue or misleading.” 11
U.S.C. § 526(a)(2). A debt relief agency also cannot “misrepresent to any assisted person
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or prospective assisted person, directly or indirectly, affirmatively or by material omission,
with respect to -- (A) The services such agency will provide to such person; or (B) the
benefits and risks that may result if such person becomes a debtor in a case under this title
. . . .” Id. § 526(a)(3)(A)–(B). A debt relief agency must “execute a written contract” with
the assisted person that “explains clearly and conspicuously” “the (1) services being
provided and (2) the fees or charges for such services and the terms of payment.” Id. §
528(a)(1)(A)–(B).
“Any contract for bankruptcy assistance . . . that does not comply with the material
requirements of this section . . . or section 528 shall be void and may not be enforced by
any Federal or State court or by any other person, other than such assisted person.” Id. §
526(c)(1). The debt relief agency is liable to the debtor “in the amount of any fees or
charges in connection with providing bankruptcy assistance . . . .” Id. § 526(c)(2). This
includes actual damages, and reasonable attorney’s fees if the debt relief agency “is found.
. . to have -- (A) intentionally or negligently failed to comply with any provision of this
section, [including] section 528 with respect to a case or proceeding . . . ; (C) intentionally
or negligently disregarded the material requirements of this title or the Federal Rules of
Bankruptcy Procedure . . . .” Id. at § 526(c)(2)(A), (C). In addition, if the bankruptcy court,
on its own motion or the motion of the U.S. Trustee or the debtor, finds that any attorney
violated this section “or engaged in a clear and consistent pattern or practice of violating
this section,” the bankruptcy court may; “(A) enjoin the violation of such section; or (B)
impose an appropriate civil penalty against such person.” Id. at § 526(c)(5)(A)–(B).
Here, Appellants argue that they are not liable under § 526(c)(2) because they did
not intend to make misrepresentations to their clients or to the Bankruptcy Court. (Doc. 13
at 23.) Appellants contend that they were well within the requirements for debt relief
agencies because they informed their clients of the charge for their services, the terms of
payment, and that the Bankruptcy Court “made no finding that [Appellants] were
overzealous attorneys who misrepresented information to the Bankruptcy Court in an effort
to obtain bankruptcy relief for their clients, or that [Appellants’] representation harmed the
clients.” (Id. at 37.) Appellants may have informed their debtor-clients about the amount
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being charged for the services, but they did not disclose the fee sharing arrangement
between Appellants and EZLegal.
The purpose of the Bankruptcy Abuse Prevention and Consumer Protection Act
(BAPCPA) is to “correct perceived abuses of the bankruptcy system.” Milavetz, Gallop, &
Milavetz, P.A. v. U.S., 559 U.S. 229, 231 (2010). This includes the regulation of conduct
of debt relief agencies. Id. at 232. The bankruptcy provisions at issue here were created to
allow for full transparency between the debtor and the attorney, as well as transparency
between the attorney and the court. Such transparency, logically, includes the disclosure of
any shared fee between an attorney and a non-legal entity. Appellants did not “clearly or
conspicuously” explain the $3,000 Attorney Flat Fee. Moreover, at no point in the
Retention Agreements did they notify the clients of the existence of the fee sharing
arrangement between EZLegal and Appellants. (See Doc. 18 at 25–30, 32–37.) The
Retention Agreements also include material misrepresentations about debtor payment
obligations, inconsistent terms that go against Local Rule 9010-1, and are inconsistent with
the Promises to Pay. (See id. at 33, 34, 38.)
Therefore, Appellants are liable under 11 U.S.C. § 526(c)(2) “in the amount of any
fees or charges in connection with providing bankruptcy assistance.”
iv. 11 U.S.C. § 528
A debt relief agency must “execute a written contract” with the assisted person that
“explains clearly and conspicuously” “the (1) services being provided and (2) the fees or
charges for such services and the terms of payment.” 11 U.S.C. § 528(a)(1)(A)–(B). “Any
contract for bankruptcy assistance . . . that does not comply with the material requirements
of this [section 526] or section 528 shall be void and may not be enforced by any Federal
or State court or by any other person, other than such assisted person.” Id. § 526(c)(1).
