In Re: Justo Reyes

Background

Linda Tirelli, an attorney who represented Chapter 13 debtors, used nonstandard repayment-plan provisions in at least 16 cases. Those provisions stated that, when the validity of a mortgage was disputed, post-filing mortgage payments would not immediately go to the lender or Chapter 13 trustee. Instead, the payments would be made to Tirelli and held in escrow until the mortgage dispute was resolved.

The bankruptcy court later learned that funds were not being escrowed as the plans represented in several cases. It also found that Tirelli’s escrow account had a $21,300 shortfall lasting from June 2019 until August 2021, that the account had not been reconciled for nearly two years, and that non-client funds had been deposited into the account at least twice. Tirelli described the shortfall as a bookkeeping error and said it was corrected by a deposit in August 2021.

The bankruptcy court issued an order addressing Tirelli’s handling of the funds and the public access to filings concerning the investigation. It found that Tirelli violated New York and Connecticut ethical rules, lacked candor with the court, referred her to the Committee on Grievances for possible further investigation and discipline, and required her to give a copy of the order to judges before whom she appeared as bankruptcy counsel while the disciplinary proceedings were pending. The bankruptcy court also granted the United States Trustee’s motion to unseal the filings.

Issues on Appeal

Tirelli raised three arguments: the filings should have remained sealed; the bankruptcy court wrongly found that she lacked candor; and the bankruptcy court imposed an improper sanction. She did not appeal the portion of the order referring her for further proceedings concerning accounting issues in the escrow account.

Sealing of the Filings

The district court held that bankruptcy filings are generally public and may be sealed under Bankruptcy Code § 107(b)(2) only when clear evidence shows that they contain scandalous or defamatory material. Tirelli argued that public access could harm her professional reputation. The district court held that embarrassment, reputational harm, and possible professional consequences were not enough to overcome the presumption of public access.

The court agreed with the bankruptcy court that the filings were a straightforward and truthful account of facts and legal arguments, and that much of the information came from the public record. It also rejected the argument that confidentiality rules for filings submitted to the grievance committee required the bankruptcy filings to remain sealed. The court affirmed the bankruptcy court’s decision granting the motion to unseal.

Duty of Candor

The district court upheld the finding that Tirelli violated her duty of candor to the bankruptcy court. That duty required her to provide complete and accurate information because she had structured the plans, acted as escrow agent, and was the person who knew the status of the mortgage payments and escrow account.

The court found that the undisclosed account shortfall alone supported the finding that Tirelli’s representations lacked candor. It also relied on the finding that funds were not escrowed in six cases despite statements in the plans, and that another four cases had escrow shortfalls. In one case, Tirelli represented that a debtor was making payments to her for escrow even though the debtor had not delivered any payments, and the court found that she did not correct that representation.

The court explained that candor required more than refraining from intentional lies. Tirelli had an affirmative duty to monitor the payments, disclose the account shortfall, and correct inaccurate statements or plan provisions. The district court therefore affirmed the finding that she lacked candor.

Temporary Sanction

The bankruptcy court required Tirelli to provide the order to any judge before whom she appeared as bankruptcy counsel until the grievance proceedings ended. The district court reviewed that sanction for abuse of discretion, meaning it would overturn the decision only if the bankruptcy court applied an incorrect legal rule, relied on a clearly mistaken view of the evidence, or acted outside the range of reasonable choices.

The district court held that the temporary requirement was a reasonable measure intended to protect the integrity of Chapter 13 cases in which Tirelli might participate. It affirmed the bankruptcy court’s decision on this issue.

Disposition

The district court affirmed the bankruptcy court’s order in full.