Legal Ethics for Counsel Representing Debtor and Creditors Michael Downey Downey Law Group LLC May 2017
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LegalEthicsforCounselRepresentingDebtorandCreditors
MichaelDowneyDowneyLawGroupLLC
May2017
WhenaLawyer?
2
Scenario1• LawFirmcollectssignaturepagesforguaranteesoncorporate
loan• LawFirmattachessignaturepagestowrongdraftof
guarantee– Wrongdrafttriggersliabilityonguaranteeifanyguarantordeclares
bankruptcy;correctdraftdoesnot
• Guarantor#1filesforbankruptcy• Guarantor#2facesliabilityinmillionsandsuesLawFirmfor
malpractice
Ivanovichv.McKennaLong (Ill.App.1st Dist.2017)
3
Plaintifffurtherassertsthatescrowservicesarenotlegalservices,citingtothecommentstoRule1.15oftheIllinoisRulesofProfessionalConduct.SeeIll.Sup.Ct.R.Prof'lConduct1.15cmt.5(eff.July1,2015).Commentfiveprovides,"TheobligationsofalawyerunderthisRuleareindependentofthosearisingfromactivityotherthanrenderinglegalservices.Forexample,alawyerwhoservesonlyasanescrowagentisgovernedbytheapplicablelawrelatingtofiduciarieseventhoughthelawyerdoesnotrenderlegalservicesinthetransactionandisnotgovernedbythisRule." Id.AswehavealreadydeterminedthatMcKenna'sallegedbreacharoseoutoftheperformanceofprofessionalservices,wefindthisprovisionisnotapplicable.
Weconcludesection13-214.3appliestoallclaimsthatarisefromtheprovisionofprofessionallegalservicesandplaintiff'sallegationsrelatetoMcKennainitsprofessionalcapacity.735ILCS5/13-214.3(West2014....Accordingly,thecourtdidnoterrinfindingthatplaintiff'sclaimsagainsttheattorneydefendantswereuntimely.
4
WhoIstheClient?
5
Scenario2
• HusbandandWifecontactLawyeraboutfilingforbankruptcy– OnespouseownsBadBusiness,LLC,whichhascausedHusbandandWifetobeinsolvent
• SeniorandJuniorLendercontactLawFirmaboutcollectingon$50Mlineofcredit
6
7
FormationofAttorney-ClientRelationship(Restatement)
[A]personmanifests toalawyertheperson's intentthatthelawyerprovidelegalservices fortheperson;andeither
a) thelawyermanifeststothepersonconsent todoso;or
b)thelawyerfailstomanifestlackofconsent todoso,andthelawyerknowsorreasonablyshouldknowthatthepersonreasonablyrelies onthelawyertoprovidetheservices;
Restatement(Third)LawGoverningLawyers§ 14
Scenario3• DebtorborrowsmoneyfromBank• LoandocumentsincludedocumentempoweringAttorneyfor
Banktosignconfessionofjudgmentifdebtordefaults• Debtordefaults• AttorneyforBanksignsandfilesconfessionofjudgment
againstDebtor• DebtorsuesAttorneyforlegalmalpractice
BayGroupHealthCareLLCv.GinsbergJacobs(NDIll.2017)
8
ConflictsofInterest
9
Scenario4
• Creditor1approachesLawFirmregardingcollectingdebtfromDebtor
• Creditor2approaches(same)LawFirmregardingcollectingdebtfrom(same)Debtor
• DoesLawFirmhaveaconflict?
10
JointRepresentationConflicts:MissouriRule4-1.7(a)
Exceptasprovidedinparagraph(b),alawyershallnotrepresentaclientiftherepresentationinvolvesaconcurrentconflictofinterest.Aconcurrentconflictofinterestexistsif:(1) …(2) thereisasignificantriskthattherepresentationofoneor
moreclientswillbemateriallylimitedbythelawyer'sresponsibilitiestoanotherclient,aformerclientorathirdpersonorbyapersonalinterestofthelawyer.
