Claitor's
ETHICS, PROFESSIONALISM, LAWYER LIABILITY & RELATED CONCERNS
Lawrence R. Anderson, Jr.
Baton Rouge, Louisiana
John C. Anderson
Baton Rouge, Louisiana
John A. Hollister
Warren, Ohio
Ricardo I. Kilpatrick
Auburn Hills, Michigan
Richard W. Martinez
New Orleans, Louisiana
W. Abigail Ottmers
San Antonio, Texas
Robin E. Phelan
Dallas, Texas
John D. Penn
Fort Worth, Texas
Eric Terry
San Antonio, Texas
CHAPTER IV
Ethics, Professionalism, Lawyer Liability, and Related Concerns
TABLE OF CONTENTS
§4.01 General Ethics Rules Governing Attorneys
§4.02 Ethical Considerations in Bankruptcy Cases
1. Determining the Attorney-Client Relationship
2. The Scope of Representation & Attorney Competence
a. Competence
b. Scope of Representation
3. Diligence Required
4. Communication Required
§4.03 Ethical & Lawyer Liability Issues - Pre-Filing
1. Exemption Planning
a. Bankruptcy Rule 4003
b. Practical Suggestions
c. Changes to Exemption Provisions by BAPCPA
2. Fraudulent Transfers and Concealment of Assets
3. Accuracy of All Information
4. Attorneys Fees
5. Conflicts of Interest
a. Louisiana Ethics Rule 1.7 & 1.8
1. Fiduciary Duty of Debtor and Trustee’s Bankruptcy Counsel
A. Trustee
B. Debtor-In-Possession
C. Duty of Loyalty
D. Fiduciary Duty
b. Procedure for Employing Counsel
1. Bankruptcy Regulations
2. Local Bankruptcy Rules
3. Fee Sharing Prohibited
4. New BAPCPA §504©
5. §330(a)
6. Preemployment Authorization
7. Disclosure of Fees
8. Concept of Disinterestedness
c. The Requirement of Disinterestedness/No Adverse Interests
1. Disinterestedness
2. Definition of Disinterestedness
3. Simultaneous Creditor Representation
4. Prefiling Debtor Representation
5. Adverse Interest
d. Imputation of Attorney’s Disqualification to Law Firm
1. Insider Status
2. Nonimputation of Adverse Interest
e. Potential Disqualifying Relationship – Attorney as Creditor
1. Creditor Status
2. No disqualifications
3. Waivers
4. State Law
f. Attorney as Equity Holder or Insider and Multiple Representations
1. Insider Status
a. Equity Holder
b. Nondisqualification
2. Receipt of Retainer
3. Representation of General Partner, Limited Partner or Partnership
4. Representation of Debtor and Insider or Third Party Guarantor of Debtor’s Obligations
5. Representation of Corporation and Shareholder
g. Compensation Consequences of Disqualification
1. Conflicts of Interest
2. Reduction of Disallowance of Fees
3. Misrepresentation of Conflicts – Penalties
h. Special Counsel for Debtor or Trustee
1. Special Counsel
2. Requirement – Special Purpose
3. No Requirement of Disinterestedness
4. No Disqualification for Prepetition Creditor Status
i. Other Common Issues in Bankruptcy Representation
1. Award of Creditor’s Attorney’s Fees
A. Substantial Contribution
B. Requirement that Services Substantially Contribute to Case
C. Client vs. All Parties
2. Waiver of Conflicts
A. Consent Necessary
B. Multiple Clients – Requirement of Adequate Representation
C. Bankruptcy Rules – More Restrictive
D. Conflict Waivers Generally Not Allowed
3. Representation of the Debtor
A. Disinterestedness Not Required
B. Disclosures Required
C. State Ethics Rules Must Be Followed
4. Application of Prepetition Payments and Retainers
A. Prepetition Retainers and Payments
B. Court Review of Retainers and Payments
C. Court Regulation of Compensation
D. Excessive Fees Regulated
E. Examination of Fee Transactions
F. Prepetition Retainers May Be Property of Estate
j. Payment for Prepetition Work When Counsel Does Not Receive a Retainer
1. Adequate Retainer Suggested
2. Prepetition Fess May Be Discharged
3. No Reaffirmation
4. Prepetition Payments
k. Avoiding Fee Disputes
1. Written Engagement Agreements Now Required
2. Scope of Engagement
3. Nondebtor Spouse Issues
4. Corporate and Stockholder Interests May Require Separate Counsel
5. Local Bankruptcy Rules
6. Limiting Scope of Engagement for Unseen Potential Problems
7. Advice Concerning Exemptions Secured Claims & Related Issues
8. Reaffirmations
9. Accuracy of Financial Information – Duty for Such is Client’s Obligations
10. Impact of Bankruptcy on Future Credit Worthiness of Client
11. Client Consent for Fee Request
12. Written Engagement Agreement Disclosed to Client at First Meeting
§4.04 New Lawyer Liability Issues - New §§526, 527, 528 & 707(b)(4)(C)&(D)
1. New Verification & Certification Requirements for Attorneys
2. New Lawyer Liability under Rule 9011
3. Pre-Filing Issues
a. New “Means Testing” for Chapter 7 Debtors
b. Pre-Bankruptcy Credit Counseling
c. New Attorney Notice to Debtor
d. New Documents Filed with Schedules
§4.05 Reaffirmations - New Rules and Forms (by Richardo I. Kilpatrick)
1. Notices
a. New §342©
b. §342(e) Notice In Individual Cases
c. §342(f) Specification of a Central Location for Notice
d. Office Procedures and Sanctions
2. Reaffirmations: Disclosures and In re Latanowich
a. New §524
b. Additional Mandatory Disclosures
c. Certification of Debtor’s Attorney
d. Debtor’s Statement in Support of the Reaffirmation Agreement
e. Presumption of Undue Hardship
3. Forms
a. Form 1 - Security Interest
b. Form 2 - Dual Interest
c. Form 3 - Open End
d. Form 4 - Open End 4% or Less
e. Form 5 - Open End 5% or More
f. Form 6 - Open End Simple Interest
§4.06 Lawyer Advertising & “Debt Relief Agency” Issues
1. Important Definitions & Corresponding Rules
2. New §526 - Attorney Requirements, Liability, Waiver & Enforcement
3. New Disclosures Required Under New §527
4. New Engagement Contract & Advertising Requirements for “Debt Relief Agencies” Under §528
5. Latest (!) Case Law
§4.07 Exclusive Jurisdiction in Matters Involving Bankruptcy - New 28 U.S.C. §1334
§4.08 New Rules for Bankruptcy Petition Preparers - New §110
§4.09 Professionalism Issues
§4.10 Forms
1. Form 1 - Engagement Agreement
2. Form 2 - Disengagement Letter
§4.11 “Attorney Liability under §707(b)(4) of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,” (by Ad Hoc Committee on Bankruptcy Court Structure and Insolvency Processes, American Bar Association, Business Law Section)
EXECUTIVE SUMMARY
§1. Scope of Report
§2. Scope of §707(b)(4); Application
Recommendation
Commentary
§3. §707(b)(4)(C)
§3.1 “Reasonable Investigation”
Recommendations
Commentary
§3.2 “Well Grounded in Fact”
Recommendations
Commentary
§3.3 “Warranted by Existing Law or a Good Faith Argument for Extension, Modification of Reversal of Existing Law”
Recommendations
Commentary
§3.4 “Not an Abuse Under Section 707(b)(1)”
Recommendations
Commentary
§4 §707(b)(4)(D)
§4.1 “Inquiry”
Recommendations
Commentary
§4.2 “Knowledge”
Recommendations
Commentary
§4.3 “Incorrect”
Recommendations
Commentary
APPENDIX A
Time Constraints
Court’s Review of Attorney’s Conduct
Attorney’s Verification of Client’s Information, Especially if Client’s Information Signals Inaccuracies
Attorney’s Reliance on Documents Prepared by Third Parties, Such as Tax Returns
“Good Faith” and “Totality of the Circumstances”
Requiring Documentary Evidence from Debtors
“Knowledge” as a “Should Have Known” Standard
APPENDIX B
§4.12 Some Ethical Issues Unique to Bankruptcy Proceedings – A view Under Ohio Law (by John A. Hollister)
§4.13 “Bankruptcy Ethics, An Oxymoron,” Vol. 5, No. 1 Am. Bankr. Inst. L. Rev. 1 (1997) (by Robin Phelan, John D. Penn, Eric Terry & Abigail Ottmers)
INTRODUCTION
I. ETHICAL CONSIDERATIONS IN PREBANKRUPTCY ASSET
PLANNING
A. Bankruptcy Crimes and Fraudulent Transfers
1. Relying on Advice of Counsel (My lawyer told me to do it)
2. An Opportunity to Cure
B. Conversion of Nonexempt Assets into Exempt Assets (But my cousin Leroy did it
II. PROBLEMS OF DIVIDED LOYALTY (Only Schizophrenics Need Apply)
A. The Basics
B. Actual Versus Potential Conflicts (Let’s wait and see what happens)
1. Court rejecting potential-actual dichotomy
2. Courts adopting potential-actual dichotomy
C. Selected Problems
1. May the Same Attorney or law Firm Represent Multiple Creditors in a Bankruptcy Case?
2. Representing a Creditor and a Creditor’s Committee
3. Can a Lawyer Ethically Represent Both the Debtor in Possession (or a Trustee) and a Creditor in Connection with the Case?
4. Simultaneous Representation of the Debtor and a Creditor in an Unreleased Case
5. May Debtor’s Counsel be Paid by a Nondebtor Third Party?
6. Can a Broker Loan Part of the Purchase Price?
7. What is an Attorney’s Duty to Police Debtor’s
8. May the Same Firm Simultaneously Represent Unsecured Creditors Committees of Debtors Who are Economic Competitors?
9. Is it proper for a trustee to represent him or herself in connection with the case?
10. Excessive Billing
11. Refusing to Cease Work When Fired
III. CONSEQUENCES OF ETHICAL VIOLATIONS (What can they do to me?)
A. Fines and Imprisonment
B. Conspiracy Theory
C. Suspension or Disbarment
IV. PROPOSED COURSE OF ACTION
CONCLUSION
CHAPTER IV
ETHICS, PROFESSIONALISM, LAWYER
LIABILITY AND RELATED CONCERNS
§4.01 GENERAL ETHICS RULES GOVERNING ATTORNEYS
There are two themes of which bankruptcy lawyers should be aware concerning ethics issues in bankruptcy – they are the hallmarks around which all ethics rules center:
(1) the lawyer has a duty of undivided and complete loyalty to his client’s interests and the advocacy of the same;
(2) the lawyer has a duty to protect the confidential information which he learns from his client.
As noted in the article, “Bankruptcy Ethics, An Oxymoron,” in §4.12, infra:
As representatives of clients as well as officers of the court, attorneys frequently are required to consider the implications and propriety of proposed courses of action on behalf of their clients. Although each situation may present distinct problems of its own, attorneys must deal with at least three sources of ethical considerations: (1) the minimal standards governing conduct expressed by the ABA and the respective state bodies which, if violated, may subject the lawyer to formal disciplinary action, (2) the aspirational goals, which are normally not mandatory rules, but are urged and recommended by the ABA and several states, and (3) the attorney’s own conscience and morality. For bankruptcy cases in particular, there is yet a fourth set of significant considerations when evaluating a proposed course of action—the Bankruptcy Code, Bankruptcy Rules and related statutes.
The Louisiana State Bar Association’s Rules of Professional Conduct (hereinafter the “Louisiana Ethics Rules”) apply to attorneys practicing before any court in Louisiana. These are similar to the suggested ethical rules created by the American Bar Association (“ABA”), so they probably will be analogous to ethics rules in force throughout the United States.[1] However, the Bankruptcy Code, Federal Rules of Bankruptcy Procedure (“Bankruptcy Rules”) and Local Bankruptcy Rules (“Local Bankruptcy Rules”) of each local bankruptcy court impose additional requirements regarding the professional conduct of attorneys practicing bankruptcy law.[2] For some matters, the Bankruptcy Code, Bankruptcy Rules and Local Bankruptcy Rules are even more restrictive than state professional conduct rules. See, e.g., Waivers of Conflicts and Avoiding Fee Disputes, infra.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“New BAPCPA Act”), Pub. L. 109-8, 199 Stat. 23, enacted April 20, 2005 (the major portion of which becomes effective October 17, 2005) adds new requirements and concerns for lawyers practicing bankruptcy, particularly those representing debtors. These amendments to the Bankruptcy Code, which will so substantially affect the practice of law, must be considered together with the general principles regarding ethics and professionalism in Louisiana (and other states) under the Louisiana Ethics Rules.
The Louisiana Ethics Rules for Louisiana lawyers have been in effect in Louisiana since January 1, 1987, and replaced the Code of Professional Responsibility and Disciplinary Rules in effect prior to that date. They are found in Article XVI of the Articles of Incorporation of the Louisiana State Bar Association and are divided into eight sections dealing with the various roles of the attorney and the attorney’s relationship with the client. The Rules are published in West’s Louisiana Revised Statutes (“green books”) in Volume 21A as an Appendix to Chapter 4, Attorneys, Title 37, Professions and Occupations, at the end of La. R.S. 37:211-222.[3]
§4.02 ETHICAL CONSIDERATIONS IN BANKRUPTCY CASES
1. Determining the Attorney-Client Relationship
It is important to determine who the client is because of the duties imposed upon the lawyer when a client-lawyer relationship is established. Generally, “[t]he existence of an attorney-client relationship turns largely on the client’s subjective belief that it exists.” La. State Bar Assn. v. Bosworth, 481 So.2d 567, 571 (La. 1986). “[A]n attorney-client relationship exist[s] where the client had a subjective belief, which was justified under the circumstances that such a relationship existed.” La. State Bar Assn. v. Williams, 549 So.2d 275, 278 (La. 1989).
Thus, it is strongly recommended that in the initial interview with the prospective client, or shortly thereafter, the attorney determine the prospective client’s identity, determine the fee arrangements and other terms of the engagement or decide that the prospective client will not be a client and promptly communicate, preferably in writing, this to the prospective client.[4]
If the attorney and prospective client mutually determine to establish an attorney-client relationship, it is recommended that promptly in the initial interview the attorney disclose (for example, by giving the prospective client a copy of the proposed engagement contract) the fees and terms of the engagement and – New BAPCPA §548(a) requires that, no later than 5 days after the initial meeting with the client, the attorney send a letter to the client so advising and setting forth the terms of the fee arrangement and other terms of engagement. This letter is usually described as a “engagement agreement” or “engagement letter.”[5]
Similarly, if the prospective client has an urgent legal situation requiring immediate professional services, and if the attorney declines representation or the prospective client decides not to engage the attorney, it is recommended that the attorney promptly send a letter to the prospective client confirming that there was no attorney-client relationship established. This letter is usually described as a “non-engagement letter” or “disengagement letter” (a sample “disengagement” letter is found at §4-10, infra, as Form No. 2).[6]
The above guidelines and recommendations are particularly important and should be stressed because of the dramatic changes to the practice of law which will be required for attorneys representing debtors in bankruptcy cases under the New BAPCPA Act and the quick actions which must be taken by attorneys in counseling consumer debtors under New §§526, 527 & 528.
2. The Scope of Representation and Attorney Competence
In determining whether to establish an attorney-client relationship, the lawyer should consider the duties and scope of such representation required by the Rules and the need for competence in this new specialized practice.
a. Competence
Louisiana Ethics Rule 1.1 generally provides:
(a) A lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.
(b) A lawyer is required to comply with the minimum requirements of continuing legal education as prescribed by Louisiana Supreme Court rule.
A lawyer is bound by the rule that ignorance of the law is “no defense at all.” La. State Bar Assn. v. Gremillion, 320 So.2d 171 (La. 1975). If an attorney is unable to handle a specific matter for a client because the attorney knows that he or she can not provide competent representation, the attorney has an obligation to refer the client to competent counsel or seek assistance from competent co-counsel. La. State Bar Assn. v. Causey, 393 So.2d 88, 91 (La. 1980).
Bankruptcy is a particularly specialized area of the law that an attorney should be reluctant to undertake in filing a case for a debtor under any chapter of the Bankruptcy Code without sufficient experience and specialized education or extensive preparation and research. Also, handling a bankruptcy for a debtor can involve other specialized areas of the law such as tax consequences of a Chapter 11 reorganization plan or the discharge of a real estate mortgage debt in bankruptcy. For example, tax consequences of a bankruptcy discharge can be significant to the debtor as well as a nondebtor spouse, especially Chapter 11 cases or if real estate mortgage debt is discharged. See, e.g., Marin v. U.S., 159 F.3d 932 (5th Cir. 1998) (non-debtor spouse not protected by Internal Revenue Code §§ 1398(f)(1) and (2) from recognition of tax consequences on sale of debtor’s spouse’s interest in gas purchase contract). Finally, decisions made before filing for reorganization, and in the early stages of Chapter 11 cases concerning complicated matters, such as the debtor’s use of cash collateral or requirements to pay adequate protection to secured creditors, can have a significant affect on the outcome of the reorganization case. Inexperienced counsel may inadvertently jeopardize his or her clients’ rights and ability to reorganize as a result of these decisions.
Thus, it is very important that if a lawyer does not have sufficient experience or knowledge in complicated areas of bankruptcy law, such as handling a Chapter 11 reorganization case for a business, that the lawyer either (1) decline representation, (2) refer the client to competent counsel or (3) associate competent co-counsel.
Particularly because of the added requirements on lawyers representing debtors under the New BAPCPA Act, an attorney should seriously consider referring representation of a debtor in a bankruptcy case to other competent counsel, if that attorney is not fully knowledgeable regarding the changes in the New BAPCPA Act and does not have the experience or wherewithal to handle those requirements. New §526(c) expressly imposes liability on an attorney for intentional wrongs and any negligence which results in actual damages to a debtor by failing to materially comply with §§526,527 or 528. Under these express provisions. If the negligence of the attorney results in actual damages, the debtor is entitled to (1) a return of his fees, (2) his actual damages, and (3) attorney’s fees and costs.
b. Scope of Representation
Louisiana Ethics Rule 1.2 provides:
“(a) Both lawyer and client have authority and responsibility in the objectives and means of representation. The client has ultimate authority to determine the purposes to be served by legal representation, within the limits imposed by law and the lawyer’s professional obligations.
b) A lawyer may limit the objectives of the representation if the client consents after consultation.
c) A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent, but a lawyer may discuss the legal consequences of any proposed course of conduct with a client and may counsel or assist a client to make a good faith effort to determine the validity, scope, meaning or application of the law.”
d) When a lawyer knows that a client expects assistance prohibited by the Rules of Professional Conduct or other law, the lawyer shall consult with the client regarding the relevant limitations on the lawyer’s conduct.”
It is a good idea to state specifically the scope of the representation in a written employment contract. In fact, the New BAPCPA Act requires such. See New §528(a)(1). The engagement contract and its terms fix the attorney’s work and duties according to state contract law. For example, if a contract only states that the lawyer will negotiate, then the lawyer is not obligated to litigate. Conversely, the lawyer is obligated to litigate if the contract so states. In a fee dispute, the attorney will be paid for the service he was contracted to perform. Henican, James and Cleveland v. Strate, 348 So.2d 689, 690 (La. App. 4th Cir. 1977), cert. denied 350 So.2d 1213 (La. 1977).
One should note, however, that these state law rules of contract are expressly superseded in bankruptcy cases by the mandatory requirements of New §§526, 527, 528. For example, under some Local Rules (or local customs and practices), in Chapter 13 cases, a bankruptcy court may create a presumption or rule that the duties of the attorney for the debtor may not end at confirmation, but rather will continue until all plan payments are completed (and thereby require some continued work of the attorneys until consummation of the case), unless the court expressly allows withdrawal of the attorney as counsel for the debtor through a court order. In such cases, there should be a corresponding precept that the court should allow the attorney for the debtor to apply fees for any substantial post-confirmation work, so that the case will not become overly burdensome for the attorney.
The Local Bankruptcy Rules of the United States Bankruptcy Court for the Middle District of Louisiana (hereinafter the “Local Bankruptcy Rules”) provide in Local Bankruptcy Rules 2016-2 & 3 issues concerning the scope of representation of counsel for the debtor. Local Bankruptcy Rule 2016-2 requires that an attorney file a “Statement Disclosing” fees and services which must conform to Form No. 5 contained in the Local Rules. Further, Local Bankruptcy Rule 2014-1 requires an application and order conforming to Form No. 5 of the Local Rules to be executed and filed. Form No.5 has express provisions which are designed for the attorney to delineate the scope of the representation – the work and services which will be performed for the stated fee and the work and services which will not be covered by the stated fee. These rules should be read by counsel for the debtor each time he files a bankruptcy case.
The agreement of an attorney to perform work for a party on a particular matter of transaction does not create an attorney-client relationship as regards other business or affairs of the client. Grand Isle Campsites, Inc. v. Cheek, 262 So.2d 350, 359 (La. 1972); Delta Equipment and Construction Co. v. Royal Indemnity Co., 186 So.2d 454, 458 (La. App. 1st Cir. 1966). In particular, an attorney who is engaged to handle a collection suit on a contingency fee basis is not obligated to include a defense of a damage suit growing out of the collection suit as a part of the attorney’s original engagement. Lazarus, Michel & Lazarus v. Veazie, 1917 WL 1665, 14 Teiss. 342, 14 Orleans App. 342 (1917). “It is not the duty of the attorney who is retained to [perform one service only] to involve himself in questions of how the parties arrived at the terms.” Grand Isle Campsites, Inc. v. Cheek, 262 So.2d 350, 359 (La. 1972).
In certain circumstances, an attorney filing a bankruptcy petition also may limit the undertaking for the client. This is allowed by Louisiana Ethics Rule 1.2© & 1.4(b), if the client consents, after consultation. See §4.10, infra, Form No. 1, for an example of an engagement agreement limiting the scope of services. However, the Bankruptcy Court retains supervisory jurisdiction over all fee engagement agreements between attorneys and (1) the debtor (2) the trustee, (3) the examiner, (4) any committee and (5) any other parties who will receive the compensation from the Bankruptcy estate. See, generally, §§326-330 of the Bankruptcy Code. In fact, New 28 U.S.C. §1334 (created by the BAPCPA Act) confers exclusive jurisdiction over all such issues to the Federal District Court (and these issues are then usually and automatically referred to the Bankruptcy Court for adjudication).
If the attorney is handling a consumer Chapter 7 or 13 for a flat fee, it is important for the attorney to limit the scope of that representation if the flat fee does not also include (for example) representing the debtor involving objections to the dischargeability of debts or objections to the debtor’s discharge, or similar disputes after the 341 meeting; and this should be reflected in the written engagement contract and must be disclosed to the court by a 2016 statement. See Form 1 at §4.10, infra.
However, there are many new actions and investigations requirements of the New BAPCPA Act which will be required to be done by an attorney in any bankruptcy case in which the attorney represents a debtor, and these requirements can not be limited by the engagement between the attorney and the client. Thus, the lawyer must to consider these facts in determining the fee that should be charged in representing the debtor in a bankruptcy.
Section 329(a) of the Bankruptcy Code requires that any attorney representing a debtor in a bankruptcy case, whether or not such attorney applies for compensation under the Bankruptcy Code, shall file with the bankruptcy court a statement or disclosure of the compensation paid or agreed to be paid, if such payment or agreement was made within one year before the date of the filing of the petition, for services rendered or to be rendered in contemplation of or in connection with the case by the attorney, and the source of such compensation. Also, Rule 2016(b) of the Federal Rules of Bankruptcy Procedure requires such disclosure statement to be filed within fifteen days after the order for relief and that a supplemental statement shall be filed within fifteen days after any payment or agreement not previously disclosed.
New §528(a) of the Bankruptcy Code now requires that a “debt relief agency” – defined as an attorney who provides “bankruptcy assistance” services to an “assisted person” (i.e., the debtor) whose debts consist “primarily of consumer” debts and whose “nonexempt property has a value less than $150,000” – shall: (1) act not later than 5 business days after the first date on which the attorney provides any bankruptcy assistance services to the debtor, but prior to filing the bankruptcy petition, whichever is earlier, (2) execute and/or deliver a written contract to the debtor that explains clearly and conspicuously (a) the services the attorney will provide to the debtor, (b) the fees or charges for such services, and (c) the terms of payment, and (3) provide the debtor with a copy of the fully executed and completed contract. It would appear that there would be no prohibition against combining this contract with the disclosure statement of the compensation paid or agreed to be paid required by §329(a). See §4.10, infra, Form No. 1, for an example of such.
3. Diligence Required
Louisiana Ethics Rule 1.3 provides:
“A lawyer shall act with reasonable diligence and promptness in representing a client.”
Do not neglect legal matters entrusted to your care. If you can not attend to your client’s case promptly, notify the client and refund the unearned portion of the fee to comply with Louisiana Ethics Rule 1.16. Do nothing to cover up your actions, and if a complaint is filed against you, cooperate fully with the Disciplinary Committee. Offer restitution immediately if appropriate. Advise the Disciplinary Committee of any mitigating circumstances.
Examples of conduct warranting censure and discipline imposed:
1) Neglecting legal matters, failing to carry out contracts of employment, and prejudicing client during the course of the professional relationship. (six months) La. State Bar Assn. v. Villa, 570 So.2d 1165, 1167 (La. 1990).
2) Neglecting legal matters, failing to promptly return unearned fees, and failing to cooperate with disciplinary committee, mitigated by taking remedial measures, relative inexperience, and serious professional and marital problems. (six months) La. State Bar Assn. v. Jones, 570 So.2d 1161 (La. 1990).
3) Four separate acts of misconduct involving failure to perform work or to return retainer and failure to cooperate with the committee. (three years) La. State Bar Assn. v. Martin, 559 So.2d 483, 487 (La. 1990).
4. Communication Required
Louisiana Ethics Rule 1.4 provides:
“(a) A lawyer shall:
(1) A lawyer shall promptly inform the client of any decision or circumstance with respect to work the client’s informed consent is required.
(2) The lawyer shall give the client sufficient information to participate intelligently in decisions concerning the objectives of the representation and the means by which they are to be pursued, to the extent the client is willing and able to do so.
(3) keep the client reasonably informed about the status of the matter;
(4) promptly comply with reasonable requests for information; and
(5) consult with the client about any relevant information on the lawyer’s conduct when the lawyer knows that the client expects assistance not permitted by the Rules of Professional Conduct or other law.
“(b) The lawyer shall give the client sufficient information to participate intelligently in decisions concerning the objectives of the representation and the means by which they are to be pursued.”
The attorney must communicate generally with clients about the issues involved in any bankruptcy, and if any potential settlement of the controversy arises, about the terms of any settlement. The obligation to communicate any legal advice to clients cannot be delegated to a non-lawyer employee. Where such misconduct occurs, public sanction is the appropriate disciplinary measure where restitution had been made and the client did not suffer financial damage. La. State Bar Assn. v. St. Romain, 560 So.2d 820, 824 (La. 1990); La. State Bar Assn. v. Horton, 504 So.2d 828, 833 (La. 1987).
Examples of breach of communication include:
(1) Failure to respond to correspondence from both opposing counsel and the presiding judge.
(2) Failure to notify client of lawyer’s new office address or telephone number; and
(3) Failure to inform client of all matters relating to representation that, if known to client, might cause client to alter the course of action.
It is common knowledge among attorneys who attend seminars on ethics under Louisiana law, that the most common complaint against attorneys is their failure to communicate with clients, particularly the failure of the attorney to return the client’s telephone calls.
In hearings before various bankruptcy courts in Louisiana, this also appears to be a common complaint by bankruptcy consumer debtors, which frequently is expressed to the bankruptcy judge handling their particular case. The New BAPCPA Act provides in New §§526-528 added requirements for communications by the lawyer to the bankruptcy debtor client.
§4.03 ETHICAL AND LAWYER LIABILITY ISSUES – PRE-FILING
Asset protection planning is done by many individuals whether they have financial difficulties or not. Where insolvency is not an issue, a debtor can generally deal with his or her assets freely and without fear of revocation of any transactions or any form of liability for selling, donating, or structuring assets in a favorable manner for any client.[7] There is low malpractice risk for attorneys who engage in asset planning where the debtor is not insolvent and/or will not be rendered insolvent through any transfer of assets. However, an attorney who is negligent in executing an asset protection plan may be liable for failure to consummate all transactions, record the transactions properly, and/or fulfill all steps to complete the transactions in question.
Where the client is in the area of insolvency, the attorney has to be especially sensitive as to whether his client may be liable for engaging in fraudulent conduct through fraudulent conveyances or concealments of assets; and the attorney for the client may be subject to liability himself under a conspiracy (or aiding and abetting) theory of recovery.[8] An attorney may not represent a client or must withdraw from representing a client when the representation is in violation of the Model Rules or other law (and Louisiana Ethics Rule 1.2(d) provides that a “lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent, but a lawyer may discuss legal consequences of any proposed course of action with the client and may counsel or assist a client to make a good-faith effort to determine the validity, scope, meaning or application of the law”).
Generally, attorneys have no affirmative duty of disclosure to third parties, such as creditors, of any estate planning or protection activities, but they must refrain from making false statements of material fact or law to third parties. They may become liable for false statements which are relied upon by third parties to their prejudice.[9] Lawyers should be especially sensitive if the transactions create conflicts of interest. Further, they should be aware that becoming involved in or advising a client concerning fraudulent concealment or transfer of assets in context with bankruptcy law may subject them to criminal sanctions or disciplinary proceedings.[10]
In conclusion, asset protection and planning holds very little problems for attorneys where the client is clearly solvent and will not be rendered insolvent by the asset planning and protection transactions in which the client may engage. However, when the client is in the shadow of insolvency, all of these rules tend to change.
1. EXEMPTION PLANNING
Originally, bankruptcy laws were penal in nature and only looked to a distribution of the debtor’s property among creditors. Considerations of exempting property to the debtor or discharging liabilities developed originally only as an incidental purpose of the proceeding.[11] However, social evolution caused bankruptcy laws to become more sympathetic to the debtor’s plight and allowances of exemptions (from seizures, repossessions or the like) of minimal personal property to the debtor became recognized as a reasonable objective.[12] As one commentator has noted, state and federal exemption laws are designed to promote five distinct social policies and objectives, to-wit:
(1) To provide the debtor with property necessary for his physical survival.
(2) To protect the dignity and the cultural and religious identity of the debtor.
(3) To enable the debtor to rehabilitate himself financially and earn income in the
future.
(4) To protect the debtor’s family from the adverse consequences of impoverishment.
(5) To shift the burden of providing the debtor and his family with minimum financial support from society to the debtor’s creditors.[13]
The policy of recognizing exemptions is continued in the Bankruptcy Code under §522. Under the old Bankruptcy Act, exemptions were provided under state or federal laws.[14] In a significant departure, the Bankruptcy Code afforded individual debtors a choice of exemptions - under the Bankruptcy Code, as prescribed in §522(d), or under the law of the state of their domicile.[15] The House Report explained:
“[Section 522(b)] is a significant departure from present law. It permits an individual debtor in a bankruptcy case the choice between exemption systems. The debtor may choose the Federal exemptions prescribed in subsection (d), or he may choose exemptions to which he is entitled under other Federal law and the law of the State of his domicile.”[16]
Also, the debtor is permitted to buy exempt assets prior to the bankruptcy. This is explained in both the House and Senate Reports: “As under current law, the debtor will be permitted to convert nonexempt property into exempt property before filing a bankruptcy petition…The practice is not fraudulent as to creditors, and permits the debtor to make full use of the exemptions to which he is entitled under law.”[17]
This legislative history aids in clarifying the debtor’s right to convert exempt property into nonexempt property on the eve of bankruptcy and clarifies that this is not a fraudulent practice.[18] Subsection (c) protects exempt property from prepetition claims, except for tax claims, alimony, maintenance, or support claims, as well as valid liens which are not avoided.[19] Subsection (d) specifies also the federal exemptions to which the debtor is entitled, and counsel for debtor should be familiar with these specific exemptions before filing.[20] However, §522(b)(1) provides that the federal list of exemptions contained in §522(d) is available to debtors unless state law provides otherwise.[21] In other words, the federal exemption scheme under the Code is subject to a state veto, which would allow states to “opt out” from the federal exemption scheme.[22] Significantly, most states have opted out of the federal exemption scheme for debtors.[23]
There are several other provisions in §522 beneficial to debtors. Subsection (e) of §522 “protects the debtor’s exemptions, either federal or state, by making unenforceable in a bankruptcy case a waiver of exemptions or a waiver of the debtor’s avoiding powers [under §522(f) and (g)].”[24] Further, subsection (f) of §522
“protects the debtor’s exemptions, his discharge, and thus his fresh start by permitting him to avoid certain liens on exempt property. The debtor may avoid a judicial lien on any property to the extent that the property could have been exempted in the absence of lien, and may similarly avoid a nonpurchase-money security interest in certain household goods and personal goods. The avoiding powers are independent of any waiver of exemptions.”[25]
The Code also gives the debtor the ability to exempt property recovered by a trustee or debtor in possession under his or her avoiding powers, if the property was involuntarily taken from the debtor and if the debtor does not conceal the property.[26] The recovery and redemption powers of the debtor are enhanced by subsection (i) of §522, which allows the debtor to avoid transfers to subsequent transferees, allows the preservation of the transfer for the benefit of the debtor, and allows the debtor to exempt any property recovered or preserved.[27]
Section 522 (1) provides the mechanics for claiming and gaining exemptions.[28] This subsection provides that the debtor shall file a list of exempt property. If the debtor does not file such a list, a dependent may file a list and claim exempt property on behalf of the debtor. Unless a party in interest objects, the property claimed as exempt on the list will be exempted. Finally, §522(m) allows, in a joint case, each debtor to select his or her own exemptions.[29]
A number of Bankruptcy Courts have held that the amount of exemption planning and nonexempt assets which are converted to exempt assets shortly before bankruptcy may be indicia of fraud that will support a denial of discharge. This is especially critical where nonexempt assets are converted to exempt assets as part of prebankruptcy planning, and the closer the conversion of assets occurs to the date of bankruptcy, the stronger the presumption potential abuse arises. For example, in the case of In re Zouhar, 10 B.R. 154 (Bankr. N. M. 1981), the debtor obtained a loan by pledging stock in his professional corporation for approximately $45,000; and instead of paying debts, he purchased an annuity with the funds. The annuity was structured so that payments were directed to the holder of the promissory note, who held a pledge of the stock. The court found that the purpose of this was to shield the debtor’s assets from his creditors. In that castigating the debtor, the court noted the transaction of encumbering nonexempt assets or converting such to exempt assets on the eve of bankruptcy is not fraudulent per se. However, a legitimate transaction may take on the taint of fraud, if an excessive amount of nonexempt property is converted to exempt property - the issue is one of degree. The court noted the simple colloquial phrase that “when a pig becomes a hog, it is slaughtered.” The court rendered an appropriate sanction against the debtor.
Similarly, in the case of Northwest Bank of Nebraska NA v. Tveten, 848 F.2d 871 (8th Cir. 1988), a physician owing $19 Million converted all of his assets (land, life insurance policies, annuities, salaries, retirement plans, interest in a home, all of which had an aggregate value of $700,000) into life insurance or annuity policies that were exempt in unlimited amount under state law. The court sanctioned the debtor for these transactions, labeling them fraudulent. The spirit of the court’s decision was that the amount of property converted to exempt property constituted an indicia of fraud. Thus, a wholesale conversion of virtually all of the debtor’s assets to exempt property constitutes fraud, even though a modest conversion of nonexempt assets to exempt assets prebankruptcy may be valid. Accord: In re Reed, 700 F.2d 986 (5th Cir. 1983). The court stated that it would constitute a perversion of the purposes of the Bankruptcy Code to convert virtually every one of his major nonexempt assets to exempt assets on the eve of bankruptcy with the actual fraudulent intent to defraud his creditors and then emerge cleansed of obligations after bankruptcy through this carefully concocted scheme.
There have been other cases which have not followed the Tveten holding. In the case of In re Johnson, 880 F.2d 78, 82-83 (8th Cir. 1989), the court held that the Tveten holding will not be applied where there was a significant societal benefit in preserving property for the debtor, such as homestead property. Further, the surrounding facts did not indicate the conversion was abusive in light of the debtor’s total circumstances; and thus, the amount of the exempt property converted alone did not prevent a discharge in the Johnson case.
In the case of In re Smith, 113 B.R. 579, 587 (Bankr. D.N.D. 1990), the debtor was allowed to convert $90,000 of a $100,000 settlement to purchase an exempt annuity policy which would pay him $728 per month. In this case, his earnings were less than $5,000 a year and he was earning $4.40 per hour, was only 25 years old, lacked a high school diploma, and needed the settlement proceeds for his ongoing financial survival. The Smith court held that this conversion provided the debtor with minimal financial security and, thus, was not abusive in light of the totality of the circumstances. Accord: Stern v. Gill, 345 F.3d 1036 (9th Cir. 2003), cert. denied, 124 S. Ct. 1671 (2004) (purposeful conversion of nonexempt assets to exempt assets by an insolvent person, after entry of a large arbitration award against him, was not fraudulent per se).
Of course, the serious problem here in counseling debtors is that there is tremendous ambiguity in the amount of nonexempt property which may be converted to exempt property and will still be considered legitimate prebankruptcy planning. The conversion of nonexempt property to exempt property in excess of a proper amount of property creates an indicia of prebankruptcy fraud. But what amounts will be seen as undue or abusive conversions of nonexempt property to exempt property? The concept of abusiveness is a very subjective notion which will clearly change relative to (1) each bankruptcy judge, (2) each region of the Untied States, and (3) the particular financial (and other special) circumstances facing each client. The purpose of all state and federal exemptions is to allow the debtor a modest amount of critical assets to provide for the future financial well being of the debtor and his family after bankruptcy, but what is modest vel non is conjectural. So, beyond this simple statement, it is virtually impossible in counseling debtors to give them any assurance as to when the conversion of assets will be considered modest versus when it will turn into a “windfall” and become “fraud”. Whether the conversion of nonexempt assets to exempt assets constitutes “fraud” turns on the subjective view of each bankruptcy judge as to what constitutes abusive prebankruptcy planning. If it is too much, the debtor is frequently punished, and the attorney can rarely delineate for the client the exact point at which the client will “pass the line” from legitimate prebankruptcy estate planning to abusive, fraudulent prebankruptcy estate planning.[30] This issue creates a dangerous conundrum for bankruptcy lawyers.
In conclusion, exemptions are important in Bankruptcy cases where debtors are individuals. Section 522(b) makes it clear that only individual debtors may exempt property of the estate.[31] Since many bankruptcy cases are filed by individuals, exemption laws will be initially important to the bankruptcy practitioner.
a. Bankruptcy Rule 4003
The procedure for claiming and objecting to exemptions is contained in Bankruptcy Rule 4003, which provides:
“(a) CLAIM OF EXEMPTIONS. A debtor shall list the property claimed as exempt under §522 of the Code on the schedule of assets required to be filed by Rule 1007. If the debtor fails to claim exemptions or file the schedule within the time specified in Rule 1007, a dependent of the debtor may file the list within 15 days thereafter.
(b) OBJECTIONS TO CLAIM OF EXEMPTIONS. The trustee or any creditor may file objections to the list of property claimed as exempt within 30 days after its filing or the filing of any amendment to the list unless, within such period, further time is granted by the court. Copies of the objections shall be delivered or mailed to the trustee and the person filing the list and his attorney.
(c) BURDEN OF PROOF. In any hearing under this rule, the objecting party has the burden of proving that the exemptions are not properly claimed. After hearing on notice, the court shall determine the issues presented by the objections.
(d) AVOIDANCE BY DEBTOR OF TRANSFERS OF EXEMPT PROPERTY. A proceeding by the debtor to avoid a lien or other transfer of property exempt under §522(f) or (h) of the Code shall be by motion in accordance with Rule 9014.”[32]
The Interim Rules and Forms for new BAPCPA cases have amended Bankruptcy Rule 4003 in the following respect:
1) Bankruptcy Rule 4003(b) has been amended to add the following underlined language to subsection (b):
“OBJECTIONS TO CLAIM OF EXEMPTIONS. (1) Except as provided in paragraph (2)(a), a party in interest may file objections to the list of property claimed as exempt within 30 days after its filing or the filing of any amendment to the list unless, within such period, further time is granted by the court. (2) An objection to a claim of exemption based on §522(q) shall be filed before the closing of the case after the exemption is first claimed. (3) Copies of the objections shall be delivered or mailed to the trustee and the person filing the list and his attorney.”
Rule 4003 has been amended to reflect the BAPCPA Act’s addition of §522(q) to the Bankruptcy Code. New Section 522(q) imposes a $125,000 limit on a state homestead exemption if the debtor has been convicted of a felony or owes a debt arising from certain causes of action. Other revised provisions of the Bankruptcy Code, such as §727(a)(12) and §1328(h), suggest that the court may consider issues relating to §522 late in the case, and thus the 30-day period for objections would not be appropriate for this provision. Thus, a new subdivision (b)(2) is added to provide a separate time limit for this provision.
b. Practical Suggestions
First, if the client is an individual, counsel for the debtor should be aware and knowledgeable of all aspects of the applicable exemption laws before filing. Specifically, the attorney for the debtor should review the exemption law of the state in which the debtor is domiciled and determine whether that state has opted out of the federal exemption scheme. The debtor should be fully advised of whether he or she may choose either federal exemptions or state exemptions.
Second, most individual debtors who are candidates for bankruptcy relief question their lawyers extensively about their rights to convert nonexempt property into exempt property. This is a dangerous area, since the fraudulent conversion of assets may furnish grounds for an objection to the debtor’s discharge.[33] Counsel for the debtor should be especially cautious of advising individual debtors concerning these rights, since inexperience or faulty suggestions could lead to severe consequences ultimately.[34] If counsel is not comfortable with answering such questions due to lack of experience or knowledge, it is strongly recommended that more experienced bankruptcy counsel be retained for assistance. Note that New §526 makes the attorney for the debtor expressly liable to the debtor for negligent advice.
c. Changes to Exemption Provisions by BAPCPA
The BAPCPA Act effects the following changes to exemption law:
Redemption of the Exempt Property Restricted. The payment for a debtor to redeem exempt property from a secured credit must be made in cash at the time of redemption, as provided in New §722.
Homestead Exemptions Limited. Debtors may elect the state homestead exemption in the state in which they have lived for the 730 days (i.e., 2 years) immediately prior to a bankruptcy filing under New §522(b)(3)(A). If they moved during that 730-day period, the state exemptions which will apply to their homesteads are those in the state in which they lived the majority of time for the 180 days before the 730-day period.Regardless of the level of state exemptions, the debtor may only exempt up to $125,000 in monetary amount in a homestead that was acquired within the 1,215-day period (approximately 3 years and four months) prior to filing under New §522(p). There is also an exception for those who violate securities laws or who have engaged in certain criminal conduct; for these people, the cap on the homestead exemption is $125,000 notwithstanding the existence of a higher state homestead exemption. See New §522(q). Further, to the extent a homestead was obtained through fraudulent conversion of nonexempt assets during the 10-year period before the filing, the homestead exemption is reduced by the amount attributed to the fraud under New §523(o)(4). Note: This limitation will not really affect Louisiana residents, since La. R.S. 20:1 limits homestead exemptions in Louisiana to the sum of $25,000.00.
Limitation on Exempt Household Goods. Subsection (4)(A) has been added to Section 522(f), and this new subsection defines and limits what “household goods” may be exempt. Section 522(f) is the provision of the Bankruptcy Code that allows the avoidance of nonpossessary, nonpurchase-money security interests in exempt property, including household goods. New Section 522(f)(4)(A) limits the amount of household items from which liens may erased by excluding anything but the most basic household goods. New Section 522(f)(4)(B) expressly excludes property such as works of art, electronic entertainment equipment valued at $500 or more, jewelry or antiques valued at $500 or more, motorized recreational devices, vehicles, boats, watercraft and aircraft.
Individual Retirement Accounts. Section 522(b)(2)(C)&(4) appears to make exempt all retirement funds that are tax-qualified under the Internal Revenue Code of 1986, and this exemption shall not cease or be rendered ineligible based upon a “rollover distribution” from such an exempt account, if the moneys are returned back to another such account not later than 60 days after the distribution. However, subsection (m) has been added to Section 522 to provide that there is a limit on the monetary account which the debtor may claim as exempt for an IRA, which is a sum of one million dollars; provided, however, that this amount may be increased “if the interests of justice so require.” Also, Subsections (5) & (6) have been added to Section 541(b) to provide that funds in educational IRAs, funds used to purchase tuition credits or certificates, amounts held by employers as contributions to employee benefit plans, and any amounts withheld by an employer in the form of deferred compensation, tax deferred annuities, or other tax-deferred arrangements are not property of the estate. Generally, these amendments to Section 522 are created to encourage debtors to contribute funds to any account that is tax-qualified under Sections 401, 403, 408, 408(A), 414, 457, and 501(a) of the Internal Revenue Code. Further, if the debtor has made a loan against such an account, an exception to the automatic stay is created under Section 362(b)(19) to allow amounts to be withheld postpetition from the debtor’s wages to repay such a loan. And, under new Section 523(a)(18), such loans owed to retirement accounts are excepted from discharge; and new Subsection (f) of Section 1322 provides that the terms of repayment of such loans to the retirement account may not be altered by a Chapter 13 plan and that the amounts required to be paid on account of such loans do not constitute “disposable income” under Section 1325(b).
2. FRAUDULENT TRANSFERS AND CONCEALMENT OF ASSETS
Creation of fraudulent transactions, or simple omissions to disclose assets in bankruptcy, constitutes a form of bankruptcy fraud through the concealment of the assets which are transferred before bankruptcy and/or which are omitted from being disclosed by the debtor on his Schedules.
The old Bankruptcy Act allowed creditors to use either §67(d) or §70(e) to avoid fraudulent transfers or conveyances.[35] Section 67(d) was a federal codification of the Uniform Fraudulent Conveyance Act and allowed a trustee or debtor in possession the rights of a common law creditor to revoke fraudulent conveyances within one year of bankruptcy.[36] In contrast §70(e) granted the trustee or debtor in possession the rights available to creditors of the debtor under state law to avoid fraudulent transactions. Normally, fraudulent transfers and conveyances arise in the context of insolvent debtors transferring their property in attempts to place it beyond the reach of their creditors, but his concept also encompasses the actions of a debtor in incurring obligations or granting security interests in property while insolvent.[37]
Section 548 of the Bankruptcy Code is the existing federal enactment of the Uniform Fraudulent Conveyance Act,[38] which permits the trustee to avoid transfers made within one year before bankruptcy which are actually or constructively fraudulent against creditors.[39] Basically, §548 reprobates two types of transfers: (1) those which are constructively fraudulent, that is, those made for inadequate or no consideration at a time when the debtor is insolvent; and (2) those transfers which are actually fraudulent, that is those made with actual intent to hinder, delay, or defraud creditors.[40]
The House and Senate Reports explain §548 as follows:
“This section [§548] is derived in large part from section 67d of the Bankruptcy Act. It permits the trustee to avoid transfers by the debtor in fraud of his creditors. Its history dates from the statute of 13 Eliz. c. 5 (1570).
The trustee may avoid fraudulent transfers or obligations if made with actual intent to hinder, delay, or defraud a past or future creditor. Transfers made for less than a reasonably equivalent consideration are also vulnerable if the debtor was or thereby became insolvent, was engaged in business with an unreasonably small capital, or intended to incur debs that would be beyond his ability to repay.
The trustee of a partnership debtor may avoid any transfer of partnership property to a partner in the debtor if the debtor was or thereby became insolvent.
If a transferee’s only liability to the trustee is under this section, and if he takes for value and in good faith, then subsection (c) grants him a lien on the property transferred, or other similar protection.
Subsection (d) specifies that for the purposes of the fraudulent transfer section, a transfer is made when it is valid against a subsequent bona fide purchaser. If not made before the case, it is considered made immediately before the case. Subsection (d) also defines “value” to mean property, or the satisfaction or securing of a present or antecedent debt, but does not include an unperformed promise to furnish support to the debtor or a relative of the debtor.”[41]
An actually fraudulent conveyance is a transfer of property of the debtor or an obligation incurred by the debtor with actual intent to hinder, delay, or defraud creditors, either existing or future.[42] Fraudulent conveyances may take any form and are broadly defined as any “infringement of the creditor’s right to realize upon the available assets of this debtor.”[43] The doctrine of fraudulent conveyance “imposes a substantive prohibition: the debtor may not dispose of his property with the intent or the effect of placing it beyond the reach of his creditors…and full compliance with recording acts will not save the transaction if the substantive prohibition is violated.”[44]
In comparison, a constructively fraudulent conveyance is one made for less than reasonably equivalent value through the debt or in exchange for the transfer or obligation when (1) the debtor was insolvent or became insolvent as a result of the transfer, (2) the debtor was engaged in business and was left with unreasonably small capital after the transfer, or (3) the debtor intended to incur debts after the transfer which would be beyond the debtor’s ability to pay as they matured.[45] The pivotal question in gauging whether a transfer is constructively fraudulent is whether the debtor received reasonably equivalent value in the transaction.[46]
Fraudulent conveyances may also be set aside by a trustee or debtor in possession pursuant to §544(b),[47] which gives the trustee the power to assert the rights of actual unsecured creditors under state law in avoiding transactions. The most obvious benefit conferred by §544(b) is the power of the trustee to assert rights under the laws of various states within the United States (e.g., to avoid fraudulent transactions under the Uniform Fraudulent Transfer Act), which usually have a longer “look back” period than provided by bankruptcy law.[48] In any event, the reader should be especially aware that the trustee has a definite choice of remedies between these two sections of the Code in avoiding fraudulent transactions.[49]
Section 727(a)(2) provides grounds to deny the debtor’s discharge in a bankruptcy case and it prohibits not only the fraudulent transfer of assets by a debtor prior to bankruptcy, but also the fraudulent removal, destruction, mutilation or concealment of assets.[50] The concept of “concealment” has been defined as hiding assets in the estate that could fund distribution to creditors in a bankruptcy case.[51] Further, if the concealment is done through placing the property in the hands of a third party, who is merely holding it for the debtor, this will also be seen as a form of fraudulent transaction avoidable under §§544(b) & 548 of the Bankruptcy Code. Moreover, the debtor is required to file Schedules with the bankruptcy court which lists all material assets owned by the debtor or in which the debtor has an ownership interest, which is required by §521 of the Bankruptcy Code. A trustee attacking a transaction as fraudulent, or moving to the deny the discharge of a debtor under §727(a)(2) based upon concealment of assets, will have to show intent of the debtor to defraud, hinder or delay creditors. On the other hand, no such showing is technically required to deny a debtor’s discharge under §727(a)(3).[52] In many instances, debtor will fail to list items of property, or will undervalue the assets and not make complete disclosure of them, which might evince a form of willful or reckless disregard for the truth sufficient for the court to find actual intent to justify holding that there was a concealment of assets and deny discharge.[53]
One of the most famous examples of this is a case rendered by the Fifth Circuit, In re Olivier, 819 F.2d 550 (5th Cir. 1987). In the Olivier case, the debtors, husband and wife, transferred their home to the husband’s mother seven years prior to filing bankruptcy (in anticipation of an unfavorable judgment being rendered against them). The transfer of the home occurred two days after the debtors’ minor son had an automobile accidence which caused serious personal injuries to the driver of the other vehicle. The facts of the case indicated (1) that the transfer was made from the debtor-husband to his mother, (2) that he gave back to his mother the cash which she had paid for the purchase price, and (3) that after the transfer, the debtors lived in the house continuously until they filed for bankruptcy—during which time (a) the debtors paid for the taxes and insurance on the property, (b) the debtors paid no rent, (c) the victim of the automobile accident filed suit, (d) the victim gained a judgment in excess of the insurance coverage and (e) the debtors then filed bankruptcy. The court found that the transfer of the home and the continued use by the debtors created a “continuing concealed interest” of the debtors in the home which continued from the time of the alleged transfer through (and within one year of) the bankruptcy.
This holding was necessary to place the debtor beyond the one year period for fraudulent conveyance law under §548 of the Bankruptcy Code and the denial of discharge provisions of 727. Implicit in the decision is that, when the debtor’s son had the automobile accident and the debtors recognized that the victim could sue for substantial damages, they were faced with the possibility of insolvency via a judgment to the victim under which the victim could seize the house for the amount of damages suffered in the automobile accident. By concocting the transaction in question (and recording it to make it appear on the public records that there was an actual transfer of the debtor’s residence and real estate on which the residence was situated), while retaining the actual possession of the residence (and living in it), the debtors had created a scheme under which it would ostensibly appear that they had no interest in the residence after the transaction, whereas, in fact, they had a “continuing concealed interest” in the residence. This is commonly called the “Continuous Concealment Doctrine,” which has been used by courts to extend the one-year “look back” period in order to reach assets of the estate which were concealed by the debtor through schemes like this more than one year before the filing of bankruptcy. The foundation of this doctrine and the holding of Olivier is that the requisite intent to defraud, hinder or delay creditors has continued from the time of the transaction down through the one-year period immediately proceeding the bankruptcy filing, and thus it covered by sections of the Bankruptcy Code concerning fraudulent conveyances (§548) and denial of discharge for improper concealment of assets (§727).
In conclusion, the concealment of material assets by the debtor, either through failing to disclose and list them on the Schedules of Assets and Liabilities, or the feigned transfers of assets (simulations under Louisiana law) under which the debtor keeps a continuing concealed interest, are both reprobated by bankruptcy law and grounds for the trustee to (1) attack and attempt to revoke the transaction in question and (2) move to deny the debtor’s discharge for fraudulent concealment of assets.
New BAPCPA changes:
(1) New §522(o)(4) provides that, to the extent a homestead was obtained through fraudulent conversion of nonexempt assets during the 10-year period before the bankruptcy, the homestead exemption will be reduced by the amount of the fraudulent conversion.
(2) New §548(e) provides that a “self-settled” trust or similar device (to which the debtor is a beneficiary) which have received transfers of property within 10 years of filing of a bankruptcy with actual intent to hinder, delay or defraud existing or future creditors are subject to being attacked by bankruptcy trustees as being deemed as a fraud of creditors’ rights.
(3) New §548(a) has expanded the “look back” period for fraudulent conveyance subject to attack by a trustee to two years, rather than one year, before the bankruptcy was filed.
3. ACCURACY OF ALL INFORMATION
a. Section 707(b)(4) allows the court on its own initiative or on motion of a party in interest in accordance with Rule 9011 of the Federal Rules of Bankruptcy Procedure to order an attorney for the Debtor to reimburse the trustee for all reasonable costs in prosecuting a motion filed under §707(b), including reasonable attorney’s fees, if the debtor provides inaccurate financial information and the debtor’s attorney does not exercise sufficient due diligence to discover the inaccuracy. This rule, combined with §§526, 527, & 528, imposes much greater risks on the Debtor’s counsel.
The American Bar Association Task Force on attorney discipline issued a report titled, “Attorney Liability Under §707(b)(4) of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,” dated October 6, 2005, which is found at §4.11, infra. The article should be reviewed for its analysis of the applicability of Rule 9011 and §707,
4. ATTORNEYS FEES
Louisiana Ethics Rule 1.5 provides:
“(a) A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses. The factors to be considered in determining the reasonableness of a fee include the following:
(1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;
(2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;
(3) the fee customarily charged in the locality for similar legal services;
(4) the amount involved and the results obtained;
(5) the time limitations imposed by the client or by the circumstances;
(6) the nature and length of the professional relationship with the client;
(7) the experience, reputation, and ability of the lawyer or lawyers performing the services; and
(8) whether the fee is fixed or contingent.
(b) The scope of the representation and the basis or rate of the fee and expenses for which the client will be responsible shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation, except when the lawyer will charge a regularly represented client on the same basis or rate. Any changes in the basis or rate of the fee or expenses shall also be communicated to the client.
(c) A fee may be contingent on the outcome of the matter for which the service is rendered, except in a matter in which a contingent fee is prohibited by Paragraph (d) or other law. A contingent fee agreement shall be in a writing signed by the client and shall state the method by which the fee is to be determined, including the percentage or percentages that shall accrue to the lawyer in the event of settlement, trial or appeal; the litigation and other expenses that are to be deducted from the recovery; and whether such expenses are to be deducted before or after the contingent fee is calculated. The agreement must clearly notify the client of any expenses for which the client will be liable whether or not the client is the prevailing party. Upon conclusion of a contingent fee matter, the lawyer shall provide the client with a written statement stating the outcome of the matter and, if there is a recovery, showing the remittance to the client and the method of its determination.
(d) A lawyer shall not enter into an arrangement for, charge, or collect:
(1) any fee in a domestic relations matter, the payment or amount of which is contingent upon the securing of a divorce or upon the amount of alimony or support, or property settlement in lieu thereof; or
(2) a contingent fee for representing a defendant in a criminal case.
(e) A division of fee between lawyers who are not in the same firm may be made only
if:
(1) the client agrees in writing to the representation by all of the lawyers involved, and is advised in writing as to the share of the fee that each lawyer will receive;
(2) the total fee is reasonable; and
(3) each lawyer renders meaningful legal services for the client in the matter.
(f) Payment of fees in advance of services shall be subject to the following rules:
(1) When the client pays the lawyer a fee to retain the lawyer’s general availability to the client and the fee is not related to a particular representation, the funds become the property of the lawyer when paid and may be placed in the lawyer’s operating account.
(2) When the client pays the lawyer all or part of a fixed fee or of a minimum fee for particular representation with services to be rendered in the future, the funds become the property of the lawyer when paid, subject to the provisions of Rule 1.5(f)(5). Such funds need not be placed in the lawyer’s trust account, but may be placed in the lawyer’s operating account.
(3) When the client pays the lawyer an advance deposit against fees which are to accrue in the future on an hourly or other agreed basis, the funds remain the property of the client and must be placed in the lawyer’s trust account. The lawyer may transfer these funds as fees are earned from the trust account to the operating account, without further authorization from the client for each transfer, but must render a periodic accounting for these funds as is reasonable under the circumstances.
(4) When the client pays the lawyer an advance deposit to be used for costs and expenses, the funds remain the property of the client and must be placed in the lawyer’s trust account. The lawyer may expend these funds as costs and expenses accrue, without further authorization from the client for each expenditure, but must render a periodic accounting for these funds as is reasonable under the circumstances.
(5) When the client pays the lawyer a fixed fee, a minimum fee or a fee drawn from an advanced deposit, and a fee dispute arises between the lawyer and the client, either during the course of the representation or at the termination of the representation, the lawyer shall immediately refund to the client the unearned portion of such fee, if any. If the lawyer and the client disagree on the unearned portion of such fee, the lawyer shall immediately refund to the client the amount, if any, that they agree has not been earned, and the lawyer shall deposit into a trust account an amount representing the portion reasonably in dispute. The lawyer shall hold such disputed funds in trust until the dispute is resolved, but the lawyer shall not do so to coerce the client into accepting the lawyer’s contentions. As to any fee dispute, the lawyer should suggest a means for prompt resolution such as mediation or arbitration, including arbitration with the Louisiana State Bar Association Fee Dispute Program.”
