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RULES AND TOOLS TO AVOID LOOKING THE FOOL: Ethical Issues for Bankruptcy

Practitioners

Lindsey Simon Alexandra Caval Associate Attorney Lukins & Annis, P.S. Coeur d’Alene, Idaho

Staff Attorney Office of Kathleen A. McCallister, Chapter 13 Trustee Boise, Idaho

RULES AND TOOLS TO AVOID LOOKING THE FOOL:

Ethical Issues for Bankruptcy Practitioners

Lindsey Simon Associate Attorney Lukins & Annis, P.S. Coeur d’Alene, Idaho

RULES AND TOOLS TO AVOID LOOKING THE FOOL:

Ethical Issues for Bankruptcy Practitioners

Alexandra Caval Staff Attorney Office of Kathleen A. McCallister, Chapter 13 Trustee Boise, Idaho

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WHAT ARE THE STANDARDS IN YOUR DISTRICT?

• Check your Local Rules

• District of Idaho incorporates the state bar’s Idaho Rules of Professional Conduct

• The Idaho Rules of Professional Conduct are substantially similar to the Model Rules of Professional Conduct

SURVEY OF BANKRUPTCY CASES FROM THE DISTRICT OF

IDAHO

Ethical Rules Most Frequently Cited:

• Rule 1.5: Fees cited 6 times

• Rule 3.3: Candor Toward the Tribunal cited 5 times

0 2 4 6 8 10 12 14 16 18

Client-Lawyer Relationship

Advocate

Maintaining the Integrity of the Profession

Law Firms and Associations

Transactions with Persons Other than Clients

Information About Legal Services

Counselor

Public Service

AREAS OF ETHICAL CONCERNS IN THE DISTRICT OF IDAHO

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LAWYER/CLIENT RELATIONSHIP

1.1: Competence

1.2: Scope of Representation

1.4: Communication

1.8: Conflicts of Interest: Current Clients: Specific Rules

1.15: Safekeeping Property

1.16: Declining or Terminating Representation

NATIONAL PERSPECTIVE

• Marie Leary, Federal Judicial Center, Standards Governing Attorney Conduct in Bankruptcy Court (Mar.1999)

• Report to the Judicial Conference Advisory Committee on Bankruptcy Rules

• Sent out 317 questionnaires to all bankruptcy judges and compiled the responses

AREAS OF ETHICAL CONCERNS NATIONWIDE 0 20 40 60 80 100 120 140 160 180 200

Confidentiality

Safekeepting of Client Property

Communications with Represented Persons

Lawyer as a Witness

Truthfulness in Statements to Others

Candor Towards the Tribunal

Attorneys' Fees

Conflict of Interest (MRPC)

Required Disclosures

Conflict of Interest (Code)

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TOP THREE AREAS • Disclosure/Candor

• Attorneys’ Fees

• Conflicts of Interest

Consistent with the survey results

from the District of Idaho

Lindsey

Simon

Alexandra

Caval

FOUR C’S OF BANKRUPTCY ETHICS

1. Compensation

2. Candor

3. Conflicts of Interest

4. Competency

In many instances, these issues are not separate and distinct from each other

COMPENSATION

• MRPC 1.5 requires, inter alia:

▫ Reasonable fees

▫ Explanation to client regarding basis for fees and scope of representation

• Bankruptcy debtor attorneys are subject to MRPC 1.5 as well as more stringent requirements under the Bankruptcy Rules and Code

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COMPENSATION

• One of the primary goals of bankruptcy is to facilitate an orderly and equitable repayment of claims out of limited estate assets

• 11 U.S.C. § 329 requires independent review of reasonableness by the Bankruptcy Court

▫ For all attorneys representing debtors

▫ Regardless of whether compensation is applied for in the bankruptcy case

COMPENSATION/CANDOR

• How is a Court able to determine reasonableness of attorneys’ fees? ▫ Candor and disclosure come into play ▫ § 329 requires disclosure of:

Compensation paid Basis for fees Source of funds

▫ Federal Rule of Bankruptcy Procedure 2016 requires disclosure (within 14 days of the petition) of: § 329 information Fee-sharing agreements

COMPENSATION

• How does a Court determine what is a reasonable attorney’s fee?

