New Bankruptcy Opinion: IN RE ALLEGRO LAW LLC – Bankr. Court, MD Alabama, 2016

In re ALLEGRO LAW LLC, Chapter 7, Debtor.




Case No. 10-30631-WRS, Adv. Pro. No. 11-3007-WRS.

United States Bankruptcy Court, M.D. Alabama.

Filed February 16, 2016.


WILLIAM R. SAWYER, Bankruptcy Judge.

This Adversary Proceeding was called for trial on November 4, 2013. Plaintiff Daniel G. Hamm [1] was present in person and by counsel Steve Olen and Lucy Tufts. Neither the Defendants nor their counsel, Thomas McAlpine, appeared. For the reasons set forth below, the Court enters judgment by default in favor of Plaintiff Carly B. Wilkins and against Defendants Timothy McCallan, AmieriCorp, Inc., and Seton Corp., in the amount of $102,949,220.72. The Court will enter judgment by way of a separate document.


A. Overview

This is an extraordinary case of fraud on a massive scale that was perpetrated by Defendant Timothy McCallan (“McCallan”) on thousands of victims. McCallan masterminded a debt settlement scheme in which customers were enticed into handing their money to entities controlled by McCallan with a promise that their debts would be either paid or settled. Thousands of customers signed up for debt settlement services offered by McCallan and paid him more than $100,000,000. Almost none of the money was paid to creditors of the customers as promised by McCallan. Instead McCallan, and those in league with him, siphoned off the money into a vast array of companies controlled by or closely associated with him. Among these entities were McCallan’s co-defendants: AmeriCorp, Inc. (“AmeriCorp”) and Seton Corp. (“Seton”).

McCallan used attorneys as a “front” to perpetuate his scheme and to provide it an air of legitimacy. McCallan’s scheme was most recently fronted by Keith Nelms (“Nelms”), an Alabama attorney whose license has since been suspended for his many unethical activities. [2] Allegro Financial and Allegro Law (collectively “Allegro”) were instrumentalities controlled by McCallan and fronted by Nelms as a law firm. Prior to Nelms, McCallan’s front was Laura Hess, a Florida attorney who was disbarred for actions she took while fronting a previous iteration of McCallan’s debt settlement scheme, a law firm called Hess-Kennedy.

From the viewpoint of the customer, or victim, McCallan’s scheme began with mass media advertising — television, radio, billboards, etc. — designed to appeal to those in financial distress. The potential customer could call a toll-free number and speak with a representative who would then sign the customer up, promising him that his financial worries would be over. The representative would promise the customer that they would deal directly with his creditors, that all the customer would have to do is pay his money to them instead of his creditors, and that they would take care of the rest. Instead, the customer’s money would be siphoned off under the guise of hidden fees and costs, the customer would be that much poorer, and he would default on his debts because his creditors would go unpaid. As the District Court has aptly noted, the effect of McCallan’s debt settlement scheme on its victims was “personal economic suicide[.]” McCallan v. Hamm, 2012 WL 1392960, *1, 2012 U.S. Dist. LEXIS 56097, *3 (M.D. Ala. Apr. 23, 2012). This adversary proceeding is an attempt by the Trustee in bankruptcy to recover the money that McCallan defrauded from these victims.

B. The Allegro Bankruptcies

Nelms originally started Allegro in 2007 as a small solo practice law firm. Chase Bank v. Nelms (In re Nelms), 2014 WL 3700511, *3, 2014 Bankr. LEXIS 3158, *7 (Bankr. M.D. Ala. Jul. 24, 2014). At that time, McCallan was perpetrating his debt settlement scheme through the Hess-Kennedy law firm in Florida and was introduced to Nelms through that firm. Nelms, 2014 WL 3700511 at *1-2, 2014 Bankr. LEXIS 3158 at *4-7. After the State of Florida moved against Hess-Kennedy in mid-2008, McCallan tabbed Nelms and Allegro to continue his debt settlement scheme in Alabama. Nelms, 2014 WL 3700511 at *3, 2014 Bankr. LEXIS 3158 at *8.

Nelms ostensibly “hired” McCallan and his entities, AmeriCorp and Seton, to handle back-office processing for Allegro; however, McCallan was effectively running Allegro. Nelms, 2014 WL 3700511 at *3-4, 2014 Bankr. LEXIS 3158 at *8. Allegro’s marketing, form letters, and call centers were provided by McCallan’s entities, and payments from Allegro’s customers were controlled by McCallan’s entities, though the paperwork listed Nelms as the customers’ attorney. Through this setup, McCallan charged Allegro’s customers massive up-front hidden fees for merely holding their money, sent a portion of the collected fees to Nelms, and pocketed the rest.

When the State of Alabama learned of the nature of Allegro’s activities and fee structure with its clients, it placed Allegro in receivership under the control of Louis Colley (“Colley”) in July 2009. Cut off from the wellspring of his ill-gotten gains, Nelms filed Chapter 7 bankruptcy on February 22, 2010. (Case No. 10-30430, Doc. 1). Daniel G. Hamm (“Hamm”) was appointed as the Trustee in the Nelms bankruptcy and, upon learning of the nature of Nelms’s involvement in Allegro, pulled its components (Allegro Financial and Allegro Law) into Chapter 7 bankruptcy as well. (Case Nos. 10-30630 and 10-30631). Hamm was also appointed Trustee in the Allegro bankruptcies. [3]

On May 20, 2010, Colley filed a motion for administrative expenses for the payment of almost $400,000 in invoices sent by AmeriCorp and Seton. (Case No. 10-30631, Doc. 74). The Court issued a Memorandum Decision in July 2010 in which it deferred payment, expressed its concerns about the value of the services allegedly rendered, and asked the following questions:

1. How much money was taken from Allegro clients?

2. How much of that money was taken by Nelms?

3. How much was paid to AmeriCorp, Seton and other third parties?

4. How much was paid to creditors of the Allegro clients?

(Case No. 10-30631, Doc. 105, p. 15).

To answer these questions, one must have the records of the Allegro companies. Yet, Allegro did not keep its own records and it did not own or control the data that its business activities generated. Nelms was incapable of answering these questions because he did not keep his own records. Instead, almost all of the business records of the Allegro companies were kept by AmeriCorp. Therefore, the key to understanding what happened to the money of the victims (creditors in the Allegro bankruptcies) was to get these records from AmeriCorp, which was controlled by McCallan.

As the Court will discuss below, it has taken years of litigation to learn the answers to these questions. However, a review of the Allegro claims register reveals that 5,214 claims have been filed by Allegro’s creditors for a total amount of $102,949,220.72. (Case No. 10-30631). The evidence will support a range of figures both as to the numbers of victims and the amount by which they were defrauded. The Court has heard figures as high as 30,000 victims and $160,000,000.00. As a result of the duplicity of McCallan, Nelms, and those in league with them, the true figures will never be known. The Court will limit its judgment here to the 5,214 claimants in the amount of $102,949,220.72. The undersigned, having spent five years and several thousand hours on this case, is of the view that this number of claimants and this amount of claims are reasonable. The true figures are certainly higher.

C. The Adversary Proceeding

1. Initial Pleadings, Arbitration Motions, and Appeal

In his capacity as Trustee of the Allegro bankruptcies, Hamm filed suit against McCallan, AmeriCorp, and Seton on February 15, 2011. (Doc. 1). In his amended complaint, Hamm asserted that the Defendants served as the alter ego of Allegro, and sought turnover of property of the estate (Count I), avoidance of preferential transactions (Count II), avoidance of post-petition transfers (Count III), avoidance of fraudulent transfers (Count IV), and an accounting of the fees the Defendants collected (Count V). (Doc. 6).

McCallan moved to dismiss (Docs. 28 & 29), while AmeriCorp and Seton moved to compel arbitration (Docs. 31 & 33). The Court denied both motions on July 8, 2011. (Doc. 66). AmeriCorp and Seton appealed the denial of their motion to compel arbitration and moved to stay proceedings pending appeal (Docs. 70 & 74), and McCallan likewise moved to compel arbitration (Doc. 72). The Court denied McCallan’s motion to compel arbitration and he appealed. (Docs. 98 & 104). The Court also denied AmeriCorp’s and Seton’s motions to stay proceedings and ordered the parties to commence discovery. (Doc. 99). The Court subsequently issued a report and recommendation for the benefit of the District Court, to which the Defendants objected. (Docs. 140 & 147). The District Court ultimately affirmed this Court’s denial of the Defendants’ motion to compel arbitration. McCallan v. Hamm, Case No. 2:11-cv-784-MEF, 2012 WL 1392960, *7, 2012 U.S. Dist. LEXIS 56097, *22 (M.D. Ala. Apr. 23, 2012) (Docs. 194 & 195).

2. Discovery Proceedings: The Allegro Database

a. First Discovery Order

Hamm learned early in the Allegro bankruptcy proceedings that Nelms and Allegro did not keep and maintain their own business records. He was told by Nelms, McCallan, and others that the Allegro records were kept by AmeriCorp in an electronic form on AmeriCorp’s computer servers. Hamm asked McCallan for access to the Allegro records (Docs. 7 & 8) but was refused.