The factors enumerated in Louisiana Ethics Rule 1.5 (concerning the reasonableness of legal fees) are supplemented by Local Bankruptcy Rule 2016-1 (for the Middle District of Louisiana) in evaluating the reasonableness of fees (principally time and labor, difficulty or novelty of the problem, preclusion of other employment, customary charges for similar services) and are incorporated into provisions of the Bankruptcy Code and Bankruptcy Rules governing compensation of counsel. For practical purposes, requests for payment of attorney fees in bankruptcy cases are more likely to be assessed using these criteria than in most other types of cases. Moreover, unlike the typical attorney-client relationship outside bankruptcy cases, fees of lawyers being compensated by the bankruptcy estate are subject to the scrutiny of the bankruptcy court, the United States Trustee and all interested parties in the case (including the creditors). Local Bankruptcy Rule 2016-1 governs all requests for fees and expenses; and where Chapter 11 cases are filed, additional requirements are set forth in Local Bankruptcy Rule 2016-1(b). Further, in Chapter 13 cases, Local Bankruptcy Rule 2016-1(c) requires that counsel for the debtor comply with Local Bankruptcy Rule 905(4). It should be noted that fees and expenses requested in excess of $500 require that the requesting professional send notice of the fee request and the date and time of the hearing thereon.
5. CONFLICTS OF INTEREST
Counsel for the Debtor should be greatly aware of the ethical rules imposed on him and guard against any conflicts of interest existing before he or she accepts the representation of the debtor. The following materials will review the Louisiana Ethics Rules concerning conflicts of interest including the additional burdens and duties imposed by the Bankruptcy Code, Bankruptcy Rules, Local Bankruptcy Rules, and the Federal Bankruptcy Cases interpreting these special bankruptcy rules.
a. Louisiana Ethics Rules 1.7 & 1.8 provide:
Rule 1.7. Conflict of Interest: Current Clients
“(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if:
1) the representation of one client will be directly adverse to another client; or
2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.
(b) Notwithstanding the existence of a concurrent conflict of interest under
paragraph (a), a lawyer may represent a client if:
1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client;
2) the representation is not prohibited by law;
3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and
4) each affected client gives informed consent, confirmed in writing.”
Rule 1.8. Conflict of Interest: Current Clients: Specific Rules
“(a) A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client unless:
1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client;
2) the client is advised in writing of the desirability of seeking and is given reasonable opportunity to seek the advice of independent legal counsel on the transaction; and
3) the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer’s role in the transaction, including whether the lawyer is representing the client in the transaction.
(b) A lawyer shall not use information relating to representation of a client to the disadvantage of the client unless the client gives informed consent, except as permitted or required by these Rules.
(c) A lawyer shall not solicit any substantial gift from a client, including a testamentary gift, or prepare on behalf of a client an instrument giving the lawyer or a person related to the lawyer any substantial gift unless the lawyer or other recipient of the gift, is related to the client. For purposes of this paragraph, related persons include a spouse, child, grandchild, parent, or grandparent.
(d) Prior to the conclusion of representation of a client, lawyer shall not make or negotiate an agreement giving the lawyer literary or media rights to a portrayal or account based in substantial part on information relating to the presentation.
(e) A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except that:
(1) a lawyer may advance court costs and expenses of litigation, the repayment of which may be contingent on the outcome of the matter;
and
(2) a lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client.
(f) A lawyer shall not accept compensation for representing a client from one other than the client unless:
1) the client gives informed consent, or the compensation is provided by contract with a third person such as an insurance contract or a repaid legal service plan;
2) there is no interference with the lawyer’s independence or professional judgment or with the client-lawyer relationship; and
3) information relating to representation of a client is protected as required by Rule 1.6.
g) A lawyer who represents two or more clients shall not participate in making an aggregate settlement of the claims of or against the clients, or in a criminal case an aggregated agreement as to guilty or nolo contender pleas, unless each client gives informed consent, in a writing signed by the client, or a court approves a settlement in a certified class action. The lawyer’s disclosure shall include the existence and nature of all the claims or pleas involved and of the participation of each person in the settlement.
h) A lawyer shall not:
1) make an agreement prospectively limiting the lawyer’s liability to a client for malpractice unless the client is independently represent in making the agreement; or
2) settle a clime or potential claim for such liability with an unrepresented client or former client unless that person is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent counsel in connection therewith.
i) A lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for a client, except that thelawyer may:
1) acquire a lien authorized by law to secure the lawyer’s fee or expenses;
and
2) contract with a client for a reasonable contingent fee in a civil case.
j) [Reserved].
k) A lawyer shall not solicit or obtain a power of attorney or mandate from a
client which would authorize the attorney, without first obtaining the client’s informed consent to settle, to enter into a binding settlement agreement on the client’s behalf or to execute on behalf of the client any settlement or release documents. An attorney may obtain a client’s authorization to endorse and negotiate an instrument given in settlement of the client’s claim, but only after the client has approved the settlement.
l) While lawyers are associated in a firm, a prohibition in the foregoing
paragraphs (a) through (k) that applies to any one of them shall apply to all of them.”
Bankruptcy courts are highly sensitive to conflicts of interest, especially if those conflicts involve counsel for the trustee, the debtor-in-possession, or a committee of creditors. Bankruptcy ethical rules, in many situations, are more stringent that the ethical rules of each state as to conflicts of interest. Attorneys in bankruptcy cases who are compensated by the estate may be more likely than lawyers in other fields to directly suffer the consequences of ethical lapses because of the bankruptcy courts’ control of employment and compensation of counsel.
1. Fiduciary Duty of Debtor and Trustee’s Bankruptcy Counsel.
A. Trustee. The bankruptcy trustee in a case under Title 11 is the representative of the estate. 11 U.S.C. § 323(a). The trustee is a fiduciary of all creditors of the estate and to the bankruptcy court.
B. Debtor-In-Possession. In Chapter 11 cases, the debtor-in possession also is a fiduciary to creditors of the estate and to the bankruptcy court. Cal. State Bd. Of Equalization v. Sierra Summit, Inc., 490 U.S. 844, 850, 109 S. Ct. 2228, 104 L. Ed. 2d 910 (1989).
C. Duty of Loyalty. Because a trustee and a debtor-in-possession have a fiduciary duty to the estate that requires them to act in ways that may not be in the debtor’s own self-interest, counsel for the trustee or debtor-in-possession sometimes faces the difficult task of maintaining his loyalty to the client while at the same time fulfilling his fiduciary obligation to the court and creditors. The burden of reconciling these occasionally conflicting objectives is increased substantially by the emerging trend of decisions holding that the debtor’s counsel personally has a fiduciary duty to the bankruptcy estate. In re Perez, 30 F.3d 1209, 1219 (9th Cir. 1944); see also, Matter of Evangeline Refining Co., 890 F.2d 1312, 1323 (5th Cir. 1989). Louisiana Bank v. Anderson, 526 So.2d 1586 (La. App. 3d Cir. 1988) (under Louisiana law, an attorney for the debtor may not be sued by a creditor for breach of any duty; based upon the attorney’s duty of loyalty to his client, an adverse duty may not be owed to a party with an adverse interest, e.g., the creditor – so no cause of action can arise for breach of a duty to a creditor in tort or malpractice). In Chapter 11 cases, one should refer to Form No. 3 of the Local Rules which impose duties on counsel to the debtor-in-possession in advising his client so that the debtor-in-possession will fulfill certain fiduciary duties to the bankrupt estate – but this can impose no specific duty to an individual creditor.
D. Fiduciary Duty. The trustee and debtor-in-possession’s fiduciary duty to the estate includes protecting and maximizing the value of and return on estate assets.
1. This duty includes prosecution of causes of action against the debtor’s principals if it would be beneficial to the estate. Louisiana World Exposition v. FDIC, 858 F.2d 233 (5th Cir. 1988); In re Granite Sheet Metal Works, Inc., 159 B.R. 840 (Bankr. S.D. Ill. 1993).
2. The fiduciary duty also encompasses the obligation not to dissipate assets by continuing to operate and incur debts in chapter 11 when it is evident that the reorganization cannot succeed. Perez, 30 F.3d at 1219.
3. Bankruptcy counsel can, for example, arguably be sanctioned through fee disallowance if he counsels a debtor to operate solely to pay down secured debt and tax obligations owed by the debtor’s principals – his duty is to the estate of the debtor and not its principals.
b. Procedure for Employing Counsel
1. Bankruptcy Regulations. Under the Bankruptcy Code, Bankruptcy Rules and Local Bankruptcy Rules, professionals may not be employed by the trustee, debtor-in-possession, or a creditor’s committee to represent the state without the prior approval of the bankruptcy court. The Bankruptcy Code, Bankruptcy Rules, and Local Bankruptcy Rules, state the procedure and requirements for obtaining court approval. 11 U.S.C. §327; [54] See Local Bankruptcy Rule 2014-1. The application must state specific facts setting forth the need for the employment, the services to be rendered, and any proposed arrangement for compensation. Bankruptcy Rule 2014-1(a)[55] also mandates disclosure of an attorney’s affiliation with all parties in interest. In re Prudhomme, 152 B.R. 91, 105 (Bankr. W.D. La. 1993).
2. Local Bankruptcy Rules. Bankruptcy courts (for example, in the Eastern and Middle Districts of Louisiana) may also have local rules governing applications for employment or professionals on behalf of the estate. See Local Bankruptcy Rule 2014-1 (Eastern District); Local Bankruptcy Rule 2014-1 (Middle District).
3. Fee Sharing Prohibited. Approved attorneys may not “share or agree to share” any compensation or reimbursement with any other person, other than an agreement for sharing with a member or regular associate of the approved firm. 11 U.S.C. §504.[56]
4. New BAPCA §504(c). However, the New BAPCPA Act adds Subsection (c) to §504 to provide:
“this section shall not apply to sharing or agreeing to share, compensation with a bona fide public service attorney referral program that operates in accordance with non-Federal law regulating attorney referral services and with the Rules of Professional Responsibility applicable to attorney acceptance of referrals.”
Apparently, Congress has decided to allow certain limited referral fees to be paid by bankruptcy practitioners pursuant to this new section of Bankruptcy Code. This amendment apparently requires that the fee sharing only be done with a bona fide public service attorney referral program operating in accordance with state law regulating attorney referral services and Rules of Professional Responsibility applicable of such. One should note well this limitation on referral fees.
5. §330(a). Bankruptcy Code section 330(a)[57] incorporates Section 327(a) by reference and specifies that only professionals who have been employed under sections 327 or 1103 are entitled to be compensation for the estate.
6. Preemployment Authorization. Professionals may be compensated only for services performed after the entry of the order approving their employment, See In re 245 Associates, L.L.C., 188 B.R. 743 (Bankr. S.D.N.Y. 1995), although bankruptcy courts may in some cases allow compensation for the period between undertaking work and filing for approval. Matter of Zedda, 169 B.R. 605 (Bankr. E.D. La. 1994); In re Atkins, 69 F.3d 970 (9th Cir. 1995). The prudent practice is to apply for approval of employment as soon as the bankruptcy case is filed.
7. Disclosure of Fees. Bankruptcy Code Section 329 also requires the applicant to file a statement of all compensation paid or contracted “for services rendered or to be rendered in contemplation of or in connection with” the bankruptcy case within the year prior to bankruptcy, whether or not the attorney applies for compensation from the estate. Bankruptcy Rule 2016(b) requires the filing of a statement of compensation prior to the first date set for the first meeting of creditors.[58] Lawyers representing all debtors, including chapter 11 debtors-in-possession, must file the disclosure statement required by 11 U.S.C. §329(a) and Bankruptcy Rule 2016(b). In the Middle District of Louisiana, for example, the statement required of debtor’s counsel must conform with Form No. 5 of the Local Bankruptcy Rules.
8. Concept of Disinterestedness. Section 328(c) of the Bankruptcy Code[59] authorizes the court to deny fees and expenses to an attorney retained under Section 327 or 1103 “if at any time during. . . employment under Section 327 or 1103 of this title, such professional person is not a disinterested person, or represents or holds an interest adverse to the interest of the estate with respect to the matter on which such professional person is employed.” (emphasis supplied)
c. The Requirement of Disinterestedness/No Adverse Interests
1. Disinterestedness. Bankruptcy Code §327 requires a showing that the attorney does “not hold or represent an interest adverse to the estate” and is a “disinterested person.” 11 U.S.C. §327(a).
2. Definition of Disinterestedness. Section 101(14) of title 11, defines disinterested person as a person who ---
(a) is not a creditor, an equity security holder, or an insider;
(b) is not and was not an investment banker for any outstanding security of the debtor;
(c) has not been, within three years before the date of the filing of the petition, an investment banker for a security of the debtor, or any attorney for such an investment banker in connection with the offer, sale or issuance of a security of the debtor.
(d) is not and was not, within two years before the date of the filing of the petition, a director, officer, or employee of the debtor or of an investment banker specified in subparagraph (b) or (c) of this paragraph; and
(e) does not have an interest materially adverse to the interest of the estate or of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor or any investment banker specified in subparagraph (b) or (c) of this paragraph, or for any other reason.
Lawyers should check the local bankruptcy rules. For example, in the Middle District of Louisiana, one should note that Local Bankruptcy Rule 2014-1 sets forth its requirement for representations which must be made in Chapter 11 cases for counsel of the debtor-in-possession, and Local Bankruptcy Rule 2014-1(a)(3) requires that the order approving counsel conform with Form No. 3 of the Local Bankruptcy Rules.
3. Simultaneous Creditor Representation. The disinterestedness/no adverse interest requirement is specifically modified by §327(c), which provides that disqualification is not required solely “because of such person’s employment by or representation of a creditor, unless there is objection . . ., in which case the court shall disapprove such employment if there is an actual conflict of interest. 11 U.S.C. §327(c) (emphasis supplied).
4. Prefiling Debtor Representation. In Chapter 11 cases, §1107 further modifies §327(a): “Notwithstanding section 327(a) of this title, a person is not disqualified from employment under section 327 of this title by a debtor in possession solely because of such person’s employment by or representation of the debtor before the commencement of the case.” 11 U.S.C. §1107(b).
5. Adverse Interest. Congress did not define “adverse interest,” but cases have construed the term “adverse interest” as meaning to serve as an agent or attorney for an individual or entity holding an interest adverse to the estate. In re Star Broadcasting, Inc., 81 B.R. 835, 838 (Bankr. D. N.J. 1988); In re Roberts, 46 B.R. 815, 827 (Bankr. D. Utah 1985), aff’d in part, rev’d and remanded in part on other grounds, 75 B.R. 402 (D. Utah) 1987). Several courts have adopted the view of the Roberts court that “the holding of an interest adverse to the estate” means:
(a) to possess or assert any economic interest that would tend to lessen the value of the bankruptcy estate or that would create either an actual or potential dispute in which the estate is a rival claimant; or
(b) to possess a predisposition under circumstances that renders such a bias against the estate.
See generally, Robert J. Au & Son, Inc. v. Aetna Ins. Co., 64 B.R. 600, 604 (N.D. Ohio1986); In re Rusty Jones, Inc., 134 B.R. 321, 342 (Bankr. N.D. Ill. 1991).
d. Imputation of Attorney’s Disqualification to Law Firm
1. Insider Status. Insider status of an attorney can be imputed to the attorney’s law firm, and result in the disqualification of the firm. In re Weibel, 161 B.R. 479, 483 (Bankr. N.D. Cal. 1993) (if a partner is disqualified, firm is disqualified); In re Environdyne Industries, 150 B.R. 1008 (Bankr. N.D. Ill. 1993); In re Tinsley Plaza, 142 B.R. 272 (N.D. Ill. 1992).
2. Nonimputation of Adverse Interest. Disqualification of attorney due to insider status is not imputed to his law firm when the disqualified attorney will not be involved in the representation of the debtor-in possession. Gray v. English, 30 F.3d 1319 (10th Cir. 1994) (attorney for trustee disqualified for purchasing claim of creditor, but disqualification not imputed to other members of firm); Vergos v. Timber Creek, 200 B.R. 624 (W.D. Tenn. 1996) (disqualification of partner of law firm as insider is not imputed to firm where firm precludes lawyer from any involvement in representation); In re Capen Wholesale, Inc., 184 B.R. 547 (N.D. Ill. 1995) (inactive officer status of partner and agreement not to participate in representation where grounds for not imputing insider status to law firm).
e. Potential Disqualifying Relationships - Attorney as Creditor
1. Creditor Status. A professional who is a creditor runs the risk of being held to not be a disinterested person, and being disqualified from representing the estate. In re Federated Dept. Stores, Inc., 44 F.3d 1310 (6th Cir. 1995) (reversing bankruptcy court’s approval on equitable grounds of debtor’s retention of financial advisor, and instructing court on remand to disallow all compensation previously awarded to the advisor, because of the advisor’s extensive pre-bankruptcy financial connections with the debtor); In re Guard Force Management, Inc., 185 B.R. 656 (Bankr. D. Mass 1995) (revoking authorization of attorney’s employment as counsel for debtor, denying award of compensation and ordering disgorgement of all fees paid by debtor, where attorney failed to disclose prepetition claim against debtor); In re Fulgham Enterprises, Inc., 181 B.R. 139, 142 (Bankr. N.D. Ala. 1995) (denying debtor’s application for employment of certified public accountant who held prepetition claim against the debtor, but suggesting that the accountant could be employed if he waived his prepetition claim); In re Eastern Charter Tours, Inc., 167 B.R. 995 (Bankr. M.D. Ga. 1994) (same result).
2. No Disqualification. There are cases holding otherwise, however. One court has held that “[i]t should be left to the discretion of the court as to whether the relationships are such a degree that a court should conclude that the applicant is not disinterested.” In re Microwave Products of America, Inc., 94 B.R. 971, 973 (Bankr. W.D. Tenn. 1989) (holding under 11 U.S. C. §1107(b) that public relations firm with small prepetition claim was not disqualified from employment because it was not “materially adverse” to the estate). See also In re Sharon Steel Corp., 154 B.R. 53 (W.D. Pa. 1993) (affirming In re Sharon Steel Corp., 152 B.R. 447 (Bankr. W.D. Pa. 1993); and In re Sharon Steel Corp., 156 B.R. 14 (W.D. Pa. 1993)) . These opinions adopt a “flexible rule” and an equitable analysis to allow the debtor-in-possession to retain an accounting firm and lawyers that held pre-petition claims against the debtor.
3. Waivers. Some courts will allow claim waivers to cure conflicts resulting from a professional’s prepetition claim against the estate. In re Watervliet Paper Co., Inc., 111 B.R. 131 (W.D. Mich. 1989); Matter of PHM Credit Corp., 99 P.R. 762 (E.D. Mich. 1989).
4. State Law. One might be interested in a Louisiana state court case which is analogous to the above issues, Teel v. Teel, 400 So.2d 357 (La. App. 4th Cir. 1981), where an attorney for a corporation was disqualified from representing the wife of the corporation’s (husband) shareholder in divorce proceedings where the stock in the corporation was the largest community asset.
BAPCPA CHANGES
Section 101(4) was amended to delete language automatically rendering investment bankers (and their lawyers) not disinterested. The relaxation of this standard, however, will not save these professionals from disqualification where their interests are in fact materially adverse to the bankruptcy estate.
f. Attorney as Equity Holder or Insider and Multiple Representations
1. Insider Status. Published opinions differ as to whether disqualification from employment is required on the basis of the attorney’s insider[60] status or his ownership of equity in the debtor.
A. Equity Holder. Professional disqualified due to equity holder or insider status:
In re Middleton Arms Ltd. Partnership, 934 F.2d 723 (6th Cir. 1991) (professional who is an insider is per se not disinterested); In re Anver Corp., 44 B.R. 615 (Bankr. D. Mass. 1984) (counsel that was stockholder and pre-petition creditor of debtor was not disinterested).
B. Nondisqualification. Employment of professional permitted despite equity interest or insider status.
Matter of PMH Credit Corp., 110 B.R. 284 (E.D. Mich. 1990) (law firm that was both insider and equity owner could be employed after curative measures, including resignation of attorney who was an officer of the debtor corporation); Matter of Federated Dept. Stores, Inc., 114 B.R. 501 (Bankr. S.D. Ohio 1990) (approving employment as financial advisor of entity that held ownership interest in debtor); In re Pacific Exp., Inc., 56 B.R. 859, 861 (Bankr. E.D. Cal. 1985) (law firm permitted to act as counsel despite several members’ ownership of debtor’s stock).
2. Receipt of Retainer. Receipt of payment or retainer from insider, creditor or other interested person.
A. May create conflict and may result in disqualification.
In re Adams Furniture Indus., Inc., 158 B.R. 291 (Bankr. S.D. Ga. 1993) (lawyer paid by shareholders and affiliated entities who had allegedly obtained prepetition avoidable transfers); In re Black Hills Greyhound Racing Association, 154 B.R. 285 (Bankr. D. S.D. 1993) (firm’s retainer paid by shareholder of debtor corporation constitutes disqualifying conflict); In re Neidig Corp., 113 B.R. 696 (D. Colo. 1990) (fees paid by third party to attorney who represented debtor and officers of debtor).
B. Is not per se cause for disqualification.
In re Kelton Motors, Inc., 109 B.R. 641 (Bankr. D. Vt. 1989) (when counsel has made clear that he does not represent owner, a disclosed payment of fees by owner of corporation is not disqualifying); In re City Mattress, Inc., 163 B.R. 687 (Bankr. W.D. N.Y. 1994) (receipt of mortgage on real property leased by the debtor, but owned by officers and shareholders, to secure fees up to $85,000 not disqualifying where property not necessary to reorganization).
3. Representation of general partner, limited partner or partnership. The Fifth Circuit held in In re W.F. Development Corp., 905 F.2d 883, 884 (5th Cir. 1990) that: “When one attorney represents both limited and general partners in bankruptcy, there will always be a potential for conflict, and disqualification is proper.” See also In re TMA Associates, Ltd., 129 B.R. 643 (Bankr. D. Colo. 1991) (attorneys who represented general partners disqualified from representing partnership debtor); In re McKinney Ranch Assoc., 62 B.R. 249, 255 (Bankr. C.D. Ca. 1986) (representation of general partner “will always disqualify” counsel from representing limited partner).
4. Representation of debtor and insider or third party guarantor of debtor’s obligations. Counsel employed by the estate, while also representing a guarantor of the debtor’s obligations (or an entity liable for the debtor’s debts for another reason) may have a disqualifying conflict because of the guarantor’s or co-obligor’s conflicting interest in having its obligations paid by the debtor. Dual representation of the debtor and non-debtor in these circumstances generally is not permitted. See in re Humble Place Joint Venture, 936 F.2d 814 (5th Cir. 1991) (actual conflict existed where counsel for corporate debtor also represented guarantor, and a primary purpose of debtor’s plan was to effectuate release of guarantor’s liability); In re First Ambulance Center of Tennessee, Inc., 181 B.R. 323 (Bankr. M.D. Tenn. 1995) (dual representation of chapter 11 debtor corporation and its owners, who were chapter 13 debtors, not permitted where owners had guaranteed the largest corporate debt); Roger J Au & Son, Inc. v. Aetna Ins. Co., 64 B.R. 600 (N.D. Ohio 1986).
5. Representation of corporation and shareholder. Simultaneous representation of the debtor and a shareholder often is cause for disqualification or denial of compensation from the estate. Occasionally bankruptcy courts will not deny compensation or order the professional to disgorge fees previously paid if counsel has disclosed to the court its connections with the non-debtor party. See, e.g., In re Grantie Sheet Metal Works, Inc., 159 B.R. 840 (Bankr. S.D. Ill., 1993) (law firm’s undisclosed representation of the interests of shareholder and corporate debtor constituted conflict that was grounds for denial of all fees); In re Tinley Plaza Associates, L.P., 142 B.R. 272 (Bankr. N.D. Ill. 1992) (conflict due to firm member’s representation of an investment banking firm retained by debtor’s affiliate to obtain capital); In re EWC, Inc., 138 B.R. 276 (Bankr. W.D. Okla. 1992) (although concurrent representation of debtor and sole shareholder was not a per se conflict, actual conflict and failure to disclose relationship resulted in denial of all fees); In re Rusty Jones, Inc., 134 B.R. 321 (Bankr. N.D. In. 1991) (dual representation is actual conflict of interest); In re Kendavis Industries Intern., Inc., 91 B.R. 742 (Bankr. N.D. Tex. 1988) (representation of corporate debtor and shareholders constituted per se conflict, and any agreement by counsel for corporation to protect interests of shareholder, or by partnership counsel to protect interests of partner, constitutes actual conflict).
Some courts have taken a pragmatic approach in cases involving closely-held entities. Compare In re Huddleston, 120 B.R. 399 (Bankr. E.D. Tex. 1990) (absent actual conflict, representation of both small corporation and shareholder debtors-in-possession was approved despite joint debts); In re Hurst Lincoln Mercury, Inc., 80 B.R. 894, 895, 897 (Bankr. S.D. Ohio 1987) (“simultaneous representation of a corporation and its sole stockholder is not in and of itself improper,” because sole stockholder “is the operating head of the debtor-in-possession, to whom counsel for debtor must look as the voice of the client”).
g. Compensation Consequences of Disqualification
1. Conflicts of Interest. In bankruptcy cases, unlike most non-bankruptcy proceedings, conflicts of interest often surface and may have serious consequences for professionals being paid by the estate. The bankruptcy court has the power to take relatively swift action to redress conflicts through its control of compensation. Bankruptcy courts have broad discretion in controlling compensation, and can award fees in a reduced amount to attorneys who are not disinterested. See, e.g., In re Crivello, 134 F.3d 831 (7th Cir. 1998). Moreover, they often disallow any compensation where counsel has a conflict, especially if the applicant has not previously disclosed his relationship to the court. See In re Granite Partners, L.P., 219 B.R. 22 (Bankr. S.D. N.Y. 1998) (counsel for chapter 11 trustee disqualified resulting in denial of $3 million in fees, where firm failed to disclose that a newly-hired lateral partner simultaneously represented defendant in preference action); In re Weibel, Inc., 176 B.R. 209 (9th Cir. BAP 1994) (failure to obtain approval of employment due to conflict of interest precludes award of fees under any provision of Bankruptcy Code); In re EWC, Inc., 138 B.R. 276 (Bankr. W.D. Okla. 1992) (court has no discretion under §328(c) to approve any fees if a conflict is present at inception of the representation and is not disclosed).
2. Reduction or Disallowance of Fees. The bankruptcy court also can reduce or disallow compensation if the professional’s services do not benefit the estate, such as when the lawyer’s fees are disproportionate to the value of the services. See, e.g., Matter of Taxman Clothing Co., 49 F.3d 310 (7th Cir. 1995) (disallowing fees in excess of an initial award of $7,000 where counsel was seeking more than $85,000 for prosecuting a preference action that the lawyer believed was worth only $30,000).
3. Misrepresentation of Conflicts - Penalties. Misrepresentations to the bankruptcy court about a conflict may also trigger more serious repercussions. U.S. v. Gellene, 24 F. Supp.2d 922 (E.D. Wis. 1998) (lawyer who failed to disclose to bankruptcy court that while the firm represented the debtor, it also represented one of the debtor’s largest creditor in unrelated matters, convicted for making false statements to bankruptcy court and sentenced to prison).
h. Special Counsel for Debtor or Trustee
1. Special Counsel. Because action by the debtor against third parties are not affected by the automatic stay, and any claim by the debtor against a third party becomes property of the bankruptcy estate once the bankruptcy petition is filed, the debtor or trustee often will need to retain counsel to continue the action. Special counsel may also be necessary to represent the interests of the estate in specialized areas of the law not within the expertise of the bankruptcy counsel.
2. Requirement-Special Purpose. To continue to represent the trustee or debtor-in-possession in an action that is property of the estate, or to represent the estate for a special purpose, the non-bankruptcy lawyer must obtain bankruptcy court approval under 11 U.S.C. §327(e) and Bankruptcy Rule 2014.
3. No Requirement of Disinterestedness. The special counsel applicant need not be a “disinterested person.” The statue only requires that the attorney not “represent or hold any interest adverse to the estate with respect to the matter on which the attorney is to be engaged.” 11 U.S.C. §327(e).
4. No Disqualification for Prepetition Creditor Status. For practical purposes, in most cases this means that an attorney can serve as special counsel even though he is pre-petition creditor of the debtor — which would disqualify the attorney from serving as general bankruptcy counsel. It typically is used by the bankruptcy court to approve employment of the debtor’s pre-bankruptcy counsel if retention of experienced counsel for a special purpose or case will benefit the estate.
i. Other Common Issues in Bankruptcy Representation
1. Award of Creditors’ Attorneys’ Fees
A. Substantial Contribution. The bankruptcy court may award the actual, necessary expenses incurred by a creditor, including its attorney’s fees, if the creditor has made “a substantial contribution in a case under chapter 9 or 11 of this title.” 11 U.S.C. §§503(b)(3)(D), 503(b)(4).[61] Prior bankruptcy court approval of employment is not a condition for the award of compensation under the provisions. In fact, an award is not appropriate if the professional already has been retained pursuant to court order. In re Balport Const. Co., Inc., 123 B.R. 174 (Bankr. S.D. N.Y. 1991).
B. Requirement That Services Substantially Contribute to Case. Services that “substantially contribute to a case” are those that “foster and enhance, rather than retard or interrupt the progress of reorganization.” Matter of DP Partners Ltd. Partnership, 106 F.3d 667 (5th Cir.), cert. denied, 522 U.S. 815, 118 S. Ct. 63 (1997) and appeal after remand 1998 WL 241243 (N.D. Tx 1998); Matter of Consolidated Bancshares, Inc., 785 F.2d 1249, 1253 (5th Cir. 1986) (quoting In re Richton Intern’l Corp., 15 B.R. 854, 856 (Bankr. S.D. N.Y. 1981)).
C. Client vs. All Parties. Courts evaluating whether a substantial contribution has been made consider whether (1) the claimant’s services were rendered to benefit the client or all parties in the case, (2) resulted in a direct, significant and demonstrable benefit to the estate, and (3) duplicated services rendered by other professionals working for the debtor or an official committee. In re Buttes Gas & Oil Co., 112 B.R. 191 (Bankr. S.D. Tex. 1989). See In re Aspen Limousine Service, Inc., 193 B.R. 325 (D. Colo. 1996) (creditor not entitled to attorney fees for pursuing competing plan, despite plan’s incidental effect of increasing value of chapter 11 estate, where creditor was acting in its own interest in objecting to debtor’s plan and
advancing a competing proposal).
2. Waivers of Conflicts
A. Consent Necessary. Under Louisiana law (as well as the ethics law prevailing in many other states), an attorney cannot represent a client where actual or potential conflicts of interest exist unless each client affected by the conflict gives its consent and the attorney reasonably believes that dual representation will not be adversely affected by the conflict.[62]
B. Multiple Clients – Requirement of Adequate Representation. An attorney is not specifically prohibited under the law many states from representing multiple clients, when the clients consent after full disclosure of all actual or potential conflicts of interest which may exist. However, the attorney must be able to adequately represent the interest of all the clients.[63]
C. Bankruptcy Rules – More Restrictive. Some bankruptcy courts rely on state law regarding conflicts of interest. See In re Star Broadcasting, Inc., 81 B.R. 835, 838 (Bankr. D. N.J. 1988); In re Kelton Motors, Inc., 109 B.R. 641 (Bankr. D. Vt. 1989). However, the majority rule concerning simultaneous multiple representations and “disinterestedness” is that the bankruptcy statutes and rules governing disqualification are broader than state ethics rules. See In re Sauer, 191 B.R. 402 (Bankr. D. Neb. 1995) (conflict of interest provision derived from Bankruptcy Code’s requirement of disinterestedness on the part of professionals is more stringent than parallel ethical standards governing conduct of attorneys); Matter of Butterfield Ltd. Partnership, 131 B.R. 67 (E.D. Mich. 1990); In re Tinley Plaza Associates, L.P., 142 B.R. 272 (Bankr. N.D. Ill. 1992).
D. Conflict Waivers Generally Not Allowed. The bankruptcy qualification standard is preemptive. For that reason, conflicts waivers probably are not available or effective to cure conflicts of an attorney who seeks to be employed by the debtor in possession or trustee. See In re First Ambulance Center of Tennessee, Inc., 181 B.R. 323 (Bankr. M.D. Tenn. 1995); In re American Printers & Lithographers, Inc., 148 B.R. 862 (Bankr. N.D. Ill. 1992); In re Amdura Corp., 121 B.R. 862 (Bankr. D. Col. 1990).
3. Representation of the Debtor
A. Disinterestedness Not Required. Counsel hired by a chapter 7 debtor on his own behalf, and not paid from estate assets, is not subject to the requirements of court approval or disinterestedness. See, e.g., In re Trinsey, 115 B.R. 828 (Bankr. E.D. Pa. 1990) (Section 237(a) does not apply to chapter 7 debtor retaining counsel on his own behalf). The 1994 amendments to the Bankruptcy Code deleted the phrase “or to the debtor’s attorney” from section 330(a) to clarify that counsel for a chapter 7 debtor cannot be paid from the estate.
B. Disclosures Required. However, certain disclosures still are required under 11 U.S. C. §329 and Bankruptcy Rule 2016(b). In the Middle District of Louisiana, Local Bankruptcy Rule 2014-1 requires a specific disclosure statement conforming with Form No. 5 of the Local Bankruptcy Rules. See §4.10, infra, Form 1.
C. State Ethics Rules and BAPCPA Rules Must Be Followed. Attorneys engaged by parties filing chapter 7 petitions still should be mindful of state law ethics requirements. Accuracy in information placed in Schedules is further required from both the debtor and his lawyer now by New BAPCPA Act §§707(b)(4), 526(a), 527(a) & 528(a).
4. Application of Pre-Petition Payments and Retainers
A. Prepetition Retainers and Payments. Section 328 of the Bankruptcy Code[64] gives bankruptcy courts authority over pre-petition retainers and other payments to the attorney for the debtor. In the Middle District of Louisiana Local Bankruptcy Rule 2016-1, requires disclosure of the retainer paid, if any, and its application.
B. Court Review of Retainers and Payments. Any fees promised to or received by the debtor’s attorney in connection with or in contemplation of bankruptcy are subject to court review under section 328(c)[65] which gives bankruptcy courts the authority to deny compensation if the debtor’s attorney, after employment, is found not to be “disinterested” or if counsel represents or holds an interest adverse to the interest of the estate with respect to the matter on which such professional person is employed.
C. Court Regulation of Compensation. Section 329 gives the court additional control over compensation to attorneys representing the debtor or debtor-in-possession, even when the attorney is not seeking compensation from the estate.[66] Section 329(a) is implemented by
Bankruptcy Rule 2016(b).
D. Excessive Fees Regulated. Section 329(b) specifically gives the court authority to cancel a fee agreement, or to order the return of any fee previously paid if the agreement or payment is excessive.
E. Examination of Fee Transactions. Bankruptcy Rule 2017 establishes the procedure for examining the debtor’s transactions with its counsel.[67]
F. Prepetition Retainers May Be Property of Estate. Prepetition retainers to secure or effectuate payment for services rendered as counsel for a chapter 11 debtor-in-possession may be arguably deemed property of the bankruptcy estate upon the filing of the case, and courts have held that they cannot be used by the attorney unless the bankruptcy court approves a fee request. See, e.g., In re Prudhomme, 43 F.3d 1000 (5th Cir. 1995); In re National Magazine Publishing Co., 170 B.R. 329 (Bankr. N.D. Ohio 1994); In re Peterson, 163 B.R. 665 (Bankr. D. Conn. 1994). However, some courts have held under state law that advance-payment retainers are the attorney’s property, do not become property of the estate upon bankruptcy, and can be used by the debtor’s attorney without obtaining prior court approval. See In re GOCO Realty Fund Inc., 151 B.R. 241 (Bankr. N.D. Cal. 1993); In re D.L.I.C., Inc., 120 B.R. 348 (Bankr. S.D.N.Y. 1990); In re McDonald Bros. Constr., Inc., 114 B.R. 989 (Bankr. N.D. Ill. 1990).
j. Payment for Prepetition Work When Counsel Does Not Receive a Retainer
1. Adequate Retainer Suggested. Lawyers agreeing to represent a debtor in a case under any chapter of the Bankruptcy Code should secure an adequate retainer before undertaking work.
2. Prepetition Fees May Be Discharged. Absent a retainer to secure his or her claim, the attorney cannot arguably be paid, since all the debtor’s prepetition obligations appear to be discharged in the bankruptcy — including the debt to the bankruptcy attorney. In re Hessinger, 165 B.R. 657 (Bankr. N.D. Ca. 1994) (prepetition claims for attorney’s fees dischargeable); In re Symes, 174 B.R. 114, 117 (Bankr. D. Ariz. 1994) (pre-petition fee agreement providing for a payment by post-dated checks is dischargeable claim); In re Martin, 197 B.R. 120 (Bankr. D. Col. 1996) (installment arrangement entered into pre-petition is dischargeable debt that creates conflict of interest).
3. No Reaffirmation. The attorney may not even by able to resolve his or her problem through the debtor’s reaffirmation of the debt. See In re Voglio, 191 B.R. 420, 425 (D. Ariz. 1996), where the district court noted that “an attorney . . . cannot represent the debtor in negotiating the reaffirmation agreement [of the unpaid attorney’s fees] because of a conflict of interest.”
4. Prepetition Payments. Moral of the story: secure a sufficient retainer prior to staring work on the case. If the retainer is paid by check, the check should have cleared the issuers bank prior to commencing work, and certainly prior to filing the bankruptcy petition.
k. Avoiding Fee Disputes
1. Written Engagement Agreements Now Required. A written agreement remains the best way of avoiding fee disputes in bankruptcy cases, just as in any other representation. See Louisiana State Bar Association Rules of Professional Conduct 1.5(b), 1.5(f)(5) (requiring that fee arrangements be communicated to the client, preferably in writing). Under Local Bankruptcy Rule 2016-2 and Local Form #5 (the form of which is virtually the same as Form 1 in §4.10, infra) for the United States Bankruptcy Court for the Middle District of Louisiana, written agreements are mandatory(and must be filed in the record in every case). New BAPCPA §528(a)(1) now requires a written engagement agreement.
2. Scope of Engagement. The agreement should include the scope of the undertaking, describe the services to be rendered, the fee charged (or the lawyer’s hourly rate or other basis for charging the client), identify the source and amount of any retainer. It should be signed by the client before filing the bankruptcy petition. See New §528(a) and Form 1 at §4.10, infra.
3. Non-debtor Spouse Issues. In consumer cases involving filing by only one spouse, the extent of the attorney’s obligation to address the potential consequences of a bankruptcy filing to the non-debtor spouse should be spelled out. See New §§526(a), 527(a) & 528(a).
4. Corporate and Stockholder Interests May Require Separate Counsel. In business cases, attorneys should consider explicitly pointing out that the attorney’s and debtor-in-possession’s fiduciary duties preclude the obligation to represent the interests of the debtor’s equity holders. It may also be wise to recite counsel’s advice that equity holders can retain separate counsel to protect or advance their interests in the bankruptcy proceeding.
5. Local Bankruptcy Rules. In the Middle District, Local Bankruptcy Rule 2016-2 supplements Federal Rule of Bankruptcy Procedure 2015(b) by requiring the debtor’s counsel to specifically describe the extent to which her services will be limited in the case. Failing that disclosure, the attorney for the debtor will be presumed to appear for the debtor in all proceedings in the case, unless a fee agreement signed by the debtor and counsel setting forth the limitations and other information is attached to the disclosure of compensation required by Bankruptcy Rule 2016. Local Bankruptcy Rule 2016-2 requires a disclosure statement between the debtor and its lawyer which conforms to Form No. 5 of the Local Rules. See §4.10, infra, Form 1, for an example of such an engagement agreement.
6. Limiting Scope of Engagement for Unseen Potential Problems. In Chapter 7 cases, the agreement also should specify the terms for payment of fees to represent the debtor in discharge or dischargeability proceedings. Many agreements provide that in consideration of the initial payment, the attorney will file the petition and related documents, and appear with the debtor at the first meeting of creditors. If any substantial additional work is required after the first meeting of creditors, the engagement agreement should address this and whether additional fees are owed for any further potential services required of the attorney after the first meeting of creditors. The debtor should agree to pay for any such unforeseen additional necessary representation on an hourly basis. See Form No. 5 of the Local Bankruptcy Rules; Form 1 at §4.10, infra; New §§526(a), 527(a) & 528(a).
7. Advice Concerning Exemptions Secured Claims & Related Issues. Counsel for the debtor should explain the debtor’s exemptions and describe the property he may be able to retain (or any risk that the property may not be exempt under applicable law). Conversely, the debtor should be alerted to the possibility that property securing liens (including automobiles and homes) may be repossessed by the secured creditor, unless the creditor agrees to the debtor’s reaffirmation of the obligation. New §526(a) appears to make it mandatory now for a “debt relief agency” to explain the “benefits and risks” of a bankruptcy case, including issues concerning exemptions, redemptions of exempt property from liens, secured claims, and the performance requirements of New §521.
8. Reaffirmations. If the client intends to reaffirm any debt, the procedure for and consequences of reaffirmation should be explained in detail. See New §524(i), (j), & (k).
9. Accuracy of Financial Information - Duty for Such Is Client’s Obligation. To avoid later disputes if unscheduled debts or assets are discovered (and to foreclose potential professional liability), the engagement letter should recite that counsel is relying on the debtor for complete documentation and information on his property and debts, including the names and correct addresses of creditors. The letter also should mention the potential consequences of failing to list a creditor: nondischargeability of the omitted debt. See New §536(a) & §523(a)(3).
10. Impact of Bankruptcy on Future Creditworthiness of Client. Counsel should incorporate in the agreement an explanation of the consequences of bankruptcy for future credit applications (because the filing may remain on the debtor’s credit record for as long as 10 years) and identify debts that will not be discharged in the bankruptcy proceeding, such as taxes and support obligations. See New §526(a). It also is wise to advise the client that a bankruptcy discharge will preclude another discharge in a subsequent bankruptcy case for as long as eight years after the filing of the earlier case. New §727(a)(8)&(9). Local Bankruptcy Rules Form No. 11 requires counsel for the debtor in a Chapter 7 case in the Middle District of Louisiana to file a declaration signed by the debtor explaining certain discharge and reaffirmation requirements.
11. Client Consent for Fee Request. In chapter 11 cases in which the bankruptcy court may award professionals compensation on an interim basis during the proceeding, fee statements should be sent to the client regularly for review and written approval, even though fees cannot be paid without a court order. The attorney should incorporate into the application a representation that the client (trustee or debtor-in-possession) has reviewed the application, and believes that the amount sought is reasonable. Fee disputes usually can be avoided or resolved if the client has reviewed and approved the bills and application in advance.
12. Written Engagement Agreement Disclosed to Client at First Meeting. Preparation of a standard form of engagement letter to be used in bankruptcy cases will reduce the likelihood of dissatisfied clients and help prevent fee disputes. New §526(a) requires such. See Form 1 at §4.10, infra, for an example of such. In the Middle District of Louisiana, Local Bankruptcy Rule 2016-2 provides for resolution of this issue, because the debtor and his counsel must sign a disclosure statement conforming to Form No. 5 of the Local Bankruptcy Rules. The language of New §528(a) requires that a “debt relief agency” (an attorney representing consumer debtor) shall execute a written engagement contract no later than 5 business days after the first meeting with the client. For these reasons, it is strongly recommended that the client be given a copy of the engagement agreement at the first meeting and that its terms and conditions be expressly explained to the client
§4.04 NEW LAWYER LIABILITY ISSUES – NEW §§526, 527, 528 & 707(b)(4)(c)&(d)
A summary or CHECKLIST OF NEW DEBTOR ATTORNEY DUTIES is as follows:
(1) Rule 9011 verification and §707(b)(4)(C) & (D) certifications.
(2) Debt relief agency disclosure, written engagement agreement and advertising requirements.
(3) Assurance of compliance by the debtor of new requirements and notice to debtor.
(4) Means test calculations assistance to debtor.
(5) Awareness of Code changes and timely communications to the debtor.
1. New Verification and Certification Requirements for Attorneys
Section 319 of the New Act provides that it is the sense of Congress that Rule 9011 of the Federal Rules of Bankruptcy Procedure should be modified to include a requirement that all documents (including schedules), signed and unsigned, submitted to the court or to a trustee by debtors who represent themselves and debtors who are represented by attorneys be submitted only after the debtors’ attorneys have made reasonable inquiry to verify that the information contained in such documents is - -
(1) well grounded in facts; and
(2) warranted by existing law or good faith argument for the extension, modification, or reversal of existing law.
Thus, Congress clearly has expressed its intent that it is the responsibility of the debtor’s attorney to take reasonable steps to verify the factual accuracy and legal basis for material factual data and information contained in bankruptcy schedules and other documents submitted to the court or to the trustee. This is incorporated in the New BAPCPA Law by the amendments creating §707(b)(4)(C) & (D). The amendments to 11 U.S.C. §707(b) require attorney certification of such and expressly impose liability on the debtor’s attorney for violations under Rule 9011.
New §707(b)(4)(C) of the Bankruptcy Code provides that the signature of an attorney on a petition, pleading, or written motion shall constitute a certification that the attorney has -
(i) performed a reasonable investigation into the circumstances that gave rise to the petition, pleading, or written motion; and
(ii) determined that the petition, pleading, or written motion - - (I) is well grounded in fact; and (II) is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law and does not constitute an abuse under paragraph (b)(1) of §707.
Also, New §707(b)(4)(D) provides that the signature of an attorney on the petition constitutes a certification that the attorney has no knowledge after an inquiry that the information in the schedules filed with such a petition is incorrect.
These new certification rules raise many questions. How much inquiry and to what extent must an attorney for a debtor inquire as to the accuracy of the information furnished by the debtor? If the attorney for the debtor receives substantial information indicating that the debtor is being dishonest about the information provided to the bankruptcy court, is the attorney required to withdraw from representation?[68] Will the court allow the withdrawal? Presumably, it will if there would be a violation of bankruptcy law.
Louisiana Ethics Rule 1.16 (declining or terminating representation) requires that the lawyer not become a party to any fraud or dishonesty allowing the lawyer to withdraw if the client uses the lawyer’s services to perpetrate a crime or fraud or if the client insists upon pursuing an objective that the lawyer considers repugnant or imprudent.
Louisiana Ethics Rules 1.18, titled “Duties to Prospective Client,” (1) identifies a person who discusses with a lawyer the possibility of forming a relationship as a perspective client, (2) ensures that a lawyer, even when no client-lawyer relationship is accomplished, not reveal confidential information, except as Rule 1.9 would permit (and see also, the Louisiana Ethics Rule 1.6 fraud exception), (3) prevents the lawyer from representing a prospective or existing client with interests materially adverse to those of another existing or prospective client in the same or substantially related matter and (4) requires (when receiving disqualifying information from the prospective client) that to represent the prospective client, this can only be done if the prospective client (and any existing client, if applicable) has consented in writing after receiving “an informed consent.”
Under Louisiana Ethics Rule 2.1, titled “Advisor,” a lawyer must exercise independent professional judgment and render candid advice including advice as to the law, moral, economic, social and political factors that may be relevant to the client’s situation.
Louisiana Ethics Rule 4.1, titled “Truthfulness and Statements to Others,” prevents a lawyer from (1) knowingly making a false statement of material fact or law to a third person or (2) failing to disclose the material fact to a third person when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client, unless disclosure is prohibited by Louisiana Ethics Rule 1.6.
2. New Lawyer Liability under Rule 9011
New §707(b)(4)(A) provides that the court, on its own initiative or on the motion of a party in interest, in accordance with the procedures described in Rule 9011 of the Federal Rules of Bankruptcy Procedure, may order the attorney for the debtor to reimburse the trustee for all reasonable costs in prosecuting a motion filed under §707(b), to force the debtor to convert a Chapter 7 case to a Chapter 13 case (or face dismissal based upon “substantial abuse,”) including reasonable attorneys’ fees, if - - (i) a trustee files a motion for dismissal or conversion under this subsection; and (ii) the court - - (I) grants such motion; and (II) finds that the action of the attorney for the debtor in filing a case under Chapter 7 of the Bankruptcy Code violated Rule 9011 of the Federal Rules of Bankruptcy Procedure.
Rule 9011 of the Federal Rules of Bankruptcy Procedure incorporates Rule 11 of the Federal Rules of Civil Procedure and provides:
“(a) Signature. Every Pleading, written motion, and other paper shall be signed by at least on attorney of record in the attorney’s individual name, or, if the party is not represented by an attorney, shall be signed by the party…
(b) Representations to Court. By presenting to the court (whether by signing, filing, submitting, or later advocating) a pleadings, written motion, or other paper, an attorney or unrepresented party is certifying that to the best of the person’s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances, -
(1) it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation;
(2) the claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law;
(3) the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery; and
(4) the denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on a lack of information or belief.
(c) Sanctions. If, after notice and a reasonable opportunity to respond, the court determines that subdivision (b) has been violated, the court may, subject to the conditions stated below, impose an appropriate sanction upon the attorneys, law firms, or parties that have violated subdivision (b) or are responsible for the violation.”
Also, New §707(b)(4)(B) provides that if the court finds that the attorney for the debtor violated Rule 9011 of the Federal Rules of Bankruptcy Procedure, the court, on its own initiative or on the motion of a party in interest, and in accordance with such procedures, may order - - (i) the assessment of an appropriate civil penalty against the attorney for the debtor; and (ii) the payment of such civil penalty to the trustee, the United States Trustee (or the bankruptcy administrator, if any).
Further, New §526 imposes liability on an attorney (“debt relief agency”) for a debtor (an “assisted person” – one whose debts are “primarily consumer debts” and the value whose “nonexempt property has a value less than $150,000”) for violation of the notice, engagement contract and advertising requirements of Sections 526, 527 and 528, which is discussed in more detail infra.
Because of the potential liability for an attorney representing a debtor, a lawyer needs to be thoroughly familiar with the state’s ethical rules, code of professionalism and the new additional requirements of the debtor, which will require substantial assistance by the attorney to the debtor and act with haste and diligence to meet certain new deadlines and actions required by the New BAPCPA Act. See §4.11 for the ABA’s analysis of these issues.
3. Prefiling Issues
a. New “Means Testing” for Chapter 7 Debtors. New §707(b)(1), (2) & (3) provide new means testing for Chapter 7 debtors to ensure their eligibility to gain relief under Chapter 7. This formula and calculation is very, very complicated and will require the assistance of the attorney for the debtor in making sure that the calculations are done correctly. Obviously this will have to be done before the bankruptcy is filed in order to ensure that Chapter 7 relief is available to the debtor before the petition commencing the case is filed. See Chapter I, supra, for a detailed discussion of this issue
b. Pre-bankruptcy Credit Counseling. With limited exceptions, all individual debtors must obtain within 180 days before filing bankruptcy an individual or group briefing from an approved nonprofit budget and credit counseling agency, and the briefing, at a minimum, must outline the opportunities for available credit counseling and assist such individual in performing a related budget analysis under New §109(h). Also, unless an exception is applicable, as a condition to filing bankruptcy, the debtor must file with the court a certificate from the agency confirming the services were rendered, and, if a debt repayment plan was created, the debtor must file that plan with the bankruptcy court.
Thus, before an attorney can file a bankruptcy for a debtor, the attorney must insure that the debtor has obtained the necessary pre-filing credit counseling and obtained a certificate of such.
c. New Attorney Notice to Debtor. New §342(b) requires that, before commencement of case, the clerk of the bankruptcy court (and, thus, arguably counsel for debtor also) give an extensive notice to the debtor. Also, New §521(a)(B)(iii) requires that the attorney for the debtor file a certificate that the debtor has received the notice required by §342(b). Translation: the debtor’s attorney must insure pre-filing execution of this Notice document and then file it with the court.
Further, New §527 requires that the attorney (who is defined therein as a “debt relief agency”) who provides the bankruptcy assistance to a debtor (who is an “assisted person”- one whose debts consist of primarily consumer debts and whose nonexempt property does not exceed in value the sum of $150,000) must also provide an extensive written notice under §342(b)(1) to the debtor (not later than 3 business days after the first date on which the attorney first offers to provide any bankruptcy assistance services to the debtor), and an extensive form of notice which is set out in §527. This notice must provide the debtor with (1) the notice required by §342(b)(1) and (2) certain warnings about the requirements and duties imposed upon debtors by the bankruptcy law and rules of procedure.
d. New Documents Filed with Schedules. New §521(a)(1)&(h) requires that, in addition to the schedules of assets of liabilities, the schedule of current income and current expenditures, the statement of the debtor’s financial affairs, a “picture” identification and the certificate of the attorney for the debtor that the debtor received the notice required by §342(b), the debtor must file copies of all payment advices or other evidence of payment of income to the debtor received within 60 days before the date of filing of the petition from any employer of the debtor. Further, §521(a)(1) required the debtor to file (1) a statement of the amount of the monthly net income (itemized to show how the amount is calculated) and (2) a statement disclosing any reasonably anticipated increase(s) in income and expenditures over the 12-month period following the date of the filing of the petition.
Although the schedules and the other documents do not have to be filed until 15 days after filing of the bankruptcy petition, it is important that the attorney for the debtor insure that all of the necessary information and documents are obtained from the debtor before the petition is filed. Otherwise, the attorney for the debtor may be subjected to potential liability. Further, if the information is not obtained prior to filing, if the debtor is an individual, if the debtor does not cooperate with the attorney after filing, and if the attorney for the debtor is therefore not able to file the schedules and other required documents within 45 days after filing of the bankruptcy petition, the case will be dismissed automatically on the 46th day following filing of the petition under New §521(i). Such action and actions may create liability for the attorney to the debtor based on negligence under New §526©(2).
§4.05. REAFFIRMATIONS – NEW RULES
Amendments to §524 and a new subsection (k) at the end specifically set out disclosures that must be in reaffirmation agreements – mandatory language—referred to in §524(c). These disclosures include an explanation about rescinding the agreement and the obligations incurred by a reaffirmation agreement, and the specific contents for such agreements are set out in this subsection. The administrative office of the U.S. Courts will develop a national form in conformity with these additional disclosure requirements.
The following text as prepared by Richardo I. Kilpatrick and Kilpatrick & Associates, P.C. on the amendments to the Bankruptcy Code concerning notices to creditors and reaffirmations.
NOTICES AND REAFFIRMATIONS UNDER BAPCPA
By: Richardo I. Kilpatrick
Auburn Hills, Michigan
Copyright © 2005 by Richardo I. Kilpatrick. All rights reserved.
1. NOTICES
One of the most significant changes as a result of the amendments is in the area of notification to creditors. Section 342 has been amended to address the concerns voiced by creditors resulting from lack of notice and in some cases denial of due process. Some creditors indicated that debtors would serve P.O. Boxes or remote locations to delay notice to the institutions. Other creditors sought the ability to direct mail to a central depository. The changes to § 342 will assist in addressing these concerns.
a. New §342(c)
• §342(c)(1)
• Requires that the debtor include the last four digits of the debtor’s tax identification number on all notices.
Comment: This section was added to assist creditors in identifying the debtor involved in the filing.
• §342(c)(2)(A) provides as follows:
• If within 90 days before the commencement of a voluntary case, a creditor supplies the debtor in at least 2 communications sent to the debtor with the current account number of the debtor and the address at which such creditor requests to receive correspondence, then any notice required by this title to be sent by the debtor to such creditor shall be sent to such address and shall include such account number.
Comment: Creditors are authorized to include on the monthly statements forwarded to account holders an indication of the address to be utilized for receiving “correspondence”. It is important that creditors who choose to utilize this provision include the specific term “correspondence” when specifying the address.
• §342(c)(2)(B)
• If a creditor would be in violation of applicable nonbankruptcy law by sending any such communication within such 90 day period and if such creditor supplies the debtor in the last 2 communications with the current account number of the debtor and the address at which such creditor requests to receive correspondence, then any notice required by this title to be sent by the debtor to such creditor shall be sent to such address and shall include such account number.
Comment: If it would be a violation under the Fair Debt Collection Practices Account (FDCPA); state consumer protection statutes; the debtor claims that he or she will be filing a bankruptcy case, has consulted an attorney or otherwise requires a creditor to cease and desist communications; this provision requires the debtor to forward correspondence to the address specified by such creditor in communications sent prior the 90 day period.
• §342(c)
• If the notice concerns an amendment that adds a creditor to the schedules of assets and liabilities, the debtor shall include the full taxpayer identification number in the notice sent to that creditor, but the debtor shall include only the last 4 digits of the taxpayer identification number in the copy of the notice filed with the court.
Comment: In any amendment that adds a creditor to the schedules of assets and liabilities; the debtor is required to include the debtor’s full taxpayer identification number in the notice sent to the affected creditor.
b. §342(e) NOTICE IN INDIVIDUAL CASES
• § 342(e)(1)
• In a case under chapter 7 or 13 of this title of a debtor who is an individual, a creditor at any time may both file with the court and serve on the debtor a notice of address to be used to provide notice in such case to such creditor.
• §342(e)(2)
• Any notice in such case required to be provided to such creditor by the debtor or the court later than 5 days after the court and the debtor receive such creditor’s notice of address, shall be provided to such address.
Comment: In any chapter 7 or 13 case a creditor may both file with the bankruptcy court and serve on the debtor a specification of the address to be used for notice to such creditor in the debtors case. No later than 5 days after the Court and debtor received such notice from the creditor of the address to be used, any Notice from the Court or debtor must be sent to that address.
c. §342(f) SPECIFICATION OF A CENTRAL LOCATION FOR NOTICE
• §342(f)(1)
• An entity may file with any bankruptcy court a notice of address to be used by all the bankruptcy courts or by particular bankruptcy courts, as so specified by such entity at the time such notice is filed, to provide notice to such entity in all cases under chapter 7 and 13 pending in the courts with respect to which such notice is filed, in which such entity is a creditor.
Comment: This allows the designation of a location or locations for creditors with central processing of bankruptcy cases; the entity (creditor) may file with any bankruptcy court the following:
• The address to be used by all or by particular bankruptcy courts
• The address to be used for notices in all pending 7 or 13 cases
• The Bankruptcy Noticing Center (BNC) is currently exploring methods to implement this provision
• §342(f)(2)
• In any case filed under chapter 7 or 13, any notice required to be provided by a court with respect to which a notice is filed under paragraph (1), to such entity later than 30 days after the filing of such notice under paragraph (1) shall be provided to such address unless with respect to a particular case a different address is specified in a notice filed and served in accordance with subsection (e).
Comment: Not later than 30 days after the filing of such notice set forth in §342(f)(1), the notice to creditor shall be sent to such address unless as to a particular case a different address is specified.
• §342(f)(3)
• A notice filed under paragraph (f)(1) may be withdrawn by such entity. d. OFFICE PROCEDURES AND SANCTIONS
• §342(g)(1)
• Notice provided to a creditor by the debtor or the court other than in accordance with this section (excluding this subsection) shall not be effective notice until such notice is brought to the attention of such creditor. If such creditor designates a person or an organizational subdivision of such creditor to be responsible for receiving notices under this title and establishes reasonable procedures so that such notices receivable by such creditor are to be delivered to such person or such subdivision, then a notice provided to such creditor other than in accordance with this section (excluding this subsection) shall not be considered to have been brought to the attention of such creditor until such notice is received by such person or such subdivision.
Comment: A Notice not in compliance with §§342(c)(e) or (f) shall not be effective until brought to the attention of the Creditor. If the Creditor designates a person or an organizational subdivision (department) to be responsible to receive notices under title 11 and establishes reasonable procedures so that such notices are to be delivered to such person or subdivision then a Notice not in compliance with §§342(c)(e) or (f) is not brought to the attention of the Creditor until received by the specified person or subdivision. The courts are authorized to review the procedures established to meet the requirement that creditors adopt reasonable procedures. Paper flows and mail room processes should be reviewed to insure that they are set up in a fashion to receive and properly distribute notices and pleadings.