Appellants argue that because they followed § 528’s requirements for debt relief
agencies, they are not liable under the restrictions on debt relief agencies in § 526(c)(2).
(Doc. 13 at 37.) As indicated previously, Appellants did not “clearly and conspicuously”
disclose the Attorney Fee Arrangement, in violation of § 528. However, even if they had
not violated § 528, under § 526(c)(2), any contract may be voided, and the debt relief
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agency can be liable if the agency makes a material omission or fails to file the required
documents. 11 U.S.C. § 526(c)(2), (a)(2), (a)(3)(A). Appellants prepared skeletal
bankruptcy documents that were not properly reviewed by the debtor-clients before filing.
(See Doc. 19 at 62–63.) This is a direct violation of § 526(a)(2). Therefore, Appellants can
be liable “in the amount of any fees or charges in connection with providing bankruptcy
assistance” for intentionally violating §526. 11 U.S.C. § 526(c)(2).
Secondly, the record reveals that Appellants misrepresented their required services
to their debtor-clients. The Retention Agreements state that any other work necessary for
continued representation through their bankruptcy petition would be at Appellants’
discretion and would cost $300 extra an hour depending on the services needed, even
though they were required to continue that representation under Local Rule 9010-1(c).
(Doc. 18 at 34.) While Appellants argue they continued to represent their clients contrary
to the language of the Retention Agreements, debtors with no knowledge of the law, let
alone the Bankruptcy Code and the Local Rules, would not be able to conclude that such
services were required. This is also a direct violation under § 526(a)(3)(A)–(B).
Therefore, even if Appellants conformed with the requirements under § 528, they
are still liable under § 526(c)(2) because of their violations under § 526(a)(3)(A).
e. Ethical Rule Compliance
Appellants argue that the Bankruptcy Court “erroneously found that My Arizona
Lawyers did not affirmatively explain the retention agreements.” (Doc. 13 at 15.)
Appellants contend that the Retention Agreements “correctly advised” debtor-clients
about: (1) the potential conflicts of interest; and (2) the benefit of obtaining independent
counsel; and (3) giving them a reasonable opportunity to obtain independent counsel. (Doc.
13 at 38.)
Under Arizona Rules of Professional Conduct 1.8:
(a) A lawyer shall not enter into a business transaction with a client or
knowingly acquire an ownership, possessory, security or other pecuniary
interest adverse to a client unless:
(1) the transaction and terms on which the lawyer acquires the interest
are fair and reasonable to the client and are fully disclosed and transmitted in
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writing in a manner that can be reasonably understood by the client;
(2) the client is advised in writing of the desirability of seeking and is
given a reasonable opportunity to seek the advice of independent legal
counsel on the transaction; and
(3) the client gives informed consent in a writing signed by the client
to the essential terms of the transaction and the lawyer’s role in the
transaction including whether the lawyer is representing the client in the
transaction[.]
. . . .
(f) A lawyer shall not accept compensation for representing a client from one
other than the client unless:
(1) the client gives informed consent;
(2) there is no interference with the lawyer’s independence of
professional judgment or with the client-lawyer relationship; and
(3) information relating to representation of a client is protected as
required by ER 1.6.
ER 1.8.
The ethical rules specifically state that agreements must contain terms that are fair
and reasonable and must be fully disclosed in a way that is easy for the client to understand
and allows the client to give their informed consent. The Court finds they did not. Informed
consent “denotes the agreement by a person to a proposed course of conduct after the
lawyer has communicated adequate information and explanation about the material risks
of and reasonably available alternatives to the proposed course of conduct.” United States
v. Lacey, No. CR-18-00422-001-PHX-SPL, 2018 WL 4953275, at *4 (D. Ariz. Oct. 12,
2018) (quoting E.R. 1.0(e)) (emphasis added).
Here, Kallen stated that she did not take the time to adequately explain the terms of
the contract with her debtor-clients, specifically the details of the business relationship
between the Firm and EZLegal. (Doc. 18 at 18; Doc. 19 at 48.) She merely stated that if
they had questions, they could ask her or obtain independent counsel. (Doc. 18 at 18; Doc.