11
ConflictWaiver
• Circumstances• Risks
– To"zeal"– To"confidences"
• Alternatives
12
Scenario4(again)
• Creditor1approachesLawFirmregardingcollectingdebtfromDebtor
• Creditor2approaches(same)LawFirmregardingcollectingdebtfrom(same)Debtor
• DoesLawFirmhaveaconflict?
13
ConflictforLawyer
ConflictedLawyerColleague ColleagueColleague
• DoesConflictaffectLawyer?
Rule4-1.7,4- 1.8,4- 1.9,
4-1.11,4-1.12,4-1.18
14
ImputationofConflicts–ConflictforFirm
ConflictedLawyerColleague ColleagueColleague Colleague
• DoesConflictedLawyer'sconflictaffectLawyer'scolleagues?– Rule1.10(or1.8(k)or1.11or1.12)
15
NoImputationWithScreen
ConflictedLawyerColleague Colleague
EthicalScreen EthicalScreen
16
§327(a)– Employmentofprofessionalpersons
Exceptasotherwiseprovidedinthissection,thetrustee,withthecourt'sapproval,mayemployoneormoreattorneys,accountants,appraisers,auctioneers,orotherprofessionalpersons,thatdonotholdorrepresentaninterestadversetotheestate,andthataredisinterestedpersons,torepresentorassistthetrusteeincarryingoutthetrustee'sdutiesunderthistitle.
17
§328(c)– Limitationsoncompensationofprofessionalpersons
Exceptasprovidedinsection327(c),327(e),or1107(b)ofthistitle,thecourtmaydenyallowanceofcompensationforservicesandreimbursementofexpensesofaprofessionalpersonemployedundersection327or1103ofthistitleif,atanytimeduringsuchprofessionalperson'semploymentundersection327or1103ofthistitle,suchprofessionalpersonisnotadisinterestedperson,orrepresentsorholdsaninterestadversetotheinterestoftheestatewithrespecttothematteronwhichsuchprofessionalpersonisemployed.
18
TrustAccountingIssues
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Scenario6
• LawyeragreestofileChapter7bankruptcyforClient
• ClientpaysLawyer$1200fixedfee• WhereshouldLawyerputthefee?
20
21
FirmOperatingAccount
TrustAccount
EarnedFeesAdvancesforfees(Retainers)and"OtherPeople's
Money"
BasicRuleonHandlingFundsPaidforLegalServices
22
WorkPayment Payment
TrustAccount
Operating
Account
Earned
FlatFeesinAdvance:MissouriFormalOpinion128(2010)
• Webelievethatallflatfeesmustbedepositedintoalawyertrustaccountandpromptlyremovedwhenactuallyearned,similartopromptremovalofearnedhourlyfees.
• Flatfeescouldberemovedbaseduponreachingaparticularstageofacaseorbasedonsomeotherreasonablecriteria,dependingonthenatureandcircumstancesoftherepresentation.
23
ReceivingFundsIntoTrust
MethodofPayment Funds"good"(received)
RiskofUnilateralCancelationorWithdrawal
Amountreceived
Cash Immediate None Amountpaid
Check
Minimumofseveraldaysanduptotwoweeks,*presumingnoattemptto"stop
payment"
None
(afterfundsarereceived)
Amountpaid
CreditCard SeveraldaysConsiderable– oftenforsixmonths(or
more)
Amountpaidlessfees
ElectronicFundTransfer Immediate None Amountpaid
DisbursingFundsfromTrust• Permitted
– Checkwithnamedpayee– Electronictransfertonamed
payee
• Notpermitted– counterchecks– cash-backtransactions
fromdeposits– ATMcardwithdrawals– debitcardtransactions
DisbursingTrustFundstoLawyer
Disbursedwhen"earned" – if fundsareinaccount(good)• Earnedperagreementwithclient
"Swept" fromaccount• Allfeesearnedshouldbe"swept" inonetransactionatone
time
26
"Three-Way" Reconciliation
27
RequiredTrustAccountDocumentation(Missouri)
(1) receiptanddisbursementjournals
(2) client-specificledgers(3) feeagreementsandsimilar
documents(4) accountingstatements
showingdisbursementsmade
(5) billsandexpensessenttoclients
(6) disbursementrecords(7) check-bookregistersand
bankstatementsortheequivalents
(8) electronictransferrecords(9) accountreconciliations(10)credit-cardtransaction
information
28
Scenario7
• LawyeragreestofileChapter7bankruptcyforClient
• ClientpaysLawyer“non-refundable”$1200fixedfee
• Beforefiling,Clientterminatesrepresentation• HowmuchcanLawyerkeep?