• (g)(2)
• A monetary penalty may not be imposed on a creditor for a violation of a stay in effect under section 362(a) (including a monetary penalty imposed under section 362(k)) or for failure to comply with section 542 or 543 unless the conduct that is the basis of such violation or of such failure occurs after such creditor receives notice effective under this section of the order for relief.
Comment: No monetary sanction for §362(g)(violation of the stay), §542 (turnover of property) or §543 (turnover of property by custodian) until after the Creditor receives effective Notice.
Summary:
§342 as amended allows 3 separate methods for creditors to designate an address for receipt of notices and pleadings;
1. address for “correspondence’ on monthly statements - §342(c)(2)(A)
2. address for notice in a particular specific/individual case - §342(e)(1)
3. specification of a central address - §342(f)
It is important that the address for receipt of notices and pleadings be consistent to avoid multiple notices being sent to varied locations.
2. Reaffirmations: Disclosures and In Re Latanowich
a. New §524
• Reaffirmation practices came under attack in the late 90’s.
• One of the first cases was In Re Latanowich which called into question the reaffirmation practices of Sears.[69]
• In this case, the debtor asserted that Sears required the execution of a pro-se Reaffirmation Agreement that was neither filed with nor approved by the Bankruptcy Court as required by 11 U.S.C. 524© and 524(d). It was further alleged that Sears collected payments pursuant to this agreement.
• After Latanowich, there were a number of cases filed that questioned the practices of other creditors.[70]
• In resolving the reaffirmation cases, many creditors agreed to give the debtor a special notice advising the debtor of:
• The consequences of entering into a Reaffirmation Agreement;
• The fact that the Reaffirmation Agreement was a voluntary Agreement between the debtor and creditor and was not Compelled under Title 11;
• The legal ramifications attendant to entering into a Reaffirmation Agreement; and
• Emphasizing the rescission period.
▪ Subsequent to the reaffirmation class action cases, many jurisdictions adopted forms of Reaffirmation Agreements that required more specificity and detail through Local Rules or Standing Orders. The Reaffirmation Agreement came to be known as the modified B240 and required disclosure of: the interest rate; the minimum payment; disclosure of the property securing the debt; the basis for the reaffirmation; and in most instances, required an indication of the term over which the debtor would be repaying the reaffirmed debt.
▪ The special notices and the modified B240 Reaffirmation Agreements have been incorporated into the code through §524(k). 524(k) supplements the requirements to obtain a valid reaffirmation set forth in 524(c) and (d).
• 524(k)(2) states that the “disclosures made shall be made clearly and conspicuously and in writing.” It further provides that the terms “Amount Reaffirmed” and “Annual Percentage Rate” shall be disclosed more conspicuously than other terms. The requisite disclosure must also contain language that states “before agreeing to reaffirm a debt, review these important disclosures.”[71]
▪ Under Summary of Reaffirmation Agreement, the agreement must state “this summary is made pursuant to the requirements of the Bankruptcy Code.”[72]
• 524(k)(3) requires that Reaffirmation Agreements:
• Outline the rights of the debtor
• Specify the amount of the debt being reaffirmed
• The agreement must contain the term “amount reaffirmed” and must state “this amount is the total amount of the debt you have agreed to reaffirm by entering into this agreement . . . your credit agreement may obligate you to pay additional amounts which may come due after the date of this disclosure. Consult your credit agreement.”[73]
• Specify additional charges or costs imposed upon the debtor
• Specify the annual percentage rate, and simple interest rate
• As stated previously, this term must be more conspicuous than the other terms of the agreement[74]
• Provide a statement of the repayment schedule, if elected by the creditor
• Provide a description of the property to which the lien is attached in the case of a secured debt
• Specify the original purchase price of the items
• Provide a statement that the debtor has the right to consult an attorney
• Provide a statement that the reaffirmation agreement must be filed with the court before it becomes effective
• Provide a statement that the debtor has the right to rescind the reaffirmation within 60 days of filing
b. Additional Mandatory Disclosures
▪ 524(k)(3)(J) has been added to require the following statements:
1) Reaffirming a debt is a serious financial decision. The law requires you to take certain steps to make sure the decision is in your best interest. If these steps are not completed, the reaffirmation agreement is not effective, even though you have signed it.
2) This section also requires a statement advising the debtor to “read the disclosures in Part A carefully. Consider the decision to reaffirm carefully. Then, if you want to reaffirm, sign the reaffirmation agreement in Part B.”
3) If you were represented by an attorney during the negotiation of this agreement, your reaffirmation becomes effective upon the filing of the agreement with the Court, unless the reaffirmation is presumed to have an undue hardship as explained in Part D.
4) If you were not represented by an attorney during the negotiation of your reaffirmation agreement, it will not be effective unless the court approves it. The court will notify you of the hearing on your reaffirmation agreement. You must attend this hearing in bankruptcy court where the judge will review your reaffirmation agreement. The bankruptcy court must approve your reaffirmation agreement as consistent with your best interests, except that no court approval is required if your reaffirmation agreement is for a consumer debt secured by a mortgage, deed of trust, security deed, or other lien on your real property, like your home.
5) YOUR RIGHT TO RESCIND (CANCEL) YOUR REAFFIRMATION AGREEMENT. You may rescind (cancel) your reaffirmation agreement at any time before the bankruptcy court enters a discharge order or before the expiration of the 60-day period that begins on the date your reaffirmation agreement is filed with the court, which ever occurs later. To rescind (cancel) your reaffirmation agreement, you must notify the creditor that your reaffirmation agreement is rescinded (canceled).
6) WHAT ARE YOUR OBLIGATIONS IF YOU REAFFIRM THIS DEBT? A reaffirmed debt remains your personal legal obligation. It is not discharged in your bankruptcy case. That means that if you default on your reaffirmed debt after your bankruptcy case is over, your creditor may be able to take your property or your wages. Otherwise, your obligations will be determined by the reaffirmation agreement which may have changed the terms of the original agreement. For example, if you are reaffirming an open end credit agreement, the creditor may be permitted by that agreement or applicable law to change the terms of that agreement in the future under certain conditions.
7) ARE YOU REQUIRED TO ENTER INTO A REAFFIRMATION AGREEMENT BY ANY LAW? No, you are not required to reaffirm a debt by any law. Only agree to reaffirm a debt if it is in your best interest. Be sure you can afford the payments you agree to make.
8) WHAT IF YOUR CREDITOR HAS A SECURITY INTEREST OR LIEN? Your bankruptcy discharge does not eliminate any lien on your property. A ‘lien’ is often referred to as a security interest, deed of trust, mortgage or security deed. Even if you do not reaffirm and your personal liability on the debt is discharged, because of the lien your creditor may still have the right to take the security property if you do not pay the debt or if you default on the debt. If the lien is on an item of personal property that is exempt under your State’s law or that the Trustee has abandoned, you may be able to redeem the item rather than reaffirm the debt. To redeem, you make a single payment to the creditor equal to the current value of the security property, as agreed by the parties or determined by the court.
c. Certification of Debtor’s Attorney
▪ 524(k)(5)(A) requires the debtor’s attorney to certify the following in reaffirmation agreements:
o He/she is the attorney for the Debtor and represented this Debtor during the course of negotiating this Reaffirmation Agreement;
o That the agreement represents a fully informed and voluntary agreement by the Debtor and does not impose an undue hardship on the Debtor or any dependent of the Debtor;
o He/She has fully advised the Debtor of the legal effect and consequences of this Reaffirmation Agreement including but not limited to a default under such agreement.
▪ 524(k)(5)(B)
o If a presumption of undue hardship has been established the certification shall state that in the opinion of the attorney the debtor is able to make the payment
o Must also include signature of Debtor’s attorney and the date signed
o The requirement for debtors attorneys to certify that the debtor can make the payments due on the reaffirmed debt will lead to some attorneys not executing the declaration.
d. Debtor’s Statement in Support of the Reaffirmation Agreement
▪ 524(k)(6)(A) requires the following statement by the debtor:
I believe this reaffirmation agreement is in my best interest and will not impose an undue hardship on my dependents or me. I can afford to make the payments on the reaffirmed debt because my monthly income (take home pay plus any other income received is $_________, and my actual current monthly expenses including monthly payments on post-bankruptcy debt and other reaffirmation agreements total $_______, leaving $_________ to make the required payments on this reaffirmed debt. I understand that if my income less my monthly expenses does not leave enough to make the payments, this reaffirmation agreement is presumed to be an undue hardship and must be reviewed by the court. However, this presumption may be overcome if I explain to the satisfaction of the court how I can afford to make payments here: ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
I received a copy of the Reaffirmation Disclosure Statement in Part A and a completed and signed reaffirmation agreement.
▪ If the debtor is not represented by an attorney, in negotiation the reaffirmation agreement 524(k)(7) requires that the debtor file a Motion for Court Approval.
▪ The Motion must state:
o I am not represented by an attorney in connection with this reaffirmation agreement.
o I believe this reaffirmation agreement is in my best interest based on the income and expenses I have disclosed in my Statement of Support of this affirmation agreement.
o Therefore, I ask the court for an order approving this reaffirmation agreement.
• If the court grants the debtor’s motion and approves the reaffirmation agreement, the court order must state the following:
o The court grants the debtor’s motion and approves the reaffirmation agreement described above.
• §524(l) states that “notwithstanding any other provision of this title, the following shall apply:”
o A creditor may accept payments from the debtor before and after the filing of an agreement of the kind specified in subsection (c) with the court;
o A creditor may accept payments from a debtor under such agreement that the creditor believes in good faith to be effective;
o The requirements in subsections (c)(2) and (k) shall be satisfied if the disclosures required under those subsections are given in good faith.
e. Presumption of Undue Hardship
▪ Pursuant to 524(m)(2), a reaffirmation agreement is presumed to be an undue hardship on the debtor, until 60 days after it is filed with the court, if the debtor’s monthly income less the debtor’s monthly expenses as shown on the debtor’s statement in support of the agreement is less than the scheduled payments on the reaffirmed debt.
▪ This presumption may be rebutted in writing by the debtor if the debtor’s statement contains an explanation that identifies additional sources of funds to make the scheduled reaffirmation payments.
▪ If the presumption is not rebutted to the court’s satisfaction, then the court may disapprove the reaffirmation agreement.
▪ However, no reaffirmation agreement will be disapproved without notice and a hearing and this section mandates the conclusion of this hearing before the entry of the debtor’s discharge.
3. Forms
The following forms were prepared by Richardo I. Kilpatrick and Kilpatrick & Associates, P.C. Copyright © by Richardo I. Kilpatrick. All Rights Reserved.
[Forms to follow, starting on the next page]
a. Form 1 – Security Interest
UNITED STATES BANKRUPTCY COURT
IN THE MATTER OF:
[INSERT DEBTORS NAME]
Case No.
Honorable Chapter 7
Debtor.
___________________________/
REAFFIRMATION AGREEMENT
PART A: DISCLOSURE STATEMENT
Before agreeing to reaffirm a debt, review these important disclosures:
Summary of Reaffirmation Agreement. This Summary is made pursuant to the requirements of the Bankruptcy Code.
|AMOUNT REAFFIRMED: |ANNUALPERCENTAGE RATE: |
| | |
|$_________________________________ |________% |
| | |
|This is the amount of debt you have agreed to reaffirm. Your credit | |
|agreement may obligate you to pay additional amounts, which may come | |
|due after the date of this disclosure statement. Consult your credit| |
|agreement. | |
| | |
|The “AMOUNT REAFFIRMED” disclosed above includes the following fees | |
|and costs: | |
| | |
|Attorney Fees: $______________________________ | |
|Costs: $______________________________ | |
Consumer Disclosure: Security Interest
( A security interest of lien in goods or property is asserted over the debt that you are reaffirming. The items subject to this security interest are:
Items: _____________________________ Original Purchase Price: _______________
REPAYMENT SCHEDULE
( Your first payment in the amount of _______________ is due on _______________, but the future payment amount may be different. Consult your reaffirmation agreement or credit agreement as applicable.
( Your payment schedule will consist of approximately ______ payments in the amount of _________to be made on the _______ of every month.
NOTE: When this disclosure refers to what a creditor ‘may’ do, it does not use the word ‘may’ to give the creditor specific permission. The word ‘may’ is used to tell you what might occur if the law permits the creditor to take the action. If you have questions about your reaffirming a debt or what the law requires, consult with the attorney who helped you negotiate this agreement reaffirming a debt. If you don’t have an attorney helping you, the judge will explain the effect of your reaffirming a debt when the hearing on the reaffirmation agreement is held.
Reaffirming a debt is a serious financial decision. The law requires you to take certain steps to make sure the decision is in your best interest. If these steps are not completed, the reaffirmation agreement is not effective, even though you have signed it.
1. Read the disclosures in this Part A carefully. Consider the decision to reaffirm carefully. Then, if you want to reaffirm, sign the reaffirmation agreement in Part B (or you may use a security agreement you and your creditor agree on).
2. Complete and sign Part D and be sure you can afford to make the payments you are agreeing to make and have received a copy of the disclosure statement and a completed and signed reaffirmation agreement.
3. If you were represented by an attorney during the negotiation of your reaffirmation agreement, the attorney must have signed the certification in Part C.
4. If you were not represented by an attorney during the negotiation of your reaffirmation agreement, you must have completed and signed Part E.
5. The original of this disclosure statement must be filed with the court by you or your creditor. If a separate reaffirmation agreement (other than the one in Part B) has been signed, it must be attached.
6. If you were represented by an attorney during the negotiation of your reaffirmation agreement, your reaffirmation agreement becomes effective upon filing with the court unless the reaffirmation is presumed to be an undue hardship as explained in Part D.
7. If you were not represented by an attorney during the negotiation of your reaffirmation agreement, it will not be effective unless the court approves it. The court will notify you of the hearing on your reaffirmation agreement. You must attend this hearing in bankruptcy court where the judge will review your reaffirmation agreement. The bankruptcy court must approve your reaffirmation agreement as consistent with your best interests, except that no court approval is required if your reaffirmation agreement is for a consumer debt secured by a mortgage, deed of trust, security deed, or other lien on your real property, like your home.
YOUR RIGHT TO RESCIND (CANCEL) YOUR REAFFIRMATION AGREEMENT. You may rescind (cancel) your reaffirmation agreement at any time before the bankruptcy court enters a discharge order or before the expiration of the 60-day period that begins on the date your reaffirmation agreement is filed with the court, which ever occurs later. To rescind (cancel) your reaffirmation agreement, you must notify the creditor that your reaffirmation agreement is rescinded (or canceled).
WHAT ARE YOUR OBLIGATIONS IF YOU REAFFIRM THIS DEBT? A reaffirmed debt remains your personal legal obligation. It is not discharged in your bankruptcy case. That means that if you default on your reaffirmed debt after your bankruptcy case is over, your creditor may be able to take your property or your wages. Otherwise, your obligations will be determined by the reaffirmation agreement which may have changed the terms of the original agreement. For example, if you are reaffirming an open end credit agreement, the creditor may be permitted by that agreement or applicable law to change the terms of that agreement in the future under certain conditions.
ARE YOU REQUIRED TO ENTER INTO A REAFFIRMATION AGREEMENT BY ANY LAW? No, you are not required to reaffirm a debt by any law. Only agree to reaffirm a debt if it is in your best interest. Be sure you can afford the payments you agree to make.
WHAT IF YOUR CREDITOR HAS A SECURITY INTEREST OR LIEN? Your bankruptcy discharge does not eliminate any lien on your property. A ‘lien’ is often referred to as a security interest, deed of trust, mortgage or security deed. Even if you do not reaffirm and your personal liability on the debt is discharged, because of the lien your creditor may still have the right to take the security property if you do not pay the debt or default on it. If the lien is on an item of personal property that is exempt under your State’s law or that the Trustee has abandoned, you may be able to redeem the item rather than reaffirm the debt. To redeem, you make a single payment to the creditor equal to the current value of the security property, as agreed by the parties or determined by the court.
PART B: REAFFIRMATION AGREEMENT
I/we (hereinafter “I” shall refer to debtor and co-debtor) agree to reaffirm the debts arising under the credit agreement described below.
|BRIEF DESCRIPTION OF CREDIT AGREEMENT: |
| |
|Contract Date:______________________; Collateral:____________________________ |
| |
|Account No.:________________________; |
| |
|FOR THE ANNUAL PERCENTAGE RATE AND AMOUNT REAFFIRMED, SEE THE DISCLOSURE STATEMENT IN PART A. |
I agree to reaffirm the Credit Agreement described above and agree to be bound by all the terms and conditions of the Credit Agreement, which is hereby incorporated by reference. I agree to the “ANNUAL PERCENTAGE RATE” DISCLOSED IN PART A. I agree to pay the “AMOUNT REAFFIRMED” DISCLOSED IN PART A. I agree to make monthly payments as described in the REPAYMENT SCHEDULE DISCLOSED IN PART A each month until the debt has been satisfied. I waive any defense that I have to the indebtedness due under the Credit Agreement described above by reason of my bankruptcy or otherwise.
Description of any changes to the credit agreement made as part of this reaffirmation agreement:
________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ _
Payments on this debt were in default on the date on which this bankruptcy was filed. I agree to cure arrearages of $________________ as follows:
IF YOU DECIDE TO EXERCISE YOUR RIGHT TO RESCIND THIS REAFFIRMATION AGREEMENT THE NOTICE OF RESCISSION MAY BE SENT TO THE CREDITOR AT THE FOLLOWING ADDRESS:
___________________________
Date of Borrower/Co-Borrower Signature: _________________________
Signature: ___________________________ _____________________________
Borrower (Debtor) Co-borrower (Co-Debtor)
Accepted by Creditor by Attorney or Agent for Creditor: ______________________
Date of Creditor Acceptance: ______________________
PART C: CERTIFICATION OF DEBTOR’S ATTORNEY
I hereby certify that:
1) This agreement represents a fully informed and voluntary agreement by the debtor,
2) This agreement does not impose an undue hardship on the Debtor or any dependent of the debtor; and
3) I have fully advised the debtor of the legal effect and consequences of this agreement and any default under this agreement.
If a presumption of undue hardship has been established with respect to this agreement I am of the opinion that the debtor is able to make the payments as specified in this reaffirmation agreement.
Signature of Debtor’s Attorney: ___________________________ Date: ___________________
(TYPED OR PRINTED NAME) _________________, Esq. (P )
PART D: DEBTOR’S STATEMENT IN SUPPORT OF REAFFIRMATION AGREEMENT
1. I believe this reaffirmation agreement will not impose an undue hardship on my dependents or me. I can afford to make the payments on the reaffirmed debt because my monthly income (take home pay plus any other income received is $__________________, and my actual current monthly expenses including monthly payments on post-bankruptcy debt and other reaffirmation agreements total $_________________, leaving $___________________ to make the required payments on this reaffirmed debt. I understand that if my income less my monthly expenses does not leave enough to make the payments, this reaffirmation agreement is presumed to be an undue hardship on me and must be reviewed by the court. However, this presumption may be overcome if I explain to the satisfaction of the court how I can afford to make payments here: ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
I received a copy of the Reaffirmation Disclosure Statement in Part A and a completed and signed reaffirmation agreement.
Debtor Signs: _________________________ Date: __________________________
PART E: MOTION FOR COURT APPROVAL
UNITED STATES BANKRUPTCY COURT
IN THE MATTER OF:
[INSERT DEBTORS], Case No.
Hon.
Debtor. Chapter 7
________________________________/
debtor Motion for approval of reaffirmation agreement
Now comes, ______________, Debtor(s) herein, and in support of this Motion for an Order Approving Reaffirmation of the debt owed to Creditor, states as follows:
1. I (we), the Debtor(s), affirm the following to be true and correct.
2. I (we) am (are) not represented by an attorney in connection with this reaffirmation agreement.
3. I (we) believe this reaffirmation agreement is in my (our) best interest based on the income and expenses I (we) have disclosed in my (our) Statement of Support of this reaffirmation agreement.
4. I (we) believe this reaffirmation agreement is in my (our) best interest based on the following additional relevant reasons the court should consider: _______________________________________________________________________________________________________________________________________________________________________________________________________________________.
THEREFORE, I (we) ask the court for an order approving this reaffirmation agreement.
_________________________________
Debtor
_________________________________
Dated:__________ Debtor
UNITED STATES BANKRUPTCY COURT
IN THE MATTER OF:
[INSERT DEBTORS], Case No.
Hon.
Debtor. Chapter 7
________________________________/
ORDER APPROVING REAFFIRMATION OF DISCHARGEABLE
CONSUMER DEBT
This matter having come before the Court on the Motion of the above referenced Debtor to reaffirm a secured indebtedness to Creditor, and the Court being fully advised in the premises:
it is hereby ordered that the court grants the debtor’s motion and approves the reaffirmation agreement described above.
_____________________________________
HONORABLE
UNITED STATES BANKRUPTCY COURT
IN THE MATTER OF:
[INSERT DEBTORS], Case No.
Hon.
Debtor. Chapter 7
________________________________/
NOTICE OF HEARING ON DEBTOR MOTION FOR
COURT APPROVAL OF REAFFIRMATION AGREEMENT
TO ALL INTERESTED PARTIES:
Please take notice that the above entitled cause has been set for hearing on Debtor Motion for Approval of Reaffirmation Agreement on the _____ day of ______________, 2005, at _______ o’clock in the _____noon, before the Honorable _____________, United States Bankruptcy Court, _____________, Courtroom _____, ________________.
____________________________________
CLERK TO THE HONORABLE
b. Form 2 – Dual Interest
UNITED STATES BANKRUPTCY COURT
IN THE MATTER OF:
[INSERT DEBTORS NAME]
Case No.
Honorable Chapter 7
Debtor(s).
___________________________/
REAFFIRMATION AGREEMENT
PART A: DISCLOSURE STATEMENT
Before agreeing to reaffirm a debt, review these important disclosures:
Summary of Reaffirmation Agreement. This Summary is made pursuant to the requirements of the Bankruptcy Code.
|AMOUNT REAFFIRMED: |ANNUAL PERCENTAGE RATE: |
| | |
|1. $___________________________ |1. ________% |
| | |
|2. $___________________________ |2. ________% |
| | |
| | |
|These are the amount of debt you have agreed to reaffirm. Your | |
|Credit Agreement may obligate you to pay additional amounts, | |
|which may come due after the date of this disclosure statement. |Different interest rates may apply as indicated above to each of |
|Consult your Credit Agreement. |the different balances disclosed under the AMOUNT REAFFIRMED. |
| | |
|The “AMOUNT REAFFIRMED” disclosed above includes the following | |
|fees and costs: | |
| | |
|Attorney Fees: $___________________________ | |
|Costs: $___________________________ | |
Consumer Disclosure: Security Interest
A security interest of lien in goods or property is asserted over the debt that you are reaffirming. The items subject to this security interest are:
Items: __________________________ Original Purchase Price: __________________
Original Amount of Loan: __________________
REPAYMENT SCHEDULE
Choose one of the following:
Your first payment in the amount of $ _______________ is due on __________, for_______________________________ but the future payment amount may be different. Consult your reaffirmation agreement or credit agreement as applicable.
Your payment schedule will be approximately _____ payments in the amount of $________to be made on the ____ of every month.
NOTE: When this disclosure refers to what a creditor ‘may’ do, it does not use the word ‘may’ to give the creditor specific permission. The word ‘may’ is used to tell you what might occur if the law permits the creditor to take the action. If you have questions about your reaffirming a debt or what the law requires, consult with the attorney who helped you negotiate this agreement reaffirming a debt. If you don’t have an attorney helping you, the judge will explain the effect of your reaffirming a debt when the hearing on the reaffirmation agreement is held.
Reaffirming a debt is a serious financial decision. The law requires you to take certain steps to make sure that the decision is in your best interest. If these steps are not completed, the reaffirmation agreement is not effective, even though you have signed it.
1. Read the disclosures in this Part A carefully. Consider the decision to reaffirm all of these debts carefully. Then, if you want to reaffirm, sign the reaffirmation agreement in Part B (or you may use a separate agreement you and your creditor agree on).
2. Complete and sign Part D and be sure you can afford to make the payments you are agreeing to make and have received a copy of the disclosure statement and a completed and signed reaffirmation agreement.
3. If you were represented by an attorney during the negotiation of your reaffirmation agreement, the attorney must have signed the certification in Part C.
4. If you were not represented by an attorney during the negotiation of your agreement, you must have completed and signed Part E.
5. The original of this disclosure statement must be filed with the court by you or your creditor. If a separate reaffirmation agreement (other than the one in Part B) has been signed, it must be attached.
6. If you were represented by an attorney during the negotiation of your reaffirmation agreement, your reaffirmation becomes effective upon filing with the court unless the reaffirmation is presumed to be an undue hardship as explained in Part D.
7. If you were not represented by an attorney during the negotiation of your reaffirmation agreement, it will not be effective unless the court approves it. The court will notify you of the hearing on your reaffirmation agreement. You must attend this hearing in bankruptcy court where the judge will review your reaffirmation agreement. The bankruptcy court must approve your reaffirmation agreement as consistent with your best interests, except that no court approval is required if your reaffirmation agreement is for a consumer debt secured by a mortgage, deed of trust, security deed, or other lien on your real property, like your home.
YOUR RIGHT TO RESCIND (CANCEL) YOUR REAFFIRMATION AGREEMENT. You may rescind (cancel) your reaffirmation agreement at any time before the bankruptcy court enters a discharge order or before the expiration of the 60-day period that begins on the date your reaffirmation agreement is filed with the court, which ever occurs later. To rescind (cancel) your reaffirmation agreement, you must notify the creditor that your reaffirmation agreement is rescinded (or canceled).
WHAT ARE YOUR OBLIGATIONS IF YOU REAFFIRM THIS DEBT? A reaffirmed debt remains your personal legal obligation. It is not discharged in your bankruptcy case. That means that if you default on your reaffirmed debt’s after your bankruptcy case is over, your creditor may be able to take your property or your wages. Otherwise, your obligations will be determined by the reaffirmation agreement which may have changed the terms of the original agreement. For example, if you are reaffirming an open end credit agreement, the creditor may be permitted by that agreement or applicable law to change the terms of that agreement in the future under certain conditions.
ARE YOU REQUIRED TO ENTER INTO A REAFFIRMATION AGREEMENT BY ANY LAW? No, you are not required to reaffirm a debt by any law. Only agree to reaffirm a debt if it is in your best interest. Be sure you can afford the payments you agree to make.
WHAT IF YOUR CREDITOR HAS A SECURITY INTEREST OR LIEN? Your bankruptcy discharge does not eliminate any lien on your property. A ‘lien’ is often referred to as a security interest, deed of trust, mortgage or security deed. Even if you do not reaffirm and your personal liability on the debt is discharged, because of the lien your creditor may still have the right to take the security property if you do not pay the debt or if you default on it. If the lien is on an item of personal property that is exempt under your State’s law or that the Trustee has abandoned, you may be able to redeem the item rather than reaffirm the debt. To redeem, you make a single payment to the creditor equal to the current value of the security property, as agreed by the parties or determined by the court.
PART B: REAFFIRMATION AGREEMENT
I/we (hereinafter “I” shall refer to the Debtor and Co-Debtor) agree to reaffirm the debts arising under the credit agreement described below.
|BRIEF DESCRIPTION OF CREDIT AGREEMENT: |
| |
|Contract Date:_____________; Collateral:_________________________; |
| |
|Account No.:________________________; |
| |
|FOR THE ANNUAL PERCENTAGE RATE AND AMOUNT REAFFIRMED, SEE THE DISCLOSURE STATEMENT IN PART A. |
| |
| |
I agree to reaffirm the Credit Agreement described above and agree to be bound by all the terms and conditions of the Credit Agreement, which is hereby incorporated by reference. I agree to the “ANNUAL PERCENTAGE RATES” DISCLOSED IN PART A. I agree to pay the “AMOUNTS REAFFIRMED” DISCLOSED IN PART A. I agree to make monthly payments as described in the REPAYMENT SCHEDULE DISCLOSED IN PART A each month until the debts has been satisfied. I waive any defense that I have to the indebtedness due under the Credit Agreement described above by reason of my bankruptcy or otherwise.
Description of any changes to the credit agreement made as part of this reaffirmation agreement:
Payments on the ___________________, Account No.______________ were in default on the date on which this bankruptcy was filed. I agree to cure arrearages of $________________ as follows:
IF YOU DECIDE TO EXERCISE YOUR RIGHT TO RESCIND THIS REAFFIRMATION AGREEMENT THE NOTICE OF RESCISSION MAY BE SENT TO THE CREDITOR AT THE FOLLOWING ADDRESS:
___________________________
Date of Borrower/Co-Borrower Signature: _________________________
Signature: ___________________________ ______________________________
Borrower (Debtor) Co-borrower (Co-Debtor)
Date of Creditor Acceptance: ______________________
Accepted by Creditor Attorney or Agent for Creditor: ________________________________
PART C: CERTIFICATION OF DEBTOR’S ATTORNEY
I hereby certify, that:
4) This agreement represents a fully informed and voluntary agreement by the Debtor;
5) This agreement does not impose an undue hardship on the debtor or any dependent of the Debtor; and
6) I have fully advised the Debtor of the legal effect and consequences of this agreement and any default under this agreement.
If a presumption of undue hardship has been established with respect to this agreement I am of the opinion that the debtor is able to make the payments as specified in this reaffirmation agreement.
Signature of Debtor’s Attorney: ___________________________
Dated: _______ day of ________ 2005
(TYPED OR PRINTED NAME)_________________, Esq. (P )
PART D: DEBTOR’S STATEMENT IN SUPPORT OF REAFFIRMATION AGREEMENT
1. I believe this reaffirmation agreement will not impose an undue hardship on my dependents or me. I can afford to make the payments on the reaffirmed debt because my monthly income (take home pay plus any other income received) is $_________, and my actual current monthly expenses including monthly payments on post-bankruptcy debt and other reaffirmation agreements total $_______, leaving $_________ to make the required payments on these reaffirmed debts. I understand that if my income less my monthly expenses does not leave enough to make the payments, this reaffirmation agreement is presumed to be an undue hardship on me and must be reviewed by the court. However, this presumption may be overcome if I explain to the satisfaction of the court how I can afford to make payments here: ______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________.
2. I received a copy of the Reaffirmation Disclosure Statement in Part A and a completed and signed reaffirmation agreement.
Debtor Signs: __________________________Date:_____________________________
PART E: MOTION FOR COURT APPROVAL
UNITED STATES BANKRUPTCY COURT
IN THE MATTER OF:
[INSERT DEBTORS], Case No.
Hon.
Debtor(s). Chapter 7
________________________________/
debtor’S MOTION FOR APPROVAL OF reaffirmation AGREEMENT
Now comes, ______________, Debtor herein, and in support of this Motion for an Order Approving Reaffirmation of the debt owed to Creditor________, states as follows:
1. I (we), the Debtor(s), affirm the following to be true and correct.
2. I (we) am (are) not represented by an attorney in connection with this reaffirmation agreement.
3. I (we) believe this reaffirmation agreement is in my (our) best interest based on the income and expenses I (we) have disclosed in my (our) Statement in Support of this reaffirmation agreement.
4. I (we) believe this reaffirmation agreement is in my (our) best interest based on the following additional relevant reasons the court should consider:
____________________________________________________________________________________________________________________________________________________________.
THEREFORE, I (we) ask the court for an order approving this reaffirmation agreement.
_________________________________
Debtor
_________________________________
Dated:__________ Debtor
UNITED STATES BANKRUPTCY COURT
IN THE MATTER OF:
[INSERT DEBTORS], Case No.
Hon.
Debtor(s). Chapter 7
________________________________/
ORDER APPROVING REAFFIRMATION OF DISCHARGEABLE CONSUMER DEBT
This matter having come before the Court on the Motion of the above referenced Debtor to reaffirm a secured indebtedness to the Creditor_________ and the Court being fully advised in the premises:
it is hereby ordered that the Court grants the Debtor’s motion and approves the reaffirmation agreement described above.
___________________________________
HONORABLE
UNITED STATES BANKRUPTCY COURT
IN THE MATTER OF:
[INSERT DEBTORS], Case No.
Hon.
Debtor. Chapter 7
________________________________/
NOTICE OF HEARING ON DEBTOR MOTION FOR
COURT APPROVAL OF REAFFIRMATION AGREEMENT
TO ALL INTERESTED PARTIES:
Please take notice that the above entitled cause has been set for hearing on Debtor’s Motion for Approval of Reaffirmation Agreement on the _____ day of ______________, 2005, at ________ o’clock in the _____noon, before the Honorable _________________, United States Bankruptcy Court, _______________, Courtroom ,___________________.
______________________________________
CLERK TO THE HONORABLE
c. Form 5 – Open End 5% or More
UNITED STATES BANKRUPTCY COURT
IN THE MATTER OF:
[INSERT DEBTORS NAME]
Case No.
Honorable
Chapter 7
Debtor(s).
___________________________/
REAFFIRMATION AGREEMENT
Consumer Credit Disclosure—Open End Credit Plan:
PART A: DISCLOSURE STATEMENT
Before Agreeing to Reaffirm a debt, review these important disclosures:
Summary of Reaffirmation Agreement. This Summary is made pursuant to the requirements of the Bankruptcy Code.
|AMOUNT REAFFIRMED: |ANNUAL PERCENTAGE RATE: |
| | |
|$___________________________ |4.99% |
| | |
|This is the amount of debt you have agreed to reaffirm. Your | |
|Credit Agreement may obligate you to pay additional amounts, |Consumer Credit Disclosure—Open End Credit Extensions: |
|which may come due after the date of this disclosure statement. | |
|Consult your Credit Agreement. |The interest rate on your loan may be a variable interest rate |
| |which changes from time to time, so that the annual percentage |
|The “AMOUNT REAFFIRMED” disclosed above includes the following |rate disclosed here may be higher or lower. |
|fees and costs: | |
| | |
|Attorney Fees: $___________________________ | |
|Costs: $___________________________ | |
Consumer Disclosure: Security Interest
( A security interest of lien in goods or property is asserted over the debt that you are reaffirming. The items subject to this security interest are:
Items: __________________________ Original Purchase Price or Loan
Amount: _______________________
REPAYMENT SCHEDULE
Choose one of the following:
( Your first payment in the amount of $ _______________ is due on __________, but the future payment amount may be different. Consult your reaffirmation agreement or credit agreement as applicable.
( Your payment schedule will be approximately _____ payments in the amount of $________to be made on the ____ of every month.
NOTE: When this disclosure refers to what a creditor ‘may’ do, it does not use the word ‘may’ to give the creditor specific permission. The word ‘may’ is used to tell you what might occur if the law permits the creditor to take the action. If you have questions about your reaffirming a debt or what the law requires, consult with the attorney who helped you negotiate this agreement reaffirming a debt. If you don’t have an attorney helping you, the judge will explain the effect of your reaffirming a debt when the hearing on the reaffirmation agreement is held.
Reaffirming a debt is a serious financial decision. The law requires you to take certain steps to make sure that the decision is in your best interest. If these steps are not completed, the reaffirmation agreement is not effective, even though you have signed it.
1. Read the disclosures in this Part A carefully. Consider the decision to reaffirm carefully. Then, if you want to reaffirm, sign the reaffirmation agreement in Part B (or you may use a separate agreement you and your creditor agree on).
2. Complete and sign Part D and be sure you can afford to make the payments you are agreeing to make and have received a copy of the disclosure statement and a completed and signed reaffirmation agreement.
3. If you were represented by an attorney during the negotiation of your reaffirmation agreement, the attorney must have signed the certification in Part C.
4. If you were not represented by an attorney during the negotiation of your agreement, you must have completed and signed Part E.
5. The original of this disclosure statement must be filed with the court by you or your creditor. If a separate reaffirmation agreement (other than the one in Part B) has been signed, it must be attached.
6. If you were represented by an attorney during the negotiation of your reaffirmation agreement, your reaffirmation becomes effective upon filing with the court unless the reaffirmation is presumed to be an undue hardship as explained in Part D.
7. If you were not represented by an attorney during the negotiation of your reaffirmation agreement, it will not be effective unless the court approves it. The court will notify you of the hearing on your reaffirmation agreement. You must attend this hearing in bankruptcy court where the judge will review your reaffirmation agreement. The bankruptcy court must approve your reaffirmation agreement as consistent with your best interests, except that no court approval is required if your reaffirmation agreement is for a consumer debt secured by a mortgage, deed of trust, security deed, or other lien on your real property, like your home.
YOUR RIGHT TO RESCIND (CANCEL) YOUR REAFFIRMATION AGREEMENT. You may rescind (cancel) your reaffirmation agreement at any time before the bankruptcy court enters a discharge order or before the expiration of the 60-day period that begins on the date your reaffirmation agreement is filed with the court, which ever occurs later. To rescind (cancel) your reaffirmation agreement, you must notify the creditor that your reaffirmation agreement is rescinded (or canceled).
WHAT ARE YOUR OBLIGATIONS IF YOU REAFFIRM THIS DEBT? A reaffirmed debt remains your personal legal obligation. It is not discharged in your bankruptcy case. That means that if you default on your reaffirmed debt after your bankruptcy case is over, your creditor may be able to take your property or your wages. Otherwise, your obligations will be determined by the reaffirmation agreement which may have changed the terms of the original agreement. For example, if you are reaffirming an open end credit agreement, the creditor may be permitted by that agreement or applicable law to change the terms of that agreement in the future under certain conditions.
ARE YOU REQUIRED TO ENTER INTO A REAFFIRMATION AGREEMENT BY ANY LAW? No, you are not required to reaffirm a debt by any law. Only agree to reaffirm a debt if it is in your best interest. Be sure you can afford the payments you agree to make.
WHAT IF YOUR CREDITOR HAS A SECURITY INTEREST OR LIEN? Your bankruptcy discharge does not eliminate any lien on your property. A ‘lien’ is often referred to as a security interest, deed of trust, mortgage or security deed. Even if you do not reaffirm and your personal liability on the debt is discharged, because of the lien your creditor may still have the right to take the security property if you do not pay the debt or if you default on it. If the lien is on an item of personal property that is exempt under your State’s law or that the Trustee has abandoned, you may be able to redeem the item rather than reaffirm the debt. To redeem, you make a single payment to the creditor equal to the current value of the security property, as agreed by the parties or determined by the court.
PART B: REAFFIRMATION AGREEMENT
I/we (hereinafter “I” shall refer to the Debtor and Co-Debtor) agree to reaffirm the debts arising under the credit agreement described below.
|BRIEF DESCRIPTION OF CREDIT AGREEMENT: |
| |
|Contract Date:_____________; Collateral:_________________________; |
| |
|Account No.:________________________; |
| |
|FOR THE ANNUAL PERCENTAGE RATE AND AMOUNT REAFFIRMED, SEE THE DISCLOSURE STATEMENT IN PART A. |
I agree to reaffirm the Credit Agreement described above and agree to be bound by all the terms and conditions of the Credit Agreement, which is hereby incorporated by reference. I agree to the “ANNUAL PERCENTAGE RATE” DISCLOSED IN PART A. I agree to pay the “AMOUNT REAFFIRMED” DISCLOSED IN PART A. I agree to make monthly payments as described in the REPAYMENT SCHEDULE DISCLOSED IN PART A each month until the debt has been satisfied. I waive any defense that I have to the indebtedness due under the Credit Agreement described above by reason of my bankruptcy or otherwise.
Description of any changes to the credit agreement made as part of this reaffirmation agreement:
Payments on this debt were in default on the date on which this bankruptcy was filed. I agree to cure arrearages of $________________ as follows:
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
IF YOU DECIDE TO EXERCISE YOUR RIGHT TO RESCIND THIS REAFFIRMATION AGREEMENT THE NOTICE OF RESCISSION MAY BE SENT TO THE CREDITOR AT THE FOLLOWING ADDRESS:
___________________________
Date of Borrower/Co-Borrower Signature: _________________________
Signature: ______________________________ _____________________________
Borrower (Debtor) Co-borrower (Co-Debtor)
Date of Creditor Acceptance: ______________________
Accepted by Creditor Attorney or Agent for Creditor: ________________________
PART C: CERTIFICATION OF DEBTOR’S ATTORNEY
I hereby certify, that:
1) This agreement represents a fully informed and voluntary agreement by the Debtor;
2) This agreement does not impose an undue hardship on the Debtor or any dependent of the Debtor; and
3) I have fully advised the Debtor of the legal effect and consequences of this agreement and any default under this agreement.
If a presumption of undue hardship has been established with respect to this agreement I am of the opinion that the debtor is able to make the payments as specified in this reaffirmation agreement.
Signature of Debtor’s Attorney: ___________________________
Dated: _______ day of ________ 2005
(TYPED OR PRINTED NAME)_________________, Esq. (P )
PART D: DEBTOR’S STATEMENT IN SUPPORT OF REAFFIRMATION AGREEMENT
1. I believe this reaffirmation agreement will not impose an undue hardship on my dependents or me. I can afford to make the payments on the reaffirmed debt because my monthly income (take home pay plus any other income received) is $_________, and my actual current monthly expenses including monthly payments on post-bankruptcy debt and other reaffirmation agreements total $_______, leaving $_________ to make the required payments on this reaffirmed debt. I understand that if my income less my monthly expenses does not leave enough to make the payments, this reaffirmation agreement is presumed to be an undue hardship on me and must be reviewed by the court. However, this presumption may be overcome if I explain to the satisfaction of the court how I can afford to make payments here: ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
2. I received a copy of the Reaffirmation Disclosure Statement in Part A and a completed and signed reaffirmation agreement.
Debtor Signature: __________________________ Date: _________________________
Co Debtor Signature: __________________________ Date: ______________________
PART E: MOTION FOR COURT APPROVAL
UNITED STATES BANKRUPTCY COURT
IN THE MATTER OF:
[INSERT DEBTORS], Case No.
Hon.
Chapter 7
Debtor(s).
________________________________/
debtor’S MOTION FOR APPROVAL OF reaffirmation AGREEMENT
Now comes, ______________, Debtor herein, and in support of this Motion for an Order Approving Reaffirmation of the debt owed to Creditor______, states as follows:
1. I (we), the Debtor(s), affirm the following to be true and correct.
2. I (we) am (are) not represented by an attorney in connection with this reaffirmation agreement.
3. I (we) believe this reaffirmation agreement is in my (our) best interest based on the income and expenses I (we) have disclosed in my (our) Statement in Support of this reaffirmation agreement.
4. I (we) believe this reaffirmation agreement is in my (our) best interest based on the following additional relevant reasons the court should consider:
WHEREFORE, I (we) ask the court for an order approving this reaffirmation agreement.
__________________________
Debtor
___________________________
Debtor
Dated:___________________
UNITED STATES BANKRUPTCY COURT
IN THE MATTER OF:
[INSERT DEBTORS],
Case No.
Hon.
Chapter 7
Debtor(s).
________________________________/
ORDER APPROVING REAFFIRMATION OF DISCHARGEABLE CONSUMER DEBT
This matter having come before the Court on the Motion of the above referenced Debtor to reaffirm a secured indebtedness to the Creditor______ and the Court being fully advised in the premises:
it is hereby ordered that the Court grants the Debtor’s motion and approves the reaffirmation agreement described above.
________________________________
Honorable
UNITED STATES BANKRUPTCY COURT
IN THE MATTER OF:
[INSERT DEBTORS],
Case No.
Hon.
Chapter 7
Debtor.
________________________________/
NOTICE OF HEARING ON DEBTOR MOTION FOR
COURT APPROVAL OF REAFFIRMATION AGREEMENT
TO ALL INTERESTED PARTIES:
Please take notice that the above entitled cause has been set for hearing on Debtor’s Motion for Approval of Reaffirmation Agreement on the _____ day of ______________, 2005, at ________ o’clock in the _____(AM/PM), before the Honorable _________________, United States Bankruptcy Court, _______________, Courtroom ,___________________.
____________________________________________
CLERK TO THE HONORABLE
d. Form 6 – Open End Simple Interest
UNITED STATES BANKRUPTCY COURT
IN THE MATTER OF:
[INSERT DEBTORS NAME]
Case No.
Honorable
Chapter 7
Debtor.
___________________________/
REAFFIRMATION AGREEMENT
Consumer Credit Disclosure—Open End Credit Plan:
PART A: DISCLOSURE STATEMENT
Before agreeing to reaffirm a debt, review these important disclosures:
Summary of Reaffirmation Agreement. This Summary is made pursuant to the requirements of the Bankruptcy Code.
|AMOUNT REAFFIRMED: |ANNUAL PERCENTAGE RATE: |
| | |
|$___________ |4.99% |
| | |
|This is the amount of debt you have agreed to reaffirm. Your Credit | |
|Agreement may obligate you to pay additional amounts, which may come due | |
|after the date of this disclosure statement. Consult your Credit Agreement.| |
| | |
|The “AMOUNT REAFFIRMED” disclosed above includes the following fees and | |
|costs: | |
| | |
|Attorney Fees: $_______________________ | |
|Costs: $___________________________ | |
Consumer Disclosure: Security Interest
( If this box is checked, a security interest of lien in goods or property is asserted over the debt that you are reaffirming. The items subject to this security interest are:
Items: __________________________ Original Purchase Price:_________________
Original Amount of Loan: ________________
REPAYMENT SCHEDULE
( Your first payment in the amount of _______________ is due on __________, but the future payment amount may be different. Consult your reaffirmation agreement or credit agreement as applicable.
( Your payment schedule will consist of approximately____ payments in the amount of ______to be made on the ____ of every month.
NOTE: When this disclosure refers to what a creditor ‘may’ do, it does not use the word ‘may’ to give the creditor specific permission. The word ‘may’ is used to tell you what might occur if the law permits the creditor to take the action. If you have questions about your reaffirming a debt or what the law requires, consult with the attorney who helped you negotiate this agreement reaffirming a debt. If you do not have an attorney helping you, the judge will explain the effect of your reaffirming a debt when the hearing on the reaffirmation agreement is held.
Reaffirming a debt is a serious financial decision. The law requires you to take certain steps to make sure that the decision is in your best interest. If these steps are not completed, the reaffirmation agreement is not effective, even though you have signed it.
1. Read the disclosures in this Part A carefully. Consider the decision to reaffirm carefully. Then, if you want to reaffirm, sign the reaffirmation agreement in Part B (or you may use a separate agreement you and your creditor agree on).
2. Complete and sign Part D and be sure you can afford to make the payments you are agreeing to make and have received a copy of the disclosure statement and a completed and signed reaffirmation agreement.
3. If you were represented by an attorney during the negotiation of your reaffirmation agreement, the attorney must have signed the certification in Part C.
4. If you were not represented by an attorney during the negotiation of your reaffirmation agreement, you must have completed and signed Part E.
5. The original of this disclosure statement must be filed with the court by you or your creditor. If a separate reaffirmation agreement (other than the one in Part B) has been signed, it must be attached.
6. If you were represented by an attorney during the negotiation of your reaffirmation agreement, your reaffirmation agreement becomes effective upon filing with the court unless the reaffirmation is presumed to be an undue hardship as explained in Part D.
7. If you were not represented by an attorney during the negotiation of your reaffirmation agreement, it will not be effective unless the court approves it. The court will notify you of the hearing on your reaffirmation agreement. You must attend this hearing in bankruptcy court where the judge will review your reaffirmation agreement. The bankruptcy court must approve your reaffirmation agreement as consistent with your best interests, except that no court approval is required if your reaffirmation agreement is for a consumer debt secured by a mortgage, deed of trust, security deed, or other lien on your real property, like your home.
YOUR RIGHT TO RESCIND (CANCEL) YOUR REAFFIRMATION AGREEMENT. You may rescind (cancel) your reaffirmation agreement at any time before the bankruptcy court enters a discharge order or before the expiration of the 60-day period that begins on the date your reaffirmation agreement is filed with the court, which ever occurs later. To rescind (cancel) your reaffirmation agreement, you must notify the creditor that your reaffirmation agreement is rescinded (or canceled).
WHAT ARE YOUR OBLIGATIONS IF YOU REAFFIRM THIS DEBT? A reaffirmed debt remains your personal legal obligation. It is not discharged in your bankruptcy case. That means that if you default on your reaffirmed debt after your bankruptcy case is over, your creditor may be able to take your property or your wages. Otherwise, your obligations will be determined by the reaffirmation agreement which may have changed the terms of the original agreement. For example, if you are reaffirming an open end credit agreement, the creditor may be permitted by that agreement or applicable law to change the terms of that agreement in the future under certain conditions.
ARE YOU REQUIRED TO ENTER INTO A REAFFIRMATION AGREEMENT BY ANY LAW? No, you are not required to reaffirm a debt by any law. Only agree to reaffirm a debt if it is in your best interest. Be sure you can afford the payments you agree to make.
WHAT IF YOUR CREDITOR HAS A SECURITY INTEREST OR LIEN? Your bankruptcy discharge does not eliminate any lien on your property. A ‘lien’ is often referred to as a security interest, deed of trust, mortgage or security deed. Even if you do not reaffirm and your personal liability on the debt is discharged, because of the lien your creditor may still have the right to take the security property if you do not pay the debt or default on it. If the lien is on an item of personal property that is exempt under your State’s law or that the Trustee has abandoned, you may be able to redeem the item rather than reaffirm the debt. To redeem, you make a single payment to the creditor equal to the current value of the security property, as agreed by the parties or determined by the court.
PART B: REAFFIRMATION AGREEMENT
I/we (hereinafter “I” shall refer to both debtor and co-debtor) agree to reaffirm the debts arising under the credit agreement described below.
|BRIEF DESCRIPTION OF CREDIT AGREEMENT: |
| |
|Contract Date:_________________; Collateral:______________________; |
| |
|Account No.:________________________; |
| |
|FOR THE ANNUAL PERCENTAGE RATE AND AMOUNT REAFFIRMED, SEE THE DISCLOSURE STATEMENT IN PART A. |
I agree to reaffirm the Credit Agreement described above and agree to be bound by all the terms and conditions of the Credit Agreement, which is hereby incorporated by reference. I agree to the “ANNUAL PERCENTAGE RATE” DISCLOSED IN PART A. I agree to pay the “AMOUNT REAFFIRMED” DISCLOSED IN PART A. I agree to make monthly payments as described in the REPAYMENT SCHEDULE DISCLOSED IN PART A each month until the debt has been satisfied. I waive any defense that I have to the indebtedness due under the Credit Agreement described above by reason of my bankruptcy or otherwise.
Description of any changes to the credit agreement made as part of this reaffirmation agreement:
________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ _________________________________________________________________________
Payments on this debt were in default on the date on which this bankruptcy was filed. I agree to cure arrearages of $________________ as follows:
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
IF YOU DECIDE TO EXERCISE YOUR RIGHT TO RESCIND THIS REAFFIRMATION AGREEMENT THE NOTICE OF RESCISSION MAY BE SENT TO THE CREDITOR AT THE FOLLOWING ADDRESS:
___________________________
Date of Borrower/Co-Borrower Signature: _________________________
Signature: ___________________________ __________________________________
Borrower (Debtor) Co-borrower (Co-Debtor)
Accepted by Creditor by Attorney or Agent for Creditor: _______________________
Date of Creditor Acceptance: ______________________
PART C: CERTIFICATION OF DEBTOR’S ATTORNEY
I hereby certify, that:
1) This agreement represents a fully informed and voluntary agreement by the Debtor;
2) This agreement does not impose an undue hardship on the Debtor or any dependent of the Debtor; and
3) I have fully advised the Debtor of the legal effect and consequences of this agreement and any default under this agreement.
If a presumption of undue hardship has been established with respect to this agreement I am of the opinion that the debtor is able to make the payments as specified in this reaffirmation agreement.
Signature of Debtor’s Attorney: ___________________________
Dated: _______ day of ________ 2005
(TYPED OR PRINTED NAME) _____________________, Esq. (P )
PART D: DEBTOR’S STATEMENT IN SUPPORT OF REAFFIRMATION AGREEMENT
1. I believe this reaffirmation agreement will not impose an undue hardship on my dependents or me. I can afford to make the payments on the reaffirmed debt because my monthly income (take home pay plus any other income received is $_________, and my actual current monthly expenses including monthly payments on post-bankruptcy debt and other reaffirmation agreements total $_______, leaving $_________ to make the required payments on this reaffirmed debt. I understand that if my income less my monthly expenses does not leave enough to make the payments, this reaffirmation agreement is presumed to be an undue hardship and must be reviewed by the court. However, this presumption may be overcome if I explain to the satisfaction of the court
how I can afford to make payments here: ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
I received a copy of the Reaffirmation Disclosure Statement in Part A and a completed and signed reaffirmation agreement.
Debtor Signature: ________________________________ Date: ___________________
Co Debtor Signature: ______________________________ Date: __________________
PART E: MOTION FOR COURT APPROVAL
UNITED STATES BANKRUPTCY COURT
IN THE MATTER OF:
[INSERT DEBTORS],
Case No.
Hon.
Debtor. Chapter 7
________________________________/
debtor’s MOTION FOR APPROVAL OF reaffirmation AGREEMENT
Now comes, ______________, Debtor(s) herein, and in support of this Motion for an Order Approving Reaffirmation of the debt owed to Creditor, states as follows:
1. I (we), the Debtor(s), affirm the following to be true and correct.
2. I (we) am (are) not represented by an attorney in connection with this reaffirmation agreement.
3. I (we) believe this reaffirmation agreement is in my (our) best interest based on the income and expenses I (we) have disclosed in my (our) Statement of Support of this reaffirmation agreement.
4. I (we) believe this reaffirmation agreement is in my (our) best interest based on the following additional relevant reasons the court should consider:
THEREFORE, I (we) ask the court for an order approving this reaffirmation agreement.
______________________________
Debtor
______________________________
Debtor
Dated:____________________
UNITED STATES BANKRUPTCY COURT
IN THE MATTER OF:
[INSERT DEBTORS],
Case No.
Hon.
Debtor. Chapter 7
________________________________/
ORDER APPROVING REAFFIRMATION OF DISCHARGEABLE CONSUMER DEBT
This matter having come before the Court on the Motion of the above referenced Debtor to reaffirm an indebtedness to [Creditor] regarding [account/collateral description] and the Court being fully advised in the premises:
it is hereby ordered that the Court grants the Debtor’s motion and approves the reaffirmation agreement described above.
_____________________________
Honorable
UNITED STATES BANKRUPTCY COURT
IN THE MATTER OF:
[INSERT DEBTORS], Case No.
Hon.
Debtor. Chapter 7
________________________________/
NOTICE OF HEARING ON DEBTOR MOTION FOR
COURT APPROVAL OF REAFFIRMATION AGREEMENT
TO ALL INTERESTED PARTIES:
Please take notice that the above entitled cause has been set for hearing on Debtor Motion for Approval of Reaffirmation Agreement on the _____ day of ______________, 2005, at _______ o’clock in the _____(AM/PM), before the Honorable _____________,
United States Bankruptcy Court, ______________, Courtroom ________,
_______________.
________________________________________
CLERK TO THE HONORABLE
§4.06. LAWYER ADVERTISING AND “DEBT RELIEF AGENCY” ISSUES
1. Important Definitions and Corresponding Rules
Section 101(12A) created a new definition and concept—a “debt relief agency.” This new term is related to the new definitions provided in New§101(3) as to an “assisted person” and “bankruptcy assistance.” New §101(4A). An “assisted person” is a consumer debtor (i.e., one whose debts primarily arise from consumer credit transactions) with less than $150,000 in nonexempt assets. New §101(3). An attorney who provides bankruptcy assistance or counseling to such a debtor falls within the definition of a “debt relief agency” and is subject to the restrictions and disclosure requirements placed on a debt relief agency by New Sections 526, 527, and 528. “Bankruptcy Assistance” is the advice, information and/or counseling provided to an “assisted person.” New §101(4A).
Under New §526(a), a debt relief agency shall not - -
(1) fail to perform any service that such agency informed an assisted person or prospective assisted person that it would provide in connection with a case or proceeding under Title 11;
(2) make any statement (or counsel or advise any assisted person or prospective assisted person to make a statement) in a document filed in a case or proceeding under Title 11 that is untrue and misleading, or that (upon the exercise of reasonable care) should have been “known” by such agency to be untrue or misleading;
(3) misrepresent to any assisted person or prospective assisted person, directly or indirectly, affirmatively or by material omission, with respect to - -
(A) services that such agency will provide to such person; or
(B) the benefits and risks that may result if such person becomes a debtor in a case under Title 11; or
(4) advise an assisted person or prospective assisted person to incur more debt (a) in contemplation of such a person filing a case under Title 11 or (b) to pay an attorney or bankruptcy petition preparer fee or charge for services performed as a part of preparing for or representing a debtor in a case under Title 11. The “benefits and risks” stated in New §526(a) are undefined – a clear problem for the attorney in demonstrating compliance with New §526(a).
Thus, a debt relief agency attorney can not advise the “assisted person” debtor to (1) borrow more money or (2) borrow the money to pay the attorney’s fee for filing the bankruptcy.
Also, any waiver by any assisted person of any protection or right provided under §526 shall not be enforceable against the debtor or against any Federal or State court or any other person that may be enforced against a debt relief agency under subsection (b) of §526.
Any contract for bankruptcy assistance between a debt relief agency and an assisted person that does not comply with all of the material requirements of §526, §527, or §528 shall be void and may not be enforced by any Federal or State court or by any other person, other than such assisted person.
2. New §526 – Attorney Requirements, Liability, Waiver & Enforcement
New §526© establishes new attorney liability for a debt relief agency for failure to comply with sections 526, 527, or 528.
Under §526(c)(2) any debt relief agency shall be liable to an assisted person in the amount of any fees or charges in connection with providing bankruptcy assistance to such person that such debt relief agency has received, for any fees or charges, actual damages, and for reasonable attorneys’ fees and costs if such agency is found, after notice and a hearing, to have -
(A) intentionally or negligently failed to comply with any provision of §526, §527, or §528 with respect to a case or proceeding under Title 11 for such assisted person;
(B) provided bankruptcy assistance to an assisted person in a case or proceeding under Title 11 that is dismissed or converted to a case under another Chapter of Title 11 because of such agency’s intentional or negligent failure to file any required document including those specified in §521; or
(C) intentionally or negligently disregarded the material requirements of Title 11 or the Federal Rules of Bankruptcy Procedure applicable to such agency.
Under §526(c)(3), in addition to such other remedies as are provided under State law, whenever the chief law enforcement officer of the State, or an official agency designated by a State, has reason to believe that any person has violated or is violating §526, the State - -
(A) may bring an action to enjoin such violations;
(B) may bring an action on behalf of its residents to recover the actual damages of assisted persons arising from such violation, including any liability under paragraph (2) of §526(c); and
(C) shall be awarded, in the case of any successful action under subparagraph (A) or (B) of section 526(c)(2), the costs of the action and reasonable attorneys’ fees as determined by the court. The district courts of the United States for districts located in the state shall have concurrent jurisdiction of any action under these provisions contained in subparagraph (A) or (B) or paragraph (3) of §526(c).
Under §526(c)(5), notwithstanding any other provision of Federal law and in addition to any other remedy provided under Federal or State law, if the court, on its own motion or on the motion of the United States Trustee or the debtor, finds that a person intentionally violated the section, or engaged in a clear and consistent pattern or practice of violating this section, it may -
(A) enjoin the violation of such section; or
(B) impose an appropriate civil penalty against such person.
3. New Disclosures Required Under New §527
It is important to note that new attorney liability for “consumer” debtor attorneys is created under §526 because of the extensive disclosure requirements added by New §527.
