Legal and Ethical Standards for the Bankruptcy Attorney

Transcription

1 Legal and Ethical Standards for the Bankruptcy Attorney Wednesday, March 26, :30 6:30 pm 1.0 hour Legal Ethics Credit Presenters: Honorable Judge Laura S. Taylor, Chief Judge San Diego Bankruptcy Court Radmila Fulton, Esq. Law Office of Radmila Fulton. Deborah Dixon, Esq. Partner at Wingert, Grebing, Brubaker & Juskie, LLP Andrew Servais, Esq., Partner at Wingert, Grebing, Brubaker & Juskie, LLP

2 Conflicts of Interest in Representing Debtors Statutes & Rules California Business and Professions Code section 6068 It is the duty of an attorney to do all of the following: * * * (e) (1) To maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client. (2) Notwithstanding paragraph (1), an attorney may, but is not required to, reveal confidential information relating to the representation of a client to the extent that the attorney reasonably believes the disclosure is necessary to prevent a criminal act that the attorney reasonably believes is likely to result in death of, or substantial bodily harm to, an individual. California Evidence Code section 952 Confidential communication between client and lawyer means information transmitted between a client and his or her lawyer in the course of that relationship and in confidence by a means which, so far as the client is aware, discloses the information to no third persons other than those who are present to further the interest of the client in the consultation or those to whom disclosure is reasonably necessary for the transmission of the information or the accomplishment of the purpose for which the lawyer is consulted, and includes a legal opinion formed and the advice given by the lawyer in the course of that relationship. California Rules of Professional Conduct Rule Confidential Information of a Client (A) A member shall not reveal information protected from disclosure by Business and Professions Code section 6068, subdivision (e)(1) without the informed consent of the client, or as provided in paragraph (B) of this rule. (B) A member may, but is not required to, reveal confidential information relating to the representation of a client to the extent that the member reasonably believes the disclosure is necessary to prevent a criminal act that the member reasonably believes is likely to result in death of, or substantial bodily harm to, an individual. (C) Before revealing confidential information to prevent a criminal act as provided in paragraph (B), a member shall, if reasonable under the circumstances: (1) make a good faith effort to persuade the client: (i) not to commit or to continue the criminal act or (ii) to pursue a course of conduct that will prevent the threatened death 1

3 or substantial bodily harm; or do both (i) and (ii); and (2) inform the client, at an appropriate time, of the member's ability or decision to reveal information as provided in paragraph (B). (D) In revealing confidential information as provided in paragraph (B), the member s disclosure must be no more than is necessary to prevent the criminal act, given the information known to the member at the time of the disclosure. (E) A member who does not reveal information permitted by paragraph (B) does not violate this rule. ABA Model Rules of Professional Conduct Rule 1.6 Confidentiality Of Information (a) A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure is permitted by paragraph (b). (b) A lawyer may reveal information relating to the representation of a client to the extent the lawyer reasonably believes necessary: (1) to prevent reasonably certain death or substantial bodily harm; (2) to prevent the client from committing a crime or fraud that is reasonably certain to result in substantial injury to the financial interests or property of another and in furtherance of which the client has used or is using the lawyer's services; (3) to prevent, mitigate or rectify substantial injury to the financial interests or property of another that is reasonably certain to result or has resulted from the client's commission of a crime or fraud in furtherance of which the client has used the lawyer's services; (4) to secure legal advice about the lawyer s compliance with these Rules; (5) to establish a claim or defense on behalf of the lawyer in a controversy between the lawyer and the client, to establish a defense to a criminal charge or civil claim against the lawyer based upon conduct in which the client was involved, or to respond to allegations in any proceeding concerning the lawyer's representation of the client; or (6) to comply with other law or a court order 2

4 California Evidence Code Section 962 Joint-Client Exception to the Attorney-Client Privilege Where two or more clients have retained or consulted a lawyer upon a matter of common interest, none of them, nor the successor in interest of any of them, may claim a privilege under this article as to a communication made in the course of that relationship when such communication is offered in a civil proceeding between one of such clients (or his successor in interest) and another of such clients (or his successor in interest). California Rules of Professional Conduct Rule Avoiding the Representation of Adverse Interests (C) A member shall not, without the informed written consent of each client: (1) Accept representation of more than one client in a matter in which the interests of the clients potentially conflict; or (2) Accept or continue representation of more than one client in a matter in which the interests of the clients actually conflict; or (3) Represent a client in a matter and at the same time in a separate matter accept as a client a person or entity whose interest in the first matter is adverse to the client in the first matter. (D) A member who represents two or more clients shall not enter into an aggregate settlement of the claims of or against the clients without the informed written consent of each client. (E) A member shall not, without the informed written consent of the client or former client, accept employment adverse to the client or former client where, by reason of the representation of the client or former client, the member has obtained confidential information material to the employment. 3