29
"Non-Refundable" FeesNotAllowed
MissouriFormalOpinion128
"Inthesesituationsandothers,thedescriptionofthefeeas'nonrefundable' ismisleading.Rule4-1.16(d)requiresanyfeethathasnotbeenearnedtoberefundedattheendoftherepresentation." MOFormalOpinion128(2010)
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"Intake" Fee• Reasonablefeechargedwhen"takingin" amatter
• Reflectslostopportunitytorepresentanotherparty
• Earnedupon"intake"
31
Scenario8
• LawyeragreestofileChapter7bankruptcyforClient• ClientpaysLawyer$1200fixedfee• Beforefiling,Clientterminatesrepresentation• LawyerbelievesLawyershouldkeep$600;Clientdemandsreturnofentire$1200payment
• WhatdoesLawyerdowith$1200?
32
Rule4-1.15(e)
Wheninthecourseofrepresentationalawyerisinpossessionofpropertyinwhichtwoormorepersons(oneofwhommaybethelawyer)claiminterests,thelawyershallkeepthepropertyseparateuntilthedisputeisresolved.Thelawyershallpromptlydistributeallportionsofthepropertyastowhichtheinterestsarenotindispute.Lawyersshallcooperateasnecessarytoenabledistributionoffundsthatarenotindispute.
33
Scenario9
• LawyerforCompanylearnsthatEmployeeforCreditorisviolatingFairDebtCollectionPracticesAct
• WhomshouldLawyertell?
• DoesitmatterthatEmployeeisCEOand51%ownersofCompany?
34
35
ReportingUp(andOut?)MORule4-1.13(c) If,despitethe
lawyer'seffortsinaccordancewithRule4-1.13(b),thehighestauthoritythatcanactonbehalfoftheorganizationinsistsuponaction,orarefusaltoact,thatisclearlyaviolationoflawandislikelytoresultinsubstantialinjurytotheorganization,thelawyermayresigninaccordancewithRule4-1.16.
Up
Out
36
ReportingUpandOut– IllinoisIllinoisRule1.13(c) Exceptasprovidedinparagraph(d),if(1) despitethelawyer'seffortsinaccordance
withparagraph(b)thehighestauthoritythatcanactonbehalfoftheorganizationinsistsuponorfailstoaddressinatimelyandappropriatemanneranactionorarefusaltoact,thatisclearlyacrimeorfraud,and
(2) thelawyerreasonablybelievesthatthecrimeorfraudisreasonablycertaintoresultinsubstantialinjurytotheorganization,
thenthelawyermayrevealinformationrelatingtotherepresentationwhetherornotRule1.6permitssuchdisclosure,butonlyifandtotheextentthelawyerreasonablybelievesnecessarytopreventsubstantialinjurytotheorganization.
Up
Out
TerminatingRepresentation– Rule4-1.16(a) ExceptasstatedinRule4-1.16(c),alawyershallnotrepresenta
clientor,whererepresentationhascommenced,shallwithdrawfromtherepresentationofaclientif:(1) therepresentationwillresultinviolationoftherulesofprofessional
conductorotherlaw;(2) thelawyer'sphysicalormentalconditionmateriallyimpairsthe
lawyer'sabilitytorepresenttheclient;or(3) thelawyerisdischarged.