Section 527(a) provides that a “debt relief agency” providing bankruptcy “assistance” to an “assisted person,” under §101(3) & (4A) shall provide -
(1) the written notice required under §342(b)(1); and
(2) to the extent not covered in the written notice described in paragraph (1), and not later than 3 business days after the first date on which a debt relief agency first offers to provide any bankruptcy assistance services to an assisted person a clear and conspicuous written notice advising assisted persons that –
(A) all information that the assisted person is required to provide with the petition and thereafter during a case under Title 11 must be complete, accurate and truthful;
(B) all assets and all liabilities must be completely and accurately disclosed in the documents filed to commence the case;
(C) and the replacement value of each asset as defined in §506 must be stated in those documents where requested after reasonable inquiry to establish such value;
(D) current monthly income in the amounts specified in §707(b)(2), and, in a case under Chapter 13 of Title 11, disposable income, determined in accordance with §707(b)(2), must be stated after reasonable inquiry by the attorney;
(E) information -- (e.g., warning) – (1)that an assisted person during his or her case may be audited pursuant to Title 11 and (2) that failure to provide accurate information may result in dismissal of the case under Title 11 or other sanctions, including criminal sanctions.
In addition, §527(b) provides certain “form” language for the notice that must be given by a “debt relief agency” providing “bankruptcy assistance” to an “assisted person,” under §101(3) & (4A) at the same time as the notices required under subsection (a)(1) of § 527 (or one may use any form, but it must be substantially similar to the language required by §527). This language must be studied carefully – it is mandatory.
4. New Engagement Contract and Advertising Requirements for “Debt Relief Agencies” Under §528
Section 528(a) imposes new engagement agreement and advertising requirements on “debt relief agencies.” Under subsection (a) a “debt relief agency” shall -
(1) not later than 5 business days after the first date on which such agency provides any “bankruptcy assistance” services to an “assisted person,” but prior to such assisted person’s petition under Title 11 being filed, execute a written engagement contract with such assisted person that explains clearly and conspicuously -
(A) the services such agency will provide to such assisted person; and
(B) the fees or charges for such services, and the terms of payment;
(2) provide the assisted person with a copy of the fully executed and completed contract;
(3) clearly and conspicuously disclose in any advertisement of bankruptcy assistance services or of the benefits of bankruptcy directed to the general public (whether in general media, seminars or specific mailings, telephonic or electronic messages, or otherwise) that the services or benefits are with respect to bankruptcy relief under Title 11; and
(4) clearly and conspicuously use the following statement in such advertisement: “We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code” (or a substantially similar statement). See Form 1 at §4.10 for an example of a proposed engagement agreement.
In addition, §528(b)(1) provides that an advertisement of bankruptcy assistance services or of the benefits of bankruptcy directed to the general public must-
(A) include descriptions of bankruptcy assistance in connection with a Chapter 13 plan whether or not Chapter 13 is specifically mentioned in such advertisement; and
(B) not include statements such as “federally supervised repayment plan” or “Federal debt restructuring help” (or other similar statements) that could lead a reasonable consumer to believe that “debt counseling” was being offered when, in fact, the services were actually directed for the purpose of providing bankruptcy assistance with a Chapter 13 plan or other form of bankruptcy relief under Title 11.
Further, §528(b)(2) provides that an advertisement, directed to the general public, indicating that the “debt relief agency” provides “assistance” with respective credit defaults, mortgage foreclosures, eviction proceedings, excessive debt, debt collection pressure, or inability to pay any consumer debt, shall:
(A) disclose clearly and conspicuously in such advertisement that the assistance may involve bankruptcy relief under Title 11; and
(B) include the following statement: “We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code” (or a substantially similar statement).
5. Latest (!) Case Law
The following court order may be the first important decision rendered under the BAPCPA Act – it holds that “Congress intended to establish regulation of entities who interface with debtors [“Debt Relief Agencies” under §§101(3), (4A), (12A) & 526, 527 & 528]…, but it did not intend to regulate attorneys.” This decision is certain to engender a whirlwind of controversy. [Court Order from Chief Justice Lamar W. Davis, Jr., United States Bankruptcy Court – Southern District of Georgia – dated October 17, 2005 – the first day on which the BAPCPA Act was in force – it is reprinted beginning on next page].
In the United States Bankruptcy Court
for the
Southern District of Georgia
In re: ATTORNEYS AT LAW AND DEBT RELIEF AGENCIES
ORDER
The issue before the Court is whether amendments to the Bankruptcy Code, which become effective today, regulating Debt Relief Agencies apply to attorneys licensed to practice law who are members of the Bar of this Court.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) established new and significant restrictions on the activities of debt relief agencies. 11 U.S.C. §§526, 527, 528. They require “debt relief agencies” who render “bankruptcy assistance” to enter written contracts with “assisted persons,” disclose the extent of services provided and fees charged, and disclose clearly and conspicuously in all advertising that their services contemplate bankruptcy. §528. They are required to provide a detailed written notice to all “assisted persons” of the disclosure requirements of the Code, the obligation of accuracy and truthfulness on those disclosures, and that failure to comply with those requirements carry potential civil and criminal sanctions. §527. They are required to advise the “assisted person” that the person may proceed pro se, or may hire and attorney, or may hire a bankruptcy petition preparer, and that only attorneys and not petition preparers can render legal advice. Id. They are required to provide the “assisted person” with information on how to value assets, how to complete bankruptcy schedules, and how to determine what property is exempt. Id. Debt relief agencies are prohibited from failing to provide the services they contracted to provide, counseling any person to make false statements, or advising the person “to incur more debt in contemplation of such person filing a case under this title or to pay an attorney or bankruptcy petition preparer…” §526(a)(4) (emphasis added).
Section 526© creates civil liability for violation of the duties enumerated. It also grants to the Court the right “on its own motion” or that of the United States Trustee or a debtor to enjoin violations or impose civil remedies. This grant complements the inherent authority of a Court to regulate the practice of the members of its Bar, as embodied in this District in Southern District Local Rules 83, 83.5 and Local Bankruptcy Rule 2090.
Debt relief agencies are defined as follows in §101 (12A):
[A]ny person who provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration, or who is a bankruptcy petition preparer under section 110….
Bankruptcy assistance is defined as follows in §101(4A):
[A]ny goods or services sold or otherwise provided to an assisted person with the express or implied purpose of providing information, advice, counsel, document preparation, or filing, or attendance at a creditors’ meeting or appearing in a case or proceeding on behalf of another or providing legal representation with respect to a case or proceeding under this title.
Although attorneys are not expressly included in the definition, the language defining debt relief agencies is broad enough on its face to include attorneys and the reference to “providing legal representation” in §101(4A) suggests that attorneys are covered.
Indeed during the months since passage of BAPCPA, considerable analysis of all its provisions has been undertaken by the academic and legal community to educate the public, attorneys, and the judiciary of its content, scope and meaning. Commentary relating to these provisions appear to assume or at least raise the specter that beginning October 17, 2005, attorneys will come within the scope of §§101(12A), 526, 527, and 528. See Hon. William Houston Brown and Lawrence R. Ahern, III, “2005 Bankruptcy Reform Legislation with Analysis,” p.58 (Thompson/West 2005); Erwin Chemerinsky, Constitutional Issues Posed in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 79 Am. Bankr. L. J. 571, 576 (2005) (“A lawyer who provides any bankruptcy assistance to an ‘assisted person’ is defined to be a ‘debt relief agency.’”); Coastal Bankruptcy Law Institute Seminar Materials (September 23, 2005) at Tab 4, pg. 2; Hon. Keith M. Lundin, Ten Principles of BAPCPA: Not What was Advertised, 24 Am. Bankr. Inst. J. 1, 69 (Sept. 2005) (BAPCPA “de-professionalizes bankruptcy attorneys as ‘debt relief agencies.’”); Samuel Gerdano, 25 Changes to Personal Bankruptcy Law, at ¶ 19, (“Attorneys as Debt Relief Agencies”). In the words of one bankruptcy scholar:
More confusing, if not simply absurd, are the provision setting out requirements for “debt relief agencies.” These provisions, due to slipshod drafting, will apply to many attorneys who rarely, or never, represent consumer bankruptcy debtors…
[The definition of “debt relief agency”] clearly includes attorneys who represent individual landlords or other mom and pop businesses that owe primarily consumer debts, as well as those who represent consumer creditors, or nondebtor spouses who are creditors in the title 11 cases, including Chapter 11 cases. Because “person” is defined to include partnership and corporations, presumably the entire law firm is a debt relief agency.
Henry J. Sommer, Trying to Make Sense Out of Nonsense: Representing Consumers Under “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005”, 79 Am. Bankr. L. J. 191, 206-07 (Spring 2005). If these commentators are correct, a new layer or regulation will be superimposed on the bar of this Court, and evaluation of new risks and liabilities will preoccupy them as they strive to represent their clients, comply with existing state regulation of their practice, learn the new substantive and procedural mandates of this new law, and adhere to the separate professional standards applicable to members of the Bar of this Court. See Local Rule 83.5(d). That is a burden which should not be borne by the Bar needlessly or merely out of an abundance of caution. It should and must be borne by the Bar if that is the result Congress mandated. Anything less than the highest level of professional conduct is not tolerable in this Court. Equally intolerable is needless uncertainty in the minds of the Bar as to their duty under this new statute.
Are the members of the Bar of this Court “debt relief agencies?” Exercising the grant of authority of 11 U.S.C. §§526(c)[75] and 105 and the inherent power of this Court, I conclude that they are not.
1) The §101(12A) definition of “debt relief agency,” while extremely broad does not include the word “attorney” or “lawyer.” It does include “bankruptcy petition preparer,” but that term is defined in §110 and expressly excludes attorneys and their staffs. “Attorney” is separately defined in §101(4), which makes no reference to debt relief agencies or to subsection (12A). Clearly as a matter of plain language, “attorney” and “debt relief agency” are not synonymous nor do they in common understanding include each other. When construing a statute, the ordinary meaning should be read into terms unless a special statutory definition controls. See American Tobacco Co. v. Patterson, 456 U.S. 63, 68, 102 S.Ct. 1534, 71 L.E. 2d 748 (1982) (“As in all cases involving statutory construction, our starting point must be the language employed by Congress, and we assume that the legislative purpose is expressed by the ordinary meaning of the words used. Thus absent a clearly expressed legislative intention to the contrary, that language must ordinarily be regarded as conclusive.”) (citations omitted). Because the definition of “debt relief agency” omits express reference to attorneys and includes a term which excludes attorneys, it is difficult to imagine that Congress saw the necessity of expressly including “bankruptcy petition preparers” (who clearly provide “bankruptcy assistance”) in the definition of debt relief agency, yet omitted any express inclusion of attorneys.
It is true that to be a debt relief agency an entity must provide “bankruptcy assistance,” which may include “providing legal representation.” §101(4A). The inclusion of “legal representation” in the scope of what a debt relief agency does certainly suggests a contrary result to that which I reach, but it is well-known that non-lawyers often attempt to provide “legal representation,” often to poorer, less educated, and more vulnerable citizens. To do so constitutes unauthorized practice of law and may include misdemeanor penalties under state law. O.C.G.A. §15-19-56. However, the likelihood of effective enforcement of those remedies by the organized bar varies from state to state, is restricted by limited availability of resources, and often cannot occur in a time-sensitive period so as to protect the consumer. I conclude that the inclusion of the term “legal representation” in the definition of “bankruptcy assistance” was Congress’s effort to empower the Bankruptcy Courts presiding over a case with authority to protect consumers who are before the Court, who may have been harmed by a debt relief agency that may have engaged in the unauthorized practice of law, and whose existing remedies for any damage is more theoretical than real.[76]
2) Section 527(b) requires debt relief agencies to inform assisted persons that they have the right to hire an attorney or to represent themselves, that only an attorney can render legal advice, and how to perform services pro se that would be universally provided if the person hired an attorney. It is hard to imagine that the language which, again, conspicuously omits the word “attorney” really requires an attorney to tell an assisted person that he/she has the right to hire an attorney or how to prepare the documents pro se that the attorney is poised to prepare on that person’s behalf. It is far more likely that the provision is a consumer protection provision intended to regulate that universe of entities who assist persons but are not attorneys.[77] I hold that Congress intended to establish regulation of entities who interface with debtors in shadowy, gray areas not already covered by bankruptcy petition preparer regulations and to bolster the existing regulation of bankruptcy petition preparers, but it did not intend to regulate attorneys. The interpretation of a statute that is logical or sensible is preferred over interpretation that is illogical or absurd. United States v. Katz, 271 U.S. 354, 357, 46 S.Ct. 513, 70 L.E. 986 (1926) (“All laws are to be given a sensible construction; and a literal application of a statute, which would lead to absurd consequences, should be avoided whenever a reasonable application can be given to it, consistent with the legislative purpose.”).
3) Section 526(d)(2) makes it clear that there is no effort to curtail the states’ role in enforcing “qualifications for the practice of law.” Aside from this section, the 2005 Act is silent as to whether it is intended to pre-empt or curtail other state interests in regulating and disciplining attorneys’ conduct. Attorneys’ admission and discipline is historically a matter of state law. Gentile v. State Bar of Nevada, 501 U.S. 1030, 1066, 115 S.Ct. 2720, 116 L.E.2d 888 (1991). See also Arons v. New Jersey State Board of Education, 842 F.2d 58, 63 (3d Cir. 1988):
As the Supreme Court recognized, the States have a compelling interest in the practice of professions within their boundaries, and that as part of their power to protect the public health, safety, and other valid interests they have broad power to establish standards for licensing practitioners and regulating the practice of professions.
In the absence of explicit provisions, we are not convinced that Congress intended to limit the states’ traditional control over the practice of law. Nothing in the statutory language demonstrates a congressional desire to supercede the states’ authority to regulate the legal profession. We, too, decline to “rewrite the statute.” (citations and quotations omitted).
White v. Medical Review Consultants, 831 S.W.2d 662, 664 (Mo. Ct. App. 1992):
Preemption is not to be lightly presumed. Moreover, when Congress legislates in a field traditionally occupied by the states, a preemption review starts with the assumption that the historic police powers of the states were not be preempted unless that was the clear and manifest purpose of Congress. Regulations of the Bar is an
historic police power of the States. (citations omitted).
It would be a breathtakingly expansive interpretation of federal law to usurp state regulation of the practice of law via the ambiguous provisions of this Act, which in no clear fashion lay claim to the right to do any such thing. It could possibly violate the Tenth Amendment to the Constitution as well.[78] I cannot conceive that as long as this bill has been pending any such intent could have gone unnoticed and undebated by the states. Nor can I conceive that Congress would ever take such an astounding step toward the federal regulation of professionals without forthrightly and expressly stating its intent.
Finally, I will conclude by revisiting the concurring opinion of Justice Scalia who stated that, when Congress used the term “applicable non-bankruptcy law,” it meant something more expansive than merely “state law.” Indeed, he observed that when Congress meant “state law” it used the phrase “state law.”
When the phrase “applicable nonbankruptcy law” is considered in isolation, the phenomenon that three Courts of Appeals could have thought it a synonym for “state law” is mystifying. When the phrase is considered together with the rest of the Bankruptcy Code (in which Congress chose to refer to state law as, logically enough, “state law”), the phenomenon calls into question whether our legal culture has so far departed from attention to text, or is so lacking in agreed-upon methodology for creating and interpreting text, that it any longer makes sense to talk of “a government of laws, not of men.” Patterson v. Shumate, 504 U.S. 753, 766, 112 S.Ct. 2242, 2250-51, 119 L.Ed. 2d 519 (1992).
In a similar vein, I believe that if Congress meant to ensnare attorneys in the thicket of §§526, 527 and 528, it would have used the term “attorney” and not “debt relief agency.”
For the foregoing reasons, I rule that attorneys regularly admitted to the Bar of this Court or those admitted pro hac vice are not covered by the provisions of the Code regulating debt relief agencies, including without limitation §§101(12A), (4A), 526, 527 and 528, and are excused from compliance with any of those requirements or provisions, so long as their activities fall within the scope of the practice of law and do not constitute a separate commercial enterprise.
FURTHER ORDERED that attorneys appearing in this Court be reminded that maintaining the tradition of professional conduct remains of paramount concern to this Court.(
This 17th day of October , 2005.
/s/ Lamar W. Davis, Jr.
Lamar W. Davis, Jr.
Chief United States Bankruptcy Judge
§4.07 EXCLUSIVE JURISDICTION IN MATTERS INVOLVING BANKRUPTCY
NEW 28 USC §1334
The BAPCPA Act amends 28 USC §1334(e) to give the Federal District Court in which a bankruptcy case is commenced exclusive jurisdiction over all claims or causes of action involving the employment of professionals, the construction and interpretation of §327, and the rules relating to the disclosure statement requirements of §327.
§4.08 NEW RULES FOR BANKRUPTCY PETITION PREPARERS – NEW §110
The amendments to §110 under the BAPCPA Act appear to have been created for the purpose of more strictly regulating Bankruptcy Petition Preparers (hereinafter “BPP”). There is an increase in sanctions for their failure to comply with the Bankruptcy Code restrictions on BPP’s.
Generally, New §110 requires that before preparing any documents for the debtor, the BPP must specifically disclose to the debtor in writing (in an official form to be prescribed by the Judicial Conference pursuant to Bankruptcy Rule 9009, and signed by the debtor) that:
(1) The BPP is not an attorney and can not give legal advice or practice law;
(2) Examples of advice that a BPP can not give debtors, setting forth examples of the type of “legal” advice they can not give;
(3) The BPP must disclose in their letter any guidelines set by the Judicial Conference for maximum allowable fees, and any fee charged by a BPP in excess of the limit may be disallowed;
(4) A BPP may be forced to forfeit any and all fees for failing to comply with the
provisions of New §110.
Further, New §110 contains provisions for fining BPP’s, and fines may be tripled for
sanctionable misconduct.
§4.09 PROFESSIONALISM ISSUES
Louisiana has adopted a Code of Professionalism for the conduct of attorneys throughout the State of Louisiana. It provides:
“My word is my bond. I will never intentionally mislead the court or there counsel. I will not knowingly make statements of fact or law that are untrue.
I will clearly identify for other counsel changes I have made in documents submitted to me.
I will conduct myself with dignity, civility, courtesy and a sense of fair play.
I will not abuse or misuse the law, its procedures or the participants in the judicial process.
I will consult with other counsel whenever scheduling procedures are required and will be cooperative in scheduling discovery, hearings, the testimony of witnesses and in the handling of the entire course of any legal matter.
I will not file or oppose pleadings, conduct discovery or utilize any course of conduct for the purpose of undue delay or harassment of any other counsel or party. I will allow counsel fair opportunity to respond and will grant reasonable requests for extensions of time.
I will not engage in personal attacks on other counsel or the court. I will support my profession’s efforts to enforce its disciplinary rules and will not make unfounded allegations of unethical conduct about other counsel.
I will not use the threat of sanction as a litigation tactic.
I will cooperate with counsel and the court to reduce the cost of litigation and will readily stipulate to all matters not in dispute.
I will be punctual in my communication with clients, other counsel and the court, and in honoring scheduled appearances.”
Each bankruptcy attorney should consult with his or her local bar association, state
bar associations, and any local bankruptcy rules concerning professionalism issues.
§4.10 FORMS
1. Form 1 – Engagement Agreement
2. Form 2 – Disengagement Agreement
Form 1 under §410 – Engagement Agreement
| |
| |
|Local Rules Form #5 |
| |
|United States Bankruptcy Court |
|Middle District of Louisiana |
|In re |John Doe | |Case No. |05-10000 |
| |Debtor(s) | |Chapter |Chapter 7 |
DISCLOSURE OF COMPENSATION OF ATTORNEY FOR DEBTOR
1. Pursuant to 11 U.S.C. § 329(a) and Bankruptcy Rule 2016(b), I certify that I am the attorney for the above-named debtor(s) and that compensation paid to me within one year before the filing of the petition in bankruptcy, or agreed to be paid to me, for services rendered or to be rendered on behalf of the debtor(s) in contemplation of or in connection with the bankruptcy case is as follows:
|For legal services, I have agreed to accept |$ |$1,000.00 |
|Prior to the filing of this statement I have received |$ |$1,000.00 |
|Balance Due |$ |$0.00 |
2. $ __209.00____ of the filing fee has been paid.
3. The source of the compensation paid to me was:
(X) Debtor ( Other (specify):
4. The source of compensation to be paid to me is: N/A
( Debtor ( Other (specify):
5. (x) I have not agreed to share the above-disclosed compensation with any other person unless they are members and associates of my law firm.
( I have agreed to share the above-disclosed compensation with a person or persons who are not members or associates of my law firm. A copy of the agreement, together with a list of the names of the people sharing in the compensation, is attached (as is set forth below).
6. In return for the above-disclosed fee, I have agreed to render legal service for and in the bankruptcy case, including:
a. Analysis of the debtor’s situation, and rendering advice to the debtor in determining whether to file a petition in bankruptcy.
b. Preparation and filing of any petition, schedules, statement of affairs, and plan which may be required.
c. Representation of the debtor at the meeting of creditors and confirmation hearing (if the case is a Chapter 13 case).
7. By agreement with the debtor(s), a copy of which is either set forth herein or attached hereto, the above-disclosed fee does not include the following services, for which, if I am to be retained, the debtor will be charged and will have to agree to pay fees and reimbursement of expenses as follows:
a. Representation of the debtor in adversary proceedings and other contested bankruptcy matters.
b. Representation of the debtor at any adjourned hearings.
c. Preparation and filing of any amended schedules, statement of affairs, and amended plans.
d. Fees for work required on any subsequent conversion of the case to another chapter under Title 11, voluntary or involuntary.
e. Substantial negotiations with the Trustee concerning exemptions, purchase (or retention of ownership) of non-exempt assets, or the like,
f. Preparation for an attendance at any Rule 2004 Examinations and response(s) to any discovery requests, or the like.
g. In general, any work after completion of the 341 meeting (or completion of the first confirmation hearing, if the case is a Chapter 13 proceeding).
|CERTIFICATION OF ATTORNEY |
| |
|I certify that the foregoing is a complete statement of any agreement or arrangement for payment to me for |
|representation of the debtor(s) in this bankruptcy proceeding. |
|10-15-05 | |/s/ John C. Anderson | |
|Date | | | |
| | | |Signature of Attorney | |
| | | | | |
| | | | | |
| | | |Anderson Firm, LLC | |
| | | |Name of Law Firm | |
CERTIFICATION OF DEBTOR(S)
[if applicable, i.e. services limited and agreement is contained in disclosure as opposed to being separately attached].
I certify that the above agreement with my attorney has been explained to me by my attorney and accurately reflects the services that my attorney has agreed to provide for the fees paid or promised as stated in this disclosure. Further, I agree that the description of those services that will not be provided by my attorney for the fees paid or promised in the disclosure is accurate and that I understand that if any of these excluded services become necessary, my attorney is under no duty to represent me unless I make further arrangements, as set forth by my attorney above, for the attorney to act on my behalf.
| |
|10-15-05 |
| Date |
| |
|/s/ John Doe |
| |
| Signature of Debtor |
| |
| |
Signature of Joint Debtor
Form 2 under §410 – Disengagement Agreement
October 20, 2005
Mr. John Doe
123 Main Street
Anytown, Louisiana 45678
RE: John Doe - Chapter 7 Bankruptcy Case
Dear John,
Thank you for allowing us to be of service to you in discussing filing bankruptcy under Chapters 7, 11, 12, and 13.
You stated that you had some serious financial problems which were giving you immediate concerns in terms of your property being repossessed or foreclosed on by your creditors. We gave you various materials explaining the benefits and risks of filing bankruptcy, together with substantial other information required by §§526, 527 & 528 of the Bankruptcy Code, as required by that statute, together with a copy of our proposed Engagement Agreement.
Since you have not called us or returned to us, this letter will confirm that we have not agreed to an Attorney-Client relationship with you and that we are not doing any further work to prepare or file a bankruptcy for you. Our services are ended and we have not agreed to be your lawyer for purposes of filing bankruptcy or taking any other steps on your behalf to render legal services or advice. We are enclosing a copy of this letter for your signature, along with a self-addressed, stamped envelope, so that we can be sure that you have received this letter and that you understand that we are not taking any further steps to represent you as a client. Please sign the enclosed letter, place it in the enclosed envelope, and return it to us showing that you understand that we are not acting as your lawyer.
We wish you much happiness and we thank you for contacting us.
Very truly yours,
Attorney
Effective October 20, 2005; So Agreed: ___________________
John Doe
[CAVEAT: Make sure any withdrawal/termination is in compliance with state ethics rules – in Louisiana, Louisiana Ethics Rule 1.16 of the Rules of Professional Conduct—or the ethics rules of the state in which the bankruptcy case may be filed or in the state in which the debtor resides, if different than the state in which the attorney practices.]
§4.11 ATTORNEY LIABILITY UNDER §707(b)(4) OF THE BANKRUPTCY
ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2005 (by Ad
Hoc Committee on Bankruptcy Court Structure and Insolvency Processes, American Bar Association, Business Law Section)
Copyright © 2005 by Ad Hoc Committee on Bankruptcy Court Structure and Insolvency Processes, American Bar Association, Business Law Section.
[Article follows this page]
American Bar Association
Business Law Section
Ad Hoc Committee on Bankruptcy Court Structure and Insolvency Processes
Task Force on Attorney Discipline
Report:
Attorney Liability under § 707(b)(4) of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
October 6, 2005
By
Catherine E. Vance and Jimmy F. Dahu
Co-Reporters
Contributing Authors:
Nancy B. Rapoport
Co-Reporter
Jan Ostrovsky and Marc S. Stern
Task Force Members
The views expressed herein have not been adopted by the House of Delegates or the Board of Governors of the American Bar Association and consequently should not be considered the policy of the American Bar Association.
American Bar Association
Business Law Section
Ad Hoc Committee on Bankruptcy Court Structure and Insolvency Processes
Task Force on Attorney Discipline Members
(Excluding Bankruptcy Judges and Governmental Employees)
David W. Allard Judith Greenstone Miller
Allard & Fish, PC Chair, Jaffe Raitt Heuer & Weiss, P.C.
535 Griswold Street 27777 Franklin Road
Suite 2600 Suite 2500
Detroit, MI 48226 Southfield, MI 48034
(313) 961-6141 (248) 727-1429
(313) 961-6142 (fax) (248) 351-3082 (fax)
dallard@ jmiller@
James H. Cossitt Jan Ostrovsky
Attorney & Counselor at Law Crocker Kuno, LLC
202 KM Bldg., 40 720 Olive Way, Suite 1000
2nd St. E. Seattle, WA 98101
Kalispell, MT 59901-4563 (206) 624-9894
(406) 752-5616 (206) 624-8598 (fax)
jhc@ jostrovsky@
Jimmy Dahu Nancy B. Rapoport
3001 Hillcroft University of Houston Law Center
9999 Waterside Dr. 100 Law Center
Houston, TX 77057 Houston, TX 77204-6060
(832) 605-3824 (713) 743-2100
jfdahu@central.uh.edu (713) 743-2122 (fax)
nrapoport@uh.edu
Lisa Hill Fennin William S. Schorling
Dewey Ballantine LLP Klett Rooney Lieber & Schorling
333 S. Grand Ave., Suite 2600 Two Logan Square, 12th Floor
Los Angeles, CA 90071-1530 Philadelphia, PA 19103-2756
(213) 621-6233 (215) 567-7500
(213) 621-6133 (fax) (215) 567-2737 (fax)
lfenning@ whschorling@
Jean K. FitzSimon Jeffrey L. Solomon
Whitehall Jewellers, Inc. Law Offices of Jeffrey L. Solomon
155 N. Whacker Dr., 5th Floor 40 Crossways Park Dr.
Chicago, IL 60606 Woodbury, NY 11797
(312) 762-0202 (516) 632-8884
(312) 545-8945 (fax) (516) 747-0382 (fax)
jfitzsimon@ jefflaw99@
David A. Greer Marc S. Stern
Williams Mullen Hofheimer Nusbaum Apt 510 1825 N.W. 65th St.
Suite 700 Seattle, WA 98117
Norfolk, VA 23510 (206) 448-7996
(757) 629-0617 (206) 297-8778 (fax)
(757) 629-0700 (fax) mstern@
dgreer@
Robert R. Keatinge Paul G. Swanson
Holland & Hart Steinhilber Swanson Mares Marone
555 17th St., Suite 3200 & McDermott
Denver, CO 80202-3921 107 Church Ave.
(303) 295-8595 P. O. Box 617
(303) 295-8261 (fax) Oshkosh, WI 54903-0617
rkeatinge@ (920) 235-6690
(920) 426-5530 (fax)
pswanson@
Catherine E. Vance
Development Specialists, Inc.
6375 Riverside Dr.
Suite 200
Dublin, OH 43017
(614) 734-2717
(614) 734-2718 (fax)
cvance@
TABLE OF CONTENTS
EXECUTIVE SUMMARY
§ 1. Scope of Report
§ 2. Scope of § 707(b)(4); Application
Recommendation
Commentary
§ 3. § 707(b)(4)(C)
§ 3.1 “Reasonable Investigation”
Recommendations
Commentary
§ 3.2. “Well Grounded in Fact”
Recommendation
Commentary
§ 3.3. “Warranted by Existing Law or a Good Faith Argument for Extension, Modification or Reversal
of Existing Law” Recommendation Commentary
§ 3.4. “Not an Abuse Under Section 707(b)(1)” Recommendations Commentary
§ 4. § 707(b)(4)(D)
§ 4.1 “Inquiry” Recommendations Commentary
§ 4.2. “Knowledge” Recommendation Commentary
§ 4.3. “Incorrect” Recommendation Commentary
APPENDIX A
Time Constraints
Court’s Review of Attorney’s Conduct
Attorney’s Verification of Client’s Information, Especially If Client’s Information
Signals Inaccuracies
Attorney’s Reliance on Documents Prepared by Third Parties, Such as Tax Returns
“Good Faith” and “Totality of the Circumstances”
Requiring Documentary Evidence from Debtors
“Knowledge” as a “Should Have Known” Standard
APPENDIX B
EXECUTIVE SUMMARY
The American Bar Association’s Ad Hoc Committee on Bankruptcy Court Structure and the Insolvency Processes recently established a Task Force on Attorney Discipline. Its ultimate goal is to draft a model local rule for the Bankruptcy Courts regarding attorney discipline.
During its initial deliberations, the Task Force determined that guidance regarding the new “reasonable investigation” and “inquiry” requirements imposed on attorneys under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) would be helpful. The Task Force concluded that, in addition to the longer term goal of drafting a model rule and in light of the October 17, 2005, effective date for BAPCPA (and the new § 707(b)(4)), it would be helpful to the bar for the Task Force to publish a report with recommendations on interpreting the provisions of § 707(b)(4), particularly with a view as to how existing law may be applicable.
An overarching recommendation of the Task Force to provide guidance to attorneys is that § 707(b)(4) should be limited to the pre-filing conduct of attorneys representing consumer debtors in Chapter 7 cases to ensure that the debtor’s case is not an “abuse” under the means test and is not filed other than in good faith.
The Report, dated October 6, 2005 provides recommendations in the interpretation of several key words and phrases in § 707(b)(4). Following is a list of those key words and phrases and a very brief summary of the recommendations of the Task Force.
1. ( “reasonable investigation” - As a standard, “reasonable investigation” should be governed by the case law interpreting and applying the “reasonable inquiry” standard under Rule 9011.
2. ( “not an abuse under Section 707(b)(1)” - An attorney’s certification that the case is not an abuse should be analyzed from the perspective of the pre-filing investigation and what the attorney knew or should have known based on that investigation.
3. ( “inquiry” - Attorneys should conform their “inquiry” requirement under §707(b)(4)(D) to the “reasonable inquiry” standard under Rule 9011.
4. ( “knowledge” -should be interpreted to include what the attorney knew or should have known with respect to the accuracy of the debtor’s schedules.
5. ( “incorrect” - Attorneys should be liable for “incorrect” information only where, after reasonable inquiry, the attorney knew or should have known of the incorrectness. Further, an attorney should not be liable for information not discoverable prior to the filing of the petition.
The Task Force did not make a specific recommendations with respect to the phrases “well grounded in fact” or “warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law,” instead suggesting that these phrases must await judicial interpretation.
American Bar Association
Business Law Section
Ad Hoc Committee on Bankruptcy Court Structure and Insolvency Processes
Task Force on Attorney DisciplineReport on Attorney Liability under § 707(b)(4) of the Bankruptcy Abuse
Prevention
and Consumer Protection Act of 2005
October 6, 2005
The Ad Hoc Committee on Bankruptcy Court Structure and the Insolvency Processes is a Committee (the “Committee”) housed in the Business Law Section of the American Bar Association consisting of members representing a number of ABA entities concerned with bankruptcy and its implications, including the Business Law Section, the GP|Solo Division and the Judicial Division. In response to two issues, the Business Law Section authorized the Committee to establish a Task Force to draft a proposed model local rule for the Bankruptcy Courts regarding attorney discipline.
The first issue involved a perception that the bar and the bankruptcy courts have not adequately addressed attorney misconduct in bankruptcy cases. This perception has led to fairly broad support for the attorney liability provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”).[79] The second issue is related to the new BAPCPA provisions establishing attorney liability. Those provisions are likely to result in an increase in attorney disciplinary proceedings in the bankruptcy courts. The Committee also concluded that the state bars are not well-suited to discipline bankruptcy attorneys who violate the Rules of Professional Conduct because the violations often involve a bankruptcy law issue outside the expertise of the state bars and because of the lengthy period before the state bar process might ever result in disciplinary action.
The bankruptcy courts, as federal courts, have the power to police the members of the bar that practice before them; however, many bankruptcy courts do not have established procedures to deal with attorney misconduct and the procedures that have been established are not uniform. Hence, the Committee formed the Task Force to propose a model local rule to assist the bankruptcy courts in policing bankruptcy lawyer misconduct.
During its initial deliberations, the Task Force determined that, in addition to a procedural rule for attorney discipline, guidance regarding the new “reasonable investigation” and “inquiry” requirements imposed on attorneys under BAPCPA would be helpful. The Task Force started with the idea of developing a model local rule to address § 707(b)(4), reasoning that, if the Task Force could define the procedures that an attorney must follow in carrying out his or her new obligations under BAPCPA, not only would attorneys be able to understand the behavior necessary to comply with the new obligations, but also debtors and the courts would benefit as well.
The Task Force concluded that, in addition to the longer term goal of drafting a model rule and in light of the October 17, 2005, effective date for BAPCPA (and the new § 707(b)(4)), it would be helpful to the bench and bar for the Task Force to publish a report with recommendations on interpreting the provisions of § 707(b)(4), particularly with a view as to how existing law may be applicable. This Report is the result of the Task Force’s efforts.
§ 1. Scope of Report
BAPCPA imposes new certification standards directed at attorneys who represent debtors whose debts are primarily consumer debts[80] in Chapter 7 cases. These new standards, codified at
§ 707(b)(4)(C) and (D), provide:
(C) The signature of an attorney on a petition, pleading, or written motion shall constitute a certification that the attorney has –
(i) performed a reasonable investigation into the circumstances that gave rise to the petition, pleading, or written motion; and
2. (ii) determined that the petition, pleading, or written
motion –
1. (I) is well grounded in fact; and
1. (II) is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law and does not constitute an abuse under paragraph (1).
(D) The signature of an attorney on the petition shall constitute a certification that the attorney has no knowledge after an inquiry that the information in the schedules filed with such petition is incorrect. [81]
This Report examines several key words and phrases in § 707(b)(4) and, where appropriate, makes recommendations regarding the interpretation of those words and phrases.
Specifically, this Report examines:
( “reasonable investigation”
( “warranted by the facts”
( “warranted by existing law or a good faith argument for the extension,
modification, or reversal of existing law”
( “not an abuse”
( “inquiry”
( “knowledge”
( “incorrect”
This Report offers recommendations for interpretation of the provisions of §707(b)(4).
The Task Force has supported its recommendations using existing case law interpreting language from Rule 9011 of the Federal Rules of Bankruptcy Procedure[82], because it contains language that is the same or similar to new § 707(b)(4). The Task Force also has included as an Appendix case annotations setting forth a much fuller annotation of the law developed under Rule 9011.
§ 2. Scope of § 707(b)(4); Application
Recommendation
Section 707(b)(4) should be limited to the pre-filing conduct of attorneys representing consumer debtors in Chapter 7 cases to ensure that the debtor’s case is not an “abuse” under the means test and is not filed other than in good faith.
Commentary
Despite the seemingly broad language used in § 707(b)(4), its scope is limited to a specific set of cases: Consumer debtors seeking relief under Chapter 7 of the Bankruptcy Code subject to the new “abuse” standard adopted by BAPCPA, which is reflected in the means test[83] and the good faith requirement[84]. That § 707(b)(4) applies only in Chapter 7 cases is mandated by §103(b)[85], which BAPCPA does not amend. Subparagraphs (A)[86] and (C)[87] expressly relate to “abuse” as defined in § 707(b), which, in turn, applies only to consumer debtors. Thus, it is only two provisions of §707(b)(4), subparagraphs (B)[88] and (D)[89], that are capable of broad application to all Chapter 7 debtors’ attorneys.
Applying §§ 707(b)(4)(B) and (D) broadly in the face of these specific limitations is not consistent with well-accepted principles of statutory construction. As one commentator explains:
Applying the maxims of ejusdem generis (general terms should be understood in context of specific ones) and noscitur a sociis (a term is known by the company it keeps), courts have applied narrow definitions to otherwise broad words, phrases, or subparts of various statutes, recognizing that to do otherwise would create anomalous results, create broader applicability than legislatively intended, or both.[90]
Although few would doubt that Congress meant to tighten judicial oversight with respect to debtors’ counsel, nothing in BAPCPA or its legislative history suggests that this intent was directed at any attorneys other than those representing consumer debtors[91]. In addition to Congressional intent, § 707(b)(4) is preceded by the means test and the good faith filing requirement and succeeded by a paragraph (5)[92], which provides for sanctions against creditors relating to improper motions to dismiss a debtor’s petition as an abuse. Therefore, § 707(b)(4) is limited to the pre-filing conduct of attorneys representing consumer debtors in Chapter 7 cases to ensure that the debtor’s case is not an “abuse” under the means test and is not filed other than in good faith.
That § 707(b)(4) is limited to the attorney’s pre-filing conduct is also suggested in the language of the new provision. The “reasonable investigation” requirement in § 707(b)(4)(C) is expressly directed at “the circumstances that gave rise to the petition, pleading, or written motion.” In addition, as discussed above, § 707(b)(4) is limited to “abusive” filings. A motion alleging abuse must be filed in short order; Rule 1017(e)(1)[93] requires that a § 707(b) motion to dismiss be filed no later than 60 days from the first date set for the § 341 meeting of creditors. BAPCPA, moreover, requires the United States Trustee to file a statement within ten days of the meeting of creditors as to whether the debtor’s case would be presumed to be an abuse and, not more than 30 days later, file either a motion to dismiss or a statement indicating why no motion will be filed[94]. This restricted timeframe regarding whether the debtor’s case will be challenged as “abusive” leaves no room for § 707(b)(4) to encompass the attorney’s post-petition activities.
§3. § 707(b)(4)(C)
§3.1 “Reasonable Investigation”
Recommendation
As a standard, “reasonable investigation” should be governed by the case law interpreting and applying the “reasonable inquiry” standard under Rule 9011.
( Attorneys should be able to rely on case law that allows time constraints to be taken into account.
( The reasonableness of the attorney’s inquiry should not be analyzed with the benefit of hindsight; rather, the analysis should, as under Rule 9011, focus on the attorney’s inquiry at the time that the inquiry was made.
( Attorneys should verify information supplied by the debtor if such verification may be accomplished with a reasonable expenditure of time and expense and, in
12 the attorney’s professional judgment, the information provided by the client is inconsistent or contains other indications of inaccuracy.
( Attorneys should be able to rely upon documents prepared by third parties in the scope of their employment, including tax returns, credit and title reports, child support enforcement agency statements, or information from the debtor’s pre-petition credit counseling agency.
Unless and until the courts articulate new standards for § 707(b)(3)’s good faith requirement, attorneys should be able to rely on case law developed under § 707(a), specifically those cases interpreting and applying the “bad faith” and “totality of the circumstances tests.
Case annotations relevant to these recommendations are attached as Appendix A and incorporated herein.
Commentary
Because of the general rule of statutory construction that, where different words are used by Congress, it is presumed that different meanings are intended,[95] a “reasonable investigation” under new § 707(b)(4)(C) should differ somehow from the “reasonable inquiry” standard under Rule 9011. However, there is no discernable difference between the two terms. Rather, they are commonly used interchangeably and each is often used to define the other. In this regard, the following case excerpt typifies the judicial discussion:
Rule 11 requires an attorney to make a reasonable inquiry into the factual and legal basis for the claims asserted. The failure of an attorney to make an objectively reasonable investigation of the facts underlying a claim or the applicable law justifies the imposition of Rule 11 sanctions.[96]
Accordingly, in interpreting and applying § 707(b)(4)(C)’s “reasonable investigation” requirement, attorneys and the courts should use the “reasonable inquiry” standard articulated under Rule 9011 jurisprudence. Any other conclusion would put consumer bankruptcy attorneys in the untenable position of having to guess about their behavior before any case law regarding such behavior has been developed. More specifically, the Task Force accepts the following articulation of an attorney’s reasonable pre-filing investigation:
The duty of reasonable inquiry imposed upon an attorney by Rule 11 and by virtue of the attorney’s status as an officer of the court owing a duty to the integrity of the system requires that the attorney (1) explain the requirement of full, complete, accurate, and honest disclosure of all information required of a debtor; (2) ask probing and pertinent questions designed to elicit full, complete, accurate, and honest disclosure of all information required of a debtor; (3) check the debtor’s responses in the petition and Schedules to assure they are internally and externally consistent; (4) demand of the debtor full, complete, accurate, and honest disclosure of all information required before the attorney signs and files the petition; and (5) seek relief from the court in the event that the attorney learns that he or she may have been misled by a debtor[97].
The court’s reference to “attorney” does not necessarily preclude the use of paraprofessionals where appropriate and under proper supervision in the course of the attorney fulfilling the reasonable inquiry requirement. However, it is clear under pre-BAPCPA decisions, that attorneys cannot evade their responsibilities by relying on those paraprofessionals. Rather, all attorneys must exercise not only supervision, but, more importantly, professional judgment that derives only through personal involvement in the case and evaluation of the client’s needs.
The Task Force notes that new statutory mandates will lead to satisfaction of these considerations in certain respects, especially if the attorney is also a “debt relief agency.”[98] For example, attorneys representing consumer debtors who fit the definition of “assisted person”[99] must give the debtor and file with the court the § 342(b) notice[100], which includes a statement that debtors who make false statements under penalty are subject to fine or imprisonment and that information the debtor provides is subject to Attorney General review[101]. If the attorney is a debt relief agency, additional required disclosures include written notice to the debtor that:
( all information that the debtor is required to provide with a petition and thereafter during the case is required to be complete, accurate and truthful;[102]
( all assets and liabilities are to be completely and accurately disclosed in the documents filed to commence the case; and[103]
( information that the debtor provides during the case may be audited, and failure to provide such information may result in dismissal of the case or other sanction, including a criminal sanction.[104]
Compliance with these notice requirements would presumably satisfy the first and fourth of the attorney’s duties in performing a reasonable inquiry, as set forth above because that compliance makes clear to the debtor that complete, accurate, and truthful disclosure is required. Similarly, the debtor must file with the court payment advices or other evidence of payment received within the 60 days preceding the petition[105], thus satisfying to a degree the attorney’s investigation of the debtor’s income.
It is beyond the scope of this Report to detail all the documentation requirements that, if undertaken by the attorney, could satisfy the “reasonable inquiry” standard under Rule 9011. The point, rather, is to alert the bench and bar that BAPCPA itself may supply the requirements of a reasonable inquiry in certain respects.
On the other hand, § 707(b)’s “abuse” standard, whether defined by the means test or by the good faith restriction, presents numerous opportunities for litigation. With respect to good faith, this potential is obvious, because the court is required under certain circumstances to determine whether the debtor filed the petition in bad faith or whether the totality of the circumstances demonstrates abuse[106]. The means test itself also requires judicial interpretation.
For example:
( The debtor’s expenses will include amounts “reasonably necessary” for health and disability insurance, health savings accounts, and “to maintain the safety of the debtor and the family of the debtor.”
( It is unclear what income will be excluded from “current monthly income” as a benefit received under the Social Security Act.
( Housing and utility expenses may exceed the IRS guidelines based on the actual expenses for home energy costs if the “actual expenses are reasonable and necessary.”[107]
( If the presumption of abuse arises, it may be rebutted only by “demonstrating special circumstances…that justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative.”[108]
Each of these issues, along with many other permutations of amended § 707(b) and its abuse standards[109], provides a basis for the court to determine that the attorney has not made a reasonable inquiry. Adoption of the Task Force’s “reasonable investigation” recommendations will allow the courts to interpret and apply § 707(b)(4)(C) in a manner consistent with Congressional intent, but without subjecting attorneys to liability before the many litigable aspects of § 707(b) are given meaning, thus establishing clearer rules for the attorney’s pre-filing investigation.
§ 3.2. “Well Grounded in Fact”
Recommendation
None.
Commentary
BAPCPA has created a rather odd relationship between new §707(b)(4)(C)(ii)(I)’s “well grounded in fact” language and Rule 9011. The Task Force, therefore, concludes that the interpretation of “well grounded in fact” must await judicial development.
The problem with the use of “well grounded in fact” in § 707(b)(4)(C) is that it resurrects language used in Rule 9011 before Rule 9011 was amended in December 1997. This may be the product of Congressional oversight: the earliest versions of BAPCPA were introduced prior to the effective date of the Rule amendment.[110] Even if true, the oversight is of no moment because it is the language of the statute that matters most.
The courts have two options. The first is to apply those Rule 9011 cases decided after the 1997 amendment, treating the “well grounded in fact” language as largely synonymous with the Rule’s current language. As one commentator has noted:
Despite the different treatment of factual allegations under the legislation and Rule 9011, it is doubtful that there will be any significant practical effect. Except in cases involving very close calls, the distinction between the two is slight. Moreover, many of the facts that support the bankruptcy petition will need to be filed with the court, including detailed statements of net monthly income, payment advices, tax returns, and other information that bears on means test eligibility. Thus, much of the factual support will be provided along with the petition, or shortly thereafter[111].
Alternatively, the courts might be constrained to rely on case law decided under the pre-amendment Rule 9011. Although the difference between the statute and the Rule is not significant, it is possible that Congress, which is presumed to have knowledge of this Rule change, intended to revert to the pre-amendment Rule. The most important consequence of reverting to the cases interpreting the pre-amendment Rule is that such a reversion will necessarily cause an increase in disputes over whether the attorney should be sanctioned.[112]
§ 3.3. “Warranted by Existing Law or a Good Faith Argument for Extension, Modification or Reversal of Existing Law”
Recommendation
None.
Commentary
Like the “well grounded in fact” language discussed in § 3.2., the “good faith” language of § 707(b)(4)(C)(ii)(II) also resurrects language used in Rule 9011 before the rule was amended in December 1997. The amendment replaced “good faith” with “nonfrivolous” in an effort to forestall “pure heart, empty head” types of argument. Again, the difference is slight:
Like the factual distinction, the difference here is one of degree rather than kind, and the two can easily become blurred. Prior to being amended, courts examined objective good faith by looking, in part, at whether the argument was frivolous; post-amendment, determining whether an argument is not frivolous seems to involve at least some measure of good faith.[113]
The likely effect of the statute, then, is that courts will apply current Rule 9011 standards, with the possible addition of defenses associated with the term “good faith.”
§ 3.4.
“Not an Abuse Under Section 707(b)(1)”
Recommendations
An attorney’s certification that the case is not an abuse should be analyzed from the perspective of the pre-filing investigation and what the attorney knew or should have known based on that investigation.
Attorneys should determine if debtors qualify under § 707(b)(2)(D), an exception to the application of means testing.
( In cases subject to means testing, attorneys should perform the analysis set forth in § 707(b)(2)(A) to determine whether a presumption of abuse arises.
( In cases where a presumption of abuse arises, attorneys should determine whether special circumstances exist to rebut the presumption (including required documentation) exist under § 707(b)(2)(B).
( Unless and until the courts articulate new standards for § 707(b)(3)’s good faith requirement, attorneys should be able to rely on case law developed under § 707(a), specifically those cases interpreting and applying the “bad faith” and “totality of the circumstances” tests.
Case annotations relevant to these recommendations are attached as Appendix A and incorporated herein.
Commentary
Section 707(b)(4)(C) provides, among other things, that an attorney’s signature on a petition is a certification that the petition does not constitute an abuse under § 707(b)(1)[114]. Under § 707(b), the granting of relief may be an abuse if the debtor either “fails” the means test of § 707(b)(2) or, under the relatively looser standards of § 707(b)(3), the debtor filed the petition in bad faith or the totality of the circumstances of the debtor’s financial situation demonstrates abuse.
If an individual debtor whose debts are primarily consumer debts fails the means test, the granting of relief is presumed abusive as a matter of law. At a minimum, following a reasonable inquiry and a determination that a filing is lawful, an attorney should perform the analysis described in § 707(b)(2) to determine whether the filing is presumptively abusive, and, if so, whether good faith grounds for rebuttal exist.
Section 707(b)(3) additionally requires a court to determine whether the case was filed in bad faith or whether the totality of the circumstances demonstrate abuse in any case in which the means test presumption does not arise or has been rebutted. Unlike finding abuse by application of the means test, a finding of abuse based on bad faith or the totality of the circumstances is not often readily or reliably predictable,[115] although experienced counsel may identify cases where the issues are more likely to be raised.
The attorney’s obligation to assess bad faith or abuse based on the totality of the circumstances is analogous to the attorney’s obligation to assess possible affirmative defenses when filing a civil action. The case law regarding that obligation varies from circuit to circuit. For example, the Ninth Circuit has decided that an attorney need not
step first into the shoes of opposing counsel to find all potentially contrary authority, and finally into the robes of the judge to decide whether the authority is indeed contrary or whether it is distinguishable. It is not in the nature of our adversary system to require lawyers to demonstrate to the court that they have exhausted every theory, both for and against their client.[116]
On the other hand, the Tenth Circuit has held that “[p]art of a reasonable attorney’s pre-filing investigation must include determining whether any obvious affirmative defenses bar the case.”[117] The Tenth Circuit, however, further commented that an attorney does not run the risk of sanctions if, despite the relevance of an affirmative defense, counsel proceeds with a nonfrivolous argument as to why the defense should not apply.[118] Because an attorney’s assessment of bad faith and totality of the circumstances issues are governed by the standards of Rule 9011 that differ from circuit to circuit, counsel should determine the standards which apply in a particular jurisdiction.
Similarly, unless a debtor’s bankruptcy case is plainly not permitted under the jurisdiction’s interpretation of the “bad faith” and “totality of the circumstances” tests, an attorney should not be required to anticipate the various arguments parties might put forth in post-petition challenges to the debtor’s motivation in seeking bankruptcy relief.
§ 4.
§ 707(b)(4)(D)
§ 4.1 “Inquiry” Recommendations
Attorneys should conform their “inquiry” requirement under § 707(b)(4)(D) to the “reasonable inquiry” standard under Rule 9011.
➢ Attorneys should be able to rely on case law that allows time constraints to be taken into account.
( The reasonableness of the attorney’s inquiry should be not be analyzed with the benefit of hindsight; rather, the analysis should, as under Rule 9011, focus on the attorney’s inquiry at the time that the inquiry was made.
➢ Attorneys should verify information supplied by the debtor if such verification may be accomplished with a reasonable expenditure of time and expense and, in the attorney’s professional judgment; the information provided by the client is inconsistent or contains other indications of inaccuracy.
( Attorneys should be able to rely upon documents prepared by third parties in the scope of their employment, including tax returns, credit and title reports, child support enforcement agency statements, or information from the debtor’s pre-petition credit counseling agency.
Case annotations relevant to these recommendations are attached as Appendix A and incorporated herein.
Commentary
Section 707(b)(4)(D) marks the first time that attorneys have been responsible, via the threat of sanctions, for the accuracy of debtor’s schedules. Under Rule 9011(a), schedules and the statement of financial affairs are expressly excepted from the signature requirement.[119] Although BAPCPA does not amend Rule 9011, the § 707(b)(4)(D) certification requirement certainly overrides the Rule’s exception.[120] This is not to say that attorneys enjoyed a free ride before BAPCPA. Courts have sanctioned attorneys based on the inaccurate or incomplete schedules, using § 105 or their inherent authority to control the conduct of parties and attorneys.[121] These other means of sanctions, however, often require a higher threshold of wrongdoing, such as bad faith, than will be necessary under § 707(b)(4)(D)[122]. Some courts use their power over the attorney’s compensation, reducing or ordering the return of funds that exceed the reasonable value of the services performed.[123]
The most prominent aspect of § 707(b)(4)(D)’s language is the absence of “reasonable” before “inquiry.” This departs from both § 707(b)(4)(C) and Rule 9011 and presents immediate interpretive difficulty because where Congress includes particular language in one section of a statute but omits it in another section of the same statute, it is presumed that Congress intended different meanings.[124] This leaves “inquiry” subject to very diverse interpretations ranging from simply asking the debtor about the debtor’s assets and liabilities, to conducting an exhaustive investigation of the debtor’s assets, liabilities and other information called for in the schedules, including appraisals, title check other verifications.[125]
Neither of these alternatives is acceptable. The latter would be onerous in effect, particularly with respect to information that is itself in a constant state of flux, such as the amount of cash in the debtor’s checking account or the balance on a credit card that continues to accrue late charges and interest.[126] The former, a bare inquiry that requires the attorney to do no more than ask the debtor for information needed to complete the schedules, sets the bar too low and would be inconsistent with Congressional intent, as well as the real need to heighten the quality of disclosure in the schedules.[127]
Reasonableness creates an acceptable middle ground. Moreover, despite the fact that the § 707(b)(4)(D) inquiry is not qualified with “reasonable,” it is possible to interpret “inquiry” as incorporating a reasonableness standard. The Task Force finds the analogy one commentator drew between § 707(b)(4)(D) and § 523(a)(2) to be sound:
Section 523(a)(2) of the Code presents an analogous situation. Subparagraph (B) provides that a debt obtained by the debtor’s use of a material false statement in a written financial statement, on which the creditor reasonably relied, is nondischargeable. Subparagraph (A) renders nondischargeable debts incurred through the debtor’s misrepresentation, false pretenses, or actual fraud, without reference to reliance.
The disparity was resolved in Field v. Mans, in which the Supreme Court held that the inclusion of “reasonable” in section 523(a)(2)(B), but not section 523(a)(2)(A), meant that the latter required something different, which the Court determined to be the more lenient standard of justifiable reliance.
Of course, the context of Field v. Mans differs from that with which this Article deals because the Field v. Mans Court relied heavily on common law tort doctrines, but this distinction does not detract from the usefulness of the case in the present context. Because the Field v. Mans Court rejected the argument that the absence of a specific standard meant that only actual reliance was required, courts dealing with attorneys under the legislation can require more than a bare inquiry and the attorney’s subjective position within it. A bare inquiry is at odds with Congressional intent because the legislation plainly attempts to impose greater liability on debtors’ counsel than that which currently may be imposed. Moreover, courts would no doubt be constrained to permit such liberality on the part of counsel because it would represent an abdication of the courts’ desire and authority to control attorney conduct before them.
The level of inquiry required, then, may be gleaned in part from Field v. Mans, in which the Court stated:
[I]t is only where, under the circumstances, the facts should be apparent to one of his knowledge and intelligence from a cursory glance, or he has discovered something which should serve as a warning that he is being deceived, that he is required to make an investigation of his own.
To continue the analogy between the reasoning of Field v. Mans and the language of the legislation, then, an “inquiry,” which need not be “reasonable” or “reasonable under the circumstances,” is required when information given by the client appears incorrect on its face or serves as a warning of an inaccuracy. Although this interpretation lessens the inquiry requirement under Rule 9011, which is arguably inconsistent with what Congress wants to do, the case law supports this reading of the actual language employed in the legislation itself.
If we take this reasoning one step further, the ironic conclusion is that the standard departs little, if at all, from that currently required, save for the clarification that, under Rule 9011, counsel is accountable for information in the schedules. Field v. Mans discusses justifiable reliance from the standpoint of “one of [the person’s] own knowledge and intelligence,” which, here, would be debtors’ counsel generally. Thus, something very close to reasonableness emerges. The analysis would not be one that is purely subjective; instead, the courts would examine counsel’s conduct in light of that of a knowledgeable and intelligent attorney who represents Chapter 7 debtors.[128]
Adopting the reasoning of this analogy allows incorporation of a reasonableness standard into § 707(b)(4)(D) without opening the courts to charges of so-called “judicial activism” because of the reliance on precedent from the nation’s highest court. The Field v. Mans analogy also avoids the unacceptable alternatives of a bare inquiry, and the laxity such a standard would invite, and absolute verification, which would prove so onerous that courts would be tempted to decline to impose sanctions.
Incorporating reasonableness into § 707(b)(4)(D) also allows for a standard that is consistent with § 707(b)(4)(C)’s reasonable investigation requirement as well as the standard in § 527(c),[129] applicable to debt relief agencies, that speaks of the attorney’s “reasonably diligent inquiry so as to obtain such information reasonably accurately for inclusion on the petition, schedules, or statement of affairs.”
§ 4.2. “Knowledge”
Recommendation
“Knowledge” should be interpreted to include what the attorney knew or should have known with respect to the accuracy of the debtor’s schedules.
Commentary
As with “inquiry,” the absence of qualifying language leaves room to argue that the “knowledge” requirement in § 707(b)(4)(D) requires that attorneys have actual knowledge that information in the schedules is incorrect before sanctions may be imposed, but this is not the standard courts should glean from the statute. Rather, “knowledge” should encompass what the attorney should have known.
The “should have known” standard is required under the Rule 9011 “reasonable inquiry” requirement and has been recommended by the Task Force to apply to § 707(b)(4)(C)’s “reasonable investigation” in § 3.1. of this Report and the § 4.1. discussion of “inquiry” as used in § 707(b)(4)(D). It should also apply here because it is also in keeping with the intent of Congress to heighten the accountability of consumer debtors’ attorneys; “actual knowledge” would implement too lenient a standard. Moreover, interpreting § 707(b)(4)(D) as encompassing what the attorney should have known is more in keeping with the degree of quality that courts, other attorneys and the public have a right to expect from the legal profession.
§ 4.3. “Incorrect” Recommendation
Attorneys should be liable for “incorrect” information only where, after reasonable inquiry, the attorney knew or should have known of the incorrectness. Further, an attorney should not be liable for information not discoverable prior to the filing of the petition.
Commentary
As articulated in § 2 of this Report, § 707(b)(4) applies only to an attorney’s pre-bankruptcy conduct. Accordingly, § 707(b)(4)(D)’s reference to “incorrect” information in the schedules should be limited to what the attorney knew or should have known after a reasonable inquiry conducted prior to the filing of the bankruptcy petition. This interpretation resolves the conflict that could arise for attorneys who learn of the need to correct the schedules only after the bankruptcy case has been commenced. Attorneys are, of course, under a continuing duty to ensure their debtor clients make all required disclosures, including amendments to the schedules as needed.[130] No attorney should face sanctions under § 707(b)(4)(D) because, in honoring this duty, the attorney reveals that the schedules, as originally filed, were incorrect.