The first discovery hearing in this litigation took place on August 18, 2011, where the Court first discussed production of the Allegro database. As a result of discussions had at the August 18, 2011 hearing, the Court entered its first discovery order on August 22, 2011 (“First Discovery Order”). (Doc. 103). In the First Discovery Order, the Court set out a process that was designed to give Hamm access to the electronic database kept by AmeriCorp that held all of the business records of the Allegro companies. The First Discovery Order called for two things. First, it required a meeting between technical experts for both parties to discuss production of the database and to arrive at means of getting Hamm access to the Allegro records. Second, it called for the lawyers to discuss the matter and then report to the Court whether the problem had been resolved. (Doc. 103).

b. Second Discovery Order

The intent of the First Discovery Order was to permit Hamm to inspect, copy or clone the database. A trustee in bankruptcy has a right to look at a debtor’s books and records. See U.S.C. § 542(e). [4] Indeed, it may be said that he has a duty to look at his debtor’s books and records. See 11 U.S.C. § 704(a)(4). [5] As early as August 22, 2011, it was clear that the Court wanted the Defendants to provide Hamm access to the Allegro books and records, which were kept in electronic form by AmeriCorp. (Doc. 103).

In direct contravention of the First Discovery Order the Defendants refused to permit Hamm access, forcing Hamm to file his first motion to compel. (Docs. 112 & 113). The Court held an evidentiary hearing on November 14, 2011, and granted Hamm’s motion to compel the same day (“Second Discovery Order”). (Doc. 138).

The Second Discovery Order provided, in part, that:

The Defendants shall produce the database which is the subject of these proceedings on a server which is to be made accessible to the Plaintiff. Plaintiff may access the service directly and thereby access the database upon reasonable notice. Plaintiff shall have reasonable access to the server and the data without interference from or observation by the Defendants, their agents, parties they otherwise control under contact, or otherwise. Plaintiff may clone the database, the front end application program, and any other electronically stored information, programs or application, which may be necessary for them to access, view, and work with the subject data. The database shall be produced in its original form and shall not be altered, deleted, or modified. The Defendants shall cooperate with the Plaintiff in their effort to access the database.

Doc. 138).

On January 13, 2012, the Court awarded Hamm attorneys’ fees in the amount of $29,687.95 for the costs he incurred in filing his motion to compel. (Doc. 154). The Second Discovery Order was simple and direct: allow Hamm access to the computer servers, so that he could clone the database in order to have his own copy of the data that he could use in his efforts to administer the Nelms and Allegro bankruptcy estates.

c. Third Discovery Order, Contempt, & Arrest

On January 25, 2012, Hamm filed his first motion for sanctions, claiming that McCallan had not complied with the Second Discovery Order and had committed a host of discovery depredations. (Doc. 155). On February 14, 2012, Charles Parnell, Julian Spirer and Mark Rosenberg — the Defendants’ first team of lawyers — moved to withdraw, citing in part McCallan’s lack of cooperation in complying with the Second Discovery Order. (Doc. 168). The Court held a hearing on Hamm’s first motion for sanctions on February 16, 2012 and granted it in part and denied it in part. (Doc. 177). Hamm had requested entry of default judgment as a sanction for the Defendants’ failure to comply with the Second Discovery Order. (Doc. 155). He also requested an additional $42,787.75 in attorneys’ fees. (Doc. 175). The Court denied Hamm’s request for default judgment, but it held the Defendants in contempt and again ordered them to produce the requested database, as well as several additional items, in an order dated February 22, 2012 (“Third Discovery Order”). [6] (Doc. 177). More significantly, the Court ordered McCallan to appear in person at a hearing scheduled for March 5, 2012, and advised him that “[t]he Court will consider monetary sanctions, incarceration or entry of judgment by default.” (Doc. 177). The Court ordered Parnell and Spirer to use their best efforts to provide McCallan notice of the March 5, 2012 hearing. (Doc. 177).

McCallan did not appear at the March 5, 2012 hearing. The Court found McCallan in contempt of court and issued a warrant for his arrest. (Doc. 183). On March 7, 2012, the Court granted the motion to withdraw as counsel filed by Parnell, Spirer and Rosenberg. (Doc. 184).

On March 8, 2012, McCallan was stopped by police in New Jersey for speeding. The police officer checked the national NCIC database, discovered the bench warrant issued by the Court, and arrested McCallan. The following day McCallan was released from jail and was ordered to appear in this Court not later than March 14, 2012. (Doc. 198).

d. Defendants’ April 2012 Production

On March 14, 2012 a second team of lawyers from the firm Haskell Slaughter entered their appearance on behalf of the Defendants. [7] (Docs. 186, 187, & 191). McCallan appeared before the Court on March 14, 2014 with his new lawyers and promised to produce the Allegro database. The Court scheduled a follow-up hearing for April 9, 2012. (Doc. 188). On April 23, 2012, Thomas Mancuso (“Mancuso”) filed a lengthy “notice of compliance” in which the Defendants “assert[ed] emphatically” that they had complied with the Court’s order. (Doc. 190).

The Defendants produced data stored on a CD (compact disc) rather than allowing access as ordered by the Court in the Second Discovery Order. (Doc. 138). Since production was made by way of delivering a CD and not by providing Hamm actual access to computer servers, the Defendants’ production was facially deficient. The Defendants attempted to cover this defect by claiming (falsely as it would turn out) that the servers had been deactivated, and for that reason production by the method called for in the Second Discovery Order was not technologically possible. (Doc. 190).

e. Hamm’s Second Motion to Compel

On September 24, 2012, Hamm filed a second motion to compel in which he asserted that the data produced by the Defendants was not usable. [8] (Doc. 203).

The Court ordered the parties to confer in advance of the evidentiary hearing on Hamm’s motion to compel and attempt to resolve their differences. (Doc. 207). Over the objections of Hamm’s counsel, the Defendants’ lawyers had a court reporter transcribe the meeting, providing the Court a revealing window as to how the case was proceedings. (Doc. 239, Ex. 1, pp. 3-8). At this time, the Defendants’ lawyers were claiming that the database could not be produced as called for by the Court’s Second Discovery Order, and that production would have to be made by alternate means — a claim which was later shown to be false. The following are excerpts from the October 22, 2012 conference:

MR. OLEN: Well, that’s — that’s very, very clear and very easy. What we want the defendants to do, and what y’all have not done, is to produce all of this information exactly the way it existed when the business was operating.

MS. LEES: Well, you know — I mean, there are some technological impossibilities so — you’ve already said you don’t like having to go in through each individual consumer because it’s slow. So I can’t speed it up because of the technology. So how am I going to fix that part?

MR. OLEN: No. You’re mischaracterizing what I just said. We want it to work the way it worked when the business was operational, and we are absolutely convinced that it worked differently than when — it worked differently when the business was operational than the manner in which you have provided it to us.

(Doc. 239, Ex. 1, pp. 28-29) (emphasis added).

This discussion went on for some time but this exchange captures the positions of the parties. Hamm’s counsel, Steve Olen, repeatedly demanded that he be given access to the database as it existed when Allegro was operating and the Defendants’ counsel, Meredith Lees (“Lees”), stated that it was technologically impossible, that production would have to be made in another manner. The problem with the alternate means was that even if the data was contained in the database, it was not accessible.

The exchange which best captures the duplicity of Defendants’ counsel is as follows:

MR. OLEN: Well, I don’t know what the word “conflate” means. But what I do know is you are correct that we want the same functionality that existed before the defendants went out of business. And where we disagree is we believe that is absolutely what we’re entitled to.

And when you say what’s our proposal, that is our proposal. And according to the testimony, y’all did in fact preserve all of this in its entirety, including its functionality. And so that’s what we’re looking for.

MR. MANCUSO: And my question, Steve, is did Lewis Colley, under the direction of the Alabama Securities Commission which filed a petition in the circuit court, what steps did Lewis Colley take?

Because we didn’t go out of business, Steve. We stopped operations because they were taken over by the Securities Commission.

* * *

MR. MANCUSO: And then — and then, Meredith, there’s another intervening step. What did Mr. Hamm do when he became the trustee pursuant to the Court order? What actions did he take to see whether or not that database was in the same state it was in when we were running the company? What did he do? Do you have a report from Mr. Hamm?

MR. OLEN: Why are you asking that question? How is that relevant to this discussion?

MR. MANCUSO: Well, because we’ve got a number, Steve, of intervening parties who had access to the database. And we don’t know what they did.

We tried to — we tried to do this, Steve, based on — we’re three parties removed at this point in time in your lawsuit. You’ve got the securities commission, you’ve got Lewis Colley, you’ve got his accounting firm and then you’ve got Mr. Hamm taking over under the Court order.

MR. OLEN: Well, there is absolutely no evidence or any other basis for your suggestion, implication, accusation, whatever it is, that anyone ever did anything to alter the defendants’ computerized information in any way.

(Doc. 239, Ex. 1, pp. 33-36) (emphasis added).