5 Due Diligence Obligations of Debtor s Counsel Relevant Rules, Cases, & Statutes California Rules of Professional Conduct Rule Failing to Act Competently (A) A member shall not intentionally, recklessly, or repeatedly fail to perform legal services with competence. (B) For purposes of this rule, competence in any legal service shall mean to apply the 1) diligence, 2) learning and skill, and 3) mental, emotional, and physical ability reasonably necessary for the performance of such service. (C) If a member does not have sufficient learning and skill when the legal service is undertaken, the member may nonetheless perform such services competently by 1) associating with or, where appropriate, professionally consulting another lawyer reasonably believed to be competent, or 2) by acquiring sufficient learning and skill before performance is required. ABA Model Rules of Professional Conduct Rule 1.1 Competence A lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation. Pre-BAPCPA In re Huerta, 137 B.R. 356, 379 n.8 (Bankr. C.D. Cal 1992) In my view, one of the principal, and perhaps most neglected duties of attorneys who represent debtors, is to assist them with the reasonable inquiries required of them before they advise or instruct debtors to sign their petition, statements and schedules. The client interview prior to the drafting and filing of the petition and schedules is critical to assisting the debtor's good faith. The Court, Trustee and creditors have a right to inquire: Has the attorney, as an officer of the court, owing a duty to the integrity of the system, (1) Explained the requirement of full, complete, accurate and honest disclosure of all information required by debtor to be supplied? (2) Asked probing and pertinent questions designed to elicit full, complete, accurate and honest disclosure from the client? (3) Checked the debtor s responses in their petition, statements and schedules to be sure they are internally and externally consistent? And followed-up if they were not? (4) Demanded of the client full, complete, accurate and honest disclosure of all information required by debtor prior to the attorney s signature being placed on debtor s documents and prior to filing? (5) Sought relief from the Court of the client representation in the event the attorney learns that he or she has been mislead by the debtor? 4

6 Post-BAPCA 2005 Cases Milavetz, Gallop & Milavetz, P.A. v. United States, 559 U.S. 229, 130 S.Ct. 1324, 176 L.Ed.2d 79 (2010) Bankruptcy attorneys are debt relief agencies as defined by 101(12A). In re Robertson, 370 B.R. 804, 809 n. 8 (Bankr. D. Minn 2007) [D]ebtors counsel are to exercise significant care as to the completeness and accuracy of all recitations on their clients schedules, after they have made a factual investigation and legal evaluation that conforms to the standards applicable to any attorney filing a pleading, motion, or other document in a federal court. The content of a debtor s petition and schedules is relied on, and should have the quality to merit that reliance. Statutes - all references are to Title 11 of the United States Code 527(a)(2)(A)...[A]ll information that the assisted person is required to provide with a petition and therafter during a case under this title is required to be complete, accurate, and truthful. 527(a)(2)(B)...[A]ll assets... are required to be completely and accurately disclosed in the documents filed to commence the case (b)(2)(B)...[A]ll information supplied by a debtor in connection with a case under this title is subject to examination by the Attorney General. 527(a)(2)(D)...[I]nformation that an assisted person provides during their case may be audited pursuant to this title, and that failure to provide such information may result in dismissal of the case under this title or other sanction, including a criminal sanction. 342(b)(2)(B)...[A] person who knowingly and fraudulently conceals assets... in connection with a case under this title shall be subject to fine, imprisonment, or both (a)(2) A debt relief agency shall not... counsel or advise any assisted person... to make a statement in a document filed in a case or proceeding under this title, 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. 5