APPENDIX A
Case Annotations
Time Constraints:
In a Chapter 7 proceeding, debtor’s first attorney was replaced. Subsequent counsel attempted to convert the Chapter 7 case to Chapter 11. Although finding that a Chapter 11 reorganization would be impossible, the court declined to sanction counsel because he “was retained … on short notice, and had a limited period of time in which to research the facts of the case.” Mapother & Mapother, P.S.C. v. Cooper (In re Downs), 103 F.3d 472 (6th Cir. 1996).
In determining whether an attorney has fulfilled his or her duty under the “reasonable investigation/inquiry” standard, courts have noted that a relevant factor is the time that an attorney had to conduct an investigation. See, e.g., Mary Ann Pensiero, Inc. v. Lingle, 847 F.2d 90, 95 (3d Cir. 1988); Thomas v. Capital Sec. Servs., Inc., 836 F.2d 866, 875 (5th Cir. 1988); Glatter v. Mroz (In re Mroz), 65 F.3d 1567, 1573 (11th Cir. 1995).
The debtor’s complaint listed the rule under which jurisdiction was based and the date the Chapter 7 petition was filed. The creditor’s attorney, who was required to reply three days after being assigned to the case, answered that neither he nor his client had enough knowledge to verify the truth of the above allegations. Finding this to be easily ascertainable by asking the court’s clerk, the bankruptcy judge imposed sanctions. However, the district court vacated the order of sanctions, noting that the attorney’s answer was not wholly frivolous since he raised a successful lack of jurisdiction argument, did not waste any of the court’s time or resources, and was operating under time constraints. In re Two Star Surgical Supply, Inc., 92 B.R. 26 (E.D.N.Y.1988).
Court’s Review of Attorney’s Conduct:
“The district court … ‘is expected to avoid using the wisdom of hindsight and should test the signor’s conduct by inquiring what was reasonable to believe at the time the pleading, motion or other paper was submitted.’ The attorney’s conduct must be tested by an objective standard of reasonableness. The determination of whether an attorney conducted ‘reasonable inquiry’ is judged by objective norms of what reasonable attorneys would have done. That is, what was reasonable for the attorneys to believe at the time the bankruptcy petition was filed?” Silverman v. Mutual Trust Life Ins. Co. (In re Big Rapids Mall Assocs.), 98 F.3d 926 (6th Cir. 1996).
“The court’s inquiry [under Rule 9011] should only focus on the merits of the pleading gleaned from the facts and law known or available to the attorney at the time of filing. The court is expected to avoid using the wisdom of hindsight and should test the signer’s conduct by inquiring what was reasonable to believe at the time the pleading, motion, or other paper was submitted.” Glatter v. Mroz (In re Mroz), 65 F.3d 1567 (11th Cir. 1995) (internal quotations omitted).
Rule 11 “requires that a lawyer conduct a ‘reasonable inquiry’ before certifying that the filing is well-grounded in fact and law or is a good faith argument for extension, modification, or reversal of existing law. A court, however, should be wary about the benefit of hindsight; it is only reasonableness under the circumstances that the Rule requires.” In re Anderson, 128 B.R. 850 (D.R.I. 1991).
“The Court must use an objective standard to determine if the requirements of Rule 9011 have been met. It is not proper, however, to judge the conduct of a party by utilizing the benefit of hindsight. Instead, it is important to focus upon the facts and circumstances as they existed at the time of the filing.” Leeds Bldg. Prods. v. Moore-Handley, Inc. (In re Leeds Bldg. Prods.), 181 B.R. 1006 (Bankr. N.D. Ga. 1995).
Attorney’s Verification of Client’s Information, Especially If Client’s Information Signals Inaccuracies:
Debtor, who had filed numerous prior bankruptcy petitions, informed her new attorney of only one prior filing. Counsel investigated the prior case and learned that a Bar Order had been imposed against the debtor. Since the Bar Order had already expired, counsel continued to assist the debtor in filing a new petition. Nevertheless, the debtor was still hindered from filing a new petition under a subsequent Bar Order, of which counsel was unaware. Counsel argued that since his client only disclosed one prior bankruptcy filing, he should not be held liable for violating a subsequent Bar Order of which his client failed to inform him. The court disagreed: “Where the client identifies a prior case, and in particular where a review of the docket in that case discloses a bar order, failure to further investigate the client’s bankruptcy history, is inexcusable. A bar order is entered only where there have been prior filings and usually more than two.” A thorough pre-filing investigation would have involved investigating the court’s electronic records and attempting to uncover all prior cases, if any, of the debtor. Since counsel failed to satisfy this standard, the court imposed both monetary and non-monetary sanctions against him. In re Bailey, 321 B.R. 169 (Bankr. E.D. Pa. 2005).
In a Chapter 11 case, debtor, a Wyoming rancher, filed for bankruptcy in Wyoming. Upon failing to satisfy the requirements of a stay on his property, debtor incorporated Coones Ranch in South Dakota. Days after incorporating, Coones, with the help of a South Dakota attorney, filed for Chapter 11. The bankruptcy court held that the Chapter 11 filing was done in bad faith. On appeal to the Eighth Circuit, the attorney argued that the time constraints under which she was operating led to her inability to discover the truth behind her client’s misleading factual information. Although recognizing the time constraints under which counsel was operating, the Eighth Circuit nonetheless upheld the imposition of sanctions, concluding that since the corporation filed for Chapter 11 only four days after incorporating, the attorney “should have known Coones contemplated the bankruptcy filing at the time of incorporation.” Grunewaldt v. Mutual Life Ins. Co. (In re Coones Ranch), 7 F.3d 740 (8th Cir. 1993).
Although recognizing that Rule 9011 sanctions are not warranted against attorneys based on inaccuracies in schedules, the court, in dicta, found that it would not otherwise sanction the attorney since the debtor’s “bookkeeping methods were inadequate and unconventional[, thus making it] possible for the debtor to conceal his true financial condition and hamper his attorney’s ability to verify the accuracy of the information provided by the debtor.” In re Alderson, 114 B.R. 672 (Bankr. D.S.D. 1990).
Attorney’s Reliance on Documents Prepared by Third Parties, Such as Tax Returns:
While attempting to determine whether debtor could pay back his loans while maintaining a minimal standard of living, the court placed its reliance on the debtor’s pay stubs and tax returns in order to determine debtor’s income. Cota v. U.S. Dep’t of Educ. (In re Cota), 298 B.R. 408, 414-15. (Bankr. D. Ariz. 2003).
“Income tax returns are quintessential documents ‘from which the debtor’s financial condition or business transactions might be ascertained….’ Without tax returns, the trustee would be forced to accept the uncorroborated statements of the debtors, as contained in their schedules. Tax returns are essential to the orderly administration of the debtors’ estate, and necessary for the debtors to make a full presentation of their financial affairs to the trustee.” Lubman v. Hall (In re Hall), 174 B.R. 210, 215 (Bankr. E.D. Va. 1994); In re Wolfson, 152 B.R. 830, 833 (S.D.N.Y. 1993).
Debtor sought to merge two of his companies. He hired one attorney (attorney 1) to help him file the petition and another attorney (attorney 2) to effectuate the merger. Although the merger did not take effect until after the date of the Chapter 11 filing, attorney 2 orally asserted to attorney 1 that the merger was complete. Thus, attorney 1 characterized the two companies as merged entities in the petition. Despite the inaccuracy in the petition, the court found that attorney 1’s exclusive reliance on the statements of attorney 2 did not warrant sanctions in this particular case. H.J. Rowe, Inc. v. Spiegel, Inc. (In re Talon Holdings), 1999 Bankr. LEXIS 256 (Bankr. N.D. Ill. March 19, 1999).
“Good Faith” and “Totality of the Circumstances”:
“Section 707(a) allows a bankruptcy court to dismiss a petition for cause if the petitioner fails to demonstrate his good faith in filing. Although the Code does not define ‘good faith,’ courts in this circuit have uniformly held that ‘at the very least, good faith requires a showing of honest intention.’ … Once a party calls into question a petitioner’s good faith, the burden shifts to the petitioner to prove his good faith.” Thus, where a debtor sought discharge of a debt that was ten times larger than his income and “could point to no marked calamity or sudden loss of income that precipitated his need to accrue such a comparatively large consumer debt[,]” the court found bad faith. Tamecki v. Frank (In re Tamecki), 229 F.3d 205 (3d Cir. 2000).
“Dismissal based on lack of good faith must be undertaken on an ad hoc basis. It should be confined carefully and is generally utilized only in those egregious cases that entail concealed or misrepresented assets and/or sources of income, and excessive and continued expenditures, lavish life-style, and intention to avoid a large single debt based on conduct akin to fraud, misconduct, or gross negligence.” Therefore, where a debtor filed for Chapter 7 days after losing a court battle which led to the imposition of a $600,000 judgment, rearranged his debt obligations to creditors (such as his wife and mother) without explanation in an attempt to get the above judgment discharged, and did not change his lavish lifestyle, the court found bad faith. In re Zick, 931 F.2d 1124 (6th Cir. 1991).
Courts should determine a debtor’s bad faith under 707(a) by looking to the totality of the circumstances. Some factors relevant to the totality of the circumstances include: “1. The debtor reduced his creditors to a single creditor in the months prior to filing the petition. 2. The debtor failed to make lifestyle adjustments or continued living an expansive or lavish lifestyle. 3. The debtor filed the case in response to a judgment pending litigation, or collection action; there is an intent to avoid a large single debt. 4. The debtor made no effort to repay his debts. 5. The unfairness of the use of Chapter 7. 6. The debtor has sufficient resources to pay his debts. 7. The debtor is paying debts to insiders. 8. The schedules inflate expenses to disguise financial well-being. 9. The debtor transferred assets. 10. The debtor is over-utilizing the protection of the Code to the unconscionable detriment of creditors. 11. The debtor employed a deliberate and persistent pattern of evading a single major creditor. 12. The debtor failed to make candid and full disclosure. 13. The debts are modest in relation to assets and income. 14. There are multiple bankruptcy filings or other procedural ‘gymnastics.’ Generally, the presence of only one of these factors is not sufficient to support a § 707(a) dismissal. However, where a combination of these factors are present, the courts have held that a § 707(a) dismissal is warranted.” Thus, where debtor violated factors 2-6, 10-11, and 13, court found that the totality of the circumstances test for bad faith had been met. In re Spagnolia, 199 B.R. 362 (Bankr. W.D. Ky. 1995).
Applying the fourteen factors utilized in In re Spagnolia, the court determined that a debtor’s following violations warranted a finding of bad faith under section 707(a): “(1) he decided not to carry medical malpractice insurance because it was too expensive; (2) he has a monthly gross income of $ 29,500; (3) he has only one major unpaid creditor and has paid and continues to pay all other creditors; (4) he has made no changes to his lifestyle that might show a willingness to sacrifice in order to fulfill his credit obligations; (5) he filed in response to the Kurily’s judgment against him and has no intent to pay them; and (6) he has employed a deliberate and persistent pattern of evading the Kurily’s, his single major creditor.” Cassell v. Kurily (In re Cassell), 1999 U.S. Dist. LEXIS 13349 (E.D. Mich. Aug. 13, 1999).
Requiring Documentary Evidence from Debtors:
“In her testimony, Debtor blithely used the word ‘ballpark’ three times to describe her method of calculating some items in her original schedules. She stated that when she met with her attorney, he asked her for ‘ballpark’ figures as he prepared her schedules. Both debtors and debtors’ counsel alike should understand that the preparation of schedules, like any other sworn document, requires the most precision counsel and their clients can muster. Unsupported guesses are unacceptable.” Office of the U.S. Trustee v. Mottilla (In re Mottilla), 306 B.R. 782, 789 n.6 (Bankr. M.D. Pa. 2004).
Although recognizing that Rule 9011 sanctions are not warranted against attorneys based on inaccuracies in schedules, the court, in dicta, found that it would not otherwise sanction the attorney since the debtor’s “bookkeeping methods were inadequate and unconventional[, thus making it] possible for the debtor to conceal his true financial condition and hamper his attorney’s ability to verify the accuracy of the information provided by the debtor.” In re Alderson, 114 B.R. 672 (Bankr. D.S.D. 1990).
“Knowledge” as a “Should Have Known” Standard:
In a Chapter 11 case, debtor, a Wyoming rancher, filed for bankruptcy in Wyoming. Upon failing to satisfy the requirements of a stay on his property, debtor incorporated Coones Ranch in South Dakota. Days after incorporating, Coones, with the help of a South Dakota attorney, filed for Chapter 11. The bankruptcy court held that the Chapter 11 filing was done in bad faith. The Eighth Circuit upheld the imposition of sanctions, concluding that since the corporation filed for Chapter 11 only four days after incorporating, the attorney “should have known Coones contemplated the bankruptcy filing at the time of incorporation.” Grunewaldt v. Mutual Life Ins. Co. (In re Coones Ranch), 7 F.3d 740 (8th Cir. 1993).
In a case involving neither Rule 9011 nor Rule 11, one court declared: “If a person has knowledge of such facts as would lead a fair and prudent man, using ordinary thoughtfulness and care, to make further accessible inquiries, and he avoids the inquiry, he is chargeable with the knowledge which by ordinary diligence he would have acquired. Knowledge of facts, which, to the mind of a man of ordinary prudence, beget inquiry, is actual notice, or, in other words, is the knowledge which a reasonable investigation would have revealed.” Sands v. United States, 198 F. Supp. 880, 884 (W.D. Wash. 1960) quoting The Tompkins, 13 F.2d 552, 554 (2d Cir. 1926).
Although recognizing that Rule 9011 sanctions are not warranted against attorneys for inaccuracies in schedules, the court noted that it would not otherwise impose sanctions against an attorney who relied primarily on his client’s factual representations since the debtor’s “bookkeeping methods were inadequate and unconventional[, thus making it] possible for the debtor to conceal his true financial condition and hamper his attorney’s ability to verify the accuracy of the information provided by the debtor.” Therefore, the court implicitly determined that there was no way that the attorney “should have known” the debtor was misleading him. In re Alderson, 114 B.R. 672 (Bankr. D.S.D. 1990).
APPENDIX B
American Bar Association
Business Law Section
Ad Hoc Committee on Bankruptcy Court Structure and Insolvency Processes
Task Force on Attorney Discipline
Task Force Member Biographies
Judith Greenstone Miller, a partner at Jaffe Raitt Heuer & Weiss, P.C., focuses her practice on bankruptcy and insolvency, creditors’ rights and commercial litigation, involving representation of debtors, secured and unsecured creditors, creditors’ committees and trustees in bankruptcy proceedings, primarily involving Chapter 11 reorganizations. She also represents parties in litigation in complex commercial disputes. Ms. Miller is a graduate of the University of Michigan and obtained her law degree and received the Creditors’ Rights Book Award at Wayne State University Law School. She is a member of the State Bar of Michigan, the United States District Court for the Eastern District of Michigan and the United States Court of Appeals for the Sixth Circuit. Ms. Miller is a member of the Commercial Law League of America and its Bankruptcy Section (Legislative Committee, Co-Chair, 1998-2002; Education Committee, Co-Chair, 1997-1998; Executive Council of the Bankruptcy Section; Chair, 2002; Chair Elect, 2001; Secretary, 2000; Co-Chair National Governmental Affairs Committee, 2002-2005; Vice-Chair NCBJ Committee, 2001-2005). Ms. Miller has testified before the Subcommittee on Commercial and Administrative Law on the Judiciary Committee of the United States House of Representatives and the Subcommittee on Administrative Oversight and the Courts on the Judiciary Committee of the United States Senate on recently proposed bankruptcy legislation. Ms. Miller is also a member of the American Bankruptcy Institute and the American Bar Association (Business Law Section; Business Bankruptcy Committee; Chair, Litigation Subcommittee, 2000-2004; Co-Chair, Appeals Subcommittee, 2005-2006); Federal Bar Association for the Eastern District of Michigan; Detroit Metropolitan Bar Association (Chair, Debtor/Creditor Section, 1997-2002: Chairperson of the Year, 1998); and the State Bar of Michigan (Co-Chair, Debtor’s/Creditors’ Rights Committee of the Business Law Section; Member of the Business Council; and Member of the Debtor/Creditor Committee of the Real Property Law Section). She is also a member of the Bankruptcy Court Advisory Committee and the Mediation Panel for the Eastern District of Michigan, Southern Division; the Chapter 11 Rules Committee; and the Bankruptcy Judges Tribute Committee. The Michigan Consumer Bankruptcy Association honored her in December 2000 as a local practitioner that is a nationally recognized bankruptcy leader. Ms. Miller is a frequent lecturer nationally and has authored numerous articles dealing with issues relating to bankruptcy practice and Revised Article 9 of the Uniform Commercial Code.
David W. Allard is a shareholder of Allard & Fish, P.C. Detroit, Michigan. The law firm specializes in bankruptcy, reorganization, insolvency, workouts, commercial law, real and personal property taxation, real estate and litigation. He has been a member of the Standing Panel of Chapter 7 Trustees in the Eastern District of Michigan (“EDM”) since 1982. He is a member of numerous other bar and bankruptcy associations and currently serves as the Chair of the Subcommittee on Trustees and Examiners of the Business Bankruptcy Committee of the Business Law Section of the American Bar Association. Mr. Allard is a Past President of the National Association of Bankruptcy Trustees where he served as President in 2000-2001. He has been an author and lecturer for numerous local and national groups concerning bankruptcy issues. He received his J.D. degree, cum laude from Wayne State University Law School in 1973.
James H. Cossitt practices in Kalispell, Mont., in the areas of bankruptcy & workouts, business and commercial litigation, real estate, secured transactions and consumer finance. He was a bankruptcy attorney with the FDIC in the Des Moines, Iowa, Consolidated Office of the FDIC from 1987-88, severed as a chapter 7 panel trustee in the N.D. of Iowa from 1988-95 and as a chapter 11 trustee in the W.D. of Michigan from 1997 to 2000. Mr. Cossitt is admitted to practice in the state and federal courts in Montana, Colorado, Michigan and Iowa, is board-certified in both business & consumer bankruptcy law and is a member of the American Bar Association, American Bankruptcy Institute, National Association of Bankruptcy Trustees and other bar and professional groups. In addition, he is the Montana editor of West Group’s Bankruptcy Exemption Manual. A frequent speaker to professional and trade groups on bankruptcy and related topics, Mr. Cossitt was a member of a task force of U.S. bankruptcy judges, law professors and others who consulted with the Slovak Parliament and research institutes in Bratislava, Slovakia, in 1993 on drafting a new bankruptcy law and the transition to a market economy. He served as an invited lecturer at a Russian Bankruptcy School sponsored by the Iowa State University Center for International Agricultural Finance, held in Ames, Iowa, in July 1995. Mr. Cossitt received his B.A. with distinction in 1982 from Iowa State University and his J.D. in 1986 from the University of Iowa College of Law.
Jimmy F. Dahu is a third year law student at the University of Houston Law Center. He is currently serving as articles editor of the Houston Journal of International Law. Mr. Dahu received his undergraduate degree in political science and psychology at the University of Houston, where he was valedictorian of the College of Liberal Arts and Social Sciences. Born in Chattanooga, Tennessee, he moved with his family at the age of one to Jerusalem. One year later, Mr. Dahu’s family relocated to Clarksdale, Mississippi, where he lived for most of his life until moving to Houston to continue his education. He is a published poet and dreams of publishing a novel one day. Mr. Dahu’s deepest thanks go to Dean Nancy Rapoport for entrusting him with the responsibility to research and write for this Task Force.
Lisa Hill Fenning is a partner of Dewey Ballantine LLP, resident in the Los Angeles office as a member of the Corporate Restructuring and Bankruptcy Group. She joined the firm in 2001, following a long career as a U.S. Bankruptcy Judge for the Central District of California to which she was first appointed in 1985 and reappointed in 1999. Judge Fenning’s practice focuses on bankruptcy, corporate and real estate restructurings, and related mediation and arbitration matters, including bankruptcy risk analysis and advice regarding protections to minimize such risk in business and commercial transactions. Significant matters include the representation of creditors, commercial landlords, and contract counterparties in Delta Airlines, United Airlines, Adephia Communications, Comdisco, Metromedia Fiber Network, Valley Media, and the equity owners of Pacific Gas & Electric Co. and Kaiser Aluminum. Born in Chicago, she practiced there from 1975-1977 as a litigator at Jenner & Block, after clerking for Honorable Philip W. Tone of the U.S. Court of Appeals for the Seventh Circuit. She received her J.D. from the Yale Law School in 1974, and her B.A. from Wellesley College. Judge Fenning is a Fellow of the American College of Bankruptcy, and the American Bar Foundation. She has served on the boards of the American Bankruptcy Institute, the National Conference of Bankruptcy Judges, and the Los Angeles Bankruptcy Forum, and on the American Bar Association’s Standing Committee on Federal Judicial Improvements. She is a former chair of the board of the NCBJ’s Endowment for Education and the Ninth Circuit Council for the Board of Regents of the American College of Bankruptcy.
Jean K. FitzSimon is the Senior Vice President and General Counsel of Whitehall Jewellers, Inc., a publicly traded, mall-based, national retail jewelry chain with 388 stores in 38 states. She also serves as the Chief Compliance Officer and Corporate Secretary. Previously, Ms. FitzSimon was a principal with and the General Counsel of Bridge Associates LLC, where her practice concentrated on compliance consulting, corporate governance and enterprise-wide risk issues. Ms. FitzSimon also served as the Chief Compliance Officer and Vice President – Law for Compliance, Business Risk, and Regulatory Affairs at Sears, Roebuck and Co. Ms. FitzSimon joined Sears in 1998, taking on responsibility for all bankruptcy and collection legal matters. Among other things, she developed and implemented a complete revision of the compliance programs and was responsible for ensuring compliance with all federal, state and local laws for this Fortune 50 company. Ms. FitzSimon chairs the American Bar Association Committee on Corporate Compliance and is a regular speaker on compliance, ethics and corporate governance topics. She chairs and serves on the faculty of the Practicing Law Institute’s advanced and basic compliance programs. Ms. FitzSimon is a member of the Executive Advisory Panel of the Open Compliance and Ethics Group.
Ms. FitzSimon started her career in the United States Department of Justice. She supervised litigation under the Freedom of Information and Privacy Acts, developed federal legal policy in a variety of areas, and served as the United States Trustee for the Northern District of Illinois, overseeing the administration of bankruptcy cases and trustees. Ms. FitzSimon spent the next several years in private practice in Phoenix, Arizona, primarily handling national business bankruptcy and workout matters and mergers and acquisitions. She served from 1986 to 2005 as an author for Collier on Bankruptcy, as well as authoring numerous articles on bankruptcy issues, and served as a Director of the American Bankruptcy Institute from 1999 to 2003. She graduated from the University of Notre Dame Law School and holds her BA from St. Johns College in Annapolis, Maryland, where she served on the Board of Visitors and Governors from 1998 to 2004.
David A. Greer is a partner in the Real Estate Section at Williams Mullen. His practice is focused on commercial litigation and transactions, primarily involving real estate, business relationships and bankruptcy. Before joining the firm, Mr. Greer was a partner at Hofheimer Nusbaum, P.C., which merged with Williams Mullen in 2004. Mr. Greer has represented commercial landlords in bankruptcy cases of national retailers. A substantial portion of his practice is devoted to commercial leasing, problems in real estate transactions and collateral protection and recovery. He also provides legal expertise for commercial lending work-outs and enforcement, student loans, bankruptcy discharge, consumer transactions and contract disputes. Mr. Greer appears regularly in the U.S. Bankruptcy Court for the Eastern District of Virginia and state courts. He is vice chair and former chair of the ABA’s Business Law Section’s Consumer Bankruptcy Committee and past president of the Tidewater Bankruptcy Bar Association, and has organized and presented programs concerning important and emerging aspects of bankruptcy law. Mr. Greer currently serves on the U.S. Bankruptcy Court for the Eastern District of Virginia Local Rules Committee as well as this task force. He is a member of the Bankruptcy Section and Legislative Committee for the Virginia Bar Association and the James Kent American Inn of Court. Mr. Greer received his law degree from the Marshall-Wythe School of Law at the College of William & Mary in 1984. He earned his bachelor of arts degree in journalism cum laude, from Washington & Lee University in 1980.
Robert R. Keatinge Robert Keatinge is Of Counsel to the Denver law firm of Holland & Hart LLP. He practices in the areas of business organizations, taxation, and professional responsibility. Mr. Keatinge has represented a wide variety of business organizations and their owners from small start-up companies to publicly traded corporations. He has written and spoken nationally in the areas of business law, taxation and professional responsibility. He is the co-author of Ribstein and Keatinge on Limited Liability Companies, as well as law review and other articles on business, tax, and professional responsibility subjects. He is a fellow of the American College of Tax Counsel, a member of the American Law Institute, and is listed in the current Best Lawyers in America (corporate law), Who’s Who in America, and other publications. He is a current member of the ABA Business Law Section/National Conference of Commissioners on Uniform State Laws (NCCUSL) Joint Editorial Board on Unincorporated Business Organizations and the Association of Professional Responsibility Lawyers. He is ABA Advisor to the NCCUSL Drafting Committee on a Uniform Limited Liability Company Act and the Revision to the Uniform Limited Partnership Act and an ABA Section of Real Property Probate and Trust Law adviser on the Model Entity Transactions Act and a member of the Ad Hoc Subcommittee to Comment on the Revised Uniform Partnership Act. He is Chair of the Colorado Bar Association Business Law Section and former Chair of the CBA Taxation Section. He is former chair of the Committees on Taxation and on Partnerships and Unincorporated Business Organizations of the ABA Business Law Section and of the Joint Editorial Board for the ABA/BNA Lawyer’s Manual on Professional Conduct. He is a former Member of the American Bar Association House of Delegates.
Jan Ostrovsky is with Crocker Kuno Ostrovsky, a Seattle law firm primarily representing individual and business debtors. From 1995 through 2002, Mr. Ostrovsky was the United States Trustee for the region covering Washington, Oregon, Alaska, Montana and Idaho. He is a contributing author to the Collier treatise and has served as a fee auditor in the Enron and other bankruptcies. Mr. Ostrovsky has taught bankruptcy as the University of Washington College of Law.
Nancy B. Rapoport is Dean and Professor of Law at the University of Houston Law Center. After receiving her B.A., summa cum laude, from Rice University and her J.D. from Stanford Law School, she clerked for the Honorable Joseph T. Sneed on the United States Court of Appeals for the Ninth Circuit and then practiced law (primarily bankruptcy law) with Morrison & Foerster in San Francisco. She started her academic career at The( Ohio State UniversityCollege of Law in 1991, and she moved from Assistant Professor to Associate Professor to Associate Dean for Student Affairs and Professor in 1998 (just as she left Ohio State to become Dean and Professor of Law at the University of Nebraska College of Law). She served as Dean of the University of Nebraska College of Law from 1998-2000. She has been the Dean at the University of Houston Law Center since 2000. Her specialties are bankruptcy ethics and law and popular culture. She has taught Contracts, Sales (Article 2), Bankruptcy, Chapter 11 Reorganization, Legal Writing, Contract Drafting, and Professional Responsibility. Among her published works is Enron: Corporate Fiascos and Their Implications (Foundation Press 2004) (co-edited with Professor Bala G. Dharan of Rice University). She is admitted to the bars of the states of California, Ohio, Nebraska, and Texas and to the United States Supreme Court. In 2001, she was elected to membership in the American Law Institute, and in 2002, she received a Distinguished Alumna Award from Rice University. She is a Fellow of the American Bar Foundation and a Fellow of the American College of Bankruptcy. In her spare time, she competes in international Latin dance with her teacher, Billy King.
William H. Schorling practices in the area of bankruptcy and corporate reorganization. Mr. Schorling has represented debtors, indenture trustees, creditors’ committees, secured creditors, and unsecured creditors in bankruptcy proceedings. Mr. Schorling received his bachelor of arts degree, cum laude, in 1971 from Denison University. He received his legal education at the University of Michigan, where he graduated cum laude in 1975. Mr. Schorling is admitted to practice in Pennsylvania, Delaware and New Jersey. Mr. Schorling is a fellow of the American College of Bankruptcy and a past chair of the Business Bankruptcy Committee, Chair of the Ad hoc Committee on Bankruptcy Court Structure and a past member of the Section Council of the Business Law Section of the American Bar Association, and a member of the Founders’ Council of the Commercial Finance Association Education Foundation, the Board of Directors of the Consumer Bankruptcy Assistance Project, the executive council of the Bankruptcy Section of the Commercial Law League of America and the Eastern District of Pennsylvania Bankruptcy Conference. He is also a past Chairperson of the Bankruptcy and Commercial Law Section of the Allegheny County Bar Association and an exofficio member of its Governing Council Mr. Schorling is a fellow of the American Bar Foundation.
Mr. Schorling was actively involved in the legislative process which resulted in the 1994 Bankruptcy Amendments Act and was actively involved in the activities of the Bankruptcy Review Commission as a Member of the 12 person Alliance for Bankruptcy Legislation consisting of representatives of the American Bar Association, American Law Institute, National Conference of Bankruptcy Judges and the National Bankruptcy Conference. Mr. Schorling has been actively involved in the legislative process leading up to the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 and has testified on behalf of the American Bar Association before the House Subcommittee with responsibility for bankruptcy legislation. Mr. Schorling has been an adjunct professor of law at the Temple University School of Law and has lectured and written frequently on the topics of bankruptcy and lending law for a number of organizations.
Jeffrey L. Solomon
Marc S. Stern is a solo practitioner in Seattle, Washington where his practice emphasizes Insolvency and Bankruptcy. He is Board Certified as a Business Bankruptcy Specialist by the American Board of Certification and has been since 1993. He has represented both creditors and debtors in all phases of bankruptcy proceedings. Mr. Stern currently serves of Co-Chair of the Bankruptcy Section of the GP|Solo Division of the ABA. In this position he has been active in the ABA’s lobbying efforts opposing the attorney liability provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act. He is also the co-editor of the forthcoming book, “Letters for Bankruptcy Lawyers.” Mr. Stern is admitted to practice in the U.S. Supreme Court, the Ninth Circuit Court of Appeals, the Court of Appeals for the Armed Forces, the District and Bankruptcy Courts for both the Eastern and Western District of Washington and the Washington State Supreme Court. He earned his J.D. University of Idaho, College of Law, Moscow, Id. in December 1977 and his A.B. cum laude from Washington University, St. Louis, Mo. in May in 1975.
Paul G. Swanson
Catherine E. Vance, Task Force Co-Reporter, is Vice President of Research and Policy and Associate General Counsel at Development Specialists, Inc., resident in the firm’s Columbus, Ohio, office. Ms. Vance has written extensively on matters related to bankruptcy, bankruptcy reform, privacy, and other matters affecting the debtor/creditor relationship and insolvency proceedings. Her recent articles include The Facts & Fiction of Bankruptcy Reform, 1 DEPAUL COM. & BUS L.J. 361 (2003), co-authored with Paige Barr, and =Attorneys and the Bankruptcy Reform Act of 2001: Understanding the Imposition of Sanctions against Debtors’ Counsel, 106 COM. L.J. 241 (2001). Nine Traps and one Slap: Attorney Liability under the New Bankruptcy Law, 79 AMERICAN BANKR L. J. 283 (2005), co-authored with Corinne Cooper, Prior to joining =Development Specialists, Inc., Ms. Vance served as the Commercial Law League of America’s legal writer and analyst. In this capacity, she acquired a thorough understanding of bankruptcy reform legislation pending in the United States Congress since the late 1990s. Ms. Vance is a regular contributor to the Bankruptcy Yearbook and Almanac, co-authoring the publication’s annual legislative update. She also served as Associate Editor for the 94th edition of the National Association of Credit Management’s Manual of Credit and Commercial Laws. A United States Army veteran, Ms. Vance received her Bachelor’s Degree, magna cum laude, from The Ohio State University and is a graduate of the Ohio State University College of Law, where she was awarded the American Bankruptcy Institute’s Medal for Excellence in Bankruptcy Studies.
§4.12- Some Ethical Issues Unique to Bankruptcy Proceedings – A View Under Ohio Law (by John A. Hollister)
John Hollister
Warren, Ohio
§4.12 SOME ETHICAL ISSUES UNIQUE TO BANKRUPTCY PROCEEDINGS – A VIEW UNDER OHIO LAW
John A. Hollister[131]
§ 1. Which Systems of Rules Govern Proceedings In Bankruptcy?
§ 1.1. Multiple Sets of Procedural Rules.
Bankruptcy jurisdiction is confided to the United States District Courts. Each such District Court delegates, or “refers”, initial handling of bankruptcy matters to its particular subordinate Bankruptcy Court. Therefore, as far as procedural matters go, bankruptcy cases are governed at the national level by both the Federal Rules of Civil Procedure and by the Federal Bankruptcy Rules. Since the Bankruptcy Abuse Prevention & Consumer Protection Act (“BAPCPA”) of 2005[132] went into effect on October 17, 2005, the previous Bankruptcy Rules have been supplemented by the Interim Bankruptcy Rules that were promulgated in connection with that “reform” statute.
At the local level, the Bankruptcy Courts in most, if not all, U.S. Judicial Districts have adopted Local Bankruptcy Rules which are sometimes supplemented by standard operating procedures or general orders specific to a particular division of one District. These often govern matters such as the form and contents of routine motions, Chapter 13 Plans, and similar recurring operations.
Thus in the Northern District of Ohio, for just one example, there are a few separate general orders and procedures, each unique to one of the outlying Bankruptcy Court branches in Canton, Akron, and Youngstown, and that do not apply either to any other of those branches or to the other Court stations in Cleveland and Toledo. As is the case with the two sets of Federal procedural Rules, lawyers must also contend with any Local Rules of the District Court to which a particular Bankruptcy Court is attached.
§ 1.2. Two Systems of Ethical or “Professional Responsibility” Rules.
§ 1.2.1. Which System Of Rules Applies In Bankruptcy?
Because each Bankruptcy Court is an adjunct to a particular U.S. District Court, admission to practice before that District Court normally carries with it the right to audience in the Bankruptcy Court of that District. In addition, the Bankruptcy Courts of some Judicial Districts have local rules that provide for admission to practice before them of lawyers who may not be admitted in their superior District Courts but who are admitted before District and Bankruptcy Courts elsewhere. Thus a Bankruptcy Court may grant audience to any attorney who is admitted to and in good standing with any United States District Court, any Bankruptcy Court, and who has filed in each case concerned a prescribed Notice of Appearance that includes details of that attorney’s qualifications under that court’s Local Rule.[133]
Most lawyers obtain “derivative admission” before a particular U.S. District Court, based upon their admission to practice before the highest court of the state in which that District Court sits. However, even though in this case their state admission and their Federal one are technically two separate bar memberships, a lawyer’s conduct in a Federal matter can still give rise to proceedings before the state bar disciplinary authorities. Thus an attorney with such a dual admission, who commits an ethical violation in the course of a matter being handled in Federal court, may face separate and overlapping disciplinary proceedings at both the state and Federal District[134] levels.
So, too, some attorneys may be admitted before a particular Federal District Court who are not admitted in the state where that District Court sits. While not all that uncommon, this situation does cause confusion in the minds of some who encounter it, including junior court employees and county or state bar association officials.
There are two sets of rules of legal professional conduct that are used by courts at all levels and in all geographical locations in this country. These are always based upon either the American Bar Association’s Model Code of Professional Responsibility of 1969, sometimes referred to as “the Canons of Ethics”, or upon that same Association’s Model Rules of Professional Conduct of 1983. The Model Rules were intended to be an improvement upon, and replacement for, the Canons of Ethics and, as such, have been adopted in the majority of American states (including Louisiana), but not in Ohio – it still has in force the Cannons of Ethics.
Any Federal court may provide expressly by rule that attorneys’ conduct before them will be governed by the rules in force in the state in which it sits,[135] or its case law may simply adopt those rules by implication in a fashion analogous to the “borrowing statute” principle by which many Federal actions are made subject to the statutes of limitations contained in state law.[136]
Thus bankruptcy lawyers must inform themselves about the set of disciplinary rules that governs practice in the bankruptcy and district courts where they appear. The two available rules models differ greatly in the form in patterns in which they are each arranged, but not surprisingly, most of their content is similar. However, the two most important differences between them involves the rules governing attorney-client confidences,[137] and in each of these instances, the provisions of the Model Code are more liberal – from the standpoint of the lawyer – than are those of the Model Rules.
Under the Model Code, a lawyer may disclose a client’s confidence and secrets without leave from the client when doing so is necessary to establish or collect the lawyer’s fee; under the Model Rules, this automatic involuntary waiver of confidentiality does not exist. Under the Model Code, a lawyer may disclose a client’s confidences and secrets to prevent the client’s commission of a crime, implying that this may be done without the client’s permission regardless of the nature of the crime concerned. Under the Model Rules, however, this automatic involuntary waiver occurs only with respect to crimes that are likely to cause imminent death or substantial bodily harm.
§ 2. Conflicts of Interest.
The rules governing lawyers’ conflicts of interest with their clients are, in terms of their content, quite similar in both systems of rules.[138] However, the primary points under this subject are covered in two Disciplinary Rules under the Model Code,[139] where they require only one Rule under the Model Rules.[140] Further, lawyers from Code jurisdictions will be find that the familiar requirement that they avoid even the appearance of impropriety[141] is completely absent from the Model Rules.
Under either set of rules that may apply in a particular bankruptcy or district court, the lawyer’s practical concern must be to distinguish between actual conflicts of interest and potential conflicts of interest. This is because if two clients already have conflicting interests, or if their interests are certain to come into conflict at some future time, then the only safe rule for their lawyer to follow is to decline to represent either of them, even where both are willing to sign formal waivers of those conflicts. This is because actual present conflicts and definite future conflicts are “impermissible” conflicts, i.e., they are non-waivable.[142]
If two clients do not yet have an actual conflict of interest and it is not certain that they will be in conflict in the future, then they may have a “permissible” conflict, i.e., one that is waivable. However, even in this case, it is not safe for the lawyer to seek any such waiver unless
1) The lawyer’s professional judgment is that the potential conflict will not keep him from fulfilling his professional duties to each of his potentially conflicted clients, and
2) All of the affected clients are informed that if their potential conflict later becomes an actual one, the lawyer will be compelled to resign the representations of all of them, forcing all of them to obtain their own individual successor counsel, and
(3) The lawyer concerned has advised each such client that it should seek independent legal advice about this potential conflict, and
4) Each such client has given its informed consent to that potentially conflicted representation.
Needless to say, the evidence of the lawyer’s advice to seek outside consultation and of the clients’ waivers should be in writing.
These principles apply in special ways in bankruptcy cases. A lawyer cannot be general counsel for any debtor with whom that lawyer’s present or past engagements conflict.[143] To assure compliance with this section, every lawyer who represents a debtor in bankruptcy must file a Disclosure Statement that, in addition to detailing his fee arrangement with the client, discloses the nature of any past representations of that same client.[144] A copy of this mandatory Disclosure Statement is appended to this section of the text.
If § 327© or a related provision prevents a lawyer from being the debtor’s general counsel, the lawyer may still serve as the debtor’s special counsel to pursue a particular matter so long as the debtor and any other conflicted client of that lawyer have common interests in pursuing that one matter and have no other conflicts over that one matter.[145]
Bankruptcy conflicts do not only arise just between a debtor and that debtor’s creditors. Different classes of creditors have interests that are irreconcilably adverse, particularly secured and unsecured creditors. Thus one lawyer may not represent members of those two classes in the same bankruptcy case.
A debtors’ lawyer must be especially vigilant about potential conflicts when he represents a husband and wife as joint debtors in the same case, or as individual debtors in separate cases. One proposed treatment of a particular debt or asset may prove to be more favorable to one spouse than to the other, especially if those spouses are contemplating, or may later contemplate, a separation or divorce. If this rises to the level of an actual present conflict, that lawyer cannot represent both parties and, if both have already consulted him, may not be able to continue to represent either. A written disclosure provision regarding this problem is contained in the sample written attorney-client contract that is attached to this section of the text. It is a good practice to file that contract into the record of the bankruptcy case, such as an exhibit or attachment to the mandatory “Attorney’s Disclosure Statement Under Rule 2016(b)”.
Somewhat similar conflicts can arise between to clients who are not married individuals and so are not eligible to file a joint bankruptcy case. If the assets, liabilities, or other interests of two “persons” (unmarried individuals, corporate entities, and so on) are tied together to the point that their cases can be consolidated for administrative purposes, each such “person” must have separate representation.[146]
Even where there is only one debtor to be considered, that debtor’s affairs may involve third parties to the point where one lawyer or firm cannot represent both that debtor and those third parties. This disqualifying conflict exists between a corporate debtor on the one hand and its shareholders, officers, and directors on the other,[147] and between a partnership’s general partner and its limited partners.[148]
Every debtor’s lawyer must disclose fully to the court all facts concerning his terms of engagement, fees paid or promised, and everything that might present even a potential conflict of interest.[149] Everything means each and every fact that could even be viewed as material to such a potential conflict[150] and lawyer concerned bears the burden of to assuring the adequacy of this disclosure.
§ 3. Attorney’s Fees.
Bankruptcy is one of the fields of law in which the court may at any time review and revise the lawyer’s fees fairness and reasonableness, even if someone other than the debtor is paying those fees.[151] The time spent by the lawyer is the bedrock foundation for fee calculations under the leading Federal case,[152] and the Georgia Highway Express factors affecting fee awards set out in that case has been expressly adopted in bankruptcy cases.[153]
This means that lawyers representing debtors, trustees, and creditors’ committees must keep time records, even in flat-fee engagements. Without accurate, complete, and contemporaneous time records, a lawyer has nothing to present to the reviewing court to prove the time spent and the result may well be a forfeiture of all fees in that case. Keeping good time sheets has some additional benefits, because they can help a lawyer answer client questions about whether certain work was done, what was discussed at past meetings, and the like. In this way, time sheets, like other contemporaneous business records, are important evidence in defense of malpractice or misconduct allegations.
Because the court is entitled to review any attorney’s fees paid by a debtor, each attorney who represents a debtor in bankruptcy is required to file a formal Disclosure Statement, showing all fees paid to him by the debtor and all unpaid fees that the debtor has promised will be paid him in the future.[154] In addition, because no attorney’s fees for the bankruptcy case itself can be paid by a debtor until the case filing fee is paid in full, that Disclosure Statement must state how much of the filing fee has been paid at the time the Statement itself is filed. A sample of this standard form Disclosure Statement is appended to this section.
Lawyers should note that Rule 2016(b) applies not just to the attorney who is the actual counsel of record on the debtor’s bankruptcy petition. It also applies to any lawyer who, within a year prior to the debtor’s filing for bankruptcy, as counseled the debtor either with respect to the bankruptcy filing itself or with respect to matters that were preparatory to bankruptcy. Thus, a lawyer who negotiates with creditors to settle claims or lawsuits, on behalf of a client who within a year following files for bankruptcy, is deemed to have helped the debtor “prepare” for bankruptcy and must file the Rule 2016(b) Disclosure Statement.
The sanction for failing timely to file that Statement is forfeiture of all unpaid fees and disgorgement of all fees that were previously paid that should have been shown on that Statement.
§ 4. Special Problems With Electronic Case Filing (“ECF”).
Many bankruptcy courts now require lawyers to file documents electronically; most of the rest are moving in that direction. This is because of the immense physical and economic burden of storing huge quantities of paper files; the Federal government maintains almost unimaginable amounts of highly expensive warehouse space. Compared to that, the new forms of electronic storage are cheap, indeed.
As well as realizing massive monetary savings, ECF has also enabled the clerks’ offices to shift to members of the bar many of the clerks’ personnel and postage costs for docketing and filing incoming documents, file maintenance, mailing notices to attorneys of record, and the like. In addition to imposing on lawyers expenditures of time and money that have traditionally been paid by the courts out of case filing fees, ECF has created at least two new potential problems of professional liability for attorneys.
One involves timeliness of filings. Where ECF has been implemented, it is usually accompanied by a ban on paper filings by members of the bar. With ECF now being theoretically available twenty-four hours a day, seven days a week, lawyers may be tempted to wait until the last possible moment before filing cases or pleadings, as was demonstrated by the tens of thousands of new bankruptcy cases that were filed across the country during the last hours before the BAPCPA Act of 2005 went into effect at the Midnight between Sunday, October 16, 2005 and Monday, October 17, 2005. As some lawyers found out that night, however, in some if not all Districts, the Bankruptcy Courts’ Clerks’ Offices pulled the plug on their computers at 11:59 PM on October 16, suspending some filings and preventing others.
ECF may be unexpectedly interrupted not only by deliberate obstructions such as that one, but may be suspended for periodic maintenance, interrupted by outages in power or communications lines, and may be prevented at a critical moment by the numerous software defects in the poor-quality ECF systems. Many courts have proven too weak-willed to assume responsibility for the inherent vices of the ECF systems those same courts have imposed on the bar, so lawyers need to be especially careful to prepare in advance to be sure essential cases and pleadings are timely filed, even in the event of ECF problems.
A second problem with ECF involves so-called “electronic signatures”. Most ECF programs in Federal Court give the filing attorney the option to transmit documents for filing directly from a word processing file to the ECF intake program and, in the course of that operation, affix any necessary signatures in the form of facsimiles made up of italicized type. Thus an attorney’s signature, for example, for “John A. Hollister”, would appear over the signature line of a pleading as “/s/ John A. Hollister .”
The system designers assumed, of course, that no member of the bar would transmit for filing a document, which requires a signature unless he had in his file a hard copy bearing an actual signature of the required signer. However, this feature of the ECF programs makes it entirely possible to transmit to a court for filing, and to have filed, a document or pleading that requires the signature of a person but which that person has never even seen, let alone signed to acknowledge his agreement therewith or his authorization to have it filed.
This is particularly problematic in the case of bankruptcy petitions, schedules, statements of financial affairs, and statements of intention, all of which are required to be signed by the debtor or joint debtors and all of which, under applicable law, have the status of affidavits. The present author has recently become aware of at least two cases, in just one Federal Judicial District, where attorneys who delayed unreasonably in filing clients’ cases and then began to be harried by those clients, went ahead and filed electronically Chapter 13 petitions in those clients’ names even though those clients had never reviewed, approved, or signed their petitions.
Such actually unsigned pleadings are almost certain to be discovered in the course of a bankruptcy trustee’s routine questioning of the debtor(s) at the §341 Meeting of Creditors, because the trustee customarily shows the attestation pages to the debtor(s) and asks, “Did you sign that?” or “Is that your signature?”.[155] Such an unsigned filing is technically invalid, which could create great difficulties for a debtor, particularly one facing garnishment, repossession, or foreclosure, and constitutes both criminal and ethical violations on the part of the lawyer responsible.
§ 5. Bankruptcy Rule 9011.
Lawyers, who are familiar with Rule 11 of the Federal Rules of Civil Procedure, or with the many state rules based on it, may be surprised by the differences between that Rule 11 of the Federal Rules of Civil Procedure and Rule 9011 of the Federal Rules of Bankruptcy Procedure. Two of the most significant among these differences are:
1. Unlike Rule 11, Fed.R.Civ.Proc., if sanctions are awarded for improper attorney conduct, those sanctions may run against the law firm of the erring attorney(s), not just against the individual attorney(s) of record:
“If, after notice and a reasonable opportunity to respond, the court determines that subdivision (b) has been violated, the court may … impose an appropriate sanction upon the attorneys, law firms, or parties that have violated subdivision (b) or are responsible for the violation.”.[156]
“If warranted, the court may award to the party prevailing on the motion the reasonable attorney’s fees incurred in presenting or opposing the motion.”[157]
2. Sanctions under Rule 9011 may be awarded to the party, which “prevails” on the motion for sanctions, including the party opposing that motion, not just to the moving party:
“If warranted, the court may award to the party prevailing on the motion the reasonable attorney’s fees incurred in presenting or opposing the motion.”[158]
It should scarcely need to be pointed out that the type of situation described above, where an attorney files a bankruptcy petition, schedule, or statement that is required to bear the client’s signature but which instead contains an unauthorized manual or electronic signature, is a violation of Rule 9011 as well as of other criminal statutes and disciplinary rules.
The liabilities of the debtor’s attorney under Rule 9011 have been expanded in at least three very important ways by the Bankruptcy Prevention and Creditors’ Relief Act of 2005[159] (“BAPCRA”), which became effective October 17, 2005:
1. A new “civil penalty” has been created which the court can assess against the debtor’s counsel and which can be ordered to be paid to the case trustee, the U.S. Trustee, or the bankruptcy administrator.[160]
2. The act of filing a Chapter 7 Petition for a debtor now constitutes a certification by the debtor’s attorney that the Petition is not an “abuse” under the new provisions of 11 U.S.C. §707(b)(1),[161] that is, that the filing is not “abusive” under either the general bad-faith standard or under the new special “means test”.
3. The debtor’s attorney must now make an affirmative inquiry into the truth vel non of the statements contained in the debtor’s schedules:[162] “The signature of an attorney on the petition shall constitute a certification that the attorney has no knowledge after an inquiry that the information in the schedules filed with such petition is incorrect.” (Emphasis supplied.)
UNITED STATES BANKRUPTCY COURT
_______________ DISTRICT OF _______________
In re: _____________________________ ) Case No. _______________
_____________________________ )
)
Debtor(s) ) Chapter ____
STATEMENT OF ATTORNEY(S) FOR PETITIONER(S)
Pursuant to Bankruptcy Rule 2016(b)
The undersigned, pursuant to Rule 2016(b), Fed. R. Bankr. Proc., state(s) that:
1. The undersigned is/are the attorney(s) for the debtor(s) in this case.
2. The compensation paid or agreed to be paid by the debtor(s) in this case is:
a. For legal services rendered or to be rendered in contemplation of and
in connection with this case:………….…………………………………… $_________
b. Prior to filing this Statement, the debtor(s) has/have paid:………………... $_________
c. The unpaid balance due and payable is:…………………………………… $_________
3. $__________ of the filing fee has been paid.
4. The services rendered or to be rendered include the following:
a. Analysis of the financial situation of, and advice to, the debtor(s) in determining whether to file a Petition under Title 11, United States Code.
b. Preparation and filing of the Petition, Schedules of Assets and Liabilities, Statement of Affairs, and other documents required by the Court.
c. Representation of the debtor(s) at the First Meeting of Creditors, Confirmation Hearing, and compliance with General Order No. 1.
d. Other services: ________________________________________________________________.
e. The attorney(s) may seek additional compensation for hearings on Motions for Relief from Stay and for adversary proceedings filed by or against the debtor(s).
5. The source of payments to be made by the debtor(s) to the undersigned attorney(s) for the unpaid balance remaining, if any, will come from earnings, wages, and compensation for services performed by the debtor(s) or from ________________________________________.
6. The undersigned attorney(s) has/have not shared or agreed to share with any other person, other than members of his/their law firm or corporation, any compensation paid or to be paid, except as follows:
( None.
7. The undersigned attorney(s) has/have no present conflict of interest with the debtor(s) and have in the past:
( Never represented the debtor(s) except in connection with this case.
( Represented the debtor(s) only in connection with routine legal matters unrelated to this case.
( Represented the debtor(s) in matters including in connection with some debts or claims that may be included in this case.
Attorney for Debtor(s): _________________________________ Date:_____________
Address: _____________________________ City __________________ ZIP _______
AGREEMENT FOR LEGAL SERVICES
In Connection With A Bankruptcy Case
THIS AGREEMENT is entered into on the _____ day of _______________, 200__, at (City) ___________________, (State) __________________, by and between:
Debtor Co-Debtor
Street Address: ______________________ City ____________ State______ ZIP ______
(whether singular or plural, referred to below as “Client”) and
Attorney Attorney
Street Address: ____________________ City ____________ State______ ZIP _______
(whether singular or plural, referred to below as “Attorney”, “he”, or “him”).
1. Engagement: Client hereby employs Attorney, and Attorney accepts employment by Client, as described below for the purpose of filing for Client a Petition for Relief under the United States Bankruptcy Code (referred to below as the “Bankruptcy Case”).
2. If “Client” is a Married Couple: Husband and Wife each understand that Attorney agrees to represent both of them together only because each of them presently has the same interest as does the other in obtaining relief from their financial problems. However, each understands and agrees that if any conflict of interest arises between them, Attorney must resign from representing both of them, must withdraw from their Bankruptcy Case, and each will then have to retain his or her own individual lawyer to represent his or her personal interests in that Case. Examples of such actual conflicts of interest include, but are not limited to:
• Situations where the treatment given to a particular asset or debt is more favorable to one spouse than to the other;
• Disagreements between Husband and Wife about actions to be taken or strategies to be pursued in their Bankruptcy Case; and
• Preparations for, or the filing of, a domestic relations case between the Husband and Wife, such as a legal separation, divorce, child custody, child support, or child visitation case in which Husband and Wife have differing interests in payments to be made by one of them to the other or regarding the possession or division of their marital property.
( Not Applicable. Husband’s Initials: __________ Wife’s Initials: __________
3. Assistance to Attorney in the Handling of the Case: Client agrees that Attorney may use other attorneys to assist him when necessary, such as to cover meetings or hearings when he has conflicting engagements. Any compensation to such assistant counsel will be the responsibility of Attorney.
4. Scope of Attorney’s Work. On behalf of Client, Attorney will:
• Meet with and interview Client regarding Client’s current financial problems.
• Use his professional training, judgment, and experience to review and analyze the information he receives from Client.
• Based on his review and analysis of Client’s information, recommend to Client whether and how best the Bankruptcy Code may assist Client, including which Chapter of that Code Attorney believes is most suitable for Client. However, Client will make the final decision about whether to proceed with any bankruptcy case at all, and if so, which form of bankruptcy case will be filed.
• Assist Client to collect the information needed for Client’s Petition for Relief, Statement of Financial Affairs, Schedules of Assets and Liabilities, Schedules of Income and Expenses, Statement of Intention Regarding Secured Claims, Address List, and (if Client plans to file under Chapter 13) Plan of Arrangement, and other pleadings required to file Client’s initial Case with the Bankruptcy Court (all referred to below as the “Bankruptcy Filings”). However, it is the Client’s responsibility to obtain all information needed to prepare Client’s Bankruptcy Filings and to assure that all information filed with the Court is true, correct, and complete. To do this, Client will review all of Client’s Bankruptcy Filings and will inform Attorney of any additions, corrections, or amendments that need to be made to those Filings.
• Draft Client’s Bankruptcy Filings as defined above.
• Review with Client, prior to filing Client’s Case with the Court, all of Client’s Bankruptcy Filings as defined above.
• File with the Bankruptcy Court all Client’s Bankruptcy Filings as defined above.
• With the Client, attend the §341 Meeting of Creditors.
• Respond to routine inquiries from the Trustee in Bankruptcy and Creditors.
• Prepare one (1) minor amendment to Client’s Statement of Affairs, Schedules, Mailing List or Matrix, or Plan of Arrangement. Before any such amendment is filed with the Court, Client must pay all required filing fees.
• Prepare further amendments of Client’s Bankruptcy Filings, for which additional fees will be charged at the rate of $________ per amendment.
• Negotiate with Creditors regarding Reaffirmation Agreements.
Husband’s Initials: __________ Wife’s Initials: __________
5.Excluded Work. Under this Agreement, Attorney’s work is limited to preparation of an ordinary, uncontested Bankruptcy Case. In particular, under this present Agreement, Attorney will not:
• File for Client any Adversary Proceeding (civil suit in Bankruptcy Court), whether to determine the dischargeability of particular claims or to protect or recover any financial or property interests of the Client’s.
• Defend any Adversary Proceeding (civil suit) filed against Client, including suits to bar Client’s discharge in bankruptcy or to have certain claims declared non-dischargeable in bankruptcy.
• File any appeal to the U.S. District Court, Bankruptcy Appellate Panel, or Circuit Court of Appeals from any decision or ruling of the Bankruptcy Court.
• Reopen Client’s Bankruptcy Case after Client’s discharge or after the closing of that Case, whether to add omitted Creditors or for any other purpose.
• Prepare, file, or try any Motion for recovery of property or for any purpose other than to enforce the Automatic Stay.
• Bring any action to recover property, or to enforce claims, belonging to Client.
• Client understands and agrees that Attorney will do no such additional work unless and until Client and Attorney sign an additional special representation agreement, which provides for additional fees and which describes that additional work to be done.
Husband’s Initials: __________ Wife’s Initials: __________
6. Client’s Obligations. In exchange for Attorney’s agreement to represent Client, Client agrees:
• To provide Attorney, in a timely manner, with all information necessary to complete Client’s Schedules, Statement of Affairs, and other Bankruptcy Filings.
• To disclose to Attorney all Client’s:
• Assets and property;
• Liabilities (Debts), Creditors, and Claims against Client; and
• Income and Expenses.
Client understands and agrees that it must disclose to the Court all of the information requested on the forms for Client’s Bankruptcy Filings and that none of that information may be withheld or concealed. Failure to make such full disclosure is a breach of this Agreement that will authorize Attorney to withdraw from representing Client.
Husband’s Initials: __________ Wife’s Initials: __________
7. Professional Fees and Expenses. For Attorney’s professional services under this Agreement, Client agrees to pay Attorney a flat fee at Attorney’s standard rates as of the time of filing. Those rates as of the signing of this Agreement are set out below. However, Client understands that periodically those standard rates are adjusted upward according to the rates generally charged by attorneys practicing in the U.S. Bankruptcy Court for this Judicial District. Therefore, if the filing of Client’s Case is unduly delayed after the date of Client’s initial interview with Attorney, the fee actually charged Client will be Attorney’s standard fee as of the date of filing Client’s Case.
( Chapter 7: $_______________, all paid in advance.
( Chapter 13: $_______________, of which not less than $_______________ will be paid in advance and up to $_______________ will be included under the Chapter 13 Plan of Arrangement.
• Attorney will file no Bankruptcy Case for Client until Attorney has received the agreed advance fee together with the case filing fee required by the Bankruptcy Court.
• Client may pay installments toward the agreed advance fee. All such installment payments will be held in Attorney’s IOLTA Trust Account until the full fee has been received.
• If Client decides not to file a Bankruptcy Case, then Client will pay Attorney $250.00 for work done in the initial consultation. In addition, Client will pay Attorney a further sum up to $_______________ depending on how much work Attorney has already done in preparing and completing Client’s Bankruptcy Filings. The value of this work will be calculated at the rate of $__________ per hour.
• If Client decides not to file a Bankruptcy Case, Attorney will deduct, from Client’s funds held by Attorney, the $250.00 initial consultation fee and the additional hourly charges described above for preparation of Client’s Filings and Attorney will refund any remaining balance to Client.
• In addition to Attorney’s professional fees and expenses, Client agrees to pay Attorney’s actual out-of-pocket expenses for photocopies (other than for the initial case filing), long-distance telephone charges, postage, travel and parking (other than to attend the Client’s initial §341 Meeting of Creditors).
Husband’s Initials: __________ Wife’s Initials: __________
8.Filing Fees. Client will pay to the Bankruptcy Court the required case filing fee, at the rate charged by the Court at the time of filing. That fee is presently:
( Chapter 7: $__________.
( Chapter 13: $__________.
In addition, Client will pay the Court’s currently required filing fee for any amendments to Schedules, Statements, and Mailing Matrix that are required in Client’s Case. At present that fee is $__________ per Schedule.
9. Complete Agreement. This written Agreement, consisting of four (4) pages and ten (10) numbered paragraphs, represents the complete Agreement and undertaking between Attorney and Client. Any amendments to this Agreement must be in writing before becoming effective.