• 11 U.S.C. § 330(a)(3) lists factors the Court must consider: ▫ The time spent on representation; ▫ The rate charged; ▫ Whether representation was necessary or beneficial to

the bankruptcy case; ▫ How the time spent compares to the complexity,

importance, and nature of the problem, issue, or task addressed; and

▫ How the fees charged compare to those charged by other skilled practitioners

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COMPENSATION/CANDOR

• Implicit disclosure requirement contained within § 330(a)(3)

• Court must have the information necessary to review and compare

▫ Time spent

▫ Rates charged

▫ Complexity of the issue, etc.

• Requires itemized accounting and disclosures

COMPENSATION/COMPETENCY

• Competency comes into play ▫ MRPC 1.1 sets forth the minimum requirements

for competency: Knowledge, skill, thoroughness and preparation

reasonably necessary for the representation

▫ § 330(a)(3) incorporates the standard for competency: Representation must be necessary or beneficial to

the bankruptcy case Compensation paid to debtor’s attorney is compared

to other skilled practitioners

Compensation

Competency

(Reasonableness of Fees)

Candor

(Required Disclosures)

COMPENSATION

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COMPENSATION/CANDOR

• Failure to disclose

▫ Failure to file § 329(a) and FRBP 2016(b) disclosures

▫ Incomplete or untimely disclosures

Don’t wait for the Court to issue a show cause order

Attempts to limit scope of debtor representation in bankruptcy

• Penalty for nondisclosure

▫ In the 9th Circuit, “anything less than strict compliance with Section 329(a) and Rule 2016(b) can justifiably result in denial of all requested fees.”

COMPENSATION/COMPETENCY

• Pre-petition services

▫ Preparation of petition

▫ Adequate inquiry into status of affairs

• Attempts to limit debtor representation in bankruptcy and informed consent thereof

▫ Bankruptcy Court in the District of Idaho has articulated the minimum requirements for debtor representation in bankruptcy

COMPENSATION/COMPETENCY

1. The proper filing of all required schedules, statements and disclosures;

2. Preparation and filing of necessary amendments to the same;

3. Attendance at the § 341 meeting;

4. Turnover of assets to the trustee, and cooperation with the trustee;

5. Compliance with the tax turnover and other orders of the Court;

6. Performance of the duties imposed by § 521(1), (3) and (4);

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COMPENSATION/COMPETENCY

7. Counseling in regard to § 521(2) and the re-affirmation, redemption, surrender or retention of consumer goods securing obligations to creditors, and assisting the debtor in accomplishing those aims; and

8. Responding to issues that arise in the basic milieu of the bankruptcy case, such as violations of stay and stay relief requests, objections to exemptions and avoidance of liens impairing exemptions, and the like.

-In re Castorena, 270 B.R. 504, 530 (Bankr. D. Idaho 2001)

COMPENSATION/COMPETENCY

• In the District of Idaho, debtor attorneys “will find it exceedingly difficult to show that [they] properly contract[ed] away any of the fundamental and core obligations such an engagement necessarily imposes. Proving competent, intelligent, informed and knowing consent of the debtor to waive or limit such services inherent to the engagement will be required.”

-In re Castorena, 270 B.R. 504, 530 (Bankr. D. Idaho 2001)

COMPENSATION/COMPETENCY

• Penalty for incompetent representation

▫ Potential order disgorging fees pursuant to § 329(b)

Alexander

Caval

Lindsey

Simon

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CANDOR

• MRPC 3.3 imposes a duty of candor on all attorneys

▫ Must not knowingly make false statements of material fact, fail to disclose controlling authority, or offer false evidence

▫ Must inform the court of all material facts in an ex parte proceeding

CANDOR

• Many bankruptcy proceedings are not adversarial in nature, may be more akin to an ex parte proceeding when negative noticing is used. See In re Genay-Wolf, No. 09-21810-TLM, 2012 WL 2871685 (Bankr. D. Idaho July 12, 2012)