The position taken by Defendants’ counsel, Meredith Lees and Thomas Mancuso, here was outrageous. To begin with, the Court’s Second Discovery Order required the Defendants to make their computer servers available to Hamm’s computer experts, so that he could make his own copy of the database. (Doc. 154). By that time, the Court had already conducted several hearings, as well as one full-blown evidentiary hearing, on the question of production and functionality of the database. The purpose of the Second Discovery Order was to stop just this sort of game-playing. Yet, Lees persisted in the false argument that production could not be made in the manner called for by the Court’s order because it was technologically impossible.

Mancuso raised their duplicity to another level when he falsely claimed that Colley and Hamm had obtained control of the Allegro database. But it was McCallan, acting through AmeriCorp and Seton, who controlled the database at all times, because it was McCallan who was running Allegro. Mancuso’s claim that his clients no longer controlled the database was patently false. Indeed, it was Mancuso who filed a “Notice of Compliance” five months earlier, contending that the Defendants were then in compliance with the Court’s Second Discovery Order — because they had produced a copy of the database. (Docs. 190 & 197). Nowhere in these responses did Mancuso claim the database was no longer in the control of the Defendants.

f. Database Fundamentals

To understand the problem that Hamm was having with discovery, one must understand something of AmeriCorp’s databases and of databases in general. At the evidentiary hearing conducted on February 21-22, 2013, the Court learned that AmeriCorp used Microsoft SQL Server, a relational database. “SQL” means survey query language. Large quantities of data may be stored and later accessed. The data is stored in tables that are defined by the user, and the means by which the tables relate to one another is also defined by the user. There are two primary means to accessing data in a database. First, one may write a query — a question — where the database program will access the database and arrive at an answer. Second, the user may use a “front-end application,” which is a separate program used to access the data.

i. Writing a Query

Writing a query requires knowledge of database operations and some expertise. More importantly, in order to write a query one must understand how the tables relate to one another. The following exchange between Defendants’ counsel, Meredith Lees, and their database expert, Matthew Long (“Long”), at the February 21-22, 2013 evidentiary hearing is instructive:

MS. LEES: You heard — Mr. Middleton testified at length the reason he couldn’t have written SQL queries is because he didn’t understand how the defendant’s business operated. Is that — was that necessary for you? Did you have to know how the front end applications worked and how all of the table spoke to one another to be able to write the SQL queries?

MR. LONG: Well, let me be clear here. You combined a couple of things in that question. The front-end applications, no. How, the table related to one another, yes, I did need that information.

MS. LEES: How did you determine how the tables related to on another?

MR. LONG: I interviewed a couple of member of the AmeriCorp previous executive team.

(Doc. 259, pp. 95-96).

The significance of this testimony is that Long had assistance from AmeriCorp personnel to obtain the information necessary to write queries. Hamm’s expert, Jeff Middleton, testified that he was not given the information necessary to write a query. Counsel for the Defendants postured that Hamm did not understand the Defendants’ business, or that his experts did not understand the database, but the Defendants’ own expert undercut that argument. Long was able to write queries to access the data because AmeriCorp personnel gave him assistance as to how the information in the various tables were related.

The following hypothetical will illustrate this point. Assume that one has a paper telephone directory with 30,000 entries — that is 30,000 names with corresponding addresses and telephone numbers. Assume further that someone takes a pair of scissors and cuts up the directory so that a reader could not tell which name went with which address or telephone number. Assume further that all of these separate tables — names, addresses, and telephone numbers— are thrown into a barrel, shaken up, and given to someone from out-of-town. In theory, the entire directory could be produced without providing any useful information.

The same is true of databases. If there are thousands of entries organized by different tables, but there is no way to relate an entry’s information in one table to its corresponding information in other tables, the entire database could be produced without providing anything usable. That is what the Defendants produced throughout the course of this litigation. Even if they produced all of the data — a doubtful assumption in this case — there was no way to relate the data, rendering it useless. In essence, the Defendants produced the barrel with all of the information in it, but no way to relate one piece of information to another.

ii. Front-End Application

The other means of accessing a database is through a “front-end application.” A front-end application is a computer program that enables a user to access data in a database without having to write a query. An example that would be familiar to those who work in the federal court system is the CM/ECF system. The data in a federal court’s files is maintained in a database known as “Informix.” That is, all of the information in the various clerks’ offices resides in an Informix database. The means by which users — e.g., lawyers, judges, and administrative staff — access the Informix database is by way of a front-end application called “CM/ECF,” which is an internet-based application program. Most users are not, and need not be, aware that they are accessing an Informix database.

Returning to the AmeriCorp database, the point of the Court’s Second Discovery Order was to permit Hamm and his computer experts and accountants to clone or copy the front-end applications. In spite of repeated orders that the front-end applications be produced, and contrary to repeated representations from the Defendants and their counsel that they had been produced, a database with working front-end applications was not in fact produced until November 26, 2012. (Doc. 224, p. 30). The Defendants’ actions of producing data without a front-end application effectively kept Hamm and his experts in the dark as to what was actually in the database.

g. The February 21-22, 2013 Sanctions Hearing

When Hamm filed his second motion to compel, on September 24, 2012, the Court initially scheduled an evidentiary hearing on Hamm’s motion for November 5, 2012. (Doc. 207). On October 29, 2012, Defendants filed an “Emergency Motion to Continue” the evidentiary hearing, complaining that Hurricane Sandy made it impossible to prepare for the hearing. (Doc. 210). The Defendants attached copies of news articles about Hurricane Sandy’s imminent landfall in the New York area, but failed to mention that the computer servers containing the Allegro database had been moved to Florida a year or more earlier. Not realizing that it had again been misled by the Defendants and their counsel, the Court rescheduled the evidentiary hearing for January 29, 2013. (Doc. 216). [9]

On January 23, 2013, Hamm filed a second motion for sanctions. (Doc. 224). Thirty pages long, the motion scathingly set out the Defendants’ multitudinous discovery violations in excruciating detail. (Doc. 224). This triggered another request for delay from the Defendants, so the Court rescheduled the evidentiary hearing for February 21, 2013. (Doc. 231).

The evidentiary hearing on Hamm’s second motion for sanctions lasted two days. (Docs. 259 & 261). Hamm called Jeffrey Middleton (“Middleton”), a computer expert, who testified that the database produced by the Defendants in April 2012 was not accessible, for the reasons already discussed, and was also incomplete based on the presence of additional documents in their November 2012 production. (Doc. 259, pp. 24-67). Middleton’s testimony was forthright and credible.

Defendant Timothy McCallan also testified on February 21, 2013. McCallan acknowledged that he was the owner and chief executive officer of AmeriCorp and Seton. (Doc. 259, p. 111). The next exchange was astounding:

MR. OLEN: Where did you move the servers to after the business closed down on March 31, 2011?

MR. McCALLAN: The servers were migrated to Florida into a center called CNI, which is a third-party hosting company.

MR. OLEN: And are they still there today?


* * *

MR. OLEN: Are you aware that, until you testified right here a few minutes ago, that nobody told us that the original servers from AmeriCorp and Seton are physically located at CNI in Florida? Are you aware of that?

MR. McCALLAN: I am not aware of — no, I am not aware of that.

(Doc. 259, pp. 113, 118). Testimony by Oscar Nunez, AmeriCorp’s IT manager, was even more illuminating:

MR. OLEN: Now, in October, you just testified that in October 2011 you had all of the infrastructure in place for someone to work from home on those AmeriCorp servers; is that right?


MR. OLEN: And so the system was essentially rebuilt in Florida, right?

MR. NUNEZ: Rebuilt in Florida?

MR. OLEN: In other words, when it went to CNI, it was fully functioning and someone could have remoted into the servers and operated QPS and CreditSoft [AmeriCorp’s front-end applications] just like you would if you had been in New York, right?


MR. OLEN: Was the system in Florida that was fully operational ever dismantled?


MR. OLEN: So it has worked just like that from October 2011 to at least eight months ago [June 2012], which is the last time that you had any knowledge of it, the last time you were employed there?


(Doc. 259, p. 182) (bracketed matter added).

Oscar Nunez’s testimony shows that the representations made by the Defendants’ counsel, Meredith Lees and Thomas Mancuso, were false in two respects. First, their assertion that it was impossible to provide access to the database was proven false because the servers containing the database were fully operational and were being maintained in Florida. There was no reason why the Defendants could not comply with the Court’s Second Discovery Order by providing Hamm access to the servers. Second, the Defendants’ assertion that they needed a continuance due to Hurricane Sandy was shown to be false, again because the servers were in Florida, not New York.

The Court took Hamm’s second motion for sanctions under advisement. In late June of 2013, the Defendants finally provided Hamm access to the servers (and database) in Florida. [10] The Court scheduled trial for November 4, 2013. (Doc. 253).

3. Pre-Trial Proceedings

a. The Haskell Slaughter Lawyers Withdraw

On June 6 and 7, 2013, the Defendants’ second team of lawyers moved to withdraw their appearance, citing the Defendants’ refusal to communicate with them or to pay their fees. [11] (Docs. 277, 278, 283, & 293). The Court scheduled a hearing on the motions for July 22, 2013, and ordered McCallan to appear in person. (Doc. 279). At that hearing, the following exchange occurred:

THE COURT: . . . My primary concern is I want to get this case tried. It is scheduled to go to trial in November of this year. Now, whether that is going to happen or not, we will talk about in a few minutes.