10. Disclosure to Client. Client has received and has read a signed copy of this Agreement.
______________ __________________________________
Client (Husband) Client (Wife)
ATTORNEY’S TIME RECORD
Client(s): John Q. Debtor and Jane R. Debtor Page 1 of___
Date Activity Atty Time
|10/20/05 |Initial conf. w/ Clients. Calculated “means test”, reviewed Clients’ income and |JAH |1.25 hr. |
| |expenses, and assets that could be lost in Chapter 7. Gave Clients’ Asset, | |. |
| |Debt, Income, and Expense worksheets; Clients are to take sheets home, | | |
| |complete them, and return them to us. | | |
| |Discussed fee arrangements; signed atty/client contract and required Notices | | |
| |to Clients re: bankruptcy proceedings, Chapters to proceed under, etc. | | |
|1025/05 |Reviewed worksheets returned by Clients. Schedule conference w/ Clients to |JAH |0.33 hr. |
| |discuss nondischargeability of student loan and income tax claims. | | |
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§4.13“Bankruptcy Ethics, An Oxymoron,” Vol. 5, No. 1 Am. Bankr. Inst. L. Rev. 1 (1997)
Copyright © 2005 by Robin E. Phelan, John D. Penn, Eric Terry, W. Abigail Ottmers, Haynes and Boone, LLP, and the American Bankruptcy Institute Law Review.
By: Robin E. Phelan,
John D. Penn,
Eric Terry
&
W. Abigail Ottmers
Robin E. Phelan
phelanr@
John D. Penn
pennj@
Eric Terry
terrye@
Abigail Ottmers
ottmersa@
[pic]
TABLE OF CONTENTS
INTRODUCTION
I. ETHICAL CONSIDERATIONS IN PREBANKRUPTCY ASSET PLANNING
A. Bankruptcy Crimes and Fraudulent Transfers
1. Relying on Advice of Counsel (My lawyer told me to do it)
2. An Opportunity to Cure
B. Conversion of Nonexempt Assets into Exempt Assets (But my cousin Leroy did it
II. PROBLEMS OF DIVIDED LOYALTY (Only Schizophrenics Need Apply)
A. The Basics
B. Actual Versus Potential Conflicts (Let’s wait and see what happens)
1. Court rejecting potential-actual dichotomy
2. Courts adopting potential-actual dichotomy
C. Selected Problems
1. May the Same Attorney or law Firm Represent Multiple Creditors in a
Bankruptcy Case?
2. Representing a Creditor and a Creditor’s Committee
3. Can a Lawyer Ethically Represent Both the Debtor in Possession (or a Trustee) and a Creditor in Connection with the Case?
4. Simultaneous Representation of the Debtor and a Creditor in an Unreleased Case
5. May Debtor’s Counsel be Paid by a Nondebtor Third Party?
6. Can a Broker Loan Part of the Purchase Price?
7. What is an Attorney’s Duty to Police Debtor’s
8. May the Same Firm Simultaneously Represent Unsecured Creditors Committees of Debtors Who are Economic Competitors?
9. Is it proper for a trustee to represent him or herself in connection with the case?
10. Excessive Billing
11. Refusing to Cease Work When Fired
III. CONSEQUENCES OF ETHICAL VIOLATIONS (What can they do to me?)
A. Fines and Imprisonment
B. Conspiracy Theory
C. Suspension or Disbarment
IV. PROPOSED COURSE OF ACTION
CONCLUSION
FOREWORD: This paper consists of an article entitled Bankruptcy Ethics, an Oxymoron and one addendum regarding Recent Cases.
BANKRUPTCY ETHICS, AN OXYMORON*
Robin E. Phelan
John D. Penn
Eric Terry
Abigail Ottmers
Haynes and Boone, LLP
Introduction
As representatives of clients as well as officers of the court,[163] attorneys frequently are required to consider the implications and propriety of proposed courses of action on behalf of their clients.[164] Although each situation may present distinct problems of its own, attorneys must deal with at least three sources of ethical considerations:[165] (1) the minimal standards governing conduct expressed by the ABA and the respective state bodies which, if violated, may subject the lawyer to formal disciplinary action,[166] (2) the aspirational goals, which are normally not mandatory rules, but are urged and recommended by the ABA and several states,[167] and (3) the attorney’s own conscience and morality.[168] For bankruptcy cases in particular, there is yet a fourth set of significant considerations when evaluating a proposed course of action—the Bankruptcy Code, Bankruptcy Rules and related statutes.[169]
This Article describes selected ethical issues and problems that are commonly confronted by bankruptcy lawyers. Part I discusses possible pitfalls in prebankruptcy asset planning, including cases where the debtor attempted to exonerate himself by claiming that he relied on advice of counsel. It also raises concerns faced in the conversion of nonexempt assets into exempt assets. Part II addresses several, often subtle problems of divided loyalty and points out several specific situations of which bankruptcy attorneys should be aware. Lastly, Part III addresses the various consequences an attorney may face when the court finds an ethical violation. Part IV examines how attorneys should act to avoid problems.
I. Ethical Considerations in PreBankruptcy Asset Planning (“Yacht! What yacht? I don’t own a yacht. Haven’t owned a yacht since last month.”)
A. Bankruptcy Crimes and Fraudulent Transfers
It has been estimated that at least ten percent (10%) of bankruptcy cases filed in a recent year involved some sort of criminal activity, usually concealment of assets that should have been scheduled.[170] While some asset planning is outright criminal, the danger of which attorneys must be cautious lies in the domain between “asset-planning” and “fraud.” Even those attorneys who insist that they would never actually commit any fraud,[171] should be on guard due to the broad coverage of title 18 sections 152 through 157, which criminalize certain types of transfers intended to defeat provisions of the Bankruptcy Code or give creditors improper advantages.[172] Attorneys must be aware of these provisions; otherwise, they could be unwittingly implicated in bankruptcy fraud. These sections, some recently added and/or expanded to provide more extensive coverage,[173] list several situations that could subject an attorney to significant consequences including fine, imprisonment up to five years, or both.[174] Although the sections are not limited to attorneys,[175] several of the sections specifically mention that attorneys are covered under the statutes.[176]
Section 152 makes it a criminal offense to “knowingly and fraudulently” conceal assets in relation to chapter 11 cases and proceedings.[177] If the attorney is unsure whether his client’s asset should be reported, the safer route is to report the asset both to the court[178] and to the creditors.[179] The section also prohibits filing fake statements in a bankruptcy case. A Milbank Tweed partner was convicted of failing to disclose a conflict of interest (and other transgressions) related to the Bucyrus International bankruptcy case in Milwaukee.[180] Section 153, which was completely revised in 1994,[181] focuses on misappropriation, embezzlement, improper spending and transfers.[182] Section 154 deals with a person who “knowingly purchases, directly or indirectly, any property of the estate in which the person is an officer in a case under title 11.”[183] In addition, it punishes officers of the court who knowingly refuse to permit a reasonable opportunity for inspection by authorized persons.[184] Section 155 concentrates on illegal fee agreements between parties in interest or their respective attorneys.[185]
The two newly added sections, 156 and 157, expand the coverage of acts considered to be bankruptcy crimes.[186] The language of section 156 is quite extensive, providing for a fine or imprisonment in a bankruptcy case or related proceeding if a knowing attempt is made by “a bankruptcy petition preparer in any manner to disregard the requirement of title 11, United States Code, or the Federal Rules of Bankruptcy Procedure.”[187] However, in contrast to the other sections, a “bankruptcy petition preparer” excludes attorneys and their employees.[188] Section 157 covers any fraud made in connection with a chapter 11 case or proceeding.[189]
Since “fraud,” by definition, involves the element of intent, courts investigate whether the debtor possessed the intent to defraud the creditors.[190] The difficulty of prebankruptcy asset planning is that activities done without a clear intent to file for bankruptcy may later be investigated as fraud on creditors. Although the Bankruptcy Code covers property that was transferred within one year before the date of the filing of the petition,[191] the provisions governing fraud may extend well beyond that period.[192] For example, in United States v. West,[193] the court explicitly rejected the debtor’s argument that transactions he conducted to apparently flout creditors were outside the jurisdiction of the Bankruptcy Code.[194] West had been convicted on ten counts of bankruptcy fraud that stemmed from concealing assets in his bankruptcy case, and several counts of money laundering[195] in connection with his acts to hide the proceeds, including putting money into his girlfriend’s accounts.[196] The court affirmed his conviction for acts up to two years before filing,[197] explaining that “[a] defendant may knowingly and fraudulently transfer property in contemplation of or with the intent to defeat the provision of Title 11 without necessarily transferring the property within one year before filing a bankruptcy petition.”[198] This decision accords with the language of title 18 section 157, entitled “bankruptcy fraud,” which does not set a specific time limit for crimes that can be punished.[199] The section specifically states that making a “false or fraudulent representation, claim, or promise concerning or in relation to a proceeding under title 11, at any time before or after the filing of the petition, or in relation to a proceeding falsely asserted to be pending under such title, shall be fined under this title, imprisoned not more than 5 years, or both.”[200]
1. Relying on Advice of Counsel (“My lawyer told me to do it”)
Although the focus of fraud charges is more frequently directed upon the debtor than his attorney, the latter may be subject to consequences for incorrectly advising a client.[201] Applicable ethical rules and prudent considerations in client counseling require that counsel not encourage or assist a client in any fraudulent transfer that has the purpose or effect of hindering, delaying or defrauding creditors.[202] This is a growing concern because debtors claim occasionally they relied on the advice of counsel, and therefore did not have the requisite intent under the fraud statutes.[203]
The consequences for both client and lawyer from aggressive prebankruptcy asset planning can be substantial.[204] For the client, the prospect of the denial of discharge looms large.[205] Although Code section 727(a)(2)[206] focuses on transactions that occur within one year of the filing of bankruptcy,[207] the continuing concealment doctrine[208] may be applied, and asset planning more than one year prior to bankruptcy can have discharge implications for the client and potential malpractice implications for the attorney.[209]
Creative Recreational Systems, Inc. v. Rice (In re Rice)[210] serves as an example of asset planning that crossed over the line. In this case, the debtor consulted his attorney prior to filing regarding what to do with cash in his account.[211] The lawyer advised the client to “spend it.”[212] Relying upon the advice of counsel, the debtor withdrew cash from his account, gave some of the cash to his mother and spent the rest.[213] In the subsequent bankruptcy case, an objection to discharge was filed under section 727(a)(2)(A) of the Bankruptcy Code.[214] The debtor defended his actions on the grounds that he made the transfer without the requisite intent to hinder, delay, or defraud his creditors, because he was relying upon advice of counsel.[215] Although case law exists holding actual intent to hinder or delay can be justified by reliance upon the advice of counsel, that reliance must be in good faith.[216]
In Rice, the court rejected the reliance-on-counsel defense based on the finding that the debtor lacked good faith. The court observed:
A debtor who, intending to file bankruptcy, deliberately spends money for the sake of spending it lest the funds otherwise fall into the hands of the bankruptcy trustee and creditors is committing waste. [The action] has the ineluctable effect of hindering or delaying creditors. In such circumstance advice from a bankruptcy lawyer does not create a safe harbor.[217]
Furthermore, the Rice court distinguished between what may have been legitimate exemption planning and flagrantly hiding behind the mask of “asset planning.”[218] The court observed that the circumstances in Rice far exceeded legitimate boundaries of converting nonexempt assets into exempt assets, the latter of which is arguably[219] consistent with the Code’s fresh start policy for honest debtors.[220] However, the court noted that the policy of maximizing exemptions clashes with the policy of equitable distribution of the estate among creditors.[221]
In Bernard v. Sheaffer (In re Bernard),[222] the court was faced with debtors who withdrew over $64,000 from the bank after being notified that the plaintiff in a suit against them would request a freeze upon their assets. The debtors initially testified that the money was spent on a vacation. Later they testified that it was withdrawn and stashed in their home safe pursuant to their attorney’s advice to evade an attachment on an impending judgment. The debtors then testified that they spent the money on vacations and gambling.
The court found that they made a transfer with the intent to hinder a creditor and affirmed the Bankruptcy Court’s denial of the debtors’ discharge.
Not only does asset planning have potentially disastrous implications for the debtor, but an attorney who engages in prepetition asset planning may find himself facing a malpractice claim from the debtor if the discharge is denied, or from the bankruptcy trustee himself.[223] For example, in Eisenberg v. Resource Dynamics, Inc. (In re Environmental Research and Development),[224] a trustee sued the debtor’s prepetition counsel for malpractice alleging that counsel assisted in structuring prepetition fraudulent transfers.[225] Counsel sought to have the action dismissed for lack of subject matter jurisdiction and for failure to state a claim upon which relief could be granted.[226] Denying the motion to dismiss, the court held that if the underlying transfers were fraudulent, the bankruptcy court had jurisdiction to consider the trustee’s malpractice claim as well.[227]
A debtor’s attorneys exposed themselves to RICO[228] liability to a creditor based on their transactions with the debtor. In Handeen v. Lamaire (In re Lamaire),[229] the chapter 13 debtor’s attorneys were sued by a creditor for, among other things, RICO based upon a scheme to fraudulently get a discharge for the debtor.
The allegations included overstating claims to family members (who then returned their distributions to the debtor), relocating to another city to take a much more lucrative job (but concealing that from the chapter 13 trustee by having the debtor ship his check home to then be mailed to the trustee with a local postmark) and preparing a false note for his parents to sign.
While the Sixth Circuit did not decide whether the firm was a part of a racketeering organization, it did hold that the RICO claim against the firm was a viable claim and reversed the judgment dismissing the RICO claim.
2. An Opportunity to Cure (“I didn’t know that was illegal!”)
There is a split of authority on the issue of whether a debtor can cleanse his wrongdoing by undoing the transfer before bankruptcy.[230] In First Beverly Bank v. Adeeb (In re Adeeb),[231] the creditor of an operator of several gas stations experiencing financial difficulties during a period of fluctuating gas prices demanded that the debtor-operator secure his debts with deeds of trust on his real property.[232] Faced with these threats, the debtor consulted an attorney with little or no bankruptcy experience.[233] The attorney advised the debtor to transfer title to some of his real property without any consideration to third parties who could be “trusted.”[234] Relying on this advice, the debtor transferred title to several parcels of real property to friends and associates for no consideration, with beneficial interest at all times remaining with the debtor.[235] As the debtor’s financial condition continued to worsen, he finally sought advice from a bankruptcy attorney, who promptly advised him to reverse the transfers and disclose them to his creditors.[236] After disclosing the transfers to his creditors, several of the debtor’s trade creditors filed an involuntary petition against the debtor.[237] Prior to the commencement of the bankruptcy proceeding, the debtor had recovered some but not all the property transferred.[238] Not surprisingly, a creditor filed a complaint objecting to the debtor’s discharge under Code section 727(a)(2).[239] The bankruptcy court found that the debtor’s discharge should be denied and the district court affirmed.[240] The Ninth Circuit, however, reversed and remanded, holding that a debtor who transfers property within one year of bankruptcy with the intent penalized by section 727 may not be denied discharge of his debts if he reveals the transfers to his creditors, recovers substantially all the property before he files bankruptcy, and is otherwise qualified for a discharge.[241] A court’s willingness to allow a debtor to rectify prepetition fraudulent transfers through disclosure and corrective action is limited to the extent that the disclosure must occur before discovery of the fraudulent transfers.[242]
B. Conversion of Nonexempt Assets into Exempt Assets (“But my cousin Leroy did it!”)
Another area where bankruptcy attorneys may encounter ethical dilemmas involves one of the primary prebankruptcy planning tools: the conversion of nonexempt assets into exempt assets.[243] The Bankruptcy Code allows a debtor to retain certain “exempt” property either under Code section 522(d), or under applicable state and federal law.[244] If the Bankruptcy Code and applicable local laws do not prohibit conversion of nonexempt assets to exempt assets, there should be nothing ethically wrong with an attorney counseling and assisting this kind of prebankruptcy asset planning. To understand the ethical boundaries of asset planning, one must examine the case law dealing with “exemption planning.”[245]
Based on the legislative history of Code section 522, it is clear that Congress contemplated the conversion of nonexempt property to exempt property prior to filing for bankruptcy.[246] Both the House and Senate reports state:
As under current law, the debtor will be permitted to convert nonexempt property into exempt property before filing a bankruptcy petition. The practice is not fraudulent as to creditors and permits the debtor to make full use of the exemptions to which he is entitled under the law.[247]
The rationale behind the provision is to allow exemptions where the result would otherwise be extremely harsh to debtors, especially in those jurisdictions where the exemption allowance is minimal.[248] Nonetheless, courts are not reluctant to deny exemptions if there is extrinsic evidence of actual intent to defraud and if the state law permits disallowance of the exemption for fraud.[249] The case law regarding the issue of conversion of nonexempt property into exempt assets follows Congress’ apparent intent to permit the conversion of nonexempt to exempt property even if it had the effect and purpose of placing the property out of the reach of creditors.[250]
Creditors’ challenges to a debtor’s conversion of nonexempt property into exempt property prior to filing for bankruptcy have taken a variety of forms. These attacks have manifested themselves as objections to discharge, objections to exemptions claimed, motions to dismiss the bankruptcy case, attachments of liens, and avoidance as fraudulent or preferential transfers.[251] The main vehicle creditors have used is the objection to the debtor’s discharge pursuant to Code section 727,[252] and it is these cases that are most instructive in defining the limits of proper exemption planning.[253]
These cases uniformly recognize the debtor’s right to convert nonexempt property into exempt property prior to the filing for bankruptcy, reasoning that mere conversion is not to be considered fraudulent, nor grounds for barring a debtor’s discharge.[254] The key issue in these cases is whether the debtor possessed actual intent to hinder, delay, or defraud creditors so as to exceed proper conversion.[255] The intent must be actual, and not implied or presumed in law, so implied or constructive intent will not suffice.[256] Furthermore, the fact that property is transferred for less than appraised value is not automatically equivalent to hindering or delaying creditors. One court specifically recognized that the creditor “was, in effect, exchanging a liquid asset for an illiquid one, . . . [and] there were declining property values at the time.”[257]
Case law consistently recites the axiom that the mere conversion of nonexempt assets to exempt assets is not to be considered fraudulent, nor grounds for barring a debtor’s discharge under Code section 727(a)(2)(A).[258] Unless other evidence proves actual intent to hinder, delay, or defraud creditors, the exemption planning will not result in a denial of discharge. For example, the Fifth Circuit significantly narrowed the scope of permitted behavior in its original opinion in NCNB Texas National Bank v. Bowyer (In re Bowyer) (“Bowyer I”).[259] On rehearing (“Bowyer II”), the court withdrew Bowyer I, but left open the door to challenge a debtor’s discharge on grounds that the debtor intended to hinder and delay its creditors by converting its assets.[260]
Prior to Bowyer I, one of the leading cases on the conversion of nonexempt assets to exempt assets was In re Reed.[261] In Reed, the Fifth Circuit Court of Appeals concluded that the debtor, Reed, deserved to lose his discharge after obtaining a year-long moratorium from his creditors and used the time to convert nonexempt assets into exempt assets.[262] Reed’s conduct was so egregious that the court’s conclusion that he intended to defraud his creditors seemed sound.[263] However, the question of whether less egregious conduct would be interpreted as evidence of “actual” intent to defraud creditors remained open.
In Bowyer I, the Fifth Circuit reversed the lower courts’ rulings granting Dr. Bowyer’s discharge.[264] Although the court affirmed the lower courts’ findings that Dr. Bowyer had not shown an actual intent to defraud his creditors, it reversed the judgment because Dr. Bowyer’s conduct evidenced an intent to “hinder and delay” his creditors.[265] By focusing on the intent to hinder and delay creditors rather than the intent to defraud, the Fifth Circuit diverged from previous case law and clearly suggested that debtors may lose their discharge for actions far less egregious than those undertaken by Reed. In Bowyer I, the court implied that any significant conversion of assets and any extravagant personal spending in the year prior to bankruptcy could support a finding of intent to hinder and delay creditors and a consequent loss of discharge.[266]
On rehearing, the Fifth Circuit significantly concluded that it had not shown proper deference to the lower courts in its previous ruling.[267] The bankruptcy court and district court had found that Dr. Bowyer did not have plans to file bankruptcy at the time he converted some of his nonexempt assets to exempt assets.[268] The court concluded that this finding by the lower courts was adequately supported by the record because of a particularly significant piece of evidence.[269] During the period when Dr. Bowyer was converting assets, he also made an advance payment of $25,000 to his primary creditor.[270] The court found that it was reasonable for the bankruptcy court to conclude that Dr. Bowyer did not intend to file bankruptcy at the time.[271] On the issue of whether the debtor had intended to hinder or delay creditors, the court found that the creditor had not raised these arguments at the bankruptcy court level.[272] The court did not remand the case for such a finding because the court determined that the $25,000 payment to the creditor was inconsistent with an intent to hinder and delay.[273]
The Bowyer decisions open the door for creditors to challenge a debtor’s prebankruptcy planning merely on the grounds that the debtor intended to hinder, delay, or defraud creditors. Arguably, all bankruptcy planning is done with the intent to hinder and delay creditors. What other logical purpose could such planning possibly serve? Therefore, the ethical issue of which attorneys must be aware hinges upon the client’s motivation in making the conversions.[274] The greater the number and amount of the conversions and the closer in time to the filing date (or the degree of certainty that a bankruptcy proceeding will be necessary), the greater the risk that a court reviewing the asset conversions will conclude that they were done with sufficient wrongful intent.[275] Furthermore, to the extent counsel assists a client in making such transfers, then he or she may have stepped over the boundaries into ethical misconduct.[276]
Unfortunately for the attorney, there remains much uncertainty in advising debtors engaged in prebankruptcy planning.[277] As shown in Bowyer I & Bowyer II, courts can have a difficult time in deciding how many transfers are too many.[278] Another example of this uncertainty can be found where two debtors, represented by the same attorney, undertook very similar prebankruptcy transfers as a result of debts to the same creditor.[279] In one instance, the bankruptcy court’s denial of the debtor’s discharge was affirmed by the district court and the 8th Circuit.[280] In the other instance, both the bankruptcy court and district court allowed the discharge until the 8th Circuit reversed and remanded the case.[281] That debtor ultimately lost his discharge.[282] When courts can have such varying results on almost identical facts, the entire area of law obviously lacks certainty and serves as a warning to debtors and their attorneys to play on the safe side.
Because of such variation in court decisions, the asset planning area is fraught with dangers and risks to both client and lawyer. Therefore, the prudent course for attorneys to take is to err on the side of caution, which is far preferable to the consequences of erring on the side of risk.[283]
II. PROBLEMS OF DIVIDED LOYALTY (Only Schizophrenics Need Apply)
A. The Basics
The consequences of the failure to check for conflicts in connection with bankruptcy cases cannot be overstated.[284] In undertaking representation, particularly in chapter 11 cases, counsel must meet the requirements of section 327 of the Code, which specifically proscribe conflicts of interest.[285] Section 327 sets forth a two-part test to determine whether an attorney may act as counsel for the debtor: (i) counsel may not represent any interest materially adverse to the estate, and (ii) counsel must be disinterested.[286] The requirements are distinct although courts often confuse them. The “adverse interest” requirement is a fairly familiar conflict rule that applies to all lawyers.[287] The “disinterestedness” requirement is a term of art defined in section 101(14).[288] It doesn’t mean that the professional is bored with the representation.
In business reorganization cases, these problems of real (or potential) divided loyalties arise in a number of contexts.[289] Among the more common ethical problems of divided loyalty are: (i) simultaneous representation of multiple creditors in the same case;[290] (ii) representation of a creditor or creditors and an official creditors committee;[291] (iii) simultaneous or successive representation of a creditor and the debtor in the same case;[292] (iv) representation of the debtor in the bankruptcy case and of the creditor(s) of the debtor in other unrelated cases or on unrelated matters;[293] (v) payment of debtor counsel fees by a third party;[294] (vi) representation of multiple affiliates;[295] (vii) the problem created by the necessity that counsel for a corporate debtor take its direction from management, which itself may not be governed by the disinterestedness requirement;[296] (viii) simultaneous representation of two unsecured creditors’ committees of economic competitors;[297] and (ix) representing a creditor and the trustee (as special counsel).[298] The issue underlying each of these considerations is whether the court in fact looks to actual conflicts or potential conflicts.
This list must be expanded to describe two recent cases involving fiduciary duties. In re Bidermann Industries USA, Inc.,[299] presented the circumstances where the crisis manager/CEO/financial advisor teamed up with an investment house to buy the debtor. The bidding procedures proposed by the debtor included provisions to discourage bidding. The court found that the crisis manager had an irreconcilable conflict -- the duty to maximize the value for the estate and minimize the cost of his investment -- and ordered a show cause hearing on whether an examiner with expanded powers should be appointed.
In re HealthCo. International, Inc.,[300] outlined the fiduciary duties of directors evaluating an LBO. Some of the directors had significant ownership of the debtor and voted to accept a transaction whereby they profited handsomely. Unfortunately, they authorized the debtor to borrow so much that the company never recovered from the transaction. The large shareholders (on the debtor’s board) and the investment firm that structured the transactions were found to be jointly and severally liable for substantial damages since they knew the risks of the transaction (namely, that the debt load was too high) and that the debtor’s board had not fully evaluated the transaction.
B. Actual Versus Potential Conflicts (“Let’s wait and see what happens”)
Under the Bankruptcy Code, as in other areas of law, attorneys are not allowed to represent a person when there are conflicts, unless the clients have agreed to such representation.[301]
A number of courts that have struggled with the practicalities and potential inefficiencies of multiple lawyers representing closely affiliated entities have fashioned a distinction between actual and potential conflicts.[302] Other courts have determined that such a distinction is unrealistic.[303]
1. Court rejecting potential-actual dichotomy
In In re Kendavis Industries International,[304] the court rejected the notion that counsel ceases to be disinterested only when a potential conflict becomes actual.[305] The court held that a conflict is present “whenever counsel for a debtor corporation has any agreement, express or implied, with management or a director of the debtor, or with a shareholder, or with any control party, to protect the interest of that party.”[306] The court further characterized the situation as an “actual” conflict beginning at the date the representation commenced.[307] This holding would equally apply to counsel representing partnerships that also had “some agreement, whether expressed or implied, with the general or limited partners, or with any control person, to protect its interest.”[308] An attorney in such a situation would be subject to disqualification and a disallowance of fees.[309] The Kendavis court saw the concept of “potential” conflicts as “a contradiction in terms,” noting that “[o]nce there is a conflict it is actual—not potential.”[310]
The fallacy of a distinction between actual and potential conflicts was more recently illustrated in In re BH & P, Inc.,[311] where the court rejected the notion that actual and potential conflicts should be treated differently.[312] Pointing out that a potential conflict could “exert a subtle influence over the manner in which events develop to set the stage for an active competition,” the court emphasized that by the time a so-called “potential conflict” becomes “actual,” the damage might be done already.[313] The court stated:
To put it more bluntly, the existence of a “potential” conflict can change circumstances so that the deck is stacked by the time the conflict becomes “actual.” Secondly, when a “potential” conflict does become “actual” the court is faced with the difficulty and delay attendant upon disqualification of trustees and professionals in midstream. This can cause serious problems which could have been avoided if a professional without a “potential” conflict had been employed from the outset.[314]
This issue was taken to new heights when the First Circuit stated that a ruling from the bankruptcy court should be obtained “as soon as counsel acquires even constructive knowledge reasonably suggesting an actual or potential conflict.”[315] The court did not elaborate on how one could disclose constructive knowledge of a potential conflict, but it did warn that those failing to make a timely and complete disclosure “proceed at their own risk.”[316]
In a recent high profile case in the Southern District of New York, Bankruptcy Judge Tina Brozman suggested that instead of focusing on the potential/actual dichotomy, the court should employ the following test:
[W]hether a professional has “either meaningful incentive to act contrary to the best interests of the estate and its sundry creditors—an incentive sufficient to place those parties at more than acceptable risk or the reasonable perception of one.” In other words, if it is plausible that the representation of another interest may cause the debtor’s attorneys to act any differently than they would without that other representation, then they have a conflict and an interest adverse to the estate.[317]
As a caveat, attorneys should recognize that waiting until an “actual” conflict appears can cause severe economic consequences. In Leslie Fay, for example, Weil Gotshal’s failure to disclose potential and actual conflicts reportedly cost the firm approximately $1 million.[318]
2. Courts adopting potential-actual dichotomy
In contrast to Kendavis and BH & P, other courts have adopted an approach to conflicts that attempts to adjust the practical realities to the requirements of the Bankruptcy Code.[319] These cases make a distinction between potential and actual conflicts and decline to use a bright line rule of disqualification.[320] These courts will not disqualify established representation over affiliated or related corporations without a showing of an actual, present conflict incapable of any other equitable resolution.[321]
In In re Global Marine, Inc.,[322] the bankruptcy court was faced with a challenge to counsel’s fees based on the alleged conflict in counsel representing both the parent holding company and its subsidiary in consolidated chapter 11 cases.[323] A creditor had objected to the affiliate debtors’ counsel’s fees on the basis of an inherent conflict since one of the subsidiaries was owed approximately $170 million by the parent holding company.[324] After an exhaustive review of other cases involving joint representation of related entities, the court found that the dual representation of the parent and subsidiary company did not result in an actual conflict of interest.[325]
The cases on actual versus potential conflict diverge not so much in the distinction between potential and actual, but in the interpretation of when a conflict becomes sufficiently material so as to warrant disqualification. One view results in per se condemnation of all representation of affiliated parties from the time such representation begins, because it views all such arrangements as potentially compromising counsel’s representation.[326] The other view attempts to balance the dictates of section 327 and the perceived economies and practicalities of having one firm represent multiple affiliates.[327]
As one court described the terms “actual” and “potential” as merely “different stages in the same relationship.”[328] While an actual conflict can be defined as “an active competition between two interests in which one interest can only be served at the expense of the other,” a potential conflict is “one in which the competition is presently dormant, but may become active if certain contingencies occur.”[329]
C. Selected Problems
1. May the Same Attorney or Law Firm Represent Multiple Creditors in a Bankruptcy Case?
The Model Rules of Professional Conduct and the case law,[330] not the Bankruptcy Code, governs representation of multiple creditors.[331] With the exception of the Rule 2019[332] requirements regarding disclosure of multiple representations, the professional conduct rules rather than the Bankruptcy Code regulate the representation of multiple creditors. There is no inherent ethical conflict in a lawyer representing more than one creditor in a bankruptcy case, so long as the dual representation is disclosed, clients are informed about possible implications of the dual representation, and each client consents.[333] Consultation contemplates explaining to each client the implications, risks, and possible adverse consequences of the common representation.[334] All the clients must consent.[335] An attorney making the decision to represent more than one entity in connection with the bankruptcy case should carefully balance any risks to each client against the benefits and efficiencies of multiple representation. Only where the risks are minimal should dual representation be undertaken. Obviously, if the parties have potentially conflicting positions (such as one creditor being secured and the other unsecured) dual representation should not be undertaken.[336] Additionally, even if an attorney is representing two unsecured creditors, care should be taken to determine in advance whether one creditor may be forced to defend a preference or other avoidable transfer which would result in potential direct adversity between the two clients.
The attorney should specifically inform each client of the circumstances under which counsel will be required to explain the reasons for a termination of representation.[337] For example, communication from each client is privileged and confidential as to that client and could not be disclosed to the other in the context of explaining the reasons for withdrawal.[338] Obviously, an advance agreement with both clients is essential when an attorney is handling matters in which the two clients’ interests may diverge. This agreement should specify that circumstances may occur which require counsel to withdraw without further explanation.
Bankruptcy Rule 2019 requires that any attorney who represents more than one creditor or equity security holder in connection with a bankruptcy case file a verified statement identifying each client and the nature of their claims or interests, together with certain facts relating to the circumstances of counsel’s employment.[339] If the circumstances of representation subsequently change, those facts must also be disclosed.[340] Failure to comply with Rule 2019 can be detrimental to the interests of clients since it may become the basis for disabling counsel from being heard at hearings.[341] Although it is not the primary responsibility of the bankruptcy court to police lawyer’s ethical conduct, the Rule 2019 provision does afford the court and parties in interest information regarding certain multiple representations and has been used by at least one court as a vehicle to ensure attorneys’ adherence to their ethical responsibilities.[342] In LaFayette v. Oklahoma P.A.C. First Ltd. Partnership (In re Oklahoma P.A.C. First Ltd. Partnership),[343] a law firm proposed to represent a creditor who held the second lien on property while simultaneously representing the creditor with the first lien on the same property.[344] The court intervened and refused to permit the law firm to represent both senior and junior lienholders since the court found that zealous representation of both was impossible.[345] The court concluded that a corollary to the disclosure requirements of Rule 2019 was a corresponding obligation for the court to insist that lawyers adhere to ethical standards.[346] Since dual representation of a junior and senior lienholder was an impermissible conflict for the law firm, at the suggestion of the court, the firm withdrew from further representation of either creditor in the case.[347]
2. Representing a Creditor and a Creditors’ Committee
In 1984, Bankruptcy Code section 1103(b)[348] was amended to provide that representation of one or more creditors of the same class shall not per se constitute the representation of an adverse interest when determining whether an attorney to be employed by a creditors’ committee has a conflict.[349] Although not a per se conflict, an attorney cannot represent creditors of different classes.[350] In In re Whitman,[351] a secured creditor with a large deficiency claim was a member of the unsecured creditors committee.[352] The committee hired the undersecured creditor’s attorney to represent the committee.[353] On reconsideration, the court ordered that counsel either withdraw as counsel to the committee or as counsel to the undersecured creditor.[354] The court found that while the undersecured creditor’s interest as an unsecured creditor may be co-extensive with other unsecured creditors, such mutuality did not eliminate the irreconcilable conflict between secured and unsecured creditors.[355]
Often an unsecured creditors’ committee will be comprised of unsecured creditors who may have different levels of priority among themselves pursuant to contractual subordination agreements. How does this “conflict” on the committee affect who the committee may retain? Courts have held that in such a situation, counsel will not be allowed to represent both the committee and the individual undersecured creditors.[356]
3. Can a Lawyer Ethically Represent Both the Debtor in Possession (or a Trustee) and a Creditor in Connection with the Case?
An answer to this question requires a simultaneous analysis of Code section 327(c)[357] as well as Model Rule 1.7(b).[358] Prior to 1984, the Code contained an absolute prohibition against counsel simultaneously representing the trustee or debtor in possession (DIP), and a creditor in connection with the case.[359] Apparently, that option is now open in the absence of an actual conflict.[360] Code section 327(c)[361] has been amended to prevent automatic disqualification due to dual representation, provided that if a party objects, the court must determine whether an actual conflict exists.[362] Obviously, in most instances where an objection is made, an actual conflict would exist. Circumstances sometimes arise, however, where an attorney’s firm has been asked to file a proof of claim, to handle a lease rejection dispute or some other matter in connection with the case, but thereafter, that same counsel is asked to replace debtor’s counsel. Prior to 1984, that situation was impermissible.[363] Now, under section 327(c), the court would have to make a determination whether the representation of the creditor creates an actual conflict of interest with the representation of the debtor.[364]
Dual representation is regulated not only by section 327(c), but also by the professional conduct rules. Model Rule 1.7 provides that a lawyer shall not represent a client if that representation would be adverse to the interests of another client, unless each client consents after consultation and the lawyer makes an independent reasonable inquiry and conclusion that the representation will not adversely affect the interests of either client.[365]
The simultaneous representation of a debtor and a creditor, even if permissible under section 327(c), would seem to place the lawyer in a very precarious position given the application of Model Rule 1.7. Under that rule, if at any time a controversy were to arise and one of the two clients were to withdraw their consent to the dual representation, the lawyer would be required to withdraw from representation of either side.[366] However, even if counsel withdraws from representation of one party, the court may still disqualify the attorney.[367] Given the potential that the lawyer would have to withdraw from the representation because of a creditor’s change of heart, it would be ill advised and contrary to the best interests of a debtor-client to continue permit a lawyer to represent a creditor, even though no conflict exists at the time and all parties indicate a willingness to waive the conflict. Notwithstanding section 327(c), generally courts have been unwilling to permit dual representation.[368] The courts’ justifiable concerns relate to the prospect that the dual representation would lead counsel to fail to investigate preferences, conveyances and transactions between the creditor and the debtor.[369]
4. Simultaneous Representation of the Debtor and a Creditor in an Unrelated Case
There is nothing in the professional conduct rules which ethically prohibit an attorney from representing two clients who have claims or litigation against each other, so long as the attorney (i) does not represent opposing parties in the same or substantially related litigation, or (ii) so long as the attorney’s representation of one client in one matter does not materially and adversely affect his or her representation of the other client in other matters.[370] With informed consent, clients may waive most conflicts attendant to dual representation, except that a lawyer obviously may not represent opposing parties in the same litigation.[371]
Dual representation, even in unrelated matters, becomes considerably more complex in bankruptcy cases. The strict section 327 requirements of disinterestedness and absence of an adverse interest overlay, if they do not in fact supplant, the professional conduct rules.[372] What may be ethically acceptable in commercial settings (e.g., waivers upon informed consent) will not necessarily pass muster under section 327. This issue was highlighted in In re Amdura Corp.[373]
In Amdura, counsel represented both the corporate parent as well as two of its subsidiaries.[374] The law firm for the three affiliated companies also represented a major creditor in the case on matters unrelated to the bankruptcies, and had not been involved on behalf of the creditor in connection with any loans to any of the debtors.[375] Judge Matheson noted the Bankruptcy Code contemplates that counsel to the debtor in possession will be sufficiently free of divided loyalties as to be able to exercise a high degree of impartiality and detached judgment so it may single-mindedly pursue the interests of the debtor.[376] The court also recognized, however, that the Bankruptcy Code itself creates a virtually irreconcilable conflict between the representation of no conflicting interest and the reality of the representation.[377] The Bankruptcy Code clearly contemplates that the debtor can negotiate with creditor groups to reduce or reallocate amounts flowing to creditor classes in order to effect a plan.[378] In doing so the debtor may even seek to preserve values to equity security holders which the “fair and equitable rule” would otherwise deny.[379] This posture for counsel to the debtor in possession inherently places counsel in the position of representing conflicting interests.[380] It is substantially impossible to fully and fairly represent as counsel to the debtor in possession the interests of the estate, creditors, and the equity owners.[381] An inherent conflict would be inevitable in attempting to fulfill the duties of a trustee, as well as the duties of a chapter 11 debtor in possession.[382] While this is not ethically unacceptable, it does seem to require the debtor in possession and its counsel to confront the nature of the tension and to be fair and open about which side of the line it is coming down on.[383]
The Amdura court also addressed the question of the applicability of professional conduct rules.[384] The court noted that while those standards are applicable and must be considered by the court, activities and multiple representation that might be acceptable in commercial settings, particularly with the informed consent of clients, may not be acceptable in a bankruptcy case.[385] The court pointed out that section 327 of the Bankruptcy Code does not permit excusing the limitation of those provisions by waiver or by the trustee’s consent to the representation of dual interests.[386] To the contrary, the attorney must be disinterested and must not hold or represent an interest adverse to the estate.[387] The explicit limitations contained in the statute reflect congressional concerns with perceived past abuses.[388] They also recognize that what may be acceptable in a commercial setting, where all of the entities are solvent and creditors are being paid, is not acceptable when one or more of those parties is insolvent, and concerns exist about intercompany transfers and the preferences of one entity and its creditors at the expense of another.[389] Finally, the question of the application of section 327 of the Bankruptcy Code is one of fact.[390] Judge Matheson was unwilling to set down bright line tests in this area.[391] Instead, the judge turned to a careful analysis of the facts and circumstances relating to the relationship between the multiple affiliates and the relationship of the law firm with regard to its prior representation of the major creditor.[392]
In Amdura, the law firm acknowledged that the major creditor was the “hand that fed” the firm.[393] Judge Matheson found it impossible for a law firm with such a pervasive financial relationship with one of the creditors in the case to meet the disinterestedness requirement of section 327.[394] Using a factual analysis, the court distinguished between an isolated representation of a creditor in a totally unrelated matter versus a substantial reliance by the law firm on that creditor’s business in unrelated matters.[395]
The crucial factor for the court was the law firm’s unwillingness to represent the debtor in connection with possible litigation against the creditor, proposing instead that an examiner be appointed and special counsel be retained to handle controversies with that creditor.[396] The court found it unworkable and inappropriate for the law firm to attempt to “Chinese wall” itself from controversies with the major creditor when the negotiation of a plan of reorganization and decisions regarding the outcome of the case would turn in significant measure upon the extent to which that creditor’s claims might be subject to attack.[397]
In In re Occidental Financial Group, Inc.,[398] the court upheld the disqualification and disgorgement order against an attorney where the attorney represented affiliated debtors in simultaneous chapter 11 proceedings.[399] The attorney also simultaneously represented the insiders of these debtors, their officers, directors and general partners.[400] The fact that the multiple representation was not disclosed when the cases were filed made the disqualification and disgorgement relatively easy for the court to impose.[401]
Likewise, the Tenth Circuit affirmed a bankruptcy court’s sua sponte disqualification of debtor’s counsel where three chapter 11 debtors were controlled by one person and had intercompany claims.[402] However, the Tenth Circuit stopped short of a per se disqualification rule when one attorney represents multiple debtors in possession.[403]
In another case, a bankruptcy court denied all compensation to an attorney who received his retainer from the two largest unsecured creditors.[404]
Along a similar vein, a Delaware Court (the District Court conducting bankruptcy hearings) ruled that a trustee could not employ his own firm where the firm had Chase Bank, N.A. as one of its clients (in other cases) and was also a primary creditor in the instant case. The court denied the Application holding that the firm was probably disinterested but had the appearance of impropriety -- even though both had waived the conflict. In re Marvel Entertainment Group, Inc. (Case No. 97-638-RRM, Delaware 1996)[405].
5. May Debtor’s Counsel be Paid by a Nondebtor Third Party?
The professional conduct rules permit a lawyer to receive payment for professional services from a person other than his client so long as the consent of the client is obtained, client confidentiality is protected, the payment will not impair the lawyer’s independent professional judgment to act on behalf of the client (not the payor), and the lawyer-client relationship is not invaded by the third party payor.[406]
From time to time, an entity needing the benefit of bankruptcy relief will not have sufficient resources to pay counsel a retainer because its assets are fully encumbered. Third parties—perhaps lenders, guarantors, or shareholders—may have an incentive to advance funds to debtor’s counsel when the debtor is unable to do so.
Courts are divided with respect to whether fee payments from sources other than the debtor are permitted under the Bankruptcy Code.[407] Several courts have concluded that such payments are prohibited because the payments create a per se conflict of interest.[408] The Supreme Court has held some third party payments prohibited because the attorney should not place himself in a position where he may be required to choose between conflicting duties.[409]
Some cases have taken a less rigid approach to the problem of third party payment of counsel fees.[410] These cases reason that counsel should not be automatically disqualified by virtue of a third party payment, but that such payment should disqualify counsel only if it puts him or her in a position of actually representing an interest adverse to the estate.[411] In determining whether an adverse interest exists, the definition developed in In re Roberts[412] is instructive:
An adverse interest is the possession or assertion of any economic interest that would tend to lessen the value of the bankruptcy estate or that would create either an actual or potential dispute in which the estate is a rival claimant or to possess a predisposition under circumstances that render such a bias against the estate.[413]
On its face, merely receiving money from a third party in connection with the debtor’s bankruptcy case should not constitute an interest adverse to the estate or taint the disinterestedness of counsel. The fact that a payment is made by a creditor of the debtor does not automatically equal representation of that creditor’s interest.[414] Moreover, payment of fees by a sole shareholder does not equate to representation of the shareholder.[415] Indeed, payment to a lawyer by one person to represent a different person is not uncommon. Insurance carriers, prepaid legal plans, employers and parents are examples of frequent third-party payors. It is unrealistic to conclude that the interests of the debtor corporation and its sole shareholder always conflict. In many instances the interests of a corporate entity and its sole shareholders do not run divergent or even parallel courses, but rather the interests go hand in hand.[416] Third-party payment should not, in and of itself, result in automatic disqualification.
Counsel not only must avoid representing an interest adverse to the estate, but must also be a disinterested person under section 327(a).[417] Disinterestedness, defined in section 101(14)(E),[418] includes a “catch all” (not having an interest materially adverse to the interest of the estate by reason of any direct or indirect relationship to, connection with or interest in the debtor).[419] An expansive definition of disinterestedness under section 101(14)(E) would probably result in disqualification of counsel who received any third-party payment. Since the payment came from a party who is not disinterested, the payee law firm cannot be disinterested.
In In re Glenn Electric Sales Corp.,[420] the court reasoned that an analysis of disinterestedness should consider the facts and circumstances relating to the relationship between the payor, the debtor, and the bankruptcy process.[421] The third party payor in this case announced that it was a likely plan proponent.[422] The court found receipt by debtor’s counsel of fees from a prospective plan proponent sufficient to result in a lack of disinterestedness and hence, justified disqualification of the law firm.[423] The court observed that in addition to those who are already in the picture with competing interests—creditor, debtor, and third party proponent, equity security holders, and those with administration claims—”[a]ll one needs to do is add an additional ingredient, namely counsel for the debtor who has been paid by the principal of the debtor with monies advanced by the plan proponent and the potential plight of unsecured creditors is obvious.”[424]
Even the mere appearance of impropriety can be grounds for disqualification.[425] The Glenn Electric court acknowledged that its disqualification of debtor’s counsel was grounded more on the appearance of impropriety than on any actual conflict at the time of the hearing, but concluded that counsel should nevertheless be disqualified.[426] Interestingly, the law firm that had been disqualified had not been candid with the court with respect to the disclosure of the source of its payment and the relationship of the paying party to the bankruptcy case.[427] Therefore, this case can therefore also be read as a warning that counsel’s lack of candor with the court, aside from any implications of the third party payment itself, might be a decisive factor in the court’s decision to disqualify.[428]
The approach taken by the Glenn Electric court,[429] coupled with scrupulous adherence by counsel to the disclosure requirements provided for in section 327,[430] Rule 2014,[431] and Model Rule 1.8(f)[432] should sufficiently police any problems arising from the payment of legal fees by a third party for a debtor. A per se rule resulting in disqualification of counsel merely because of receipt of funds from a third party seems overly rigid and would limit the access of many debtors to quality representation. This limitation would be particularly true where the debtor’s assets are encumbered by substantial liens or the debtor has insufficient resources or liquidity to retain counsel for a perhaps unexpected bankruptcy. Furthermore, the Bankruptcy Code appears to clearly recognize that payment by third parties for the benefit of the debtor may be necessary. Section 329(b)[433] provides that the court may order the return of excessive fees either to the estate or to the entity that made such payment.[434]
In a peculiar twist, an insider, worked closely with and paid the attorneys for, involuntary petitioning creditors. In re Kingston Square Assoc., 214 B.R. 713 (Bankr. S.D.N.Y. 1977)[435] had the control person working towards an involuntary petition against the partnership -- a step necessitated by the “bankruptcy proofing” bylaws amendments designed to prevent a bankruptcy without the consent of the director designated by the lender. The court found that the insider did work to orchestrate the filings but the case would not be dismissed as a bad faith filing.
6. Can a Broker Loan Part of the Purchase Price?
A broker, retained by the debtor in possession to sell certain property, loaned the purchaser part of the purchase price for a sale of that property which netted the estate approximately $300,000. The broker never disclosed his relationship as a lender to the purchaser. The Bankruptcy Court reduced his commission by 10% and the Bankruptcy Appellate Panel affirmed this decision.[436]
The BAP, in affirming the decision, found that § 327 and California state law each required full disclosure of all material facts regarding connections with parties in interest.[437] Since the broker’s failure to make the requisite disclosures was a breach of its fiduciary duty to the estate (under both state and bankruptcy law) the Bankruptcy Court was well within its discretion in reducing the commission by 10%.[438]
7. What is an Attorney’s Duty to Police Debtor’s “Improper” Conduct During a Chapter 11 Case?
There is little authority regarding the obligation of debtor’s counsel to police acts taken by the debtor or its management during bankruptcy proceedings.[439] At a minimum, it seems logical that if the Bankruptcy Code empowers a chapter 11 debtor in possession to attempt to reorganize, certainly debtor’s counsel and probably debtor’s management should not incur personal liability (absent criminal or tortious conduct) if the reorganization effort fails.[440]
It is not unusual for chapter 11 debtors to dissipate assets of an estate so a case that would have initially yielded a dividend to creditors if filed as a liquidation case, becomes a no asset case after the debtor’s futile attempt to reorganize.[441] Frequently, the estate will suffer operating losses, diminution in value of assets, and creation of postpetition debts with priority over prepetition creditors.[442] Nonetheless, Congress has expressed its will that reorganization efforts be encouraged.[443] Section 706(a) of the Bankruptcy Code reflects this intent by giving the debtor an unconditional right to convert a liquidation case to a reorganization case.[444] Moreover, the entire concept of reorganization contemplates a certain degree of entrepreneurship by a debtor’s management in attempting to extend the value of the company as far as possible down the hierarchy of parties in interest (secured creditors, lessors, unsecured creditors and ultimately equity security holders).[445]
Debtor’s counsel has a difficult enough burden without being a policeman for the debtor’s postpetition conduct.[446] Under the federal bankruptcy law, that role is left to creditors’ committees, individual creditors, and the United States Trustee.[447] Vehicles are available to organized constituencies and individual parties in interest (as well as the United States Trustee) in the form of the appointment of a trustee[448] or conversion of the case,[449] such that counsel and management should be free to exercise a reasonable degree of flexibility with the estate’s assets to achieve a successful reorganization. So long as the attorney is not actively engaged in illegal conduct, his or her zealous efforts on behalf of the debtor should not be chilled by the threat of a suit from creditors if the reorganization fails.[450] Although bad judgment by the debtor, the debtor paying itself too great a salary, or failure to pay postpetition obligations, may be grounds for conversion or the appointment of a trustee, they are not the sort of illegal conduct for which an attorney representing the debtor should be personally liable, or for which he or she should suffer financially in fee application hearings.[451] However, courts have held that attorneys have a duty to inquire when warning flags appear regarding actions by the debtor or the debtor’s principal and to resolve those concerns or face the possibility of losing fees.[452]
The imposition on debtor’s counsel of a greater duty than that of a zealous advocate for the reorganization of the business would seem to create problems for counsel in adhering to the requirements of the professional conduct rules. Lawyers are not retained to provide business advice to clients. Model Rule 1.2 clearly provides that a lawyer shall abide by a client’s decision concerning the objectives of the representation.[453] Model Rule 1.4(b) provides that the lawyer must explain to the client the alternatives available, but that the client ultimately decides the course of action to be taken.[454]
The lawyer represents the organization which itself acts through its duly authorized constituents.[455] Several courts have recognized that under applicable ethical rules, counsel for a debtor entity is directed by management.[456] Ethically and legally, counsel to the debtor in possession can only advise the debtor’s designated representatives who make the decisions.
The debtor in possession and its management are not required by the Bankruptcy Code to be disinterested.[457] To the contrary, Congress contemplated that the competing interests of creditors could be protected by their own counsel, by creditors’ committees and by the United States Trustee.[458] Attorneys who take directions from interested insider management are not substitutes for the trustees, and Congress seemingly intended not to impose upon debtor’s counsel, through the vehicle of disinterestedness,[459] a duty to insure that insider management act as a trustee. For example, in In re Best Western Heritage Inn Partnership,[460] the court observed that it is difficult to believe that Congress intended to require a disinterested attorney for the debtor in possession to safeguard the rights of creditors and investors.[461] Vigorous advocacy by debtor’s counsel is not only ethical; it is required.
How does counsel deal with the dilemma of the client who decides to undertake a “scorched earth” policy with respect to the bankruptcy case? Those of us who have represented debtors have all faced a client who said, “If this case cannot work for me and to my economic interest, then I will see to it that the creditors don’t get anything.” The dilemma faced by counsel is obvious. Under the Bankruptcy Code, counsel knows that there is a hierarchy of interests intended to be protected by the Bankruptcy Code and that the debtor in possession cannot abuse its control over the estate’s assets to extort value for subsidiary interests at the risk of significant loss to senior interests.[462] Moreover, it is reasonably clear that management in a chapter 11 case has a duty to operate in a way which will maximize recovery to creditors in accordance with the congressionally mandated hierarchy of interests.[463] When management adopts a “scorched earth” policy that conflicts with that duty, what is counsel to do? On one extreme, a flagrant “scorched earth” strategy by debtor’s management would seem to cross the line of Rule 11 governing good faith standards with respect to positions taken in litigation.[464] What, however, of less flagrant circumstances where counsel, based on experience, knows that the business policies advocated by management constitute gambling with the estate’s assets, or are otherwise significantly irresponsible? In these circumstances, rather than carrying out client directions which exceed the boundaries of what counsel believes are appropriate, the debtor in possession’s attorney has an ethical obligation to counsel his client with respect to its fiduciary duties.[465] But what additional responsibilities does the debtor’s counsel have?
The professional conduct rules provide that the lawyer is a part of a judicial system charged with upholding the law.[466] One of the lawyer’s functions is to advise clients so that they avoid any violation of the law in the proper exercise of their rights.[467] In representing a client, the lawyer shall exercise independent professional judgment and render candid advice.[468] Counsel to the debtor in possession has the obligation to refrain from taking frivolous positions.[469] In addition, a lawyer shall make reasonable efforts to expedite litigation consistent with the interests of the client.[470] The comment to the rule, however, states plainly that realizing financial or other benefit from otherwise improper delay in litigation is not a legitimate interest of the client.[471] Finally, when a lawyer knows that a client expects legal assistance not permitted by the professional conduct rules or other law, the lawyer shall consult with the client regarding the relevant limitations on the lawyer’s conduct.[472]
Assume that the lawyer discharges his responsibility to render candid advice and to properly counsel the client that the client’s proposed “scorched earth” course of action goes beyond that permitted under the Bankruptcy Code. If the management of the debtor in possession again insists upon following such a course of action (which in counsel’s view is a breach of management’s fiduciary responsibilities), the lawyer should first go up the corporate chain of command, ultimately to the board of directors.[473] If the client continues to insist that the action be taken, and counsel is certain that the action is clearly a violation of the law and is likely to result in substantial injury to the organization, the lawyer is authorized to withdraw.[474] According to the Ninth Circuit, a lawyer in this situation may even be required to resign.[475]
Counsel should urge management to meet its fiduciary duties to creditors, but counsel should abide by the client’s decision so long as there is a non-frivolous basis for doing so.[476] If the attorney and client disagree, it is not the attorney’s prerogative to act on his own as he believes best for the estate, but the attorney has a duty to refrain from filing bad faith or frivolous pleadings and to withdraw if the high standard for withdrawal is met.[477] If a creditor or United States Trustee object to the position taken by the debtor in possession’s management, the remedy is to seek to displace management, to convert the case, or to seek other relief from the court.[478]
Ultimately, the court has adequate means for ensuring debtor’s counsel acts diligently to ensure that the debtor in possession’s management protects the estate from dissipation in its complete control over attorney compensation pursuant to Code section 329.[479] This control should be adequate to ensure that attorneys do not knowingly assist debtors in abusing the bankruptcy laws. For example, one firm’s fees were reduced by $250,000 for failing to advise the court that its debtor-client’s investment advisor had obtained a conflict postpetition.[480]
Practically, the court’s supervision of professional fees paid by the debtor can often put counsel into a position which conflicts with his own client regarding operations in chapter 11. Management, not being required to be disinterested,[481] may prefer to take significant risks with the estate’s assets that creditors oppose. By subtle suggestion or otherwise, debtor in possession’s counsel can permit or assist management in implementing a speculative strategy by seeking court approval or using various litigation tactics. If it turns out that the strategy fails and there is a diminution of estate assets, a suggestion will undoubtedly be made by disappointed or frustrated creditors that counsel had a duty to police the conduct of the debtor and to “blow the whistle” on management. As long as counsel for the debtor complies with its ethical obligations and as long as management’s actions do not exceed the bounds of propriety necessitating a withdrawal, counsel should not be burdened with a concern that compensation otherwise earned could be diminished because of counsel’s zealous advocacy of the debtor’s position.[482] Counsel should be aware of cases such as In re Rivers,[483] which stated that an attorney has the duty to advise the U.S. Trustee and the court if a debtor in possession is incompetent, making a reorganization unlikely.[484] The court also stated that the attorney’s duty to the court and duty as fiduciary to the bankruptcy estate deserves higher allegiance than the role as attorney for the debtor.[485]
8. May the Same Firm Simultaneously Represent Unsecured Creditors Committees of Debtors Who are Economic Competitors?
Can a law firm serve as committee counsel to two separate committees for debtors that are direct economic competitors? What if the Debtors are direct economic competitors of similar size, servicing the same markets, and selling similar goods often within several miles of each other? What if the committees have overlapping membership? This unique situation was recently faced in In re Caldor, Inc.,[486] in which Caldor, Inc. and its related entities (“Caldor”) filed a bankruptcy petition after its competitor Bradlees Corp. and affiliated companies (“Bradlees”) had already filed a bankruptcy petition.[487] Originally four members of the Caldor Committee were selected to serve on the Bradlees Committee, which later dropped to three when one member resigned from the Caldor Committee.[488]
The Caldor Committee and its proposed law firm made full disclosure to all parties of the proposed retention of the same law firm by both committees.[489] The United States Trustee objected to the employment of the law firm by the Caldor Committee.[490] The Trustee’s objection was based on the contention that the law firm held an adverse interest in connection with the case pursuant to 11 U.S.C. section 1103(b) as applied by section 327(a) and therefore could not be employed by the committee.[491] The Trustee contended that Caldor or Bradlees might merge, be bought out by a national discounter, liquidate, or compete in the purchase of other troubled discounters.[492]
In Caldor, Judge Garrity rejected the contention that simultaneous representation of the two creditors’ committees for debtors that were economic competitors created a per se adverse interest in connection with the case.[493] The Court did agree with the stipulated evidence that Bradlees and Caldor were economic competitors and “in that sense, they are adverse to one another.”[494] However, the court rejected the trustee’s contentions regarding possible mergers or liquidations of either debtor as a basis for holding an adverse interest because evidence of those possibilities was too speculative.[495] Even though a hypothetical set of facts could be devised to create a conflict, “horrible imaginings alone cannot be allowed to carry the day.”[496]
The Bradlees Committee was not a creditor or competitor of the Caldor Committee and therefore representation of both committees did not create an adverse interest in connection with the case.[497] The Court looked to two alternative tests to determine whether representation of the Bradlees Committee created a disqualifying conflict: (i) First, it inquired whether the simultaneous representation “create[s] ‘either a meaningful incentive to act contrary to the best interest of the [Caldor Committee]—an incentive sufficient to place those parties at more than acceptable risk—or the reasonable perception of one,’”[498] or (ii) “’if it is plausible that the representation of [the Bradlees Committee] will cause [the Professionals] to act any differently than they would without that . . . representation, then they have a conflict and an interest adverse to the [Caldor Committee].’”[499] The court found that neither situation existed and the law firm did not have an adverse interest in connection with the case because the committees were not competitors in any forum.[500] The Court found that the law firm’s implementation of an information barrier between the bankruptcy teams for Bradlees and Caldor augmented, rather than undermined, the propriety of the simultaneous representation.[501]
9. Is it proper for a trustee to represent him or herself in connection with the case?
Assuming a trustee and his law firm are disinterested and do not represent an interest adverse to the estate, Code section 327(d) authorizes a trustee to represent himself if it is in the best interest of the estate.[502] The ethical problem faced by a trustee who seeks to retain himself or his law firm to act as counsel arises from the provision in Code section 328(b) which limits the trustee’s compensation to purely legal matters, not trustee or management matters.[503] A trustee who represents himself has a built-in conflict in most cases in that his economic self interest will tempt him to characterize his work as legal, not managerial. A number of courts addressing the issue have held that a trustee must show good cause to justify retaining himself as counsel.[504]
The Butler case identifies certain causes which would justify a trustee’s retention of his firm.[505] Among these are (I) the trustee’s demonstration that his appointment, as opposed to that of a third party, would result in substantial savings to the estate; (ii) demonstration that much of the legal work must be undertaken immediately and there is no time to await the appointment of outside counsel; (iii) a showing that there is little work to perform which does not merit the retention and expense of an outside lawyer; and (iv) a showing that the estate’s assets consist principally of causes of action, and legal counsel would have to look to the recovery in those actions for payment.[506] Even assuming such grounds exist, the Butler court required notice to all creditors of a trustee’s proposed retention of his own firm.[507] Another court has consistently refused to authorize the employment absent a showing of cause.[508]
10. Excessive Billing.
In In re Nelson,[509] a personal injury attorney representing the debtor was discharged by the debtor. The attorney, who had been working on a contingent fee basis, submitted a claim on an hourly basis on the theory of quantum meruit. The attorney, when first told that he was to be fired, told the debtor that the suit had already been filed and she relented. The suit was actually filed the following month.[510]
The attorney, in submitting his claim, argued that the proper hourly rate was $250 per hour—regardless of whether the work was performed by him, his law clerk (a third year student) or his secretary.[511]
The Bankruptcy Court found that the attorney breached his fiduciary duty (including the fiduciary duty under Ohio law) in both misrepresenting the status of the lawsuit and “attempting to collect a clearly excessive fee.”[512] The Court then reduced the hours to those estimated to have been worked by the attorney and reduced the rate to $150, reducing the claim from over $19,000 to barely $2,000.