19 at 52.) Further, the Retention Agreements contained material misrepresentations
regarding payment obligations, inconsistent provisions when compared to the Promises to
Pay, and numerous improper conflicts of interest waivers. (Doc. 18 at 29–30; see Doc. 19
at 291–92.)
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Although it is well within the Ethical Rules to inform potential clients of the benefit
of obtaining independent counsel, this suggestion is rendered meaningless because
Appellants’ debtor-clients were not in the position to be able to afford both her services or
the services of another attorney to review the Retention Agreements and the Promises to
Pay. Furthermore, the debtor-clients lacked the informed consent needed to knowingly
agree because, as Appellants have admitted, they did not take the time to properly inform
and explain to the debtors the details of the business relationship, nor the potential conflicts
that could arise. As noted by the Bankruptcy Court, “To expect debtor-clients, who are
unsophisticated in the law, to understand documents which are complex, inconsistent,
contradictory, and overreaching, and which include numerous direct conflicts of interest
waivers is not only outrageous but in direct violation of E.R. 1.8 of the Arizona Rules of
Professional Conduct.” (Doc. 19 at 299.)
f. Sanctions Disproportionate with Findings of Fault
The court has “discretion to review newly presented issues on appeal if (1) there are
‘exceptional circumstances’ why the issue was not raised in the trial court, (2) the new
issue arises while the appeal is pending because of a change in the law, or (3) the issue
presented is purely one of law and the opposing party will suffer no prejudice as a result of
the failure to raise the issue in the trial court.” Avon, 2012 WL 1068770, at *10 (citing
Rhoades v. Henry, 598 F.3d 495, 501 n.7 (9th Cir. 2010)).
Appellants argue that even if sanctions were appropriate, the sanctions imposed
were not proportionate with the findings of fault. (Doc. 13 at 40.) Appellants contend that
when sanctioning under its inherent powers, the Bankruptcy Court “must impose the least
restrictive sanctions that would be effective.” (Id. (citing 5 Fed. Proc. L. Ed. § 9:459.))
Appellants argue that the Bankruptcy Court should have chosen less restrictive sanctions.
(Id. at 41–42.)
Appellants had the opportunity to make this argument in their post-trial briefs. They
did not. (See Doc. 19 at 263–276.) Further, they have made no argument that there is the
existence of some exceptional circumstance that prevented them from including this
argument before this appeal, that the law has recently changed, or that the opposing party
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suffers no prejudice with this newly raised argument. Therefore, the Court will not review
this portion of Appellants’ argument.
g. Recusal of Judge Whinery
Any judge “shall disqualify himself in any proceeding in which his impartiality
might reasonably be questioned.” 28 U.S.C. § 455(a). A judge must seek disqualification
if:
(1) [s]he has personal bias or prejudice concerning a party, or personal
knowledge of disputed evidentiary facts concerning the proceeding; . . . (5)
the judge or their spouse, or a person with the third degree of that relationship
of them, or the spouse of such person; (i) is a party to the proceeding, or an
officer, director, or trustee of a party; (ii) is acting as a lawyer in the
proceeding; (iii) is known by the judge to have an interest that could be
substantially affected by the outcome of the proceeding; or (iv) is to the
judge’s knowledge likely to be a material witness in the proceeding.
Id.
The test for whether a judge is impartial is “whether a reasonable person with
knowledge of all the facts would conclude that the judge’s impartiality might reasonably
be questioned.” McCray v. Ryan, 389 F. Supp. 3d 663, 665 (9th Cir. 2019) (quoting United
States v. Nelson, 718 F.3d 315, 321 (9th Cir. 1983)). In other words, would a reasonable
person “perceive a significant risk that the judge will resolve the case on a basis other than
the merits.” Id. at 666 (citing In re Mason, 916 F.2d 384, 385 (7th Cir. 1990)). A reasonable
person means a “well-informed, thoughtful observer, not a ‘hypersensitive or unduly
suspicious person.’” Id. (quoting Clemens v. U.S. Dist. Ct. for Cent. Dist. of Calif., 428
F.3d 1175, 1178 (9th Cir. 2005)). Because there is always “some risk” of impartiality, the
risk must be “substantially out of the ordinary.” Id. (citing Mason, 916 F.2d at 383)
(emphasis in original).