I guess my number one question is where do you stand with respect to the motion to withdraw?

* * *

MR. McCALLAN: I do allow the motion to withdraw. At this time, Your Honor, I don’t have the financial resources and, with the toll that this has taken on my wife, my kids and my family, I just can’t defend this case any more.

THE COURT: Okay. Well, I mean, if that is your position, then that is fine. I’m going to tell you right up-front I don’t believe it. I mean, I saw an awful lot of money going through this case, an awful lot of money going to AmeriCorp and other entities, you know, owned or at least believed to be controlled by you. So you are telling me you can’t afford it but, I mean, what is . . . so I take it you intention is not to try and retain other counsel?

MR. McCALLAN: I am just trying to sort through what options could be, Your Honor.

THE COURT: Well, I mean, the lawyers you have got right now, the Haskell Slaughter lawyers, have been in for over a year now and we will get to the matter of discovery in a minute. I want to make sure I understand where were are on that, but I don’t have to grant their motion, and you know, I haven’t decided that I am going to grant it yet.

One of the things I am concerned about is I want to get this case tried by November, if at all possible, and if you get new counsel, they almost certainly will come in and ask for additional time and ask to kick this off. So that is one problem and I am sure you have probably been counseled on all of this but the trustee is not just suing the corporations, he is suing you personally and, depending on how this all shakes out, you could end up with a very large nondischargeable liability against you.

So I don’t think you . . . well, you would be taking a real risk if you just let this thing go by default. And, of course, the immediate problem is you can represent yourself, you could maybe stave off default for a while but you can’t represent corporations. Alabama law doesn’t allow that. So they are going to be in default if you haven’t got other counsel.

So, anyway, I guess for now you are telling me you are not opposing the lawyers’ motion to withdraw and you are not . . . you don’t have other counsel that you are going to retain; is that correct?

MR. McCALLAN: No, sir.

(Doc. 303, pp. 4-7). Based on McCallan’s representations, the Court granted the motions to withdraw filed by the Defendants’ counsel on July 23, 2013. (Doc. 296).

b. Thomas McAlpine Appears and Attempts to Delay Proceedings

Four days after McCallan indicated to the Court that he would not retain new counsel, Mobile lawyer Thomas McAlpine (“McAlpine”) entered his appearance on behalf of the Defendants on July 26, 2013 — a Friday — and moved to quash depositions that were scheduled for the following Monday, precisely as the Court had predicted. (Doc. 301). The Court was troubled with both the timing of McAlpine’s motion and the tactics he used in filing it.

McAlpine called the Court’s chambers early that Friday and spoke with the undersigned’s Judicial Assistant, inquiring about technical matters such as the Court’s CM/ECF system. Yet he waited until after 4:00 p.m. to telephone the Court — ex parte — with a false claim that he could not file using the Court’s CM/ECF filing system. McAlpine represented to the Court that he had been advised by the Clerk’s office that it would take five days to be approved for a CM/ECF login, and that he needed to file his motion via facsimile. In fact, McAlpine had not even requested a CM/ECF login and did not do so until 4:40 p.m. that Friday; the Clerk’s office emailed him his CM/ECF login twenty minutes after it opened the following Monday, less than one business hour after he had requested it. In other words, McAlpine contrived his emergency to try to obstruct the proceedings. Additionally, the Court later learned that McAlpine had not contacted opposing counsel to inform them of his motion to quash.

The Defendants’ July 26 “emergency” motion was nothing more than an obstructionist tactic in a case that had seen the Defendants employ a litany of them. The Court denied the Defendants’ motion to quash, finding that it was filed in bad faith. (Doc. 300). [12]

On July 29, 2013, counsel requested a telephonic hearing where McAlpine moved to change the location of a deposition scheduled for that Thursday, August 1, from Orlando, Florida to Mobile, Alabama. Again, the Court denied the Defendants’ motion, while McAlpine repeatedly interrupted the Court during its ruling. The Court reprimanded McAlpine in its subsequent written order:

The Court would further caution Attorney McAlpine about what it considers McAlpine’s rude and unprofessional behavior. The Court is aware that he is disappointed with this ruling and the Court’s Order of July 26, 2013[.] However, McAlpine’s recriminations and complaints after an adverse ruling are unacceptable. For example, the fact that McAlpine has been practicing law since 1976, or that he had to spend the whole weekend preparing for depositions, was not pertinent. McAlpine is advised that at some point rude and unprofessional behavior crosses the line and becomes contemptuous.

(Doc. 302) (parenthetical omitted).

c. Hamm’s Third Motion for Sanctions

On August 20, 2013, Hamm filed a third motion for sanctions. (Doc. 307). He asserted that he was unable to make distributions to creditors of the Allgero bankruptcy estate due to the Defendants’ stonewalling on discovery, causing those creditors to incur continual interest on the outstanding debts they owed that in Hamm’s estimate amounted to $895,968.32. [13] Hamm had also been forced to post $71,000 in bonds as security for the money in the bankruptcy estate, and had incurred $32,489.63 worth of banking service fees during that time. Altogether, Hamm asked for $999,457.95 in costs incurred due to fees and the lost use of the estate funds. (Doc. 307).

The Defendants, through McAlpine, filed a particularly vituperative response to Hamm’s motion. (Doc. 311). They asserted that Allegro should have remained under the control of the Receiver, “stated unequivocally” that Hamm breached his duties as Trustee of the Allegro bankruptcy estate by making “a number of incredibly bad business decisions[,]” and claimed that Hamm’s handling of the money was “incredibly inept[]” and bore “very closely to abuse of the discretion” of a Trustee. [14] (Doc. 311). They also claimed that their “duty is only to reasonably respond to discovery,” ignoring the fact that they held Allegro’s business records and persistently tried to thwart discovery. (Doc. 311).

The Court took Hamm’s third motion for sanctions under advisement. Having carefully considered Hamm’s motion and the Defendants’ response, the Court finds that the motion is well-taken and should be granted as filed. These proceedings were delayed by several years as a result of the Defendants’ well-documented obstructionist tactics. The Defendants’ intemperate criticism of Hamm’s performance as Trustee in the underlying bankruptcy cases is not well-taken. Neither McCallan nor McAlpine have any experience acting as a trustee in cases such as this and they offer no evidence in support of their opposition. Put simply, they do not know of what they speak. The Defendants’ objections are overruled and the Court will, by way of a separate document, award sanctions.

d. The Defendants’ Pre-Trial Motions

On September 30, 2013, McCallan individually moved for summary judgment, supporting his motion in part with documents not previously produced to Hamm. (Doc. 320). Hamm moved to strike those documents and opposed summary judgment. (Docs. 327 & 328).

On October 22, 2013 — just thirteen days before trial — the Defendants moved for the undersigned to recuse himself. (Doc. 332). The merits of the Defendants’ motion to recuse will be discussed in greater detail below. Hamm opposed the motion to recuse, reiterating the Defendants’ discovery abuses and the impending trial. (Doc. 333). The Defendants dismissed Hamm’s response as “based upon hyperbole and devoid of facts and merit.” (Doc. 337).

The Court heard both motions at a pre-trial hearing on October 28, 2013, and denied both. [15] (Docs. 338 & 344). [16] The parties discussed expected witness and evidence to be offered at the trial scheduled for November 4, 2013, and McAlpine gave every indication that he would appear on behalf of the Defendants. (Doc. 344). The following colloquy occurred at the October 28 pre-trial hearing:

MR. McALPINE: Your Honor, with regard to the Chase records, I have seen them. I have not had an opportunity to go through them at length but essentially what they are trying to do with those Chase records violates Rule 400 and 401 of the Federal Rules of Evidence. They are trying to prove that Mr. McCallan and/or his companies are bad before this court in this case because of something that occurred in another case before another court or it may be in this court, I am not sure.

THE COURT: Okay. So if I am understanding Rule 400, you are saying that your are not objecting on the grounds of authenticity but you want to object on the grounds of relevance and materiality?

MR. McALPINE: That’s correct. I don’t think that we have an objection on grounds of authenticity if they are in fact as she says they are. I would reserve any objection to that until the time of trial.

With regard to McCallan being called as a witness by order of this court, we do not intend to call Mr. Timothy McCallan as a witness. We do not believe it is necessary.

With regard to the judicial notice, there are a number of things which have come in, in these motions and these hearings from the plaintiffs which are pure hearsay and are not admissible and, therefore, we would object to those and we will be objecting to them.

Doc. 344, pp. 44-45). The Court reiterated that it would conduct the trial on November 4, 2013.

e. The Trial

The trial took place as scheduled on November 4, 2013, where the following proceedings occurred:

THE COURT: Okay. Well, good morning. Let’s take appearances. First for the plaintiff.

MR. OLEN: Steve Olen and Lucy Tufts for the plaintff, Daniel Hamm, the trustee.

THE COURT: Good morning.

MR. HAMM: Daniel Hamm, the trustee.

THE COURT: Okay. Well, I do not see anybody. Do we have anybody for the defendants?

[No response.]