11. Refusing to Cease Work When Fired.
What do you do when an attorney continues to press a lawsuit after it was resolved in a plan (accepted by his clients) and his clients specifically instructed him to cease? These facts faced the court in Trulis v. Barton.[513] The District Court refused to impose any sanctions.
The Ninth Circuit found that the District Court abused its discretion. Continuing the litigation in the face of a plan which disposed of it and required releases from the plaintiffs was found to be a violation of 28 U.S.C. § 1927 by recklessly and vexatiously multiplying litigation as a matter of law.[514] The attorney’s failure to abide by his clients’ specific instructions after being dismissed demonstrated “subjective bad faith” as a matter of law.[515] The case was then remanded to the District Court to determine the amount of the sanctions which must be imposed.
III. Consequences of Ethical Violations (“What can they do to me?”)
As noted throughout this article, it appears that in the majority of cases where violations occur, attorneys are economically penalized by courts refusing to approve fee applications for work done.[516]
A. Fines and Imprisonment
Some violations may be criminal and carry penalties of fines and possible imprisonment. Although such cases are thankfully uncommon, attorneys should nevertheless be aware of these cases so as to avoid even being implicated. For instance, under title 18 section 156, non-lawyer bankruptcy petition preparers[517] are now subjected to federal criminal liability.[518] In fact, the FBI has begun investigating more bankruptcy crimes than at any other time in the past. The section was revised partly a result of the notoriety of the problem. The Bankruptcy Reform Act of 1994 not only revised and clarified the existing provisions of title 18 sections 152, 153, and 154, it added two new sections, section 156 and section 157.[519] Section 157 provides:
A person who, having devised or intending to devise a scheme or artifice to defraud and for the purpose of executing or concealing such a scheme or artifice or attempting to do so—
(1) files a petition under title 11;
(2) files a document in a proceeding under title 11; or
(3) makes a false or fraudulent representation, claim, or promise concerning or in relation to a proceeding under title 11, . . . shall be fined under this title, imprisoned not more than 5 years, or both.[520]
While the primary emphasis is on non-lawyers, attorneys should be aware of sanctions they might be subjected to for authorizing the filing of a debtor’s fraudulent petition.[521]
Under title 18 section 153, in addition to criminal charges, debtors and their attorneys should be forewarned that even if the bankruptcy case eventually ends in discharge, debts created by improper, fraudulent acts nevertheless remain unaffected by the discharge.[522]
B. Conspiracy Theory
Attorneys may also be potentially exposed to liability under a conspiracy theory wherein the attorney is found liable as a co-conspirator for the tortious conduct of his client.[523] The Arizona Supreme Court has found that a judgment creditor can recover from the attorney whose debtor-client made a fraudulent transfer.[524] In McElhanon, the attorney actively advised and assisted his client, a judgment debtor, and was in fact a transferee of some of the fraudulently transferred assets.[525] The judgment creditor was successful in obtaining a judgment against the lawyer on a conspiracy to defraud theory.[526]
Applicable ethical provisions make it clear that an attorney may not counsel his client with respect to conduct the lawyer knows to be fraudulent.[527] Although possibly open to some question, the professional conduct rules would seem to clearly prohibit counseling a client with respect to prebankruptcy planning other than perhaps exemption planning.[528] Model Rule 1.2(d) states, “[a] lawyer shall not counsel a client to engage, or assist a client in conduct that the lawyer knows is criminal or fraudulent.”[529] “Knows” is defined as “actual knowledge of the fact in question, but actual knowledge can be inferred from the circumstances.”[530] Although many transactions may have multiple motives and “constructive fraud” may not be “fraudulent” within the meaning of Model Rule 1.2(d), a cautious attorney should scrutinize a prospective debtor’s asset transfer plan using the same 20/20 hindsight which creditors and the Court will bring to bear on the transactions. Clearly, if the transactions fail the “smell test,” the attorney should counsel against them.[531]
C. Suspension or Disbarment
Although infrequently seen, disbarment or suspension is a possible result of continuing to represent a client engaged in a fraudulent scheme. For example, in Townsend v. State Bar of California,[532] an attorney received a three-year suspension for advising a client to convey property fraudulently.[533] Similarly, in Suffolk County Bar Ass’n v. Pfingst (In re Pfingst),[534] an attorney was disbarred for participation in fraudulent conveyances in contemplation of bankruptcy.[535] Even if an attorney lacks any prior disciplinary record, the court may find the violation so offensive so as to warrant disbarment.[536]
IV. Proposed Course of Action
Whether engaging in pre-filing asset planning or divided loyalties, the message apparently being sent by courts is: when in doubt, act conservatively and well within the guidelines of professional responsibility.[537] In light of the bankruptcy law requirements of disinterestedness and absence of conflict, professional responsibility rules seem to strongly suggest that the time to deal with divided loyalties is at the outset of the case, and not at a point, perhaps halfway through the case, when decisions have to be made and counsel is required to choose between those loyalties.[538] The professional responsibility rules require that counsel exercise his or her independent professional judgment and that an attorney not place himself or herself in the position of choosing between conflicting loyalties.[539] If such choices have to be made and separate counsel engaged, those decisions should properly be made in the beginning of the case. In the long run, facing these issues early may be more efficient, fairer to competing constituencies, and make decision making by debtors and counsel far less questionable. In addition, an overriding principle which should guide all counsel is the avoidance of the appearance of impropriety.[540] Separate counsel for “potentially” conflicted entities is perhaps the only mechanism to achieve this goal.
Finally, the professional conduct rules impose strict requirements upon counsel to preserve and protect the confidences of the client.[541] Although sharing confidences of a corporate debtor with its management is inevitable, the representation by the same counsel of multiple affiliates, partners and partnerships, corporations and shareholders, imposes difficult burdens upon counsel to ensure that confidential information is available only to the proper parties and used only for proper purposes.
Conclusion
Attorneys in all areas of law must practice within the bounds of ethical rules, whether they abide by the bare minimum required under state professional responsibility codes, state and federal statutes, or the dictates of their own conscience. However, in bankruptcy practice in particular, attorneys should carefully evaluate any proposed course of action, even before the decision is made to file a bankruptcy petition. Admittedly, the image of bankruptcy itself has changed for the better,[542] but the image of lawyers arguably has declined.[543] Being well informed concerning ethical rules will not only benefit the attorney by preventing any sanctions, but more importantly, uplift the trust of the client and the public in general.
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[1] The original canons of Professional Ethics were adopted by the ABA in 1908. The model of the Code of Professional Responsibility was adopted by the House of Delegates of the ABA in 1969 and generally is adopted by most states and the Federal Jurisdictions. The Model Rules were adopted in 1983 with amendments in 1987, 1989, and 1990. ALI-ABA Course Study Materials, Professional Ethics and Responsibility, The New Model Rules in a Changing Legal Professional, September 1991, Preface at 5-6.
[2] References to the “Local Bankruptcy Rules” hereafter are to the Local Bankruptcy Rules for the Middle District of Louisiana.
[3] Louisiana has also promulgated a Code of Professionalism. See §4.09, infra.
[4] New BAPCPA Act §528(a)(1) requires a written engagement agreement. An example of such an engagement contract is provided at §4.10, infra, as Form 1.
[5] The attorney must also make an investigation concerning any conflicts of interest and check the Local Bankruptcy Rules for any additional issues.
[6] See Form 2, §4.10, infra.
[7] There is an excellent treatise published on the subject of Asset Planning which is recommended for any reader. P. Spero, Asset Protection: Legal Planning and Strategies, (Warren, Gorham & Lamont 1994). There is an express chapter in that book on attorney liability for planning and implementing asset protection for a client. Id at §2.01-2.07.
[8] Id.
[9] See generally, P. Spero Asset Protection, supra note 6, at §2.01[2]
[10] Id at §2.03.
[11] 3 Collier on Bankruptcy (15th ed), at ¶¶522.01 & 523.01; 1 A Collier on Bankruptcy (14th ed), at ¶6.01.
[12] Resnick, "Prudent Planning or Fraudulent Transfer? The Use of Nonexempt Assets to Purchase or Improve Exempt Property on the Eve of Bankruptcy,” 85 Com LJ 238 (1980).
[13] Resnick, supra note 11, at 241.
[14] Resnick, supra note 11.
[15] 11 USC §522(b).
[16] House Report, at 360. it is significant to note that the Senate version of the Code was different in several
respects with regard to certain options under exemption law. See, e.g., In re Cannady, 653 F2d 210 (5th Cir
1981), which held that the House version of the Code was adopted by Congress in certain respects and that,
thus, a bankrupt husband might elect exemptions under state law while his bankrupt wife simultaneously
elected exemptions under federal law.
[17] House Report, at 361; Senate Report, at 76.
[18] This issue was not clear under the old Act. Resnick, supra note 226. But cf In re Reed, 700 F.2d 986 (5th
Cir 1983), which upheld the denial of a discharge to a debtor under the new Code based upon a factual
finding that the debtor had engaged in a systematic conversion of nonexempt assets into exempt assets for the
purpose of defrauding creditors. See generally §2.05, and Resnick, supra note 12, for a discussion of this
problem.
[19] 11 USC §522(c).
[20] 11 USC §522(d).
[21] 11 USC §522(b)(1) & (d).
[22] See generally 3 Collier on Bankruptcy (15th ed), at ¶522.02; 7 Collier on Bankruptcy (15th ed), at 1 et seq.
[23] Id.
[24] House Report, at 362; see also Senate Report, at 76.
[25] House Report, at 362; see also Senate Report, at 76.
[26] 11 USC §522(g). The House Report explains:
The debtor is also permitted to exempt property that the trustee recovers as a result of the avoiding of the fixing of certain security interests to the extent that the debtor could otherwise have exempted the property. If the trustee does not pursue an avoiding power to recover a transfer property that would be exempt, the debtor may pursue it and exempt the property, if the transfer was involuntary and the debtor did not conceal the property. If the debtor wishes to preserve his right to pursue an action under this provision, then he must intervene in an action brought by the trustee based on the same cause of action. It is not intended that the debtor be given an additional opportunity to avoid a transfer or that the transferee have to defend the same action twice. Rather, this section is primarily designed to give the debtor the rights that the trustee could have pursued if the trustee chooses not to pursue them. The trustee is given no greater rights under this provision than the trustee.
House Report, at 362-63; see also Senate Report, at 76-77.
[27] 11 USC §522(i). The House Report explains that §522(i) “permits recovery by the debtor of property transferred in an avoided transfer from either the initial or subsequent transferees. It also permits preserving a transfer for the benefit of the debtor. Under either case, the debtor may exempt the property recovered or preserved.” House Report, at 363; see also Senate Report, at 77.
However, §522(k) requires the debtor “to pay his aliquot share of the costs and expenses…[from the ] property that the trustee recovers and the debtor later exempts, and any costs and expenses of avoiding a transfer by the debtor that the debtor has not already paid.” House Report, at 366; see also Senate Report, at 77.
[28] 11 USC §522(1).
[29] 11 USC §522(m); In re Cannady, 653 F.2d 210 (5th Cir 1981), held that a bankrupt husband may elect exemptions under state law, while his bankrupt wife simultaneously elects exemptions under federal law in a joint case.
However, in 1984 Congress amended §522(m) and §522(b) to limit joint debtors’ ability to mix state and federal exemptions. Under the new provisions, joint debtors each must choose the same set of exemptions. See Morris, “Substantive Consumer Bankruptcy Reform in the Bankruptcy Amendments Act of 1984”, 27 Wm & Mary L Rev 91, 101-14 (1985).
[30] For an excellent discussion of this issue, See Spero, Asset Protection, supra note 6, at §10.02 [2][b]
[31] 11 USC §522(b).
[32] Bankruptcy Rule 4003.
[33] See Resnick, supra note 12; In re Reed, 700 F.2d 986 (5th Cir. 1983).
[34] Id.
[35] Bankruptcy Act §§67d & 70e.
[36] 4 Collier on Bankruptcy (15th ed), at ¶¶544.03 & 544.01-.10; Currie, “The First Act of Bankruptcy in Louisiana,” 27 La L Rev 16 (1966).
[37] There are numerous articles explaining the avoiding powers under the old Bankruptcy Act which may be of use in comparing them with the avoiding powers under the Bankruptcy Code. See Kennedy, “The Secured Lender and the Bankruptcy Code,” 3 U Com Code LJ 13 (1970); Kennedy “Article 9 of the Bankruptcy Act,” 24 Miss L Ins 191 (1969); Kennedy, “The Trustee in Bankruptcy as a Secured Creditor Under the Uniform Commercial Code,” 65 U Mich L Rev 1449 (1967); Kennedy, “Statutory Liens in Bankruptcy,” 39 Minn L Rev 697 (1955); Note, “Bankruptcy – Rights of Secured Creditors,” 17 Minn L Rev 49 (1932).
There are several other good articles explaining the trustee’s avoiding powers and the rights of secured creditors under the Bankruptcy Code. See Anderson & Hollister, “The Effect of Liquidations on Louisiana Security Devices,” 31 Loy L Rev 1 (1985); Coogan, “The New Bankruptcy Code: The Death of Security Interests?,” 14 Ga L Rev 153 (1980); Kennedy, “Secured Creditors Under the Bankruptcy Reform Act,” 15 Ind L Rev 477 (1982); Levin, “Introduction to the Trustee’s Avoiding Powers,” 54 Am Bankr LJ 173 (1980).
[38] The Uniform Fraudulent Conveyance Act is a descendent of the Statute of Fraudulent Conveyances of 1571, commonly known as the Statute of Elizabeth, 13 Eliz 1 ch 5 (1571), which is available to unsecured creditors under common law.
[39] 11 USC §548. This benefit becomes especially important in those jurisdictions such as Louisiana which have not adopted the Uniform Fraudulent Conveyances Act. See generally Currie, supra note 36; Anderson & Hollister, supra note 37.
[40] 4 Collier on Bankruptcy (15th ed), at ¶548.01 et seq.
[41] House Report, at 375; Senate Report, at 89-90.
[42] 11 USC §548(a)(1).
[43] 1 G. Glenn, Fraudulent Conveyances and Preferences §1 (1931).
[44] V. Countryman, Cases and Materials on Debtor and Creditor 127 (1974).
[45] 11 USC §548(a)(2).
[46] 4 Collier on Bankruptcy (15th ed), at ¶¶548.03-.05.
[47] 11 USC §544(b).
[48] See generally Currie, supra note 36; Anderson & Hollister, supra note 37.
[49] See generally 4 Collier on Bankruptcy (15th ed), at ¶548.01[2].
[50] See generally, Alces, The Law of Fraudulent Transactions §6A.02[1][c](West 2002)
[51] In re Bobbroff, 69 B.R. 295 (Bankr. E. D. Pa. 1987).
[52] Carlson v. Brandt, 250 B.R. 366 (N.D. Ill. 2000); In re Kauffman, 675 F. 2d 127 (7th Cir. 1981), (a concealment might involve property not literally concealed, but under which the transfer of title has been made, but the bankrupt continues to use the property as his own – where this occurs, this is usually sufficient to constitute a concealment, if the property has a material value).
[53] Spurling v. Hoflund, 163 B.R. 879 (Bankr. N.D. Fla. 1993)
[54] §327. Employment of professional persons.
“(a) Except as otherwise provided in this section, the trustee, with the court’s approval, may employ one or more attorney’s accountants, appraisers, auctioneers, or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons to represent or assist the trustee in carrying out the trustee’s duties under this title.
(b) If the trustee is authorized to operate the business of the debtor under section 721, 1201 or 1108 of this title, and if the debtor has regularly employed attorney’s accountants, or other professional persons on salary, the trustee may retain or replace such professional persons if necessary in the operation of such business.
(c) In a case under chapter 7, 11, or 12 of this title, a person is not disqualified for employment under this section solely because of such person’s employment by or representation of a creditor or the United States trustee, in which case the court shall disapprove such employment if there is an actual conflict of interest.
(d) the court may authorize the trustee to act as attorney or accountant for the estate if such authorization is in the best interest of the estate.
(e) The trustee, with the court’s approval, may employ, for a specified special purpose, other than to represent the trustee in conducting the case, an attorney that has represented the debtor, if in the best interest of the estate, and if such attorney does not represent or hold an interest adverse to the debtor or to the estate with respect to the matter on which such attorney is to be employed.
(f) The trustee may no employ a person that has served as an examiner in the case.”
11 U.S.C. Section 327 (emphasis added).
[55] Rule 2014. Employment of Professional Persons
“(a) APPLICATION FOR AN ORDER OF EMPLOYMENT. An order
approving the employment of attorneys, accountants, appraisers, auctioneers, agents, or other professionals pursuant to §§ 327, 1103, or 1114 of the Code shall be made only on application of the trustee or committee. The application shall be filed and, unless the case is a chapter 9 municipality case, a copy of the application shall be transmitted by the applicant to the United States trustee. The application shall state the specific facts showing the necessity for the employment, the name of the person to be employed, the reasons for the selection, the professional services to be rendered, any proposed arrangement for compensation, and, to the best of the applicant’s knowledge, all of the person’s connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, the United States trustee, or any person employed in the office of the United States trustee. The application shall be accompanied by a verified statement of the person to be employed setting forth the person’s connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, the United States trustee, or any personal employed in the office of the United States trustee.”
[56] 11 U.S.C. § 504 reads:
“(a) Except as provided in subsection (b) of this section, a person receiving compensation or reimbursement under §§ 503(b)(2) or 503(b)(4) of this title may not share or agree to share --
(1) any such compensation or reimbursement with another person; or
(2) any compensation or reimbursement received by another person under such sections.
(b) (1) A member, partner, or regular associate in a professional association, corporation, or partnership may share compensation or reimbursement received under section 503(b)(2) or 503(b)(4) of this title with another member, partner, or regular associate in such association, corporation, or partnership, and may share in any compensation or reimbursement received under such sections by another member, partner, or regular associate in such association, corporation, or partnership.
(2) An attorney for a creditor that files a petition under section 303 of this title may share compensation and reimbursement received under section 503(b)(4) of this title with any other attorney contributing to the services rendered or expenses incurred by such creditor’s attorney.” [emphasis supplied]
[57] Section 330. Compensation of officers.
“(1) After notice to any parties in interest and to the United States trustee and a hearing, and subject to sections 326, 328, and 329, the court may award to a trustee, an examiner, a professional person employed under section 327 or 1103 -
(a) reasonable compensation for actual, necessary services rendered by such trustee, examiner, professional person , or attorney, and by any paraprofessional persons employed by any such person; and
(b) reimbursement for actual, necessary expenses.”
[58] Federal Rule of Bankruptcy Procedure 2016(b):
“(b) DISCLOSURE OF COMPENSATION PAID OR PROMISED TO ATTORNEY FOR DEBTOR. Every attorney for a debtor, whether or not the attorney applies for compensation, shall file and transmit to the United States trustee within 15 days after the order for relief, or at another time as the court may direct, the statement required by §329 of the Code including whether the attorney has shared or agreed to share the compensation with any other entity. The statement shall include the particulars of any such sharing or agreement to share by the attorney but the details of any agreement for the sharing of the compensation with a member or regular associate of the attorney’s law firm shall not be required. A supplemental statement shall be filed and transmitted to the United States Trustee within 15 days after any payment or agreement not previously disclosed.”
[59] 11 U.S.C. §328(c) provides as follows:
“(c) Except as provided in section 327(c), 327(e), or 1107(b) of this title, the court may deny allowance of compensation for services and reimbursement of expenses of a professional person employed under section 327 or 1103 of this title if, at any time during such professional person’s employment under section 327 or 1103 of this title, such professional person is not a disinterested person, or represents or holds an interest adverse to the interest of the estate with respect to the matter on which such professional person is employed.” (emphasis supplied)
[60] Insider is defined in section 101(31):
“(31) “Insider” includes --
(A) if the debtor is an individual --
(i) relative of the debtor or of a general partner of the debtor;
(ii) partnership in which the debtor is a general partner;
(iii) general partner of the debtor; or
(iv) corporation of which the debtor is a director, officer, or person in control;
(B) if the debtor is a corporation —
(i) director of the debtor;
(ii) officer of the debtor;
(iii) partnership in which the debtor is a general partner;
(iv) general partner of the debtor; or
(v) relative of a general partner, director, officer, or person in control of the debtor;
(C) if the debtor is a partnership —
(i) general partner in the debtor;
(ii) relative of a general partner in, person in control of the debtor;
(iii) partnership in which the debtor is a general partner;
(iv) general partner of the debtor; or
(v) person in control of the debtor;
(D) if the debtor is a municipality, elected official of the debtor or relative of an elected official of the debtor or relative of an elected official of the debtor;
(E) affiliate, or insider of an affiliate as if such affiliate were the debtor; and
(F) managing agent of the debtor.”
[61] 11 U.S.C. §503(b)(e)(D) and (b)(4):
“(b) After notice and a hearing, there shall be allowed administrative expenses, other then claims allowed under section 502(f) of this title, including — . . .
(3) the actual, necessary expenses, other than compensation and reimbursement specified in paragraph (4) of this subsection, incurred by — . . .
(D) a creditor, an indenture trustee, an equity security holder, or a 1committee appointed under section 1102 of this title, in making a substantial contribution in a cage under chapter 9 or 11 of this title; or
(4) reasonable compensation for professional services rendered by an attorney or an accountant of an entity whose expense is allowable under paragraph (3) of this subsection, based on the time, the nature the extent, and the value of such services, and the cost of comparable services other than in a case under this title, and reimbursement for actual, necessary expenses incurred by such attorney or accountant.”
[62] Rule 1.7 of the Louisiana State Bar Association’s Rule of Professional Conduct prohibits lawyers from simultaneously representing clients with actual or potential conflicts of interest unless each client consents, and the lawyer reasonably believes that the representation of each client will not be adversely affected by the conflict.
[63] DR 5-105 of the ABA Model Code of Professional Responsibility authorizes the representation of multiple clients with actual or potential conflicts of interest upon their consent after full disclosure, if it is obvious that an attorney can adequately represent the interests of each client.
[64] 11 U.S.C.§328(a) provides that:
“(a) The trustee, or a committee appointed under section 1102 of this title, with the court’s approval, may employ or authorize the employment of a professional person under section 327 or 1103 of this title, as the case may be, on any reasonable terms and conditions of employment, including on a retainer, on an hourly basis, or on a contingent fee basis. Notwithstanding such terms and conditions, the court may allow compensation different from the compensation provided under such terms and conditions after the conclusion of such employment, if such terms and conditions prove to have been improvident in light of developments not capable of being anticipated at the time of the fixing of such terms and conditions.”
[65] 11 U.S. C. §328(c) provides as follows:
“(c) Except as provided in section 327(c), 327(e), or 1107(b) of this title, the court may deny allowance of compensation for services and reimbursement of expenses of a professional person employed under section 372 or 1103 of this title if, at any time during such professional person’s employment under section 327 or 1103 of this title, such professional person is not a disinterested person, or represents or hold an interest adverse to the interest of the estate with respect to the mater on which such professional person is employed.”
[66] 11 U.S.C. §329 provides as follows:
“(a) Any attorney representing a debtor in a case under this title, or in connection with such a case, whether or not such attorney applies for compensation under this title, shall file with the court a statement of the compensation paid or agreed to be paid, if such payment or agreement was made after one year before the date of the filing of the petition, for services rendered or to be rendered in contemplation of or in connection with the case by such attorney, and the source of such compensation.
(b) If such compensation exceeds the reasonable value of any such services, the court may cancel any such agreement, or order the return of any such payment, to the extent excessive, to --
(1) the estate if the property transferred --
(A) would have been property of the estate; or
(B) was to be paid by or on behalf of the debtor under a plan under chapter 11, 12, or 13 of this title; or
(2) the entity that made such payment.”
[67] Federal Rule of Bankruptcy Procedure 2017:
“(a) PAYMENT OR TRANSFER TO ATTORNEY BEFORE ORDER FOR RELIEF. On motion by any party in interest or on the court’s own initiative, the court after notice and a hearing may determine whether any payment or money or any transfer of property by the debtor, made directly or indirectly and in contemplation of the filing of a petition under the Code by or against the debtor or before entry of the order for relief in an involuntary case, to an attorney for services rendered or to be rendered is excessive.
(b) PAYMENT OR TRANSFER TO ATTORNEY AFTER ORDER FOR RELIEF. On motion by the debtor, the United States trustee, or on the court’s own initiative, the court after notice and a hearing may determine whether any payment of money or any transfer f property, or any agreement therefore, by the debtor to an attorney after entry of an order for relief in a case under the Code is excessive, whether the payment or transfer is made or is to be made directly or indirectly, if the payment, transfer, or agreement therefore is for services in any way related to the case.”
68 Louisiana Ethics Rule 1.16(a)(1) would ostensibly allow withdrawal because the representation would result in violation of the rules of professional conduct or other law (e.g., §§521, 707(b)(1), 526, or other provisions of bankruptcy law).
[68] In re Latanowich, 207 B.R. 326 (Bankr. D. Mass. 1997).
[69] In re Cherry, 247 B.R. 176 (Bankr. E.D. Va. 2000); Bankboston N.A. v. Nanton, 239 B.R. 419, 1999 U.S. Dist. LEXIS 15343 (D. Mass. 1999); In re Melendez, 235 B.R. 173 (Bankr. D. Mass. 1999); In re Bruzzese, 214 B.R. 444 (Bankr. E.D. N.Y. 1997).
[70] 11 U.S.C. 524(k)(3)(A).
[71] 11 U.S.C. 523(k)(3)(B).
[72] 11 U.S.C. 523(k)(3)(C) & (D).
[73] 11 U.S.C. 523(k)(3)E).
[74] Section 526(c)(5) authorizes the Court on its own motion to enjoin violations of the debt relief agency provisions or impose civil penalties on the violator. If the Court has that broad jurisdiction to both initiate a disciplinary action and punish a violation, it must of necessity have jurisdiction on its own motion to conclude that certain types of persons or certain types of activity are not covered at all, since the first step in enforcing the provision is to determine whom is encompassed within its grasp.
[75] Indeed many such agencies, unlike attorneys admitted to the Bar, may be located outside the geographical limits of the state in which their services are delivered and where their assisted persons are in Court, making the state enforcement practically, if not legally, impossible. Bankruptcy Courts on the other hand have nationwide service powers in cases pending before them. Fed R. Bankr. P. 7004(e), (h).
[76] I hesitate to speculate on all the types of persons or entities which might render bankruptcy assistance to a debtor which are not attorneys, but websites containing information, forms, and instructions exist. Compare (“Free Consumer Bankruptcy Information”), with (which “allow[s] you to complete your documents online and print from the comfort of your own home”) and (offering “complete professional preparation” and “The best way to prepare your bankruptcy is to have it done full service for you. NOT online software!!!”) The first appears to be a debt relief agency, the last a bankruptcy petition preparer, and the second might be either one.
[77] But see Chemerinsky, supra page 3, at 582-83
( In this regard it should be noted that some of the provisions of §§526, 527 and 528 may mirror the type of “best practices” that attorneys should follow and may be consistent with attorneys’ pre-existing professional standards. The point is that attorneys are bound by those professional standards and are unaffected by any new or different requirements that are found in §§526, 527 and 528.
[78] Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23.
[79] BAPCPA Section 102(a)(2)(B), amending Code § 707(b) to provide that the court “may dismiss a case filed by an
individual debtor under this chapter whose debts are primarily consumer debts … if it finds that the granting of relief
would be an abuse of the provisions of this chapter.”
[80] BAPCPA Section 102(a)(2)(C), adding Code §707(b)(4).
[81] Fed. R. Bankr. P. 9011. In this Report, all references to “Rule 9011” or the “Rule” mean Rule 9011 of the Federal Rules of Bankruptcy Procedure.
[82] BAPCPA Section 102(a)(2)(C), adding Code §707(b)(2).
[83] BAPCPA Section 102(a)(2)(C), adding Code §707(b)(3). The Report uses “good faith” as a shorthand for the requirements of new §707(b)(3), which provides in full:
In considering under paragraph (1) whether the granting of relief would be an abuse of the provisions of this chapter in a case in which the presumption in subparagraph (A)(i) of such paragraph does not arise or has been rebutted, the court shall consider –
A) whether the debtor filed the petition in bad faith; or
B) the totality of the circumstances (including whether the debtor seeks to reject a personal services contract and the financial need for such rejection as sought by the debtor) of the debtor’s financial situation demonstrates abuse.
[84] 11 U.S.C. § 103(b) (“Subchapters I and II of chapter 7 apply only in a case under such chapter”).
[85] BAPCPA Section 102(a)(2)(C), adding Code § 707(b)(4)(A), which reads:
The court, on its own initiative or on the motion of a party in interest, in accordance with the procedures described in rule 9011 of the Federal Rules of Bankruptcy Procedure, may order the attorney for the debtor to reimburse the trustee for all reasonable costs in prosecuting a motion filed under section 707(b), including reasonable attorney’s fees if –
i) a trustee files a motion for dismissal or conversion under this subsection; and
ii) the court –
I) grants such motion; and
II) finds that the action of the attorney for the debtor in filing a case under this chapter violated rule 9011 of the Federal Rules of Bankruptcy Procedure.
[86] Id. See supra note 2 and accompanying text for the language of § 707(b)(4)(C).
[87] Id. New Code § 707(b)(4)(B) provides:
If the court finds that the attorney for the debtor violated rule 9011 of the Federal Rules of Bankruptcy Procedure, the court, on its own initiative or on the motion of a party in interest in accordance with such procedures, may order –
i) the assessment of an appropriate civil penalty against the attorney for the debtor; and
ii) the payment of such civil penalty to the trustee, the United States trustee (or bankruptcy administrator, if any).
[88] See supra note 3 and accompanying text for the language of § 707(b)(4)(C).
[89] Catherine E. Vance, Attorneys and the Bankruptcy Reform Act of 2001:Understanding the Imposition of Sanctions Against Debtors’ Counsel, 106 COM. L.J. 241, 245 (2001).
[90] See House Rep. 109-31 at 17 (“The bill’s consumer protections include provisions strengthening professionalism standards for attorneys and others who assist consumer debtors with their bankruptcy cases.”).
[91] BAPCPA Section 102(a)(2)(C), adding Code § 707(b)(5).
[92] Fed. R. Bankr. P. 1017(e)(1).
[93] BAPCPA Section 102(C), adding Code § 704(b).
[94] See Sosa v. Alvarez-Machain, 542 U.S. 692, 741 n.9 (2004) quoting 2A N. Singer, Statutes and Statutory Construction § 46:06, p. 194 (6th ed. 2000).
[95] In re Ronco, Inc., 838 F.2d 212, 217 (7th Cir. 1988)(emphasis added). See also, e.g., Hamer v. Career Coll. Ass’n, 979 F.2d 758, 759 (9th Cir. 1992)(after noting Rule 11’s reasonable inquiry standard, court stated “an affidavit should be sufficient to constitute reasonable investigation for purposes of Rule 11”); In re Excello Press, 967 F.2d 1109, 1112-13 (7th Cir. 1992)(under Rule 9011 an attorney is required to make a ‘reasonable inquiry’ before filing a document, but “how much investigation is reasonable in a given case is a question of line drawing.”). see also 2 James W. Moore, et al., Moore’s Federal Practice ¶11.11[2] (3d Ed.) (using the words “inquiry” and “investigation” interchangeably).
[96] In re Robinson, 198 B.R. 1017, 1024 (Bankr. N.D. Ga. 1996); In reArmwood, 175 B.R. 779, 789 (Bankr. N.D. Ga. 1994); In re Matthews, 154 B.R. 673, 680 (Bankr. W.D. Tex. 1993). See In re Huerta, 137 B.R. 356, 379 n.8 (Bankr. C.D. Cal. 1992). Another court explained:
Litigation lawyers have a broad responsibility under Rule 11 and the Code of Professional responsibility (now the Model Rules of Professional Conduct): to confer with the client about the facts – and not to accept the client’s version on faith, but to probe the client in that respect (‘reasonable inquiry’); to do the lawyers’ homework on the law; and then to counsel the client about just which claims the law reasonably supports in terms of the facts the lawyers’ proper investigation has disclosed. That often involves counseling the client – sometimes against the tide of the client’s displeasure – as to how best to vindicate the client’s interests without abusing another’s. In some instances that may involve advising a client not to pursue a claim or a theory of recovery that in a technical sense (of surviving a Rule 12(b)(6) motion) might perhaps go forward, but by rights should not.”).
Fleming Sales Co., Inc. v. Bailey, 611 F. Supp. 507, 519 (N.D. Ill. 1985).
[97] BAPCPA Section 226, adding Code § 101(12A).
[98] BAPCPA Section 226, adding Code § 101(3).
[99] BAPCPA Section 315, amending Code § 521(a).
[100] BAPCPA Section 104, amending Code § 342(b).
[101] BAPCPA Section 227, adding Code § 527(a)(2).
[102] Id.
[103] Id.
[104] BAPCPA Section 315, amending Code § 521(a).
[105] BAPCPA Section 102(a)(2)(C), adding Code § 707(b)(3).
[106] BAPCPA Section 102(a)(2)(C), adding Code § 707(b)(2)(A)(ii)(V).
[107] BAPCPA Section 102(a)(2)(C), adding Code § 707(b)(2)(B)(ii).
[108] See e.g., H. R. Rep. No. 109-31, at 656 (2005) (“Judge Randall Newsome testified on behalf of the National Conference of Bankruptcy Judges that at least 16 potential sources of litigation are contained in the means testing provisions alone, and that another 42 litigation points have been identified in the other consumer provisions, noting that ‘[t]his is probably only the tip of the iceberg.’”).
[109] See e.g., H.R. 3150, introduced October 21, 1997.
[110] Vance, supra note 12, at 262.
[111] Fed. R. Civ. P. 11 advisory committee’s note (1993 Amendments):
This revision is intended to remedy problems that have arisen in the interpretation and application of the 1983 revision to the rule … The rule retains the principle that attorneys and pro se litigants have an obligation to the court to refrain from conduct that frustrates the aims of Rule 1. The revision broadens the scope of this obligation, but places greater constraints on the imposition of sanctions and should reduce the number of sanctions presented to the court.
[112] Vance, supra note 12, at 264.
[113] Section § 707(b)(1) refers to the circumstances under which the granting of relief will be considered an abuse.
[114] In addition, the “abuse” standard is new, replacing the “substantial abuse” standard. See BAPCPA Section 102(a)(2)(B), amending Code § 707(b).
[115] Golden Eagle Distrib. Corp. v. Burroughs Corp., 801 F.2d 1531, 1542 (9th Cir. 1986).
[116] White v. General Motors Corp., 908 F.2d 675, 682 (10th Cir. 1990). See also Hewitt v. City of Stanton, 798 F.2d 1230, 1233 (9th Cir. 1986) (“[A] competent attorney admitted to practice before the district court” has a duty to know about contrary authority and cannot rely on a good faith lack of knowledge for Rule 11 purposes.); In re Global Eventl. Solutions, Ltd., 2000 BNH 23, 10-11 (Bankr. D.N.H. 2000) (Although also agreeing that investigating affirmative defenses is part of counsel’s duty to make a reasonable investigation/inquiry, the court noted that this does not mean that counsel needs to make “a detailed analysis of every possible defense.”).
[117] White, 908 F.2d at 682.
[118] Fed. R. Bankr. P. 9011(a).
[119] See, e.g., In re Barnes, 308 B.R. 77, 81 (Bankr. D. Colo. 2004) (Conflicts between the Bankruptcy and Rules “must be settled in favor of the Code”).
[120] See, e.g., In re Kelley, 255 B.R. 783 (Bankr. N.D. Ala. 2000) (using § 105(a) to impose sanctions).
[121] See Glatter v. Mroz (In re Mroz), 65 F.3d 1567, 1575 (11th Cir. 1995) citing Chambers v. NASCO, Inc. 501 U.S. 32 (1991)
[122] See Hon. Steven W. Rhodes, An Empirical Study of Consumer Bankruptcy Papers, 73 AM. BANKR. L.J. 653, 693 (1999) (hereinafter “Rhodes”).
[123] See, e.g., Gozlon-Peretz v. United States, 498 U.S. 395, 404 (1991) citing Russello v. United States, 464 U.S. 16, 23 (1983).
[124] Vance, supra, note 12, at 268-69.
[125] Id.
[126] See generally Rhodes, supra note 43.
[127] Vance, supra note 12, at 270-71.
[128] BAPCPA Section 228, adding Code § 527(c).
[129] See Vance, supra note 12, at 271-72 (discussing amendments to schedules and potential for conflict).
( “The” really is capitalized as part of The Ohio State University’s official name.
[130] Clerk in Holy Orders; member of the Louisiana Bar.
[131] Pub.L. 109-8.
[132] See, e.g., R. 2090-1, Local Bankr. R., U.S. Bankr. Ct. S.D. Ohio.
[133] See, e.g., R. 2090-2, Local Bankr. R., U.S. Bankr. Ct. S.D. Ohio; cf. R. 2090-2, Local Bankr. R., U.S. Bankr. Ct. N.D. Ohio.
[134] See, e.g., Local Civ. R. 83.5(b) and 83.7(a), U.S. Dist. Ct. N.D. Ohio, and Local Bankr. R. 2090-2(a), U.S. Bankr. Ct. S.D. Ohio.
[135] See, e.g., In re Doors and More, Inc., 126 B.R. 43, 45 (Bankr. E.D. Mich. 1991); In re RKC Development Corp., 205 B.R. 869, 873 (Bankr. S.D. Ohio 1997).
[136] DR 4-101, Model Code of Professional Responsibility (1969); Rule 1.6, Model Rules of Professional Conduct (1983).
[137] DR 5-101, DR 5-105, and DR 9-101, Model Code of Professional Responsibility (1969); Rule 1.7, Model Rules of Professional Conduct (1983).
[138] DR 5-101 and 5-105, loc. cit..
[139] Rule 1.7, loc. cit.
[140] DR 9-101, loc. cit.
[141] For an extended discussion of this issue, see John A. Hollister, “St. Matthew on Masters and Servants: Prolegomena to Conceptual Bases for Analyses of Louisiana Lawyers’ Permissible and Impermissible Conflicts of Interest,” 22 So.U.L.Rev. 283 (1995).
[142] 11 U.S.C. §329(a).
[143] Rule 2016(b), Fed. R. Bankr. Proc.
[144] In re AeroChem Corp., 176 F.3d 610 (2nd Cir. 1999).
[145] In re BH & P, Inc., 949 F.2d 1300 (3rd Cir. 1999).
[146] In re Metropolitan Environmental, Inc., 293 B.R. 871, 883 (Bankr. N.D. Ohio 2003).
[147] In re W.F. Development Corp., 905 F.2d 883 (5th Cir. 1990), cert. Denied, W.F. Development Corp. v. Office of U.S. Trustee, 499 U.S. 921, 111 S.Ct. 1311, 113 L.Ed.2d 245.
[148] In re419 Co., 133 B.R. 867, 869 (Bankr. N.D. Ohio 1991).
[149] In re Fretter, Inc., 219 B.R. 769,
[150] In re Kisseberth, 273 F.3d 714, 719 (6th Cir. 2001).
[151] Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir. 1974).
[152] See, e.g., In re Sly, 77 B.R. 115, 117 (Bankr. N.D. Ohio 1986).
[153] Rule 2016(b), Fed. R. Bankr. Proc.
[154] At the time of writing, one such case, which was discovered in just the manner described, is pending before the Ohio Supreme Court, awaiting its ruling on a complaint initiated by the trustee that has already been heard before that state’s disciplinary panel.
[155] Rule 9011(c), Fed. R. Bankr. Proc. (emphasis supplied).
[156] Rule 9011(c)(1), Fed. R. Bankr. Proc. (emphasis supplied).
[157] “If warranted, the court may award to the party prevailing on the motion the reasonable attorney’s fees incurred in presenting or opposing the motion.” Rule 9011(c)(1), Fed. R. Bankr. Proc. (emphasis supplied).
[158] Pub.L. 109-8.
[159] 11 U.S.C. §707(b)(4)(B) (2005).
[160] 11 U.S.C. §707(b)(4)(C) (2005).
[161] 11 U.S.C. §707(b)(4)(D) (2005).
* It has been said that the most important thing to remember when participating in a chapter 11 is the sequence in which you double-cross your allies.
This article was previously published in the American Bankruptcy Institute Law Review, Vol. 5, No. 1, p. 1 and as Professional Responsibility and the Bankruptcy Lawyer, 32-Jun Bull. Bus. L. Sec. St. B. Tex. 1 (1995) and has been updated and revised.
[162] See Baker v. Humphrey, 101 U.S. 494, 502 (1879) (referring to attorneys as officers of law, as well as agents of those by whom they are employed); In re Arlan’s Dep’t Stores, Inc., 615 F.2d 925, 932 (2d Cir. 1979) (stating counsel for debtor is officer of court and bound by fiduciary standards) (citing Brown v. Gerdes, 321 U.S. 178, 182 (1944)); Finn v. Childs Co., 181 F.2d 431, 441 (2d Cir. 1950) (stating persons who seek compensation for services or reimbursement for expenses are held to fiduciary standards).
[163] Clients seem to think that hiding assets is the principal reason to retain bankruptcy counsel.
[164] Strangling clients is also unethical, but its propriety is beyond the scope of this Article.
[165] Each state has enacted its own set of professional conduct rules which are typically taken from the ABA Model Code of Professional Responsibility (the “Model Code”), the ABA Model Rules of Professional Conduct (the “Model Rules”) or from a combination of both sources.
[166] See In re Palumbo Family Ltd. Partnership, 182 B.R. 447, 467 (Bankr. E.D. Va. 1995) (explaining that unlike disciplinary rules, ethical considerations are aspirational in character and fail to supply basis for sanctions); Pereira v. Houze Glass Co. (In re Grakk Mktg. Corp.), 42 B.R. 801, 802 (Bankr. S.D.N.Y. 1984) (stating while ethical considerations accompanying each Canon are merely aspirational, disciplinary rules in each Canon set minimum standard of conduct each lawyer must follow).
[167] It has been speculated that following rules does not constitute the practice of ethical behavior. Ethics are needed when there are no rules to guide a person.
[168] See generally 11 U.S.C. § 327 (a) (1994) (requiring professionals retained to be disinterested); In re NBI, Inc. 129 B.R. 212, 217-18 (Bankr. D. Colo. 1991) (stating Code sections 327 through 331 and Bankruptcy Rule 2016(a) monitor ethical conduct of bankruptcy attorneys); In re Vanderbilt Assocs., Ltd., 117 B.R. 678, 680 (D. Utah 1990) (finding attorneys in bankruptcy courts are governed by two separate sources of law—the Bankruptcy Code and ethical rules governing conduct of attorneys appearing before the court); In re Glenn Elec. Sales Corp., 99 B.R. 596, 599 (D.N.J. 1988) (discussing relevance of Bankruptcy Rule 2014(a) for attorney seeking compensation).
[169] See Safford, The Slippery Slope, The Road From Ethical Practice to Attorney Negligence, Contempt or Fraud in Bankruptcy Cases, 66th National Conference of Bankruptcy Judges, Oct., 1992 (unpublished material, on file with authors) (discussing Justice Department’s significant increase in effort against bankruptcy crimes). Of course, the Justice Department’s funding is predicated upon the perceived existence of increasing criminal activity.
[170] Whatever that is.
[171] See 18 U.S.C. §§ 152-157 (1994); see also United States v. Ballard, 779 F.2d 287, 293 (5th Cir.), cert. denied, 475 U.S. 1109 (1986) (requiring attorney to testify about transfers not disclosed on bankruptcy schedules based on “crime/fraud” exception to attorney-client privilege); United States v. Rogers, 722 F.2d 557, 559 (9th Cir. 1983), cert. denied, 469 U.S. 835 (1984) (transferring assets on eve of bankruptcy was violation of 18 U.S.C. § 152); see also United States v. Webster, 125 F.2d 1024 (7th Cir. 1997); United States v. Dolan, 120 F.3d 856 (8th Cir. 1997).
[172] In 1994, Congress not only revised and clarified the existing provisions of 18 U.S.C. §§ 152, 153, and 154, it added two new sections, §§ 156 and 157. See 18 U.S.C. §§ 152, 153, and 154, as amended by Pub. L. No. 103-394, § 312, 108 Stat. 4107, 4138-40 (1994); 18 U.S.C. §§ 156, 157, as amended by Pub. L. No. 103-394, § 312, 108 Stat. 4107, 4140 (1994). Section 157 makes it a crime for a person to fraudulently file a chapter 11 petition or document, or make false or fraudulent representation, claim or promise in relation to a chapter 11 proceeding. See 18 U.S.C. § 157. Section 156 was added to cover the knowing disregard of bankruptcy law or rules. 18 U.S.C. § 156.
[173] See 18 U.S.C. § 152 (providing fines and/or imprisonment for not more than five years); id at § 153 (same); id. § 157 (same); id. §154 (providing for fine and forfeiture of person’s office); id. § 155 (1994) (providing for fines and/or imprisonment for not more than one year); 18 U.S.C. § 156 (same).
[174] See id. at §§ 152 -157 (including custodians, trustees, marshals, and other officers of courts, in addition to attorneys). For example, section 152 was primarily aimed at debtors. See Stuhley v. Hyatt, 667 F.2d 807, 809 n.3 (9th Cir. 1982) (noting 18 U.S.C. § 152 primarily aimed at preventing and punishing efforts by debtor to avoid surrendering available property to creditors).
[175] See, e.g., 18 U.S.C. § 152(4) (covering attorneys who knowingly and fraudulently present any false claim for proof against estate of debtor or use any such claim in any case under title 11); id. at § 153 (including attorneys who have access to property or documents belonging to estate); id. at § 155 (regulating fee agreements and specifically including attorneys); see also Coghlan v. United States, 147 F.2d 233, 235-37 (8th Cir.) (interpreting former section 52 of title 18, upon which § 152 is based, finding attorney not immune to punishment for violating statute), cert. denied, 325 U.S. 888 (1945).
[176] A somewhat redundant way to define fraudulent activity. See 18 U.S.C. § 152.
[177] See United States v. Cherek, 734 F.2d 1248, 1254 (7th Cir. 1984) (finding 18 U.S.C. § 152 properly imposes sanctions on those who preempt court’s determination by failing to report assets, even if asset not ultimately determined property of estate under technical bankruptcy rules), cert. denied, 471 U.S. 1014 (1985). United States v. Dolan, 120 F.3d 856 (8th Cir. 1977) involved an attorney being convicted of aiding and abetting the Debtor’s concealment of substantial assets (a Ferrari and a lawsuit settled for well over $1 million). But see United States v. Collins, 424 F. Supp. 465, 467-68 (E.D. Ky. 1977) (finding in view of uncertainty of law, defendant could not be held to have “knowingly and fraudulently” concealed property, even though it was “property” within meaning of section).
[178] See United States v. Goodstein, 883 F.2d 1362, 1366-67 (7th Cir. 1989) (transferring ownership and control of corporation in bankruptcy without notice to creditors or bankruptcy court approval could be deemed fraudulent transfer of property and subject to criminal bankruptcy statute), cert. denied, 494 U.S. 1007 (1990).
[179] See Wall Street Journal, March 4, 1998.
[180] See supra note 11.
[181] See 18 U.S.C. § 153.
[182] See 18 U.S.C. § 153.
[183] See id.
[184] See id. at § 155.
[185] See id. at §§ 156, 157.
[186] 18 U.S.C. § 156 (emphasis added).
[187] See id. at § 156(a) (defining “bankruptcy petition preparer” as “a person, other than the debtor’s attorney or an employee of such an attorney, who prepares for compensation a document for filing”).
[188] See id. at § 156(a) (defining “bankruptcy petition preparer” as “a person, other than the debtor’s attorney or an employee of such an attorney, who prepares for compensation a document for filing”).
[189] See Citibank v. Eashai (In re Eashai), 87 F.3d 1082, 1089 (9th Cir. 1996) (stating that creditor seeking to have debt deemed nondischargeable under 11 U.S.C. § 523(a)(2)(A) must establish all elements of actual fraud, including intent); Carlisle Cashway v. Johnson (In re Johnson), 691 F.2d 249, 256 (6th Cir. 1982) (noting that intent must be established to prove fraud for nondischargeability of debt); Official Comm. of Unsecured Creditors v. Michelson (In re Michelson), 141 B.R. 715, 725 (Bankr. E.D. Cal. 1992) (finding that requisite intent in context of defective disclosure exists where there is intentional omission of material facts; specific intent to defraud not necessary); Aluminum Mills Corp. v. CitiCorp North Am., Inc. (In re Aluminum Mills Corp.), 132 B.R. 869, 885 (Bankr. N.D. Ill. 1991) (stating to find either “fraud in law” or “fraud in fact,” court must find specific intent to defraud creditors); Mortgage Guar. Ins. Corp. v. Pascucci (In re Pascucci), 90 B.R. 438, 444 (Bankr. C.D. Cal. 1988) (finding that representation debtor makes with intent to deceive creditor, upon which creditor reasonably relies, and which results in damages, is fraudulent).
[190] See 11 U.S.C. § 548(a) (allowing bankruptcy trustee “to avoid any transfer of an interest of the debtor in property . . . that was made . . . on or within one year before the date of the filing of the petition”).
[191] See infra notes 30-37 and accompanying text. But cf. Vermillion v. Scarbrough (In re Vermillion), 176 B.R. 563, 568 (Bankr. D. Or. 1994) (holding chapter 11 debtor in possession must establish fraudulent transfer was made within one year of filing, along with other elements, to have such transfer avoided under 11 U.S.C. § 548); Harris v. Huff (In re Huff), 160 B.R. 256, 260 (Bankr. M.D. Ga. 1993) (stating that plaintiff seeking to avoid fraudulent conveyance must prove transfer was made within one year of petition); Roemelmeyer v. Gefen (In re Gefen), 35 B.R. 368, 370 (Bankr. S.D. Fla. 1984) (noting 11 U.S.C § 548 limits its application to transfers incurred within one year of filing).
[192] 22 F.3d 586 (5th Cir.), cert. denied, 115 S.Ct. 584 (1994).
[193] See id. at 589.
[194] What constitutes money laundering is not only beyond the scope of this article, but also beyond the rational comprehension of at least one of the authors.
[195] See West, 22 F.3d at 587.
[196] See id. at 588 (citing 1988 transaction debtor was involved in even though debtor did not file for bankruptcy until 1990).
[197] See id. at 590 (emphasis added).
[198] See 18 U.S.C. § 157(3) (1994).
[199] See id. (emphasis added).
[200] The only limits upon the types of transactions which might be implemented in a prebankruptcy planning context are the resourcefulness and creativity of clients and their advisors, including lawyers. Among these devices are (i) community property settlements where the nondebtor spouse obtains a division of liquid assets and other more demonstrably valuable properties while the prospective debtor spouse obtains illiquid assets such as minority interests in closely held corporations and partnerships; (ii) the creation of any variety of spendthrift or discretionary trusts, (iii) the transfer of asserts to partnerships or corporations in which the transferor retains a minority and noncontrolling position, (iv) conversion of nonexempt assets into exempt assets, or (v) punitive squandering of the estate’s assets as where the prospective debtor, facing an imminent bankruptcy, decides to spend all his money rather than allowing it to be available for distribution to creditors. See, e.g., Thibodeaux v. Olivier (In re Olivier), 819 F.2d 550 (5th Cir. 1987) (finding potential malpractice claim against attorney under continuous concealment doctrine); United States v. Franklin, 837 F.Supp. 916, 920 (N.D. Ill. 1993) (warning that criminal liability would be forthcoming where attorney assists in concealing assets and filing fake Schedules and Statements of Financial Affairs).
[201] Thus incurring the wrath of the client. See Model Rules of Professional Conduct 1.2(d) (stating attorney shall not encourage or assist client in conduct that attorney knows is fraudulent).
[202] See Gregory E. Maggs, Consumer Bankruptcy Fraud and the “Reliance on Advice of Counsel” Argument, 69 Am. Bankr. L.J. 1 (1995).
[203] See Citibank v. Williams (In re Williams), 159 B.R. 648, 662 (Bankr. D.R.I. 1993) (denying debtor’s discharge based on prepetition transfer of personal property to spouse during divorce proceeding); Aweida v. Cooper (In re Cooper), 150 B.R. 462, 467 (D. Colo. 1993) (precluding debtor’s discharge by his prepetition transfers to wife with actual intent to defraud); Wootton v. Ravkino (In re Dixon), 143 B.R. 671, 679 (Bankr. N.D. Tex. 1992) (attorney’s aggressive representation of debtor, which resulted in deletion of estate, might invoke government to assert RICO claim against debtor); March v. Sanders (In re Sanders), 128 B.R. 963, 969 (Bankr. W.D. La. 1991) (holding discharge is denied under continuing concealment doctrine when transfer of property is made more than one year before bankruptcy but with secretly retained interest in it).
[204] See, e.g., NCNB Tex. Nat’l Bank v. Bowyer (In re Bowyer), 916 F.2d 1056, 1058 (5th Cir. 1990), reh’g granted, 932 F.2d 1100 (5th Cir. 1991) (finding debtor’s prepetition conversion of nonexempt assets to exempt assets precludes discharge).
[205] 11 U.S.C. § 727(a)(2) (1994).
[206] See 11 U.S.C. § 727(a)(2) (providing debtor’s intent to hinder, defraud, or delay creditor by making fraudulent transfers within one year of bankruptcy will preclude debtor’s discharge).
[207] See Rosen v. Bezner, 996 F.2d 1527, 1531 (3d Cir. 1993) (stating discharge is denied under “continuous concealment doctrine” even if initial act of concealment took place before the one year period, as long as debtor allowed property to be concealed into critical year); Thibodeaux v. Olivier (In re Olivier), 819 F.2d 550, 554 (5th Cir. 1987) (focusing on continuing concealment of interest in an asset which continued into year before bankruptcy); Jacobson v. Robert Speece Properties, Inc. (In re Speece), 159 B.R. 314, 318 (Bankr. E.D. Cal. 1993) (stating concealment of interest in asset that continues, with requisite intent, into year before bankruptcy and such concealment is within reach of § 727(a)(2)(A)); Caughey v. Succa (In re Succa), 125 B.R. 168, 172 (Bankr. W.D. Tex. 1991) (stating debtor’s active, deliberate, and consistent concealment of fraudulent transfers requires court to invoke continuing concealment doctrine); see also Hughes v. Lawson (In re Lawson), 122 F.3d 1237 (9th Cir. 1997).
[208] See supra notes 30-37 (discussing defendant’s liability for fraudulent transfers occurring longer than one year before filing petition).
[209] 109 B.R. 405 (Bankr. E.D. Cal. 1989).
[210] See id. at 407.
[211] See id.
[212] See id.
[213] See id.
[214] See Rice, 109 B.R. at 408-09.
[215] See, e.g., Emmett Valley Assocs. v. Woodfield (In re Woodfield), 978 F.2d 516 (9th Cir. 1992) (stating debtor’s reliance on prepetition discussion with individual who would become chapter 7 trustee did not save the debtor’s discharge); First Beverly Bank v. Adeeb (In re Adeeb), 787 F.2d 1339 (9th Cir. 1986) (stating debtor’s reliance must be in good faith).
[216] Rice, 109 B.R. at 408.
[217] See id.
[218] See discussion infra Part I.B.
[219] See In re Rice, 109 B.R. at 409.
[220] See id. at 408.
[221] 96 F.3d 1279 (9th Cir. 1996).
[222] See In re Tomailo, 205 B.R. 10, 13 (Bankr. D. Mass. 1997) (commenting that, in Massachusetts, most chapter 7 debtors’ malpractice claims against former bankruptcy attorneys accrued from prepetition advice and services); Battley v. Pace (In re Pace), 132 B.R. 644, 645 (Bankr. D. Alaska 1991) (regarding chapter 7 debtor’s legal malpractice claim arising out of attorney’s failure to include liquor licenses in connection with debtor’s prepetition sale).
[223] 46 B.R. 774 (S.D.N.Y. 1985).
[224] See id. at 780.
[225] See id. at 776.
[226] See id. at 780.
[227] 18 U.S.C. §§ 1961-1968 (Racketeer Influenced Corrupt Organizations Act).
[228] 112 F.3d 1339 (8th Cir. 1996).
[229] Compare Martin v. Bajgar (In re Bajgar), 104 F.3d 495, 497 (1st Cir. 1997) (holding retransfer of fraudulently transferred property to chapter 7 debtor does not cure fraudulent transfer), with First Beverly Bank v. Adeeb (In re Adeeb), 787 F.2d 1339, 1345 (9th Cir. 1986) (holding debtor is not denied discharge if reveals fraudulent transfers to creditors, recovers fraudulent transfers before filing bankruptcy, and is otherwise qualified for discharge).
[230] 787 F.2d 1339 (9th Cir. 1986).
[231] See id. at 1341.
[232] See id.
[233] See id.
[234] See id.
[235] See id.
[236] See id.
[237] See id.
[238] See id.
[239] See id.
[240] See id. at 1345; see also Logan v. Barney (In re Barney), 86 B.R. 105, 110-11 (Bankr. N.D. Ohio 1987) (stating no harm, no foul); but see Davis v. Davis (In re Davis), 911 F.2d 560, 562 (11th Cir. 1990) (taking restrictive interpretation of section 727, stating “Congress certainly was capable of drafting a statute which would deny discharge only when assets were fraudulently transferred and remained transferred at the time of filing of the bankruptcy proceeding, but did not”).
[241] See Smiley v. First Nat’l Bank (In re Smiley), 864 F.2d 562, 568 (7th Cir. 1989).