7 527(c) A debt relief agency... shall provide each assisted person... reasonably sufficient information... on how to provide all the information the assisted person is required to provide under this title pursuant to section (b)(4)(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. Other Authorities 4 COLLIER ON BANKRUPTCY [3] (Alan N. Resnick & Henry J. Sommer, 16th ed. 2013) In the preparation of the schedules nothing should be taken for granted. The attorney should carefully investigate the affairs of the debtor and make certain that the attorney has all the information needed to prepare full and complete schedules, for it is the duty of the debtor to present intelligible and true schedules. 6

8 RECENT MALPRACTICE DECISIONS: 1. Smith-Canfield v. Spencer (In re Smith-Canfield), 2011 Bankr. LEXIS 700, 1 (Bankr. D. Or. 2011): Defendant was an attorney and real estate broker. The debtor (plaintiff) contacted defendant and obtained advice about filing bankruptcy, and the attorney advised her to purchase a house so she could claim a homestead exemption and reduce the amount of her disposable income for Chapter 13 plan purposes. Defendant found a house for the debtor but did not tell the debtor that a person who held a deed of trust on the house had asked him for advice on foreclosing on the deed of trust, and the attorney arranged to have the person who held the deed of trust provide financing for the debtor. An inspection of the property revealed a collapsed retaining wall that was repaired by the seller prior to sale. Once the sale closed, Defendant received his commission and debtor later filed for Chapter 13 relief. Her Chapter 13 plan was confirmed without incident and Defendant s attorney s fees were allowed. Shortly thereafter, Debtor learned that a retaining wall on the property was not properly repaired by the previous owner, and the City sought to issue monthly fines until the wall was rebuilt. Debtor, in turn, brought a claim in the bankruptcy court for disgorgement of Defendant s fees, claiming that he committed malpractice and breached his fiduciary duties as both an attorney and real estate broker. The court found that it had jurisdiction under 28 U.S.C. 157 to hear the debtor's claims, that the attorney violated Or. Rev. Stat and Or. R. Prof. Conduct 1.7(a) and 1.8 when he provided legal advice to the debtor and acted as her broker without explaining his conflict of interest and obtaining a written waiver from the debtor, and that the debtor was entitled to recover damages and the fee she paid the attorney for legal advice under 11 U.S.C. 329(b). 2. Redmond v. Kutak Rock, LLP (In re Brooke Corp.), 467 B.R. 513, 516 (Bankr. D. Kan. 2012): Counsel provided legal services relating to three categories of financial transactions: (1) acting as securities counsel for a public stock offering; (2) advising the debtor as to the propriety of the declaration of dividends on 22 occasions; and (3) acting as securities counsel for three separate private stock offerings. The trustee alleged that counsel knew or should have known that the debtor was insolvent but failed to advise the debtor of its insolvency and the impropriety of the transactions. Specifically, the Trustee alleged that, given counsel's due diligence review of debtor's financials in connection with its SEC filings, counsel knew or should have known that debtor was insolvent as early as 2003 (5 years before its bankruptcy filing) but failed to advise debtor of its insolvency, the impropriety of the public offering, or of the unlawful payment of dividends while insolvent. On a motion to dismiss, the court held that the legal malpractice count alleged a claim on which relief could be granted because the trustee presented detailed factual allegations supporting the proposition that counsel was hired to perform duties in the three stated areas, each of which related to the obligation to know whether the debtor was solvent. While the court did not believe defendant had an obligation to independently determine whether debtor was solvent or insolvent 7