THE COURT: By my watch, it is now eleven minutes past nine o’clock. This case was scheduled for 9:00 a.m. this morning. It has been scheduled for many months. We had a pretrial conference just last week. I didn’t get any indication at all from Mr. McAlpine that he didn’t intend to appear. It was discussed that Mr. McCallan would not appear but we have him by deposition and that was not going to hinder the trial, in my view. If he didn’t want to testify live, that was his business.

We telephoned Mr. McAlpine’s office and didn’t get any information. He has not telephoned chambers. He has telephoned chambers in the past when it suited him.

So, anyway, I intend to go forward with the trial. You know, it is scheduled, so my recollection was — we had a discussion, I guess — well, Mr. McCallan is not here. You have got his deposition.

I guess the next question is who have we got that you had intended to call live and then, I guess, Mr. Olen, I want your thoughts. I mean, do you want to just proffer or do you want to actually call the witnesses? You know, I am assuming at the end of the day you are going to ask for a substantial money judgment in favor of the plaintiff. I guess I am not giving anything away. I am going to be inclined to grant that at this point.

They have already filed notice or a motion for an interlocutory appeal. We did a little research, just on the off chance that they might have been under the impression that the interlocutory appeal would somehow divest the court of jurisdiction. It does not. They have not moved for a stay. I really don’t think they can be under some sort of misimpression that there would not be a trial today.

So, needless to say, you know, I don’t know why Mr. McAlpine is not here. I am a little perturbed that, you know, if he has had some sort of difficulty, a car issue or something, that he could have called. It is the age of cell phones. It is a pretty simple matter and, like I said, we did check in with his office.

So I guess, Mr. Olen, what are your thoughts? How do you want to proceed?

MR. OLEN: Your Honor, what I would like to do, if it’s okay, is have maybe ten minutes to confer with Ms. Tufts. I am caught off-guard. I did not —

THE COURT: Well, I know you have tried a lot of cases in your life. Have you ever had this happen?

MR. OLEN: Never, never, and particularly where the opposing counsel didn’t call the court, or us, or anyone. I have never had this, and the issue for us is that I would just like a few minutes to discuss how much of the evidence. . . .

(Doc. 349, pp. 3-5). The Court heard evidence from witnesses called by the Plaintiff until 11:58 a.m. and then broke for lunch. (Doc. 349, pp. 7-93). The Court resumed the trial at 1:04 p.m., where the following proceedings occurred:

THE COURT: Please be seated. Mr. Olen, Ms. Tufts, I just wanted to report Cynthia Sanders, who is one of our Case Administrators — she is actually the case administrator assigned to this adversary proceeding. She received a phone call from a man who would not identify himself who asked if we were having a trial today. She said, yes, that the trial was going on. The man then said, “Well, I filed a motion so that wasn’t supposed to happen.” She said, well, she didn’t know, that he should call chambers. She asked the man to identify himself and he did not, but she did note his telephone number on the caller ID and it was in fact Mr. McAlpine. [17]

Whether he really thought — as I am sure you are aware, Mr. Olen, you saw on the 30th, last Wednesday, he filed a motion for leave to take an interlocutory appeal. I saw is the day it was filed or within a day after and as, as you are aware, I did not ask you to respond because I had no intention of considering the motion prior to the trial; and there was no motion to stay and, as of yet, I have taken no action on the motion for an interlocutory appeal.

I don’t know if this is yet more game playing on the part of the defendants or an absolutely shocking ignorance of the law and rules of procedure. Either way, we’re going forward. I thought I would report the phone call but Ms. Sanders, our case administrator, you know, said that it was going forward and invited him to call chambers, which he did not.

(Doc. 349, pp. 93-94) (footnote added). The Court continued to hear evidence from witnesses called by the Plaintiff until it adjourned at 3:03 p.m. (Doc. 349, pp. 95-157).

At the time the this case was called for trial, the Court did not know where McAlpine was or why he was not in court. It elected to proceed, knowing that if McAlpine had a valid reason for not being present, such as car trouble or a significant health issue, that the November 4 proceedings may have been all for naught. McAlpine did not telephone the Court to make everyone aware that he had decided not to attend trial. Moreover, he was not in his office when the Courtroom Deputy telephoned inquiring as to McAlpine’s whereabouts. The individual who answered the telephoned claimed to not know where he was. Neither McAlpine nor any representative of the Defendants has contacted the Court at any time since the November 4, 2013 trial to explain their absence or request a further hearing. It is clear beyond all doubt that the Defendants and their counsel wilfully absented themselves from the trial.

All of this smacks of the worst kind of gamesmanship. McAlpine’s actions, leading the Court to believe that he would be present for trial and then not appearing, not advising that he would not appear, and then willfully absenting himself so as to create uncertainty, is utterly inexcusable conduct.

D. Findings of Fact

At the conclusion of the November 4, 2013 trial, the Court requested that the Plaintiff provide “Proposed Findings of Fact and Conclusions of Law.” The Plaintiff complied on December 3, 2013. (Doc. 355). The Defendants have not filed a response. The Court accepts the proposed findings of fact and conclusions of law, except to the extent inconsistent with the conclusions of law reached in this opinion. The Court attaches a copy of the proposed findings of fact and conclusions of law as Appendix B.

Notwithstanding the Court’s acceptance of the proposed findings of fact as submitted by the Plaintiff, a brief summary of the facts is appropriate here. Defendant Timothy McCallan operated a fraudulent debt management and debt settlement business. The primary vehicle through which McCallan operated his scheme was Defendant AmeriCorp. The “front” for the scheme — that is, the face actually shown to the public — was Allegro Finance and Allegro Law. Both of the Allegro entities were owned by Keith Nelms. Nelms was a practicing lawyer with an office on Cobbs Ford Road in Prattville, Alabama. Nelms had no experience in the debt management business and, in his testimony in several proceedings [18] before this Court, Nelms made it clear that he did not have any idea how the business actually works. Indeed, the only reason McCallan used Nelms was because his previous “front,” the Hess-Kennedy law firm, had been shut down by the State of Florida.

Using a sophisticated array of advertisements and telemarketers, McCallan induced at least 5,214 individuals to sign up for his program. His victims signed up under the belief that they would be represented by an attorney, Nelms, and that he would negotiate a settlement with their creditors (usually credit card companies). McCallan instructed these individuals to stop paying on their debts directly, and induced them into transferring a portion of their income to entities controlled by him, with the promise that their debts would be taken care of. They were not. Virtually all of the money paid by Allegro customers toward the goal of debt settlement was siphoned off by McCallan and those in league with him. The Court finds that AmeriCorp, Seton, and McCallan defrauded their victims out of $102,949,220.72.


The Court will divide its Conclusions of Law into three parts. In Part A, the Court will consider its jurisdiction and adjudicatory power. In Part B, the Court will discuss the Defendants’ motion to recuse the undersigned. In Part C, the Court will consider whether default judgment is appropriate.

A. Jurisdiction & Adjudicatory Power

1. Jurisdiction

A district court has original 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). A district court may refer all such cases to the bankruptcy judges for the district, 28 U.S.C. § 157(a), and the District Court for the Middle District of Alabama has done so. See General Order of Reference — Bankruptcy Matters (M.D. Apr. 25, 1985).

“`Arising under’ proceedings are matters invoking a substantive right created by the Bankruptcy Code.” Continental Nat’l Bank of Miami v. Sanchez (In re Toledo), 170 F.3d 1340, 1345 (11th Cir. 1999) . A proceeding is “related to” a bankruptcy case when “`the outcome of the proceeding could conceivably have an effect on the estate being administered in bankruptcy.'” Miller v. Kemira, Inc. (In re Lemco Gypsum, Inc.), 910 F.2d 784, 788 (11th Cir. 1990) (quoting Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984) ). “`An action is related to bankruptcy if the outcome could alter the debtor’s rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.'” Id. (quoting Pacor, 743 F.2d at 994 ).

Counts II, III, and IV (avoidance of preferences, post-petition transfers, and fraudulent transfers) of Hamm’s amended complaint invoke substantive rights created by the Bankruptcy Code and are thus “arising under” proceedings. In its decision affirming this Court’s denial of arbitration, the District Court ruled that Counts I and V (turnover and accounting) are more properly characterized as breach-of-contract claims. McCallan v. Hamm, 2012 WL 1392960, *5, 2012 U.S. Dist. LEXIS 56907, *15 (M.D. Ala. Apr. 23, 2012). These claims could still conceivably have an effect on the Allegro bankruptcy estate and therefore are “related to” proceedings. The Court has jurisdiction under 28 U.S.C. § 1334(b) on all five counts of Hamm’s amended complaint.

2. Adjudicatory Power

Absent consent of the parties, a bankruptcy court may not enter final judgment in non-core proceedings. 28 U.S.C. § 157(c)(1); see also N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 71-72 (1982) . A bankruptcy court may enter final judgment in a core proceeding under 28 U.S.C. § 157(b)(1) so long as it involves the restructuring of debtor-creditor relations and not merely the augmentation of the bankruptcy estate. Stern v. Marshall, 131 S. Ct. 2594, 2614 (2010) ; see also N. Pipeline Constr. Co., 458 U.S. at 71 ; Wellness Int’l Network, Ltd. v. Sharif, 135 S. Ct. 1932, 1951-54 (2015) (Roberts, C.J., dissenting) . [19] Congress has provided a non-exhaustive list of core proceedings under 28 U.S.C. § 157(b)(2), but “engrafted upon all of them is an overarching requirement that property of the estate under [11 U.S.C.] § 541 be involved.” Toledo, 170 F.3d at 1348 .