[242] See, e.g., In re Allen, 203 B.R. 786, 792 (Bankr. M.D. Fla. 1996) (holding conversion of nonexempt assets into exempt assets done with intent to defeat interests of creditors may be sufficient to deny debtor’s exemption); In re Swecker, 157 B.R. 694, 695 (Bankr. M.D. Fla. 1993) (holding conversion of nonexempt property into exempt property not per se fraudulent); Weissing v. Levine (In re Levine), 139 B.R. 551, 553 (Bankr. M.D. Fla. 1992) (holding debtor’s prepetition conversion of nonexempt assets to exempt assets does not deprive debtor of right to claim assets exempt under state law); Federal Land Bank v. Ellingson (In re Ellingson), 63 B.R. 271, 279 (Bankr. N.D. Iowa 1986) (holding debtor’s knowledge at conversion of nonexempt property to exempt property when about to file bankruptcy would not alone render such conversion fraudulent transfer).
[243] See 11 U.S.C. § 522(d) (1994) (providing list of exempt properties).
[244] See supra note 77 and accompanying text.
[245] See, e.g., In re Spoar-Weston, 139 B.R. 1009, 1014 (Bankr. N.D. Okla. 1992) (noting committee report has been cited as proof of Congressional intent to allow bankruptcy planning no matter how inequitable it may be); In re Holt, 84 B.R. 991, 1008 (Bankr. W.D. Ark. 1988) (noting Congress contemplated conversions of nonexempt assets to exempt assets in enacting the Code); Oberst v. Oberst (In re Oberst), 91 B.R. 97, 99 (Bankr. C.D. Cal. 1988) (noting congressional intent that prospective debtor may take full advantage of exemptions by converting nonexempt assets to exempt assets).
[246] S. Rep. No. 95-989, at 76 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5862; H.R. Rep. No. 95-595, at 361 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6317.
[247] See 4 Collier on Bankruptcy, ¶ 522.08 [4], at 522-46 (Lawrence P. King et al. eds., 15th ed. rev. 1996) (stating Code adopts position that will protect debtors who are not allowed to convert nonexempt property into exempt property in their jurisdictions).
[248] See id. ¶ 522.08 [4], at 522-43 (stating courts finding debtor’s intent to defraud may deny discharge).
[249] See Norwest Bank Nebraska, N.A. v. Tveten, 848 F.2d 871, 873 (8th Cir. 1988); see also Armstrong v. Lindberg (In re Lindberg), 735 F.2d 1087, 1090 (8th Cir.) (permitting debtor to exempt property from creditors either pursuant to provision of Code or state law), cert. denied, 469 U.S. 1073 (1984); First Tex. Sav. Ass’n v. Reed (In re Reed), 700 F.2d 986, 991 (5th Cir. 1983) (requiring proof of actual intent to deny discharge).
[250] See generally 11 U.S.C. § 523(a)(2) (1994) (stating false pretenses, false representations, or actual fraud may result in denial of discharge); 11 U.S.C. § 547(b) (stating preferential transfers may be avoided); 11 U.S.C. § 727 (a) (1994) (stating discharge may be denied based on debtor’s concealment, destruction, or failure to maintain assets of estate).
[251] 11 U.S.C. § 727.
[252] See, e.g., Panuska v. Johnson (In re Johnson), 880 F.2d 78, 81 (8th Cir. 1989) (noting desire to convert assets into exempt forms in itself does not constitute fraud), remanded, 124 B.R. 290 (Bankr. D. Minn. 1991); Barnett Bank v. Decker (In re Decker), 105 B.R. 79, 83 (Bankr. M.D. Fla. 1989) (finding no basis for denial of discharge under § 727 (a) (2) where debtor converted assets shortly before bankruptcy); Cristol v. Blum (In re Blum), 41 B.R. 816, 819 (Bankr. S.D. Fla. 1984) (finding of no fraud where debtor transferred nonexempt assets by using proceeds from sale to purchase exempt assets).
[253] See, e.g., Johnson, 880 F.2d at 81 (recognizing “law permits debtors to intentionally transform property into exempt assets”); Ford v. Poston (In re Ford), 773 F.2d 52, 54 (4th Cir. 1985) (reasoning “[m]ere conversion of property from nonexempt to exempt on the eve of bankruptcy—even though the purpose is to shield the asset from creditors—is not enough to show fraud”); First Tex. Sav. Assoc., Inc. v. Reed (In re Reed), 700 F.2d 986, 990 (5th Cir. 1983) (reasoning “mere conversion [of nonexempt assets into exempt assets] is not to be considered fraudulent unless other evidence proves actual intent to defraud creditors”); Decker, 105 B.R. at 83 (permitting conversion of nonexempt assets into exempt assets before filing petition); Blum, 41 B.R. at 817 (concluding mere conversion of nonexempt assets into exempt assets not prohibited by Bankruptcy Code absent actual fraudulent intent). See generally Alan N. Resnick, Prudent Planning or Fraudulent Transfer? The Use of Nonexempt Assets to Purchase or Improve Exempt Property on the Eve of Bankruptcy, 31 Rutgers L. Rev. 615 (1978); see also supra note 75 and accompanying text (discussing congressional intent with respect to this conversion practice).
[254] See Finalco, Inc. v. Roosevelt (In re Roosevelt), 87 F.3d 311, 317 (9th Cir. 1996) (noting “one of the principal points of focus in litigation involving [Code section 727 (a) (2)] involves certain conduct coupled with an appropriate guilty state of mind”); Equitable Bank v. Miller (In re Miller), 39 F.3d 301, 307 (11th Cir. 1994) (deciding whether debtor possessed requisite “actual intent to defraud” to warrant denial of discharge); Wines v. Wines (In re Wines), 997 F.2d 852, 856 (11th Cir. 1993) (reasoning evidence of actual wrongful intent necessary to deny discharge); Reed, 700 F.2d at 991 (reasoning “mere conversion is not to be considered fraudulent unless other evidence proves actual intent to defraud creditors”).
[255] See Miller, 39 F.3d at 306 (arguing constructive fraud will not support denial of discharge); Lovell v. Mixon, 719 F.2d 1373, 1376-77 (8th Cir. 1983) (concluding constructive intent cannot be basis for the denial of discharge in bankruptcy); Bank of Penn. v. Adlman (In re Adlman), 541 F.2d 999, 1003 (2d Cir. 1976) (reasoning constructive fraudulent intent will not suffice to deny discharge under section 14(c) of Bankruptcy Act, precursor to Code section 727 (a) (2)). But see Future Time, Inc. v. Yates, 26 B.R. 1006, 1007 (M.D. Ga. 1983) (reasoning “actual intent may be inferred from the actions of the debtor”).
[256] See Miller, 39 F.3d at 307; see also In re Wines, 997 F.2d at 856 (concluding undervaluation of claim alone did not warrant denial of discharge).
[257] See Marine Midland Bus. Loans, Inc. v. Carey (In re Carey), 938 F.2d 1073, 1077 (10th Cir. 1991) (reasoning absent extrinsic evidence of fraudulent intent, mere conversion will not support denial of discharge); Moreno v. Ashworth (In re Moreno), 892 F.2d 417, 419 (5th Cir. 1990) (finding actual intent to defraud creditors condition precedent to denial of discharge); Norwest Bank Neb., N.A. v. Tveten, 848 F.2d 871, 874 (8th Cir. 1988) (finding “absent extrinsic evidence of fraud, mere conversion of nonexempt property to exempt property is not fraudulent as to creditors even if the motivation behind the conversion is to place those assets beyond the reach of creditors”); Ford, 773 F.2d at 54 (concluding mere conversion of nonexempt assets into exempt assets on the eve of bankruptcy filing will not prove fraud); First Tex. Sav. Ass’n v. Reed (In re Reed), 700 F.2d 986, 991 (5th Cir. 1983) (finding “mere conversion is not to be considered fraudulent unless other evidence proves actual intent to defraud”).
[258] 916 F.2d 1056, 1060 (5th Cir. 1990) (finding district court erred in allowing debtor discharge because, while debtor may not have had intent to defraud, debtor had intent to hinder and delay creditor), aff’d on reh’g, 932 F.2d 1100 (5th Cir. 1991); see also FDIC v. Morris (In re Morris), 51 B.R. 462, 464 (Bankr. E.D. Tenn. 1985) (reasoning that since statute is disjunctive proof of intent to hinder or delay will suffice in absence of proof of intent to defraud); In re Perlumutter, 256 F. 862, 869 (D.N.J. 1919), aff’d sub nom. Perlumutter v. Hudspeth, 264 F. 957 (3d Cir. 1920) (reasoning intent to hinder and delay is sufficient to support denial of discharge under Bankruptcy Act section 14(b), precursor to Bankruptcy Code section 727(a)(2)).
[259] See Bowyer II, 932 F.2d at 1102-03 (affirming district court’s conclusion that debtor’s actions constituted “legitimate prebankruptcy planning” and, therefore, foreclosing necessity of addressing issue of whether debtor possessed non-fraudulent intent to hinder and delay his creditors).
[260] 700 F.2d at 986.
[261] See id. at 991-92.
[262] See id. at 991 (concluding Reed’s whole pattern of conduct evinces actual intent to defraud).
[263] See Bowyer I, 916 F.2d at 1060.
[264] See id. (finding “spending spree and . . . satisfaction of his homestead mortgage” support finding of actual intent).
[265] See id.
[266] See Bowyer II, 932 F.2d at 1101.
[267] See id. at 1101-02.
[268] See id. at 1102.
[269] See id.
[270] See id. at 1102.
[271] See id.
[272] See id.
[273] See id. at 1101 (concluding debtor’s unscheduled advance payment of $25,000 on his note was incompatible with intent to default on note); Bowyer I, 916 F.2d at 1058 (finding debtor’s conduct violative of Code section 727 (a) and reasoning it was not debtor’s placing assets beyond reach of creditors that rendered debtor’s conduct violative, but debtor’s intent in doing so).
[274] See Dolese v. United States, 605 F.2d 1146, 1154 (10th Cir. 1979) (stating “[t]here is a principle of too much; phrased colloquially, when a pig becomes a hog it is slaughtered.”); see also Swift v. Bank of San Antonio (In re Swift), 3 F.3d 929, 931 (5th Cir. 1993) (employing “pig to hog” argument in drawing line between legitimate prebankruptcy planning and intentionally defrauding creditors); Bowyer I, 916 F.2d at 1060 (explaining “[pig to hog] analysis recognizes that while some prebankruptcy planning is appropriate, the wholesale expenditure of nonexempt assets on the eve of bankruptcy, including conversions to exempt assets . . . may not be.”).
[275] A lawyer must not “[e]ngage in conduct involving dishonesty, fraud, deceit, or misrepresentation.” Model Code of Professional Responsibility DR 1-102 (a)(4) (1980). It is considered professional misconduct where a lawyer engages in such conduct. See Model Rules of Professional Conduct Rule 8.4 (c) (1983).
[276] See Swift, 3 F.3d at 931 (finding “line between legitimate prebankruptcy planning and intent to defraud creditors contrary to § 727 (a)(2) is not clear”); Panuska v. Johnson (In re Johnson), 880 F.2d 78, 81 (8th Cir. 1989) (recognizing “separating ordinary prebankruptcy planning from fraudulent action is difficult.”)
[277] See Bowyer II, 932 F.2d at 1101 (concluding it had not given proper deference to bankruptcy court’s findings, Fifth Circuit reversed its earlier rulings in Bowyer I on rehearing in Bowyer II).
[278] See Johnson, 880 F.2d at 78; Norwest Bank Neb., N.A. v. Tveten, 848 F.2d 871 (8th Cir. 1988).
[279] See Tveten, 848 F.2d at 877.
[280] See Johnson, 880 F.2d at 84.
[281] See Panuska v. Johnson (In re Johnson), 124 B.R. 290, 297 (Bankr. D. Minn. 1991) (concluding denial of discharge, while entirely contrary to earlier decision, is unavoidable).
[282] The colloquialism for this principle is the “Pig Rule: that when a pig becomes a hog, it is slaughtered.” Swift v. Bank of San Antonio (In re Swift), 3 F.3d 929, 931 (5th Cir. 1993). In Swift, the debtor’s repayment of alimony and car loans, the transferring money to and from relatives and the underreporting assets rendered him a hog and the court denied his discharge. Id.
[283] See, e.g., In re Kendavis Indus. Int’l, Inc., 91 B.R. 742, 762 (Bankr. N.D. Tex. 1988) (disallowing fees where attorney was not “disinterested” within meaning of Bankruptcy Code).
[284] See 11 U.S.C. § 327 (a) (1994) “[T]he duty explicitly imposed on the bankruptcy court by § 327 . . . demands that the court root out all impermissible conflicts of interest between attorney and client.” In re Martin, 817 F.2d 175, 180 (1st Cir. 1987). Code section 327 has been described as a “prophylactic provision designed to insure that the undivided loyalty and exclusive allegiance required of a fiduciary to an estate in bankruptcy is not compromised or eroded.” In re Prudent Holding Corp., 153 B.R. 629, 631 (Bankr. N.D. Ill. 1990). Therefore, Code section 327 mandates all appointed attorneys “tender undivided loyalty and provide untainted advice and assistance in furtherance of their responsibilities.” Rome v. Braunstein, 19 F.3d 54, 58 (1st Cir. 1994); see also In re Grabill Corp., 113 B.R. 966, 970 (Bankr. N.D. Ill. 1990) (noting “[c]ounsel for a chapter 11 debtor owes a fiduciary duty to the corporation or partnership as an entity”).
[285] See 11 U.S.C. § 327(a). Code section 327 (a) provides that “the trustee, with the court’s approval, may employ one or more attorney, accountants, appraisers, auctioneers, or other professional persons, that do not hold or represent an interest adverse to the estate.” See id.
[286] See Model Rules of Professional Conduct Rule 1.7 (1983) (stating general rule that lawyer shall not represent client if representation of client will be directly adverse to another client or if representation may be materially limited by lawyer’s responsibilities to another client, third person, or lawyers own interest.); N.Y. D.R. 5-101, 5-105 (same); Cal. Rules of Professional Conduct Rule 3-310 (C) (1996) (same).
[287] See 11 U.S.C. § 101(14) (1994).
[288] See infra notes 124-31 and accompanying text.
[289] See, e.g., City of Lafayette v. Oklahoma P.A.C. First Ltd. Partnership (In re Okla. P.A.C. First Ltd. Partnership), 122 B.R. 387, 389-94 (Bankr. D. Ariz. 1990) (considering simultaneous representation of five individual creditors).
[290] See, e.g., In re Calabrese, 173 B.R. 61, 63 (Bankr. D. Conn. 1994) (sustaining trustee’s objection to application of official unsecured creditors’ committee seeking retroactive employment of counsel where counsel represented secured creditors on unrelated matters); In re Grant Broadcasting, Inc., 71 B.R. 655, 660-64 (Bankr. E.D. Pa. 1987) (considering simultaneous representation of unsecured creditor and official unsecured creditors’ committee); In re Codesco, Inc., 18 B.R. 997, 1001 (Bankr. S.D.N.Y. 1982) (denying creditor’s motion objecting to trustee’s application to retain law firm in chapter 7 case where firm formerly represented creditors’ committee in aborted chapter 11 case).
[291] See, e.g., Humble Place Joint Venture v. Fory (In re Humble Place Joint Venture), 936 F.2d 814, 818-19 (5th Cir. 1991) (considering simultaneous representation of creditor and debtor in same bankruptcy proceeding).
[292] See, e.g., In re American Printers & Lithographers, Inc., 148 B.R. 862, 867 (Bankr. N.D. Ill. 1992) (denying debtor’s application to employ counsel where counsel’s representation of creditor in other matters created actual conflict requiring disqualification); In re Amdura Corp., 121 B.R. 862, 863-64 (Bankr. D. Colo. 1990) (considering counsel’s representation of six debtor entities and counsel’s former and successive representation, albeit on unrelated matters, of principal creditor); In re Status Game Corp., 102 B.R. 19, 21 (Bankr. D. Conn. 1989) (denying debtor’s application to retain its regular prepetition counsel where counsel represented debtor’s principal secured creditor both prepetition and postpetition); In re Lee Way Holding Co., 100 B.R. 950, 962 (Bankr. S.D. Ohio 1989) (granting creditor’s motion to disqualify debtor’s counsel and require disgorgement of fees where counsel represented creditor prepetition and continued professional relationship postpetition).
[293] See, e.g., In re Rabex Amuru, Inc., 198 B.R. 892, 897-98 (Bankr. M.D.N.C. 1996) (granting motion to remove debtor’s counsel where firm’s fees paid by creditor); In re Missouri Mining, Inc., 186 B.R. 946, 950 (Bankr. W.D. Mo. 1995) (denying trustee’s motion to vacate order authorizing employment of debtor’s counsel where counsel’s retainer was paid by debtor’s principal, who was also a creditor, because counsel found disinterested); In re Hathaway Ranch Partnership, 116 B.R. 208, 219 (Bankr. C.D. Cal. 1990) (finding payment of debtor’s counsel by third party creates actual conflict of interest warranting disqualification); In re Crimson Invs., N.V., 109 B.R. 397, 403 (Bankr. D. Ariz. 1989) (ordering surrender of entire retainer received by debtor’s counsel where retainer paid by debtor’s largest unsecured creditors).
[294] See, e.g., W.F. Dev. Corp. v. Office of United States Trustee (In re W.F. Dev. Corp.), 905 F.2d 883, 884 (5th Cir. 1990) (concluding simultaneous representation of general partner and limited partners creates incurable conflict of interest), cert. denied, 499 U.S. 921 (1991); In re Renfrew Ctr. Inc., 195 B.R. 335, 342 (Bankr. E.D. Pa. 1996) (granting application of two related corporate debtors to retain same law firm as counsel in respective chapter 11 cases where no impermissible conflict of interest found); In re Interstate Distribution Ctr. Assocs. (A), Ltd., 137 B.R. 826, 834-35 (Bankr. D. Colo. 1992) (finding counsel’s representation of corporate debtor and its related entities created impermissible conflict of interest precluding law firm’s employment as debtor’s counsel).
[295] For example, management may be shareholders of the debtor, guarantors of the debtor’s, liable on tax liabilities of the debtor, or may owe their livelihoods and employment to their continued relationship to the debtor. See e.g., In re Best W. Heritage Inn Partnership, 79 B.R. 736 (Bankr. E.D. Tenn. 1987).
[296] See, e.g., In re Caldor, Inc., 193 B.R. 165, 181-82 (Bankr. S.D.N.Y. 1996) (overruling trustee’s motion objecting to law firm’s retention by creditors’ committee where counsel simultaneously represented creditors’ committee in chapter 11 case of debtor’s competitor).
[297] See, e.g., In re Durbin, 205 B.R. 17 (Bankr. D.N.H. 1997) where attorneys fees were reduced by 40%. After negotiating an agreement to have certain disputed assets surrendered to the estate, the attorney attached other disputed assets solely for the benefit of his unsecured creditor client. The representation was simultaneous for a few weeks and his fees were reduced as a result of his undisclosed conduct and the question of whether the attached assets could have gone to the estate for all creditors.
[298] 203 B.R. 547 (Bankr. S.D.N.Y. 1997)
[299] 208 B.R. 288 (Bankr. D.Mass. 1997)
[300] See 11 U.S.C. § 327. “[T]he duty explicitly imposed on the bankruptcy court by § 327 . . . demands that the court root out all impermissible conflicts of interest between attorney and client.” In re Martin, 817 F.2d 175, 180 (1st Cir. 1987. Bankruptcy courts have also been held to have the inherent power to sanction attorneys for violations of professional canons, notwithstanding the absence of express statutory authority. See Barton v. Chrysler (In re Paine), 14 B.R. 272, 275 (W.D. Mich. 1981). Generally, the lawyer may only represent a client whose interests are directly adverse to those of another client if each client has consented after consultation. See Model Rules of Professional Conduct Rule 1.7(a) (1983). Further, the lawyer may only represent a client whose interests are materially limited by the lawyer’s responsibilities to another client or to a third person, or by the lawyer’s own interests” after each client has consented after consultation. See id.
[301] See, e.g., In re Global Marine, Inc., 108 B.R. 998, 1002 (Bankr. S.D. Tex. 1987) (finding that while dual representation might rise to level of potential conflict; it does not, in and of itself, reach the disqualifying level of actual conflict); In re Martin, 817 F.2d at 181 (reasoning that while actual conflict will generally be disabling, no such per se rule may be applied where mere potential conflict exists).
[302] See infra Part I.B.1.
[303] In re Kendavis Indus. Int’l, Inc., 91 B.R. 742 (Bankr. N.D. Tex. 1988).
[304] In re Kendavis Indus. Int’l, Inc., 91 B.R. 742 (Bankr. N.D. Tex. 1988).
[305] See id.
[306] See id.
[307] See id.
[308] See id.
[309] See id. (emphasis added); see also In re Global Marine, Inc., 108 B.R. 998, at 1006-07 (Bankr. S.D. Tex. 1987) (requiring actual conflict and therefore allowing law firm to represent parent holding company and subsidiaries despite existence of intercompany debt); In re Philadelphia Athletic Club, Inc., 20 B.R. 328, 337-38 (Bankr. E.D. Pa. 1982) (disqualifying all members of law firm even though no actual conflict of interest).
[310] 103 B.R. 556 (Bankr. D.N.J. 1989), aff’d, 949 F.2d 1300 (3d Cir. 1991).
[311] See id. at 563-64.
[312] See id. at 564.
[313] See id.; see also In re Paolino, 80 B.R. 341, 345 (Bankr. E.D. Pa. 1987). C.R.P.C. 3-310(C) recognizes both potential and actual conflicts and requires the attorney to obtain the informed written consent of each client prior to continuing or undertaking the representation of both clients. See In re Paolino, 80 B.R. at 345. Furthermore, the Ninth Circuit Court of Appeals has approved the employment of counsel or special counsel even if a potential conflict might arise so long as the bankruptcy court retains the power to remove counsel if the potential conflict becomes an actual conflict. See Security Pac. Bank Wash. v. Steinberg (In re Westwood Shake & Shingle, Inc.), 971 F.2d 387, 390 (9th Cir. 1992).
[314] See Rome v. Braunstein, 19 F.3d 54, 59 (1st Cir. 1994).
[315] See id. Disgorgement and denial of fees for inaccurate disclosures and failures to disclose information in connection with retention of professionals by the court was a recurring theme in several cases decided during 1997. The Ninth Circuit affirmed the lower court’s decision in Law Offices of Nicholas A. Franke v. Tiffany (In re Lewis), 113 F. 3d 1040 (9th Cir. 1997), requiring disgorgement of fees by debtor’s attorneys who allegedly had falsely indicated in their disclosures that a $40,000.00 retainer was paid prepetition when $30,000.00 was actually paid postpetition and for failure by debtors counsel to properly supplement their initial disclosure as to compensation paid to them. The Tenth Circuit BAP likewise affirmed the lower court’s decision to deny fees and require disgorgement of a retainer where the attorney failed, in the disclosure statement, to reveal a prepetition retainer and also failed to disclose a potential conflict of interest. Jensen v. United States Trustee (In re Smitty’s Truck Stop, Inc.), 210 B.R. 844 (B.A.P. 10th Cir. 1997). The First Circuit BAP in Smith v. Marshall (In re Hot Tin Roof, Inc.), 205 B.R. 1000 (B.A.P. 1st Cir. 1997), denied compensation to an attorney who was not disinterested and who had failed to make adequate disclosures at the outset of the case. Finally, the court in In re Crivello, 205 B.R 399 (E.D. Wis. 1997), sustained the bankruptcy court’s denial of fees where the debtor firm had failed to disclose critical facts and connections at the outset of the case. The moral of all of these decisions is that you cannot “over disclose” and it is important to recognize that there is a continuing duty of disclosure throughout the case. The likely penalty for nondisclosure will be loss of fees.
[316] See In re Leslie Fay Cos. Inc., 175 B.R. 525, 533 (Bankr. S.D.N.Y. 1994) (quoting In re Martin, 817 F.2d 175, 180 (1st Cir. 1987)).
[317] See id. at 530.
[318] See, e.g., id. at 539 (allowing counsel to remain in case “in effort to reconcile the twin concerns of preserving the integrity of the bankruptcy process and the viability of the reorganization case”); In re Global Marine, Inc., 108 B.R. 998, 1008 (Bankr. S.D. Tex. 1987) (considering “orderly administration of the debtors’ bankruptcy proceedings” and possibility of debtors incurring “unnecessary expense” in concluding disqualification not appropriate remedy for potential conflict of interest); In re Chamberlin Corp., 53 B.R. 764, 767 (Bankr. M.D. Fla. 1985) (allowing counsel to simultaneously represent debtor in possession and interested party in order to avoid duplication of services and waste of assets); In re O.P.M. Leasing, 16 B.R. 932, 938 (Bankr. S.D.N.Y. 1982) (finding premature prophylactic action results in confusion and interruption of orderly administration of bankruptcy cases and incurs greater expense).
[319] See Leslie Fay, 175 B.R. at 532. “The more difficult area is when a live conflict of interest has not quite emerged, yet the factual scenario is sufficiently susceptible to that possibility so as to make the conflict more than merely ‘hypothetical or theoretical.’” Id. Several courts have declined to sanction firms falling into this “scumbled” middle ground. See, e.g., In re Martin, 817 F.2d 175, 180 (1st Cir. 1987).
The First Circuit Court of Appeals declined to sanction a law firm where a potential conflict of interest, that had not become actual, existed. See Martin, 817 F.2d at 181. In Martin, the First Circuit found the bankruptcy court had improperly applied an inflexible per se rule against potential conflicts of interest. See id. at 183. Judge Selya reasoned that while actual conflicts will generally be disabling, there should be no similar per se rule against potential conflicts. See id. at 181. Judge Selya stated, “[t]he naked existence of a potential conflict of interest does not render the appointment of counsel nugatory, but makes it voidable as the facts may warrant.” See id.; see also Global Marine, 108 B.R. at 1006 (requiring actual conflict in order to necessitate denial or reduction of fees); H&K Devs. v. Waterfall Village, Ltd. (In re Waterfall Village, Ltd.), 103 B.R. 340, 344-45 (Bankr. N.D. Ga. 1989) (implying anything short of “specifically identifiable impropriety” will not result in disabling conflict of interest).
[320] See, e.g., Martin, 817 F.2d at 182 (holding existence of potential for conflict of interest renders appointment of counsel “voidable as the facts may warrant”); In re Star Broadcasting, Inc., 81 B.R. 835, 844 (Bankr. D.N.J. 1988) (reasoning “it would be unreasonable and unnecessarily cumbersome to always require different counsel in related chapter 11 cases, however, whether such an actual disqualifying conflict exists must be considered in light of the particular facts of each case”); In re S I Acquisition, 58 B.R. 454, 462 (Bankr. W.D. Tex. 1986) (endorsing application of broad equitable principles that would justify common representation of multi-affiliated entities), rev’d on other grounds, 817 F.2d 1142 (5th Cir. 1987); Chamberlin Corp., 53 B.R. at 767 (allowing counsel to simultaneously represent DIP and interested party to avoid duplication of services and waste of assets, and reasoning that adverse interests should be allowed where likelihood of actual, material conflict is slight or nonexistent); In re Guy Apple Masonry Contractor, Inc., 45 B.R. 160, 166 (Bankr. D. Ariz. 1984) (finding conflicts of interest “voidable as the facts may warrant”).
[321] 108 B.R. 998 (Bankr. S.D. Tex. 1987).
[322] See id. at 998.
[323] See id. at 1000-01. Global Marine and its subsidiaries owed one another approximately $1 billion in intercompany debt, including $170 million owed by Global Marine Deepwater Drilling to Global Marine. See id. at 1001. MCCC Corp. and the Bank of New York, the two principal creditors of Global Marine, requested counsel’s fees be denied because their dual representation of Global Marine and Global Marine Deepwater Drilling constituted an impermissible conflict of interest under Code section 327(a). See id. at 1000.
[324] See id. at 998. The Global Marine court found that dual representation of related entities with potential claims against each other was not, in and of itself, an actual conflict of interest. See id. at 1002. The court went reasoned that while a potential conflict of interest might indeed exist, that alone is not enough to justify disqualification. See id. at 1002. The court cited three reasons why such preemptive action is not appropriate: (i) the potential conflict had not yet become actual, (ii) the parties always had and continued to pursue a unity of interest, and (iii) preemptive action would only serve to interrupt the orderly administration of the debtors’ bankruptcy proceedings and cause them to incur unnecessary expense. See id. at 1004. For these reasons, the Global Marine court would have only actual conflicts result in denial or reduction of fees. See id.
[325] Several courts have applied a presumption against potential conflicts. See In re Roger J. Au & Son, Inc., 65 B.R. 322, 335 (Bankr. N.D. Ohio). The Roger J. Au court determined that past representation of the debtor corporation’s sole shareholder and principal officer rendered counsel and his firm not disinterested and disqualified them. See id. at 336. Applying Canon 9 of the Model Code of Professional Responsibility, the bankruptcy court reasoned that even the mere appearance of impropriety in simultaneous representation provided the requisite lack of disinterestedness for the purpose of disqualification. See id. at 335.
Some courts have gone further, decrying all conflicts as actual. See In re Kendavis Indus., Inc., 91 B.R. 742, 754 (Bankr. N.D. Tex. 1988). The Kendavis court described the concept of potential conflicts of interest as mistaken, holding that an actual conflict of interest arises the moment counsel “has any agreement, express or implied, with any management or a director of the debtor, or with a shareholder, or with any control party.” Id.
[326] See In re BH & P, Inc., 94 F.2d 1300, 1300 (3d Cir. 1991). The BH & P court considered the eligibility of a law firm to represent a debtor corporation and the corporation’s two principals in three related chapter 7 liquidation proceedings. See id. at 1305. Applying a presumption against a potential conflict, the bankruptcy court disqualified both the trustee and counsel. See In re BH & P, Inc., 103 B.R. 556, 564 (Bankr. D.N.J.), aff’d, 949 F.2d 1300 (3d Cir. 1991). On appeal, the Third Circuit adopted a “flexible approach” that, while presuming potential conflicts disqualifying, “allows the bankruptcy court to evaluate each case on its facts.” See BH & P, 94 F.2d at 1315.
[327] See In re BH & P, Inc., 94 F.2d 1300, 1300 (3d Cir. 1991). The BH & P court considered the eligibility of a law firm to represent a debtor corporation and the corporation’s two principals in three related chapter 7 liquidation proceedings. See id. at 1305. Applying a presumption against a potential conflict, the bankruptcy court disqualified both the trustee and counsel. See In re BH & P, Inc., 103 B.R. 556, 564 (Bankr. D.N.J.), aff’d, 949 F.2d 1300 (3d Cir. 1991). On appeal, the Third Circuit adopted a “flexible approach” that, while presuming potential conflicts disqualifying, “allows the bankruptcy court to evaluate each case on its facts.” See BH & P, 94 F.2d at 1315.
[328] See id.
[329] See Model Rules of Professional Conduct Rule 1.7 (1983).
[330] See In re Star Broad., Inc., 81 B.R. 835, 837-39 (Bankr. D.N.J. 1988) (stating courts rely on § 327(a) standards, case law interpreting that section, and rules of professional conduct to determine whether a conflict of interest exists) (citing In re Philadelphia Athletic Club, Inc., 20 B.R. 328, 335-36 (E.D. Pa. 1982); In re Roberts, 46 B.R. 815, 837-38 (Bankr. D. Utah 1985), aff’d in part, rev’d and vacated in part on other grounds, 75 B.R. 402 (D. Utah 1987); In re Chou-Chen Chems., Inc., 31 B.R. 842, 849-52 (Bankr. W.D. Ky. 1983)).
[331] Fed. R. Bankr. P. 2019 (detailing requirements for representation of creditors or equity security holders in chapters 9 and 11).
[332] See Model Rules of Professional Conduct Rule 1.7; Cal. Rules of Professional Conduct 3-310(c) (providing for dual representation with informed written consent of the clients).
[333] “Consultation” is defined in the Model Rules as “communication of information reasonably sufficient to permit the client to appreciate the significance of the matter in question.” See Model Rules of Professional Conduct Terminology (1983); see also Griva v. Davison, 637 A.2d 830, 845 (D.C. Ct. App. 1994) (stating “[w]here dual representation creates a potential conflict of interest, the burden is on the attorney involved in the dual representation to approach both clients with an affirmative disclosure so that each can evaluate the potential conflict and decide whether or not to consent to continued dual employment”).
[334] See Model Rules of Professional Conduct Rule 1.7 cmt. [5] (1983) (stating when more than one client is involved, question of conflict must be resolved as to each client).
[335] See id. Rule 1.16 (stating when conflict of interest arises during course of representation, lawyer must withdraw); see also id. Rule 1.7 cmt. [7].
[336] See id. Rule 1.6.
[337] See id. Rule 1.7 cmt. [5] (noting there may be circumstances where impossible to make disclosure necessary to obtain consent).
[338] Fed. R. Bankr. P. 2019(a).
[339] See id.
[340] See id.
[341] See LaFayette v. Oklahoma P.A.C. First Ltd. Partnership (In re Oklahoma P.A.C. First Ltd. Partnership), 122 B.R. 387, 393 (Bankr. D. Ariz. 1990).
[342] 122 B.R. 387 (Bankr. D. Ariz. 1990).
[343] See id. at 392.
[344] See id.
[345] See id. at 393.
[346] See LaFayette v. Oklahoma P.A.C. First Ltd. Partnership (In re Oklahoma P.A.C. First Ltd. Partnership), 122 B.R. 387, 392 (Bankr. D. Ariz. 1990).
[347] 11 U.S.C. § 1103(b) (1994).
[348] See id., as amended by Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub. L. No. 98-353 § 500, 98 Stat. 333, 384; see also In re Rusty Jones, Inc., 107 B.R. 161, 162 (Bankr. N.D. Ill. 1989); In re Whitman, 101 B.R. 37, 38 (Bankr. N.D. Ind. 1989).
[349] See 11 U.S.C. § 1103(b); see also Whitman, 101 B.R. at 39.
[350] 101 B.R. 37 (Bankr. N.D. Ind. 1989).
[351] See id. at 37.
[352] See id.
[353] See id.
[354] See id.
[355] See In re Electro-Optix, U.S.A., Inc., 130 B.R. 621, 623 (Bankr. S.D. Fla. 1991) (disqualifying committee counsel for continuing to represent unsecured creditor); In re Oliver’s Stores, Inc., 79 B.R. 588, 595 (Bankr. D.N.J. 1987) (counsel seeking to represent committee while also representing individual creditor in suit against debtor’s former accounting firm was denied permission for dual representation for fear that if accounting firm sought indemnification from DIP or officers, result could deplete assets otherwise available to creditors represented by committee); In re Grant Broad., Inc., 71 B.R. 655, 663 (Bankr. E.D. Pa. 1987) (holding counsel could not represent unsecured creditors committee and individual unsecured creditors attempting to force debtor to assume contract and pay administrative expense claim).
[356] 11 U.S.C. § 327(c) (1994).
[357] Model Rules of Professional Conduct Rule 1.7(b) (1983).
[358] See In re AOV Indus., Inc., 797 F.2d 1004, 1011 (D.C. Cir. 1986) (prohibiting simultaneous representation of creditor and debtor) (citing In re Georgetown of Kettering, Ltd., 750 F.2d 536, 540 & n.7 (6th Cir. 1984)).
[359] See In re Interwest Bus. Equip., Inc., 23 F.3d 311, 316 (10th Cir. 1994) (noting § 327(c), as worded, is intended to allow joint representation of trustee and creditor of estate if no apparent conflict of interest).
[360] 11 U.S.C. § 327(c).
[361] See id.
[362] See 11 U.S.C. § 327(c), as amended by 11 U.S.C. § 327(c) (1994).
[363] See id.
[364] See Cal. Rules of Professional Conduct 3-310(C) (1996) (containing similar requirements requiring informed written consent from clients).
[365] See Model Rules of Professional Conduct Rule 1.7 cmt. 2 (1983).
[366] See, e.g., In re Philadelphia Athletic Club, Inc., 20 B.R. 328, 338 (Bankr. E.D. Pa. 1982) (disqualifying all members of law firm even though firm previously resigned as counsel for creditor); cf. In re Smith, 79 B.R. 297, 299 (Bankr. S.D. Ohio 1987) (prohibiting dual employment by trustee and creditor even though attorneys did not seek any compensation for representation of trustee).
[367] See In re BH & P Inc., 949 F.2d 1300, 1313 (3d Cir. 1991) (stating potential for conflict may, without more, justify disqualification); In re Glenn Elec. Sales Corp., 99 B.R. 596, 602 (D.N.J. 1988) (holding even without actual prejudice, sufficient risk of such justifies disqualification); In re Greater Pottstown Community Church, 80 B.R. 706, 711 (Bankr. E.D. Pa. 1987) (holding dual representations always result in disqualifying conflict. See generally William I. Kohn & Michael P. Shuster, Deciphering Conflicts of Interest in Bankruptcy Representation, 98 Com. L.J. 127, 143-44 (1993) (noting that some courts hold that potential conflict is enough to disqualify).
[368] See, e.g., Humble Place Joint Venture v. Fory (In re Humble Place Joint Venture), 936 F.2d 814, 819 (5th Cir. 1991) (noting counsel’s loyalty to debtor’s estate would be tested by counsel’s other interests); In re Westwood Homes, Inc., 157 B.R. 182, 184 (Bankr. D. Me. 1993) (finding attorney representing both corporate debtor and principal shareholder was conflict of interest sufficient to justify denial of compensation); In re Amdura Corp., 121 B.R. 862, 871 (Bankr. D. Colo. 1990) (noting firm’s dual representation hindered ability to properly act as counsel).
[369] See Model Rules of Professional Conduct Rule 1.7 (1983).
[370] See id.
[371] See, e.g., In re Kendavis Indus. Int’l, Inc., 91 B.R. 742, 751 (Bankr. N.D. Tex. 1988) (stating “the Bankruptcy Code provisions dealing with conflicts of interest find their counterparts in the ABA Code of Professional Responsibility”) (citing In re Maine Power & Equip. Co., 67 B.R. 643, 654 (Bankr. W.D. Wash. 1986)); In re Roberts, 46 B.R. 815, 830-31 (Bankr. D. Utah 1985), aff’d in part and rev’d and vacated on other grounds, 75 B.R. 402 (D. Utah 1987).
[372] 121 B.R. 862 (Bankr. D. Colo. 1990).
[373] See id. at 864.
[374] See id.
[375] See id. at 865.
[376] See id. at 865.
[377] See 11 U.S.C. § 1129(a)(9) (1994) (noting one requirement for distributions to claimholders under reorganization plan provides that, “[e]xcept to the extent that the holder of a particular claim has agreed to a different treatment of such claim”).
[378] See Amdura, 121 B.R. at 865 (establishing “fair and equitable” rule citing 11 U.S.C. § 1129(b)).
[379] See id. at 865.
[380] See id.
[381] See id.
[382] See id.
[383] See id. at 866.
[384] See id.
[385] See id. at 865.
[386] See id.
[387] See id.
[388] See id.
[389] See id.
[390] See id. at 866.
[391] See id. at 862.
[392] See id. at 866.
[393] See id.
[394] See id. at 871.
[395] See id. at 867.
[396] See id. at 869.
[397] Law Offices of Ivan W. Halperin v. Occidental Fin. Group (In re Occidental Fin. Group), 40 F.3d 1059, 1062 (9th Cir. 1994).
[398] See id.
[399] See id. at 1061.
[400] See id. at 1062; In re Hot Tin Roof, Inc., 25 B.R. 1000 (Bankr. 1st Cir. BAP 1997) (an attorney’s failure to disclose relationships with insiders in another case and bring the issue to the court for determination resulted in disqualification in each case and forfeiture of any fees as well).
[401] See Interwest Bus. Equip., Inc. v. United States Trustee (In re Interwest Bus. Equip., Inc.), 23 F.3d 311, 318-19 (10th Cir. 1994).
[402] See id.
[403] See In re Crimson Invs., N.V., 109 B.R. 397, 402 (Bankr. D. Ariz. 1989). In a recent case, plaintiff sued the firm that had represented him in a suit against his former employer, a larger firm, on grounds of breach of fiduciary duty, among other things. The Southern District of New York denied defendant’s summary judgment motion as to alleged breach of fiduciary duty based on potential ethical violations where the larger firm referred about a dozen cases to the smaller defendant firm. Re v. Kornstein Veisz & Wexler (In re Re), 1997 WL 162918 (S.D.N.Y.). The court reasoned that even though these cases accounted for approximately 2% to 3% of defendant firm’s business, the amount of money made through the referrals was large enough to pose potential violations. Id. at *2, *20. The court cited concerns based on N.Y. D.R. 5-101(A). Id. at *19. In effect, failing to reveal to client that the employer he wished to sue had referred some cases to this firm, was enough to defeat a summary judgment motion!
[404] In re Marvel Entertainment Group, Inc. (Case No. 97-638-RRM, Delaware 1996).
[405] See Model Rules of Professional Conduct Rule 1.8(f) (1983) (outlining conflict of interest and prohibited transactions). The Model Rules allow for third party payor situations when certain circumstances exist. Rule 1.8 provides in relevant part:
[406] See infra notes 238-241 and accompanying text.
[407] See In re Hathaway Ranch Partnership, 116 B.R. 208, 219 (Bankr. C.D. Cal. 1990); In re WPMK, Inc., 42 B.R. 157, 163 (Bankr. D. Haw. 1984).
[408] See Woods v. City Nat’l Bank & Trust Co., 312 U.S. 262, 268 (1941); see also In re Senior G & A Operating Co., 97 B.R. 307, 310 (Bankr. W.D. La. 1989); In re 765 Assocs., 14 B.R. 449, 451 (Bankr. D. Haw. 1981); In re Bergdog Prods., Inc., 7 B.R. 890, 892 (Bankr. D. Haw. 1980). But see In re Glenn Elec. Sales Corp., 89 B.R. 410, 416 (Bankr. D.N.J. 1988) (loaning money to principal of debtor does not equal representation of creditor), aff’d, 99 B.R. 596 (D.N.J. 1988).
[409] See Woods v. City Nat’l Bank & Trust Co., 312 U.S. 262, 268 (1941); see also In re Senior G & A Operating Co., 97 B.R. 307, 310 (Bankr. W.D. La. 1989); In re 765 Assocs., 14 B.R. 449, 451 (Bankr. D. Haw. 1981); In re Bergdog Prods., Inc., 7 B.R. 890, 892 (Bankr. D. Haw. 1980). But see In re Glenn Elec. Sales Corp., 89 B.R. 410, 416 (Bankr. D.N.J. 1988) (loaning money to principal of debtor does not equal representation of creditor), aff’d, 99 B.R. 596 (D.N.J. 1988).
[410] See In re Missouri Mining, Inc., 186 B.R. 946, 949 (Bankr. W.D. Mo. 1995) (rejecting per se rule that third party payment is actual conflict and looks to fact-specific determination of whether counsel holds interest adverse to estate). The Missouri Mining court identified four factors to determine if third party payment is basis for disqualification:
[411] 46 B.R. 815, 826-27 (Bankr. D. Utah 1985), aff’d in part, rev’d and vacated on other grounds, 75 B.R. 402 (D. Utah 1987).
[412] See id. at 827.
[413] See In re Glenn Elec. Sales Corp., 89 B.R. 410, 416 (Bankr. D.N.J. 1988) (loaning money to principal of debtor does not equal representation of creditor), aff’d , 99 B.R. 596 (D.N.J. 1988).
[414] See Glenn Elec., 99 B.R. at 597 (holding payment by 100% shareholder does not equal representation of that shareholder).
[415] See Glenn Elec., 89 B.R. at 416.
[416] See 11 U.S.C. § 327(a) (1994) (dealing with employment of professionals); see also In re Star Broad., Inc., 81 B.R. 835, 838 (Bankr. D.N.J.) (stating two-prong test to qualify counsel includes disinterestedness); In re O’Connor, 52 B.R. 892, 895 (Bankr. W.D. Okla. 1985) (requiring disinterestedness of professional person).
[417] See 11 U.S.C. § 101(14)(E).
[418] See id.
[419] 89 B.R. 410 (Bankr. D.N.J.), aff’d, 99 B.R. 596 (D.N.J. 1988).
[420] See id. at 417.
[421] See id. at 412.
[422] See id. at 418.
[423] See id. at 417.
[424] See id.
[425] See id. at 418.
[426] See id. at 415.
[427] See In re Arlan’s Dep’t Stores, Inc., 615 F.2d 925, 928 (2d Cir. 1979) (denying substantial fees to two law firms that persistently failed to disclose fee arrangements between themselves that could have been adverse to client); In re Roberts, 75 B.R. 402, 413 (D. Utah 1987) (disallowing fees to law firm representing debtor corporation for failure to disclose conflicts of interest).
[428] See Glenn Elec., 89 B.R. 410 (Bankr. D.N.J.), aff’d, 99 B.R. 596 (D.N.J. 1988).
[429] See 11 U.S.C. § 327 (1994).
[430] See Fed. R. Bankr. P. 2014.
[431] See Model Rules of Professional Conduct Rule 1.8(f) (1983).
[432] See 11 U.S.C. § 329(b).
[433] See id. (emphasis added).
[434] 214 B.R. 713 (Bankr. S.D.N.Y. 1977)
[435] See In re Mehdipour, 202 B.R. 474 (9th Cir. BAP 1996).
[436] See id. at 480.
[437] See id. at 481.
[438] Importantly, however, bankruptcy Rule 9011 requires an attorney to make a “reasonable inquiry” to ensure that all documents served or filed in a bankruptcy case on behalf of his client are well-grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law.” Fed. R. Bankr. P. 9011(a).
[439] See, e.g., Scheftner v. Foster (In re Dieringer), 132 B.R. 34, 36 (Bankr. N.D. Cal. 1991) (holding attorney free from liability for gross mismanagement by debtor’s management).
[440] See id.
[441] See id.
[442] See S. Rep. No. 95-989, at 94 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5880; H.R. Rep. No. 95-595, at 380 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6336.
[443] See 11 U.S.C. § 706(a) (1994).
[444] See id. at § 1129(b).
[445] See Scheftner v. Foster (In re Dieringer), 132 B.R. 34, 36 (Bankr. N.D. Cal. 1991) (stating “policy . . . that the debtor should always be given the opportunity to repay his debts”).
[446] See id.
[447] See 11 U.S.C. § 1104.
[448] See id. at § 1112.
[449] See Dieringer, 132 B.R. at 36.
[450] See id.
[451] See In re Wilde Horse Enters., Inc., 136 B.R. 830, 840 (Bankr. C.D. Cal. 1991) (stating attorney is fiduciary to estate and has duty to remind debtor of duties under Code); cf. In re Consupak, Inc., 87 B.R. 529, 548-49 (Bankr. N.D. Ill. 1988) (stating that duty of trustee’s attorney requires active concern for interests of estate and unsecured creditors, including taking initiative “to inform his client of the need for preventative or corrective action.”)
[452] See Model Rules of Professional Conduct Rule 1.2 cmt. 1 (1983) (stating client has ultimate authority of representation).
[453] See id. Rule 1.4(b) (stating client must be provided with information to participate in decision-making process).
[454] See id. Rule 1.13.
[455] See In re Nephi Rubber Prods. Corp., 120 B.R. 477, 482 (Bankr. N.D. Ind. 1990) (stating officers and directors choose counsel and counsel obligated to follow directors); see also In re Hurst Lincoln Mercury, Inc., 80 B.R. 894, 897 (Bankr. S.D. Ohio 1987) (stating counsel must look to operating head of DIP as client’s voice).
[456] See, e.g., In re Best W. Heritage Inn Partnership, 79 B.R. 736, 740 (Bankr. E.D. Tenn. 1987) (stating no reason for debtor in possession to be disinterested).
[457] See 11 U.S.C. § 1102(a)(1) (1994) (authorizing US Trustee to appoint creditors’ committees).
[458] See id. at § 327(a).
[459] 79 B.R. 736 (Bankr. E.D. Tenn. 1987).
[460] 79 B.R. 736 (Bankr. E.D. Tenn. 1987).
[461] See 11 U.S.C. § 1129(b) (imposing “absolute priority” rule).
[462] See United States v. Aldrich (In re Rigden), 795 F.2d 727, 730 (9th Cir. 1986) (stating chapter 11 trustee or debtor in possession has “fiduciary obligation to conserve the assets of the estate and to maximize distribution to creditors”); First Union Nat’l Bank v. Tenn-Fla Partners (In re Tenn-Fla Partners), 170 B.R. 946, 970 (Bankr. W.D. Tenn. 1994) (same); Nat’l Convenience Stores Inc., v. Shields, 106 B.R. 792, 797 (Bankr. S.D. Tex. 1993) (recognizing debtor in possession’s management takes on heightened fiduciary duties of chapter 11 trustee).
[463] See Fed. R. Civ. P. 11.
[464] See In re TS Indus., Inc., 125 B.R. 638, 642 (Bankr. D. Utah 1991); In re NRG Resources, Inc., 64 B.R. 643, 647 (W.D. La. 1986).
[465] See Model Rules of Professional Conduct Preamble 4 (1983) (providing “lawyer’s duty to uphold legal process”).
[466] See id. Rule 1.2(d) (stating counsel may assist client to determine law).
[467] See id. Rule 2.1.
[468] See id. Rule 3.1; Cal. Rules of Professional Conduct 3-200 (1996) (requiring attorney not to seek accept, or continue employment knowing that objective of employment is to bring action or assert position without probable cause and for purpose of harassing or maliciously injuring another person).
[469] See Model Rules of Professional Conduct Rule 3.2.
[470] See id. Rule 3.2 cmt.
[471] See id. Rule 1.2(e).
[472] See, e.g., In re McNar, Inc., 116 B.R. 746, 751-52 (Bankr. S.D. Cal. 1990).
[473] See Model Rules of Professional Conduct Rule 1.16(a), (b).
[474] See Everett v. Perez (In re Perez), 30 F.3d 1209, 1219 (9th Cir. 1994) (stating lawyer “must seek to persuade his client to take a different course or, failing that, resign”).
[475] See Model Rules of Professional Conduct Rule 1.2 (providing lawyer must abide by client’s decision as long as decision ethically permissible).
[476] See id. Rule 1.16(a), (b).
[477] See 11 U.S.C. § 1112(b) (1994) (authorizing court to convert or dismiss chapter 11 case for cause on request of party in interest or U.S. Trustee).
[478] See 11 U.S.C. § 329.
[479] See In re CF Holding Corp., 164 B.R. 799, 808 (Bankr. D. Conn. 1994).
[480] See supra notes 286-87 and accompanying text.
[481] See generally Best W. Heritage Inn Partnership, 79 B.R. 736, 740 (Bankr. E.D. Tenn. 1987) (supporting proposition that DIP’s attorney cannot be reasonably expected to safeguard rights of all parties in interest).
[482] 167 B.R. 288 (Bankr. N.D. Ga. 1994).
[483] See id. at 300.
[484] See id. at 301 (holding that if interests of court or estate conflict with interests of debtor, then court and estate interests control).
[485] 193 B.R. 165 (Bankr. S.D.N.Y. 1996).
[486] See id. at 169.
[487] See id.
[488] See id.
[489] See id.
[490] See id. at 170-171.
[491] See id. at 171.
[492] See id.
[493] See id.
[494] See id. at 172-173 (stating that although possible to devise scenario of adverse interests, record does not support such imaginations).
[495] Id. at 172 (quoting In re Martin, 817 F.2d 175, 183 (1st Cir. 1987)).
[496] See id. at 171-72 (ruling committees do not hold disqualifying “adverse interests” because committees, like debtors are not likely to become rival claimants).
[497] Id. at 172 (quoting In re Martin, 817 F.2d at 175, 180 (1st Cir. 1987)).
[498] Id. at 171 (quoting In re Leslie Fay Cos., Inc., 175 B.R. 525, 533 (Bankr. S.D.N.Y. 1994)).
[499] See id.
[500] See id. at 182.
[501] See 11 U.S.C. § 327(d) (1994).
[502] See id. at § 328(b) (1994).
[503] See, e.g., In re Butler Indus., Inc., 101 B.R. 194, 197 (Bankr. C.D. Cal. 1989), aff’d, 114 B.R. 695 (C.D. Cal. 1990).
[504] See id.
[505] See id.
[506] See id.; see also In re Gem & Serv. Co., 117 B.R. 874, 880 (Bankr. S.D. Tex. 1990).
[507] See In re Cee Jay Discount Stores, Inc., 171 B.R. 173, 176 (Bankr. E.D.N.Y. 1994) (stating trustee should not employ own firm without showing strong reason); In re Showcase Jewelry Design, Ltd., 166 B.R. 205, 206 (Bankr. E.D.N.Y. 1994); see also Knapp v. Seligson (In re Ira Haupt & Co.), 361 F.2d 164, 168 (2d Cir. 1966) (noting trustee should be discouraged from retaining himself).
[508] 206 B.R. 869 (Bankr. N.D. Ohio 1997).
[509] See id. at 874.
[510] See id. at 875.
[511] See id. at 881.
[512] 107 F.3d 685 (9th Cir. 1995, amended opinion 1997).
[513] See id. at 692.
[514] See id. at 694.
[515] See, e.g., In re CF Holding Corp., 164 B.R. 799, 808 (Bankr. D. Conn. 1994) (reducing fee by substantial amount); In re McNar Inc., 116 B.R. 746, 752 (Bankr. S.D. Cal 1990) (depriving attorney of fees for violating disclosure requirements to debtor’s board of directors); In re Crimson Invs., N.V., 109 B.R. 397, 400-01 (Bankr. D. Ariz. 1989) (denying all compensation to attorney who improperly received retainer from two largest unsecured creditors); In re Davison, 79 B.R. 859, 861 (Bankr. W.D. Mo. 1987) (finding counsel who aided and abetted dissipation of bankruptcy estate’s funds and assets was properly denied any and all attorney’s fees).
[516] 18 U.S.C. § 156(a) (1994) defines a “bankruptcy petition preparer” as “a person, other than the debtor’s attorney or an employee of such an attorney, who prepares for compensation a document for filing.” Id.
[517] See 18 U.S.C. § 156.
[518] See supra note 11; 18 U.S.C. §§ 152, 153, and 154, as amended by Pub. L. No. 103-394, § 312, 108 Stat. 4107, 4138-40 (1994); 18 U.S.C. §§ 156, 157, as amended by Pub. L. No. 103-394, § 312, 108 Stat. 4107, 4140 (1994).
[519] See 18 U.S.C. § 157.
[520] See, e.g., In re Hessinger & Assocs., 171 B.R. 366, 372 (Bankr. N.D. Cal. 1994) (sanctioning attorney for acting as figurehead for nonlawyers who charged legal fees); Geibank Indus. Bank v. Martin (In re Martin), 97 B.R. 1013, 1017 (Bankr. N.D. Ga. 1989) (sanctioning attorney for authorizing someone in his office to sign, prepare, and file debtor’s petition).
[521] See 11 U.S.C. § 523 (1994).
[522] See McElhanon v. Hing, 728 P.2d 273, 278 (Ariz. 1986) (holding attorney liable for conspiracy with client)., cert. denied, 481 U.S. 1030 (1987).
[523] See id.
[524] See id.
[525] See id.
[526] See Model Rules of Professional Conduct Rule 1.2(d) (1983).
[527] See id.
[528] See id.
[529] Id. Terminology 5 (1983); cf. In re Bloom, 745 P.2d 61, 64-65 (Cal. 1987) (disbarring lawyers for mailing explosives to Libya without investigating).
[530] Cf. Cal. Rules of Professional Conduct 3-210 (1996), which does not use the term “fraudulent” as contained in the Model Rules but simply refers to the “violation of any law” and therefore might be less restrictive. Id.
[531] 197 P.2d 326 (Cal. 1948).
[532] See id. at 329.
[533] 385 N.Y.S.2d 806 (2d Dep’t 1976).
[534] See id. at 807; see also Coppock v. State Bar of California, 749 P.2d 1317, 1330-31 (Cal. 1988) (giving attorney who allowed client to defraud others 90 day suspension, two years probation); Office of Disciplinary Counsel v. Stern, 526 A.2d 1180, 1186 (Pa. 1987) (disbarring attorney for allowing himself to be corrupted by client and corrupting labor leader), cert. denied, 488 U.S. 826 (1988).
[535] See People v. Schwartz, 814 P.2d 793, 794 (Colo. 1991) (finding despite lack of prior disciplinary record, federal convictions for conspiracy to commit bankruptcy fraud and other federal offenses warranted disbarment).
[536] Apparently, as evidenced by two recent articles on negotiation tactics, some attorneys believe that zealous representation of their clients’ interests must at times necessarily requires tactics that push the envelope on the guidelines of professional responsibility. See McErlean & Teplinsky, Privileges: How to Uncover the Facts, Litigation, Winter 1997 at 41, 44 (suggesting that during settlement discussions, counsel should goad opponent into a diatribe for purpose of inducing opponent to voluntarily disclose privileged material, thereby waiving privilege); Geronemus, Lies, Damn Lies and Unethical Lies: How to Negotiate Ethically and Effectively, Business Law Today, May/June 1997 at 11 (suggesting that in all negotiations, it is ethically permissible and usually necessary for lawyers to engage in a limited amount of deception, i.e., bluffing). The authors of this Article do not share this view.
[537] An attorney may not represent a client where “the representation of that client will be directly adverse to another client.” Model Rules of Professional Conduct Rule 1.7(a) (1983). Further, a lawyer may not represent a client where “the representation of that client may be materially limited by the lawyer’s responsibilities to another client or to a third person, or by the lawyer’s own interests.” Id. Rule 1.7(b). Finally, a lawyer must “decline proffered employment if the exercise of his independent professional judgment in behalf of a client will be or is likely to be adversely affected by the acceptance of the proffered employment[.]” Model Code of Professional Responsibility DR 5-105(A) (1980).
[538] An attorney may not represent a client where “the representation of that client will be directly adverse to another client.” Model Rules of Professional Conduct Rule 1.7(a) (1983). Further, a lawyer may not represent a client where “the representation of that client may be materially limited by the lawyer’s responsibilities to another client or to a third person, or by the lawyer’s own interests.” Id. Rule 1.7(b). Finally, a lawyer must “decline proffered employment if the exercise of his independent professional judgment in behalf of a client will be or is likely to be adversely affected by the acceptance of the proffered employment[.]” Model Code of Professional Responsibility DR 5-105(A) (1980).
[539] See Model Code of Professional Responsibility Canon 9 (stating “[a] lawyer should avoid even the appearance of professional impropriety”); see also Roger J. Au & Son, Inc. v. Aetna Ins. Co. (In re Roger J. Au & Son, Inc.), 64 B.R. 600, 605 (N.D. Ohio 1986) (disqualifying counsel upon showing of reasonable possibility of occurrence of specifically identifiable appearance of improper conduct).
[540] A lawyer should preserve the confidences and secrets of a client.” Model Code of Professional Responsibility Canon 4. Further, a lawyer must not “reveal information relating to representation of a client.” Model Rules of Professional Conduct Rule 1.6(a).
[541] See John D. Ayer, How to Think About Bankruptcy Ethics, 60 Am. Bankr. L.J. 355, 365-66 (1986) (commenting that declaring bankruptcy no longer carries the stigma that it formerly did).
[542] See Nancy B. Rapoport, Seeing the Forest and the Trees: The Proper Role of the Bankruptcy Attorney, 70 Ind. L.J. 783, 783 (1995) (noting abundance of lawyer jokes and cartoons which hint at public’s disgust with a “profession that can unabashedly argue both sides of a question with equal vigor and can show absolutely no interest in considering, let alone resolving, important moral or social issues”).
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BANKRUPTCY ETHICS, AN OXYMORON
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