9 from an accounting standpoint, defendant should have seen, from a legal standpoint, that debtor improperly recognized a franchise fee revenue and was therefore insolvent. As for the aiding and abetting claim, the court held that the trustee's detailed factual allegations supported the allegation that the debtor was insolvent when dividends were paid, in violation of Kansas law, and that it was plausible that counsel knowingly gave substantial assistance to the board. 3. Seaver v. Frundt (In re Hansel), 2012 Bankr. LEXIS 3786, 1 (Bankr. D. Minn. 2012): Debtor and the bankruptcy trustee jointly filed a suit for malpractice against the debtor's prior counsel. Defendants allegedly misadvised debtor on several key issues, which was claimed by debtor to have resulted in the revocation of her discharge. Specifically, they alleged the attorney defendant failed to schedule and disclose to the trustee the debtor's attempts to nullify the only mortgage encumbering her homestead and had advised debtor that she could spend her income tax return, despite the trustee's directive to the contrary. Though debtor first argued that the malpractice claim did not belong to the estate, debtor and the trustee later agreed to jointly sue defendants and to share any award. Defendants sought dismissal on various grounds. Believed to lack the ability to enter final judgment, the court recommended dismissal to the district court based on the following. First, the trustee lacked standing to prosecute the claim because any damage to debtor could have been remedied by defendant's corrective action during the course of the case, any malpractice claim only accrued after the Chapter 7 filing and thus was not included in debtor's "estate." Second, despite debtor having standing to pursue the claim, any prosecution of the claim by debtor was barred by the doctrine of in pari delicto, and debtor was also bound by findings in the trustee's earlier suit to revoke her discharge that her conduct had been unreasonable. 4. In re Lupo, 2012 Bankr. LEXIS 626, 1 (Bankr. D. Mass. 2012): Debtor was represented by a lawyer in filing the Chapter 11, but conflicts resulted in his withdrawal. The U.S. Trustee then moved to convert the case to a Chapter 7 or to appoint a trustee based on substantial non-exempt assets available for liquidation, debtor s failure to formulate a feasible plan in the six months the case had been pending, and counsel s motion to withdraw. Debtor then hired the law firm of Looney & Grossman ( L&G ), who tried to draft a reorganization plan and asked for an extension of time to file a disclosure statement. As creditors became more alarmed by the condition of debtor s real estate, the court appointed a Chapter 11 trustee but ultimately the court converted the case to a Chapter 7. Debtor s relationship with the L&G apparently ended a month later. On L&G s fee application, Debtor opposed, claiming that L&G s failure to file a disclosure statement had resulted in the conversion and that a malpractice claim should be filed. The court granted the fee application and denied any relief to debtor. After an evidentiary hearing the court found that the time spent and hourly rates charged by L&G were reasonable, the court held that debtor s claim that L&G caused the conversion to Chapter 7 was nonsensical, that there was no basis for debtor s proposed malpractice claim, and that it was the trustee s withdrawal of support, not the absence of a disclosure statement, that precipitated the conversion. 8

10 Honorable Judge Laura S. Taylor: Speaker Biographies Laura Taylor completed her undergraduate degree at the University of North Carolina at Chapel Hill and received her J.D. at Duke. She has served as a United States Bankruptcy Judge for the Southern District of California since January Prior to her judicial appointment she was a partner at Sheppard, Mullin, Richter & Hampton LLP, practicing in areas of commercial law and bankruptcy. She is the Chief Judge for the Southern District and currently serves on the Ninth Circuit Bankruptcy Appellate Panel. 9

11 Radmila Fulton: Radmila has been a San Diego bankruptcy attorney since 1982 and represent debtors and creditors in consumer and business bankruptcy cases. She is certified as a specialist in bankruptcy by the State Bar of California and has received the highest rating (AV) the Martindale-Hubbell organization bestows on attorneys for their professional knowledge and ability, as well as ethical standards in the conduct and practice of the law. Education University of California, Los Angeles, 1976 California Western School of Law, J.D. cum laude 1979 Admitted to State Bar of California, November 1979 Certified Specialist, Bankruptcy Awards & Honors San Diego Super Lawyers - Bankruptcy ( ); San Diego Magazine Top Lawyers (2014) Jack Stern Volunteer of the Year, JFS (2011) Mediator of the Year, United States Bankruptcy Court, Southern District of California ( ) American Jurisprudence Award, Uniform Commercial Code Sales Professional Memberships National Association of Consumer Bankruptcy Attorneys American Bankruptcy Institute California Bankruptcy Forum Lawyers Club of San Diego Committee Memberships Legal Ethics Committee, San Diego County Bar Association ( current): Appointed by the San Diego County Bar President. Committee educates and updates members through education programs, written articles, and legal opinions regarding ethics-related issues and maintains the Ethics Hotline, a confidential telephone service for attorneys to assist them in identifying and analyzing their professional responsibilities. Federal Court Discipline Committee ( current): Appointed by the Chief Judge, United States District Court, Southern District of California to assist the Court in reviewing confidential referrals of attorneys by a federal judge or magistrate and recommending whether an attorney's conduct warrants discipline or other sanctions. Lawyer Representative, Ninth Circuit Judicial Conference ( ): Appointed by the Chief Judge, United States District Court, Southern District of California to serve as a liaison between attorneys and the Court and to assist in improving the administration of justice. Insolvency Law Committee of the Business Law Section, State Bar of California (Member ; Programs Committee Liaison, ): Appointed by the Board of Governors, State Bar of California. Committee educates and updates our membership regarding legal and practice developments in the Ninth Circuit. Personal and Small Business Bankruptcy Advisory Commission (Member ; Chair, ): Appointed by the Board of Governors, State Bar of California. Committee writes and grades the specialty Bar examination, verifies that applicants meet the certification requirements, oversees the independent inquiry and review process, and approves educational programs that qualify for specialty credit 10