In its decision affirming this Court’s denial of arbitration, the District Court held that Counts I and V of Hamm’s amended complaint are non-core. McCallan, 2012 WL 1392960 at *5, 2012 U.S. Dist. LEXIS 56097 at *15. Counts II, III, and IV are nominally core proceedings under 28 U.S.C. § 157(b)(2)(F) and (H), but under the facts of this case they merely seek augmentation of the bankruptcy estate and thus fall under the Stern exception to a bankruptcy court’s power of final adjudication over core claims.

A bankruptcy court otherwise lacking adjudicatory power may nevertheless enter a final judgment with the express or implied consent of the parties. Wellness Int’l Network, 135 S. Ct. at 1947-48 (majority opinion); 28 U.S.C. § 157(c)(2). Such consent must “be knowing and voluntary.” Wellness Int’l Network, 135 S. Ct. at 1948 . “[T]he key inquiry is whether `the litigant or counsel was made aware of the need for consent and the right to refuse it, and still voluntarily appeared to try the case’ before the non-Article III adjudicator.” Id. (quoting Roell v. Withrow, 538 U.S. 580, 590 (2003) ).

Hamm consented to adjudication by this Court when he filed his complaint. AmeriCorp and Seton asserted counterclaims against Hamm (in his capacity as Trustee of the Allegro estate) for breach of contract and quantum meruit. (Doc. 32). Also, the Receiver, Louis Colley, filed an administrative claim on their behalf in the Allegro bankruptcy for almost $400,000. (Case No. 10-30631, Doc. 74). “A creditor who files a proof of claim in a bankruptcy case submits to the bankruptcy court’s equitable jurisdiction for determination not only of the claim itself, but also of any counterclaim or defense that must necessarily be resolved in the claims allowance process.” DePaola v. Sleepy’s, LLC (In re Prof’l Facilities Mgmt, Inc.), 61 Bankr. Ct. Dec. 203, 2015 WL 6501231, *4, 2015 Bankr. LEXIS 3643, *10 (Bankr. M.D. Ala. Oct. 27, 2015); see also Katchen v. Landy, 382, U.S. 323, 330, 334-35 (1966) ; Stern, 131 S. Ct. 2607-08, 2616-18 . This Court, in Prof’l Facilities Mgmt., extended this principle to counterclaims filed by a defendant in an adversary proceeding against a Chapter 7 trustee acting in her representative capacity. See Prof’l Facilities Mgmt., 2015 WL 6501231 at *5-6, 2015 Bankr. LEXIS at *15-18. At the time they were filed, resolution of these claims and counterclaims could not be resolved without determining the merit of Hamm’s claims. Given the counterclaims filed by AmeriCorp and Seton, and the claim for administrative expenses filed by the Receiver on their behalf, the Court concludes that they have impliedly consented to adjudication by this Court. [20]

McCallan filed his initial answer as to Counts II, III, and IV on July 21, 2011, and did not expressly refuse his consent to adjudication by this Court. [21] (Doc. 73). When he (and AmeriCorp and Seton) finally answered Counts I and V more than a year later, and nearly two years into the litigation, he — for the first time — demanded a jury trial and expressly refused consent to adjudication by this Court. (Doc. 206). He also subsequently moved for summary judgment on all counts, (Doc. 320), and never again raised his jury trial demand or refusal to consent to adjudication in the hearings leading up to the trial.

After the Supreme Court remanded Wellness Int’l Network to the Seventh Circuit, the Seventh Circuit determined that the defendant had waived his right to an Article III adjudicator by failing to timely raise it — a matter of five months. Wellness Int’l Network, Ltd. v. Sharif, 617 Fed. Appx. 589, 590 (7th Cir. 2015). Notably, that case, like this one, also involved protracted litigation caused by a “pattern of discovery evasion” by the defendant, and resulted in an entry of default judgment by the bankruptcy court. Wellness Int’l Network, 135 S. Ct. at 1941 .

Here, McCallan and his co-Defendants waited almost two years to demand a jury trial and to refuse consent to adjudication by this Court. By that time, he had already violated at least three of this Court’s discovery orders, provoked two motions to compel by Hamm, and had been arrested as a consequence of the bench warrant issued by this Court. Under these facts, the Court readily concludes that McCallan’s jury trial demand and assertion of his right to an Article III adjudicator were untimely. Alternatively, McCallan (and his counsel) waived those rights by failing to subsequently reiterate them and by giving the Court (and opposing counsel) the false impression that they intended to defend this suit at a bench trial conducted by this Court. [22]

In short, all of the parties have consented to final adjudication by this Court.

B. Motion to Recuse

1. The Defendants’ Asserted Grounds for Recusal

The Defendants assert recusal is mandated pursuant to 28 U.S.C. §§ 455(a) and (b)(1). [23] (Doc. 332). They also attached an affidavit by McCallan, asserting that he is “an objective, disinterested, lay observer,” and listing numerous examples from the Court’s prior rulings and statements during hearings that purportedly demonstrate the undersigned’s bias and prejudice against the Defendants. (Doc. 332). The remarks made by the undersigned that McCallan complains of in his affidavit consist of the following:

That the Defendants “have a long history of masterminding, orchestrating and facilitation of debt settlement schemes across the United States.”

That Nelms “perpetrat[ed] McCallan’s established, fraudulent debt-settlement scheme” and that “[t]he product of this unholy conspiracy . . . was Allegro[.]”

That the benefits to consumers of the “lengthy dense contracts” between them and Allegro “appear to be largely illusory.”

Questioning Ed Reed, General Counsel of the Alabama Securities Commission, why he thought it was a good idea to continue to operate Allegro and work with AmeriCorp after Allegro’s business model had been revealed.

Reporting to the District Court that “the contract between Allegro Law and . . . Seton is part of a smoke screen used to conceal the true nature of the relationships among between [sic] the parties.”

Referring to the relationship between Allegro and AmeriCorp as a “Ponzi Scheme[.]”

Admitting that the undersigned “has got a very jaundiced view” of the debt settlement services offered by Allegro and AmeriCorp.

Mentioning a conversation with U.S. Senator Jeff Sessions at a cocktail party in which the undersigned stated “one of the worst things [Congress] did . . . was to give, you know, these debt settlement outfits an air of legitimacy” and that debt settlement was “a horrible business, horrible idea[.]”

Questioning why the Receiver wanted to continue operating Allegro and referring to it as “a completely flawed business model from the start[.]”

Stating, in reference to McAlpine’s filing of the motion to quash McCallan’s deposition, that “bad faith would be a colossal understatement.”

Stating that the “Defendants sabotaged the [discovery] process, producing large quantities of gibberish, in an effort to obstruct the Trustee’s access to the database.”

Stating that McCallan “flouted the [Court’s] order and went on the run, ignoring both orders to produce the database and to appear in Court.”

“Impugn[ing]” the Haskell Slaughter lawyers by stating they “continued to misrepresent and stonewall the Trustee and the Court” after McCallan got out of jail.

(Doc. 332, McCallan’s affidavit).

The Defendants cite Glassroth v. Moore, 229 F. Supp. 2d 1283, 1285 (M.D. Ala. 2002), for the proposition that the Court “may not pass upon the truthfulness of the facts stated in the affidavit” and that the undersigned must recuse if the facts in the affidavit are material, stated with particularity, and would convince a reasonable person that a personal bias exists. (Doc. 332).

2. The Distinction Between 28 U.S.C. §§ 144 and 455

Before addressing the merits of the motion to recuse, it is appropriate to consider the differences between §§ 144 and 455 of Title 28 of the United States Code, both of which address recusal. The Defendants’ motion addresses both sections, failing to observe that only § 455 applies here and that § 144 does not apply to a bankruptcy judge.

Section 144 permits a party to file “a timely and sufficient affidavit that the judge before whom the matter is pending has a personal bias or prejudice either against him or in favor of any adverse party[.]” 28 U.S.C. § 144. If a party files such an affidavit, the presiding “judge shall proceed no further therein,” and “another judge shall be assigned to hear such proceeding.” 28 U.S.C. § 144. When a party files an affidavit under § 144, “`the trial judge may not pass upon the truthfulness of the facts stated in the affidavit even when the court knows these allegations to be false.'” Glassroth, 229 F. Supp. 2d at 1285 (quoting United States v. Alabama, 828 F.2d 1532, 1540 (11th Cir. 1987) ). “Instead, the judge’s inquiry is limited to determining whether the facts alleged are legally sufficient to require recusal.” Id. “For an affidavit to be legally sufficient, the party must show that `(1) The facts are material and stated with particularity, (2) The facts are such that, if true they would convince a reasonable person that a bias exists and (3) The facts must show the bias is personal, as opposed to judicial in nature.'” Id. (quoting United States v. Alabama, 828 F.2d at 1540 ). In other words, § 144 requires a judge to recuse himself upon a party’s subjective, good faith, and timely assertion that the judge harbors a personal bias or prejudice for or against a party. However, § 144 only applies to district judges, not bankruptcy judges. See Liteky v. United States, 510 U.S. 540, 548 (1994) ; Seidel v. Durkin (In re Goodwin), 194 B.R. 214, 221 (9th Cir. B.A.P. 1996) .