• Heightened candor required in ex parte proceedings

• Bankruptcy Code and Rules reflect this ▫ Required disclosures

▫ False oaths in bankruptcy is a crime. 18 U.S.C. § 152

CANDOR/CONFLICTS OF INTEREST

• Common blunders are often where conflicts of interest come into play

▫ Compensation agreements

▫ Applications to employ

11 U.S.C. § 327(a) allows for employment of professionals without adverse interests

FRBP 2014 requires certain disclosures, including proposed compensation and conflicts of interest

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CANDOR/COMPETENCY

• FRBP 9011(b) and representations made in filings ▫ Not presented for an improper purpose ▫ Claims, defenses, and legal arguments are either

warranted by existing law or nonfrivolous ▫ Factual allegations and denials are supported by

evidence

• Penalty for violating FRBP 9011(b) ▫ Safe harbor provision ▫ Sanctions

CONFLICTS OF INTEREST: CURRENT CLIENTS

RULE 1.7: “… a lawyer shall not represent a client if there is a “concurrent conflict of interest,” • A concurrent conflict of interest is a situation where either:

▫ (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.

• Notwithstanding the existence of a concurrent conflict of interest, a lawyer may undertake the representation if: ▫ (1) each affected client gives informed consent, confirmed in writing, after full disclosure and

consultation ... [w]hen the lawyer represents multiple clients in a single matter, the consultation shall include an explanation of the common representation and the advantages and risks involved;

▫ (2) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client;

▫ (3) the representation is not prohibited by law; and

▫ (4) 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.

RELATIONSHIPS

GILBERT

Debtor

Asbestos Claimants

Claimants suing

Debtor

Co-Counsel WEITZ

Agreement to

Represent Asbestos

Claimants

Asbestos-Clients

are also Debtor’s

Claimants

Kenesis (claims processor for Debtor)

Gilbert owns 70%

of Kenesis

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CONFLICTS OF INTEREST: CURRENT CLIENTS

• Failure to obtain effective waivers from clients will result in a violation of Rule 1.7 of the Rules of Professional Conduct

▫ In re Congoleum, 426 F.3d 675 (3rd Cir. 2005)

Circuit Court reversed the District Court’s affirmation of the Bankruptcy Court’s approval of the application to employ Gilbert as special counsel.

Law firm failed to obtain effective waivers from asbestos-claimant clients

An “effective waiver” depends upon whether the clients given true informed consent. In Congoleum, the law firm “wore too many hats” such that the Third Circuit could not conclude that the purported waivers constituted “informed, prospective consent.”

• Section 327(a) – “disinterested” requirement ▫ Employment under 327(a) should be disallowed because Gilbert was not

disinterested.

▫ Status as co-counsel with Weitz and ownership interest in Kenesis prevent complete loyalty to the Debtor.

▫ Ordinarily, waivers under 327(a) are not effective.

SHARING FEES

• Law Firm and Financial Consulting Co. had an arrangement where they provided financial counseling and legal representation to debtors.

• President of Consulting Co., an unlicensed attorney, contracted with a licensed attorney to provide legal services on behalf of his clients. ▫ Non-attorney met with debtors, reviewed financial

information, provided forms, prepared bankruptcy petition.

▫ Clients did not meet with the attorney prior to the 341 Meeting of Creditors

• More Specifically, the Non-Attorney:

▫ Discussed Chapter filing options;

▫ Went over procedure for filing bankruptcy;

▫ Reviewed debtors’ applications;

▫ Helped value property for Schedules;

▫ Counseled on exemptions;

▫ Advised on treatment of student loans;

▫ Discussed the effects of reaffirmation of debts.

• The Non-Attorney and the Attorney split fees.

▫ Blurred the lines between attorney and financial counselor.

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• Court ordered disgorgement of fees

▫ “Absent compliance with the law, no professional has an absolute right to their fees.”

▫ The rules of professional conduct prohibit the unauthorized practice of law.

▫ Section 329 allows a bankruptcy court to take unethical conduct into account when determining the reasonableness of legal fees paid by the Debtor.

