Judge orders a firm of Stormy Daniels' attorney to pay $10 million judgment
Posted May 22, 2018 7:29 p.m. EDT
Updated May 23, 2018 9:03 a.m. EDT
(CNN) — A US bankruptcy court judge on Tuesday ordered the law firm of Stormy Daniels' attorney Michael Avenatti to pay a $10 million judgment to an attorney who once worked for the firm, according to court documents.
The judgment comes after Avenatti's firm, Eagan Avenatti LLP, failed to make the first payment on a $4.85 million settlement with lawyer Jason Frank, a one-time partner at the firm. During Tuesday's hearing, a lawyer for the federal government also said Avenatti's firm failed to make a payment for back taxes that was due last week.
Avenatti is the managing partner of Eagan Avenatti, according to court documents.
In a text to CNN asking for his response to the judgment, Avenatti said, "Completely irrelevant and a sideshow. Nothing was issued against me personally. That firm has nothing to do with the case or the client. Who cares?"
The settlement, reached in December 2017, stemmed from Frank's claim that Avenatti's firm failed to pay him more than $18 million that he was owed as a non-equity partner of the firm, and that Avenatti misstated the firm's profits.
As the case dragged on, Frank reduced his claim to $10 million and the litigants ultimately agreed to settle for $4.85 million. But under the agreement, Avenatti's firm would be liable for the full $10 million if he failed to pay the settlement, according to court records.
"Michael Avenatti's law firm entered into a crystal clear written settlement agreement to resolve a prior lawsuit brought by Jason Frank, his former law partner," Eric George, an attorney for Frank said in a statement. "The settlement agreement was approved by a federal court and was a condition of his law firm exiting bankruptcy. Under this settlement, Mr. Avenatti's law firm was required to pay Mr. Frank $4.85 million, all of which was personally guaranteed by Mr. Avenatti."
Frank alleged that his former partner repeatedly failed to produce copies of the firm's federal income tax returns, or a full accounting of the firm's revenues and expenses, as required under the terms of their initial arrangement. Under the terms of their partnership, Frank was owed a quarter of the firm's annual profits and a cut of fees paid by some clients.
Frank ultimately sought sanctions against Avenatti's firm through a three-judge arbitration panel.
The panel agreed to sanction the firm for nonpayment of fees related to the arbitration and for not providing copies of tax returns and other documents.
The panel noted that while the case was in arbitration, Avenatti's firm repeatedly failed to comply with the panel's orders to turn over documents to Frank's firm, and did not pay the legal fees that were required as part of the arbitration process.
The judges noted that Avenatti's firm "failed to produce" tax returns; monthly bank statements; revenue accounting records; wires, checks or invoices for expenses over $25,000; as well as email correspondence.
The three-judge panel asserted that Avenatti's firm ignored its October 2016 order for the firm to produce copies of its 2013, 2014 and 2015 federal tax returns.
Eagan Avenatti LLP "did not produce the returns, claiming that neither it nor its accountant had copies of the returns," the judges said.
That response from Eagan Avenatti "stretches the bounds of credibility," the chair of the arbitration panel, retired Judge Terry Friedman wrote.
In an order allowing Frank's law firm to compel depositions from Avenatti and two other employees at his firm, the arbitration panel accused Avenatti's firm of engaging in "a pattern of delay, obfuscation and unresponsiveness."
The arbitration panel allowed Frank to amend his complaint "to add a claim for punitive damages and find that (Avenatti's firm) acted with malice, oppression and fraud in connection with its failure to produce its tax returns."
Bankruptcy records show Eagan Avenatti owed the IRS about $2.4 million in back taxes, penalties and interest. Avenatti's firm made an agreement with the tax division of the US attorney's office to pay off its tax debts.
A spokesman for the US Attorney's office, Thom Mrozek, said the firm made an initial payment of about $1.5 million in taxes. It still owes $880,000, Mrozek said. In an email to CNN, Mrozek confirmed Avenatti missed a payment that was due last week.
Avenatti has suggested that he is the target of a smear campaign because he is representing Stormy Daniels, the adult film star who alleges she had a sexual relationship with President Donald Trump and was paid $130,000 by Trump's attorney, Michael Cohen, as a hush payment.
When a Los Angeles Times reporter who attended the hearing tweeted about the $10 million judgment and a Justice Department lawyer's statement that Avenatti also defaulted on back taxes, Avenatti tweeted: "Nonsense."
He added: "Completely different law firm -- no ties to Daniels case. Irrelevant. Over blown..."
In court filings involving the Daniels case, Avenatti has filed as an attorney with the Newport Beach law firm Avenatti & Associates, APC, based in California.
The State Bar of California still lists him as an attorney with Eagan Avenatti LLP, which is based at the same address as Avenatti & Associates in Newport Beach.
CORRECTION: An earlier version of this story incorrectly stated that an arbitration panel did not issue sanctions. The panel issued some sanctions against Eagan Avenatti LLP.