Section 455, on the other hand, applies to bankruptcy judges under Bankruptcy Rule 5004(a), and has three distinct components. The first component, 28 U.S.C. §§ 455(b)(2)-(b)(5), provides objective bases on which a judge must recuse due to his personal interest in a matter or his personal relationship with someone involved in the matter. Liteky, 510 U.S. at 548 . The second component, 28 U.S.C. § 455(b)(1), provides a subjective basis for a judge to recuse due to personal bias or prejudice. Id. In other words, § 455(b)(1) “duplicate[s] the grounds of recusal set forth in § 144 (`bias or prejudice’),” but differs from § 144 in that it is applicable to all judges, it does not require the judge’s automatic recusal or his acceptance as truth of an affidavit asserting bias or prejudice, and it places the obligation to identify the existence of bias or prejudice on the judge himself. Id. The third component, 28 U.S.C. § 455(a), is a “catchall” provision “covering both `interest or relationship’ and `bias or prejudice’ grounds, but requiring them all to be evaluated on an objective basis, so that what matters is not the reality of bias or prejudice but its appearance.” Id. (internal citation omitted, emphasis in original).

The language from Glassroth that the Defendants rely on is in regard to § 144, not § 455, and this Court is not bound by § 144. See Glassroth, 229 F. Supp. 2d at 1285 ; Goodwin, 194 B.R. at 221 . “Section 455 does not require the judge to accept all allegations by the moving party as true. If a party could force recusal of a judge by factual allegations, the result would be a virtual `open season’ for recusal.” United States v. Greenough, 782 F.2d 1556, 1558 (11th Cir. 1986) . Moreover, an affidavit offered by McCallan, a Defendant, is clearly not being offered by an “objective” or “disinterested” observer, and his assertion otherwise is disingenuous. In short, there is no requirement that this Court take McCallan’s factual assertions to be true or that it wear blinders as to the nature of the Allegro-AmeriCorp relationship, McCallan’s involvement with AmeriCorp, the course of this litigation, or the context in which the undersigned’s statements were made.

3. Subjective Bias or Prejudice

A judge shall “disqualify himself . . . [w]here he has a personal bias or prejudice concerning a party, or personal knowledge of disputed evidentiary facts concerning the proceedings[.]” 28 U.S.C. § 455(b)(1).

The Supreme Court has made clear that the word “personal” in § 455(b)(1) does not “create a complete dichotomy between court-acquired and extrinsically acquired bias[.]” Liteky, 510 U.S. at 550 . Rather, the terms “bias” and “prejudice” are pejorative in that they “describ[e] dispositions that are never appropriate.” Id. at 549 (emphasis in original). However, “[n]ot all unfavorable disposition towards an individual (or his case) is properly described by those terms.” Id. at 550 (emphasis in original). Rather, “[t]he words connote a favorable or unfavorable disposition or opinion that is somehow wrongful or inappropriate, either because it is undeserved, or because it rests upon knowledge that the subject ought not to possess . . ., or because it is excessive in degree. . . .” Id. (emphasis in original).

To that end, an extrajudicial source, while the most common basis to show bias or prejudice on the part of a judge (i.e., the extrajudicial source doctrine), is not the only basis to assert bias or prejudice. “A favorable or unfavorable predisposition can also deserve to be characterized as `bias’ or `prejudice’ because, even though it springs from the facts adduced or the events occurring at trial, it is so extreme as to display clear inability to render fair judgment.” Id. at 551. This is sometimes referred to as the “pervasive bias” exception to the extrajudicial source doctrine. [24] Id.

However, the burden of proof for “pervasive bias” based on a judicial source is a demanding one. “The judge who presides at a trial may, upon completion of the evidence, be exceedingly ill disposed toward the defendant, who has been shown to be a thoroughly reprehensible person. But the judge is not thereby recusable for bias or prejudice, since his knowledge and the opinion it produced were properly and necessarily acquired in the course of the proceedings, and are indeed sometimes (as in a bench trial) necessary to completion of the judge’s task.” Id. at 550-51. “Also not subject to deprecatory characterization as `bias’ or `prejudice’ are opinions held by judges as a result of what they learned in earlier proceedings. It has long been regarded as normal and proper for a judge to sit in the same case upon its remand, and to sit in successive trials involving the same defendant.” Id. at 551.

Consequently, “judicial rulings alone almost never constitute a valid basis for a bias or partiality motion.” Id. at 555. “Almost invariably, they are proper grounds for appeal, not for recusal.” Id. Moreover, “opinions formed by the judge on the basis of facts introduced or events occurring in the course of the current proceedings, or of prior proceedings, do not constitute a basis for a bias or partiality motion unless they display a deep-seated favoritism or antagonism that would make fair judgment impossible.” Id. (emphasis added). “[J]udicial remarks during the course of a trial that are critical or disapproving of, or even hostile to, counsel, the parties, or their cases, ordinarily do not support a bias or partiality challenge. They may do so if they reveal an opinion that derives from an extrajudicial source; and they will do so if they reveal such a high degree of favoritism or antagonism as to make fair judgment impossible.” Id. (emphasis in original). “Not establishing bias or partiality, however, are expressions of impatience, dissatisfaction, annoyance, and even anger, that are within the bounds of what imperfect men and women . . . sometimes display. A judge’s ordinary efforts at courtroom administration — even a stern and short-tempered judge’s ordinary efforts at courtroom administration — remain immune.” Id. at 555-56 (emphasis in original).

An example of a judicial remark evidencing a deep-seated antagonism that rendered fair judgment impossible was present in Berger v. United States , in which the district judge stated, during a World War I era criminal espionage trial of German-Americans:

If anybody has said anything worse about the Germans than I have I would like to know so I can use it. . . . One must have a very judicial mind, indeed, not to be prejudiced against the German Americans in this country. Their hearts are reeking with disloyalty.

Berger v. United States, 255 U.S. 22, 28 (1921) ; see also Liteky, 510 U.S. 540, 555 (citing this language in Berger as an example of recusable judicial language).

All of the remarks the Defendants cite as examples of the undersigned’s bias or prejudice took place in judicial orders, judicial opinions, and judicial hearings; i.e., there is no extrajudicial source. While strong, the undersigned’s language does not demonstrate any pervasive or deep-seated bias within the meaning of Liteky. Regarding the Allegro business model and its relationship with AmeriCorp, it is important to note that the undersigned presided over the Allegro bankruptcy. The Court was inundated with letters and phone calls from angry Allegro clients who were victimized by its business practices. By advising its clients to pay Allegro and to stop paying their debts, Allegro doomed its clients to what the District Court aptly described as “personal economic suicide[.]” McCallan, 2012 WL 1392960 at *1; 2012 U.S. Dist. LEXIS 56097 at *3. Allegro’s practice of charging its clients massive front-loaded fees for providing (in most cases) no services was both unethical and fraudulent.

The Receiver filed an administrative expense claim in the Allegro bankruptcy on behalf of AmeriCorp and Seton. In the course of administering the Allegro bankruptcy it soon became apparent that most of the money flowing into Allegro was being siphoned off to AmeriCorp, and that AmeriCorp was doing the legwork of communicating with Allegro’s clients and negotiating settlement of their debts. The undersigned was not required to turn a blind eye to the fact that McCallan and AmeriCorp had a similar arrangement with a Florida law firm, Hess-Kennedy, and that Hess-Kennedy’s clients had likewise been defrauded. Faced with such a business, the Court had every right — if not also a duty — to investigate it, criticize its practices, and question the Receiver why he wished to continue operating it.

“`Impartiality is not gullibility. Disinterestedness does not mean child-like innocence. If the judge did not form judgments of the actors in those court-house dramas called trials, he could never render decisions.'” Liteky, 510 U.S. at 551 (quoting In re J.P. Linahan, Inc., 138 F.2d 650, 654 (2d Cir. 1943) ).

With regard to McCallan, the other Defendants, and their lawyers, all of the complained-of language refers to what McCallan and his lawyers have done, not to any inherent personal characteristics they have (unlike the language in Berger). According to Hamm’s complaint, which the Court had to accept as true in ruling on the motions to dismiss and to compel arbitration, McCallan acted as the principal of AmeriCorp and Seton and masterminded both the Hess-Kennedy and Allegro schemes. If true, McCallan defrauded thousands of people out of millions of dollars. Criticism of such conduct would not be “undeserved” or “excessive in degree.” See Liteky, 510 U.S. at 550 .

Moreover, McCallan’s conduct in this litigation was abusive and contemptuous. He ignored Hamm’s initial discovery request of records necessary to administer the Allegro bankruptcy estate. When the Court ordered him to turn over the records, he withheld many computer files and turned over many others that were unreadable. When the Court ordered him to turn over readable and usable files, he ignored that order, forcing the Court to hold him in contempt and to issue a warrant for his arrest. Even after being arrested, McCallan still abused the discovery process and disobeyed the Court’s order by sending Hamm millions of files lacking front-end applications to make them readable, or the internal connections to show which piece of information applied to which client. He also continued to withhold key information. In doing so, he and his lawyers lied to the Court about the location and operability of AmeriCorp’s servers. He ultimately dragged out discovery for more than two years with his stalling tactics, wasting countless resources and hours of the Court’s time, Hamm’s time, and even his own lawyers’ time.