▫ The unethical conduct of attorney and non-attorney was so egregious that it warranted disgorgement of ALL fees. In re Soulisak, 227 B.R. 77 (E.D.Va 1998).

RULE 1.5 CONTINGENT FEE

• Trustee filed a motion to approve compromise of a

lawsuit and for authorization to pay special counsel

• Contingency fee agreement between special counsel

and Trustee was silent on costs.

GROSS SETTLEMENT $540,000.00

Workman’s Comp Lien $150,000.00

Attorney Fees (33 1/3 %) $179,982.00

Attorney Costs $11,969.31

• WHO HAS TO PAY SPECIAL COUNSEL’S $11,969.31 COSTS?

▫ Options

Out of the gross proceeds prior to paying attorney fees

Out of the attorney’s share of proceeds

Directly out of the debtor’s share of proceeds

▫ NOTE: This was a solvent estate, meaning all claims would be paid in full and excess funds would be returned to the debtors

• ANSWER? Special Counsel

• WHY?

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• RULE 1.5(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 shall be in 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, litigation and other expenses to be deducted from 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…

• RULE 3.3 CANDOR TO THE TRIBUNAL ALSO CAME INTO PLAY

A lawyer shall not knowingly…fail to disclose to the

tribunal legal authority in the controlling jurisdiction known to the lawyer to be directly adverse to the position of the client and not disclosed by opposing counsel[.]

Special Counsel failed to disclose that the cases it relied upon and argued to the Court were based on a repealed version of the Code of Professional Responsibility

RESULT?

• Special Counsel attorney fees in the amount of $179,982 were approved in full satisfaction of the fee agreement.

• Special Counsel was sanctioned $11,969.31.

• In full satisfaction of the sanction, the Trustee’s request for authorization to pay the sum of $11,969.31 to Special Counsel was denied.

In re Moran, 231 B.R. 290 (N.D.Ill 1998).

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FILING DOCUMENTS WITHOUT OBTAINING SIGNATURES FROM CLIENT

• Attorney violated Rule 9011(b)(3) by filing documents without client’s “wet signatures.”

• Attorney violated Rule 9011b)(1) and (2) by forging the Debtor’s electronic signatures on the original Schedules and original SOFA

“[The attorney] is staunchly defiant in continuing to commit misdeeds. Indeed, he has resorted to forgery and perjury. The Court believes that the most effective sanction is one that hits [the attorney] in the wallet. As a result, the Court will impose monetary sanctions.” In re Stomberg, 487 B.R. 775, 822 (S.D. Tex. 2013).

SANCTIONS

Attorney’s fees and costs incurred by client for having another attorney represent her at a Show Cause hearing and for all reasonable costs associated with this client’s attendance and participation at all hearings;

Attorney’s fees and costs incurred by the UST related to the Show Cause hearing;

Attorney’s fees and costs incurred by another client for having another attorney represent her at the Show Cause hearing; also reasonable fees and costs for the lost time that this client spent testifying in court;

$500 fine to Court for Rule 9011(b)(3) violation for failure to obtain wet signatures on original Schedules

$500 fine to Court for Rule 9011(b)(3) violation for failure to get wet signatures on original SOFA

$500 fine to Court for Rule 9011(b)(1) and (2) violations for forging Debtor’s electronic signature on the original Schedules and SOFA

$500 fine for Rule 5005(a)(2) for improper electronic filing of Debtor’s original schedules and SOFA with the Court.

$2,000 fine for violation of Local Rules and Rules of Professional Conduct

TAKE CARE IN THE ADVICE GIVEN TO CLIENTS

• Attorneys are debt relief agencies ▫ Milavetz, 130 S.Ct. 1324

• An attorney cannot counsel a debtor to mislead the bankruptcy court.

▫ Debtor made a $3,000 potential preferential payment to her mother prior to filing.

▫ Attorney counseled (via email) : “short of it not happening, my next best advice is to make sure it cannot be traced and stick with the story. It did not happen.”

• Attorney was ordered to disgorge fees, pay fine to the bankruptcy court, and was referred to the District Court for disciplinary proceedings and an investigation. In re Clink, 2013 WL

1741945 (W.D. Miss. April 23, 2013).

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