A judge need not recuse simply because a litigant filed, or threatens to file, a lawsuit
against a judge. United States v. Sutcliffe, 505 F.3d 944, 958 (9th Cir. 2007). A judge also
need not recuse himself without a “factual connection or relationship” between the case
before them and a “previous investigation into the defendant that began during the judge’s
tenure as the United States Attorney.” United States v. Hunt, 153 F.4th 858, 864 (9th Cir.
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2025) (quoting United States v. Silver, 345 F.3d 1075, 1079 (9th Cir. 2001)).
Here, Appellants argue that Judge Whinery was improperly acting as “complaining
witness, prosecutor, judge, jury and executioner.” (Doc. 13 at 48 (quoting Matter of
Johnson, 921 F.2d 585, 586–87 (5th Cir. 1991).) Appellants also claim that because Daniel
Richter is married to the owner of EZLegal, Katherine Kiesel, he is a party to this case.
(Id.) In addition, Appellants claim Richter’s lawsuit against Judge Whinery was enough to
require her to recusal. (Id.) Appellants conclude that Judge Whinery was biased because
while acting in her capacity as the United States Trustee, she was heavily involved, and
played a key role in, Richter’s disbarment. However, the Court finds that Judge Whinery
was well within her authority to continue as judge in this matter.
First, Richter was never a party to this case. While he was a party to the Ruth Ann
Ambs matter, it was in his capacity as owner of Want a Fresh Start and its referral services.
(Doc. 18 at 65.) Kallen concluded that she had not used the referral services of Want a
Fresh Start, nor had she done any form of business with Richter. (Id. at 65–66.) Richter’s
position as the husband of Ms. Keisel does not make him a party to this case. Neither he
nor his LLC were named in the miscellaneous proceeding at issue here or were required to
respond to any inquiries regarding Appellants’ agreements with EZLegal.
Second, the lawsuit against Judge Whinery was filed in Maricopa County just five
days before the October 16, 2024 trial. (Doc. 19 at 328, 344.) Richter sued Judge Whinery
after she issued an OSC “regarding the concerns the [Bankruptcy C]ourt had pertaining to
the disclosures of attorney compensation and agreements, as well as, Ms. Ambs’ disclosed
relationship with Fresh Start indicating that Fresh Start referred clients to her Firm, drafted
Firm agreements, and provided financing to the Firm.” (Doc. 30 at 4; see Doc. 13 at 26.)
The lawsuit was dismissed with prejudice for failure to state a claim on May 23, 2025.
(Doc. 19 at 330.) It is clear from the timing of the filing of that suit that it was the direct
result of an unsatisfactory outcome in the Ruth Ann Ambs case and filed for the sole
purpose of removing Judge Whinery from the instant matter.
Finally, Judge Whinery acted as the United States Trustee until June 25, 2002 and
Richter was not disbarred until 2011. (Doc. 17 at 37.) Further, the U.S. Trustee’s Office
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was not involved in Richter’s disbarment. (Id.) Appellants offer no other evidence showing
that Judge Whinery had any involvement in Richter’s disbarment, save for his lawsuit that
was filed against her. (See Doc. 13 at 47.) Based on the record, the Court finds that Judge
Whinery did not have any significant involvement with Richter’s disbarment. Regardless,
Richter’s disbarment was not the subject of this case.
To the extent Appellants are arguing that Judge Whinery should have recused
herself based on 28 U.S.C. § 455(b)(5), they have made no factual allegations or legal
argument related to this subsection. Appellants have not shown that Judge Whinery’s
impartiality should be reasonably questioned. Therefore, Judge Whinery was not required
to recuse herself for this matter.
IV. CONCLUSION
For the foregoing reasons, IT IS ORDERED:
1) Appellants’ Appeal is DENIED (Doc. 1) and the Bankruptcy Court’s February 3,
2025 Order is AFFIRMED.
2) Appellants’ Motion to Stay is DENIED AS MOOT. (Doc. 22.)
3) The Clerk of Court shall docket accordingly and close the case file in this matter.
Dated this 13th day of February, 2026.
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