Finally, McCallan has a history in this litigation of breaking off communication with his lawyers and not paying them when he gets in trouble with the Court over his litigation conduct, or when his lawyers demand payment for the services they have rendered. McCallan had already done this to two sets of lawyers when McAlpine first appeared on his behalf. McAlpine then inauspiciously introduced himself to the Court by means of an improper ex parte communication and a falsehood, all for the purpose of filing an eleventh-hour motion that, given the history of this litigation, was blatantly sought in bad faith. McAlpine’s demeanor and conduct toward the Court since then has been unprofessional, rude, and deliberately provocative. Finally, despite having ample warning of the trial date, neither McCallan nor McAlpine, nor any other representative of the Defendant, bothered to appear at trial or gave any notice or indication that they would not appear.

Liteky instructs that a court’s efforts at ordinary courtroom administration are not grounds for recusal. Id. at 556. Although the Court’s efforts at administering this case have gone far beyond ordinary, they have been necessitated by the Defendants’ unwarranted and persistent conduct. “`We cannot assume that judges are so irascible and sensitive that they cannot fairly and impartially deal with resistance to their authority or with highly charged arguments about the soundness of their decisions.'” In re Evergreen Sec., Ltd., 570 F.3d 1257, 1279 (11th Cir. 2009) (quoting Ungar v. Sarafite, 376 U.S. 575, 583 (1964) ). “Requiring recusal for all disruptive, recalcitrant and disagreeable commentary would undermine the judiciary.” Id. (citing Mayberry v. Pennsylvania, 400 U.S. 455, 463 (1971) ). Likewise, “[m]ere friction between the court and counsel . . . is not enough to demonstrate `pervasive bias.'” Gwynn v. Walker (In re Walker), 532 F.3d 1304, 1311 (11th Cir. 2008) (internal quotation marks omitted). “It is improper for a lawyer or litigant . . . to create the ground on which he seeks the recusal of the judge assigned to his case. That is arrant judge-shopping.” Sullivan v. Conway, 157 F.3d 1092, 1096 (7th Cir. 1998) . “`A judge cannot be driven out of a case.'” Evergreen Sec., 570 F.3d at 1279 (quoting Mayberry, 400 U.S. at 463 ). In short, the Defendants have not proven that the Court has any “pervasive bias” or “prejudice” against them that would require the Court’s recusal under 11 U.S.C. § 455(b)(1).

4. Objective Reason to Question Impartiality

“Any justice, judge, or magistrate judge of the United States shall disqualify himself in any proceeding in which his impartiality might reasonably be questioned.” [25] 28 U.S.C. § 455(a). “Under § 455, the standard is whether an objective, fully informed lay observer would entertain significant doubt about the judge’s impartiality.” Christo v. Padgett, 223 F.3d 1324, 1333 (11th Cir. 2000) ; see also Mantiply v. Horne (In re Horne), 2015 WL 6500754, *2, 2015 U.S. App. LEXIS 18742, *5 (11th Cir. Oct. 28, 2015) (unpublished). “`The inquiry of whether a judge’s impartiality might reasonably be questioned under § 455(a) is an objective standard designed to promote the public’s confidence in the impartiality and integrity of the judicial process.'” Evergreen Sec., Ltd., 570 F.3d at 1263 (quoting Davis v. Jones, 506 F.3d 1325, 1332 n.12 (11th Cir. 2007) ). “Thus, the court looks to `the perspective of a reasonable observer who is informed of all the surrounding facts and circumstances.'” Id. (quoting Cheney v. U.S. Dist. Court for the Dist. of Columbia, 541 U.S. 913, 924 (2004) ) (emphasis in original).

“There are twin, and sometimes competing, policies that bear on the application of the § 455(a) standard. The first is that courts must not only be, but must seem to be, free of bias or prejudice. Thus the situation is viewed through the eyes of the objective person. A second policy is that a judge, having been assigned to a case, should not recuse himself on unsupported, irrational, or highly tenuous speculation. If this occurred the price of maintaining the purity of the appearance of justice would the power of litigants or third parties to exercise a veto over the assignment of judges.” Greenough, 782 F.2d at 1558 . “[R]eady recusal benefits the judge who steps aside, and the litigant who sought this outcome, but it may injure the judge who must take over the case and the litigant aggrieved by the substitution. Until Congress decides that the costs of recusal on demand are worth bearing, judges must evaluate each motion to decide whether under objective standards the judge’s impartiality might reasonably be questioned.” N.Y. City Housing Dev. Corp. v. Hart, 796 F.2d 976, 981 (7th Cir. 1986) (emphasis in original).

The Supreme Court held in Liteky that the extrajudicial source factor applies to § 455(a), see 510 U.S. at 554, and, as noted above, all of the bases the Defendants assert as grounds for recusal are remarks made in the course of judicial proceedings — either this adversary proceeding or the Allegro bankruptcy. Thus, the Defendants’ recusal motion cannot succeed under § 455(a) unless the undersigned’s remarks would display a deep-seated favoritism or antagonism that would lead an objective, fully informed lay observer to question the Court’s impartiality.

A lay observer who was fully informed of the nature of the Allegro business model, the ruinous effect Allegro had on its clients, Allegro’s relationship with AmeriCorp and McCallan, and McCallan’s (and his lawyers’) conduct in this litigation would not reasonably question the Court’s impartiality based on the remarks the Defendants complain of. A lay observer with even a modest understanding of finance and credit would conclude that Allegro’s activities with AmeriCorp and McCallan were predatory and fraudulent. Moreover, a fully informed lay observer would not reasonably expect a court to disregard a litigant’s or lawyer’s misbehavior in front of it, or ignore when a litigant violates its orders or intentionally provokes it. All of the statements the Defendants complain of have been made by the Court in response to what either Allegro or the Defendants have done in conducting their businesses and this litigation. That is not a sufficient reason to question the Court’s impartiality.

C. Default Judgment

Bankruptcy Rule 7055 incorporates Rule 55 of the Federal Rules of Civil Procedure. “When a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend, and that failure is shown by affidavit or otherwise, the clerk must enter the party’s default.” FED. R. CIV. P. 55(a). “If the plaintiff’s claim is for a sum certain or a sum that can be made certain by computation, the clerk — on the plaintiff’s request, with an affidavit showing the amount due — must enter judgment for that amount and costs against a defendant who has been defaulted for not appearing and who is neither a minor nor an incompetent person.” FED. R. CIV. P. 55(b)(1).

“It is well established that the district court has the authority to dismiss or to enter default judgment, depending on which party is at fault, for failure to prosecute with reasonable diligence or to comply with its orders or rules of procedure.” Flaska v. Little River Marine Constr. Co., 389 F.2d 885, 887 (5th Cir. 1968) . [26] “[T]he power is one inherent in the interest of the orderly administration of justice. It may be exercised sua sponte under proper circumstances.” Id. (internal quotation marks and footnote omitted). However, “[d]ismissal of an action with prejudice and entry of judgment by default are drastic remedies which should be used only in extreme situations, as the court has a wide range of lesser sanctions.” Id. at 887-88 (internal footnotes omitted). Entry of default judgment “is only appropriate where there has been a clear record of delay or contumacious conduct.” E. F. Hutton & Co., Inc. v. Moffatt, 460 F.2d 284, 285 (5th Cir. 1972) .

“The failure to appear at a duly scheduled trial after months of preparation by the parties and by the trial court is a serious offense for which the entry of a default is appropriate.” Gulf Coast Fans, Inc. v. Midwest Elecs. Imps., Inc., 740 F.2d 1499, 1512 (11th Cir. 1984) . Default has been entered and affirmed for less. In McGrady v. D’Andrea Elec., Inc., 434 F.2d 1000 (5th Cir. 1970), the defendant corporation filed as its purported answer a letter from its president denying the allegations of the complaint. McGrady, 434 F.2d at 1001 . When the defendant failed to appear at a pre-trial conference it had received notice of, the district court entered default, denied the defendant’s motion to set aside the default, and later entered final judgment in favor of the plaintiff. Id. The Fifth Circuit affirmed, and “deem[ed] it unnecessary to decide whether [the defend]ant’s purported `answer’ was adequate,” because the defendant’s failure to appear at the pre-trial conference “disclose[d] sufficient evidence of [the defend]ant’s delay and failure to comply with court rules to justify the entry of a default” under Rule 55. Id.

“Put differently, even assuming a defendant has appeared and answered, the court still has the authority to order an entry of default when there is sufficient evidence of defendant’s dilatory tactics or failure to comply with court orders and the rules of procedure.” Liberty Mut. Ins. Co. v. Fleet Force, Inc., 2013 WL 3357167, *9, 2013 U.S. Dist. LEXIS 91716, *28 (N.D. Ala. Jul. 1, 2013) (emphasis in original). The record in this case is


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