12 Deborah Dixon: Deborah devotes her practice to litigation in a diverse context. Her clients include professional liability defendants, corporations, limited liability companies, developers and individuals involved in business, employment or contract related matters. Deborah is active in the community, serving as a member of the Board of Directors for Lawyers Club of San Diego, the 2013 Secretary of San Diego Defense Lawyers, a Barrister with the Inns of Court, Welsh Chapter, and the Vice President of the Alumni Board at California Western School of Law, where she is also an Adjunct Professor of Trial Skills. Education: Juris Doctor in 2007 from California Western School of Law Member of the National Moot Court and Mock Trial teams, earning the award of First Place Oral Advocate in a National Competition President of the California Western s Women s Law Caucus Executive Member of the Moot Court Honors Board Recipient of the American Jurisprudence Award in Defamation & The Right to Privacy Bachelor of Arts in Law & Society in 2003 from the University of California at Santa Barbara Professional Memberships and Affiliations: Lawyers Club of San Diego, Board of Directors; Co-Chair of Membership (2014); Co- Chair of the Annual Dinner (2013); Co-Chair of the Golf Committee (2012) San Diego Defense Lawyers, Board of Directors Executive Committee (2013) California Western School of Law Alumni Board, Vice President Barrister, American Inns of Court, Louis M. Welsh Chapter San Diego County Bar Association, Member, New Lawyer s Division State Bar of California Lecturer: Adjunct Professor at California Western School of Law Coach for Trial Skills Training for Distinguished Advocates at California Western School of Law Guest Lecturer for San Diego State University Summer American Legal System course 11

13 Andrew Servais: Andrew defends and prosecutes civil claims on behalf of individuals, professionals and businesses. His practice focuses on representing attorneys in malpractice, malicious prosecution and defamation actions. Andrew has defended San Diego and Southern California family law practitioners, trust and estate planning practitioners, probate and trust litigation practitioners, general civil litigation attorneys and litigated several First Amendment cases. Andrew has argued before the 1st and 2nd Divisions of the Fourth District Court of Appeal. Prior to entering law school, Andrew worked as an aide to former Congressman James Gibbons (NV) in Washington, D.C. Education: Juris Doctor, cum laude, in 2005 from California Western School of Law Roger Traynor Moot Court Team while at California Western School of Law Received American Jurisprudence Awards in Constitutional Law, Criminal Procedure and Aging Law and Public Policy (scholarly writing seminar) Extern for U. S. District Judge Howard McKibben (Dist. N.V.) and U. S. Magistrate Judge James Stiven (Ret.) and Southern District U.S. Attorney s Office (White Collar Division) Bachelor of Arts in English at the University of San Diego in 2000 Professional Memberships and Affiliations: State Bar of California San Diego County Bar Association, Litigation Section member Member of San Diego Bar Association Legal Ethics Committee San Diego Defense Lawyers Association Lecturer: Annual Fair Housing Law & Litigation Conference: Attorney Ethical Considerations in Fair Housing Litigation Continuing Legal Education - Ethical and Risk Management Issues Implicated by Substance Abuse County Counsel Civil Law and Litigation Conference: Cybersleuthing, Predatory Friending and the New Face of Legal Practice Office of the Public Defendant: Preservation and use of Social Media in Litigation Recent Publications: July 1, 2013 Ethics in Brief Some Statutes May Allow for Fee Recovery Without a Retention Agreement; To Avoid Litigating the Issue, Attorneys Should, at a Minimum, Advise All Interested Parties of Their Entitlement July 29, 2013 Ethics in Brief Once A Witness is Designated to Testify or Testifies, Information Once Privileged May No Longer Be Privileged September 23, 2013 Ethics in Brief titled Where an Insurer or Employer Offers to Pay Client s Fees, But With a Different Attorney, Original Attorney Must Carefully Advise as to Consequences of Rejecting the Offer 12