(b) ExceptasstatedinRule4-1.16(c),alawyermaywithdrawfromrepresentingaclientif:(1) withdrawalcanbeaccomplishedwithoutmaterialadverseeffecton
theinterestsoftheclient;...(7)othergoodcauseforwithdrawalexists.
37
Client-RelatedInformation
38
Scenario11
• LawyerrepresentsClientincase• OpponentseeksdiscoveryofLawyer'sbills
39
Confidentiality
Rule4-1.6(a)Alawyershallnotrevealinformationrelatingtotherepresentationofaclient unlesstheclientgivesinformedconsent,thedisclosureisimpliedlyauthorizedinordertocarryouttherepresentationorthedisclosureispermittedbyparagraph(b).
"Informationrelatingtotherepresentationofaclient..." Rule4-1.6
Client
Court Filings
Real Estate Records
Newspaper
Depositions
Pleadings
Opposing Party
Lawyer
Attorney-ClientPrivilege
Client Lawyer
Renditionof
LegalServices
42
Scenario12
• LawyerrepresentsbusinesspartnersAandBincase
• AseeksdiscoveryofLawyer'sbillswhileinlitigationwithBor
• OpponentseeksdiscoveryofLawyer'sbillswhileinlitigationwithAandB
43
JointRepresentation
Client1 Client2
Lawyer
44
DeBoldv.Case (8th Cir.BAP2005)
"Whentwoormorepersons,eachhavinganinterestinsomeproblem,jointlyconsultanattorney,theirconfidentialcommunicationswiththeattorney,thoughknowntoeachother,willofcoursebeprivilegedinacontroversyofeitherorbothoftheclientswiththeoutsideworld,thatis,withpartiesclaimingadverselytobothoreitherofthosewithintheoriginalcharmedcircle."
45
CandortoaTribunal
46
Scenario13
• LawyerrepresentsClientinfilingforbankruptcy
• Client'sschedulescontainmisstatements
47
MissouriRule4-3.3(a) Alawyershallnotknowingly:
(1) makeafalsestatementoffactorlawtoatribunalorfailtocorrectafalsestatementofmaterialfactorlawpreviouslymadetothetribunalbythelawyer;
(2) failtodisclosetothetribunallegalauthorityinthecontrollingjurisdictionknowntothelawyertobedirectlyadversetothepositionoftheclientandnotdisclosedbyopposingcounsel;or
(3) offerevidencethatthelawyerknowstobefalse.Ifalawyer,thelawyer'sclient,orawitnesscalledbythelawyerhasofferedmaterialevidenceandthelawyercomestoknowofitsfalsity,thelawyershalltakereasonableremedialmeasures,including,ifnecessary,disclosuretothetribunal.Alawyermayrefusetoofferevidence,otherthanthetestimonyofadefendantinacriminalmatter,thatthelawyerreasonablybelievesisfalse.
48
Rule4-3.3(b)and(c)(b) Alawyerwhorepresentsaclientinanadjudicative
proceedingandwhoknowsthatapersonintendstoengage,isengaging,orhasengagedincriminalorfraudulentconductrelatedtotheproceedingshalltakereasonableremedialmeasures,including,ifnecessary,disclosuretothetribunal.
(c) ThedutiesstatedinRule4-3.3(a)and(b)continuetotheconclusionoftheproceeding andapplyevenifcompliancerequiresdisclosureofinformationotherwiseprotectedbyRule4-1.6.
49
ConcealmentofAssets– 18USC§ 152Apersonwho--(1)knowinglyandfraudulentlyconceals...anypropertybelongingtotheestateofadebtor;(2)knowinglyandfraudulentlymakesafalseoathoraccountinorinrelationtoanycaseundertitle11;(3)knowinglyandfraudulentlymakesafalsedeclaration,certificate,verification,orstatementunderpenaltyofperjuryaspermittedundersection1746oftitle28,inorinrelationtoanycaseundertitle11;(4)knowinglyandfraudulentlypresentsanyfalseclaimforproofagainsttheestateofadebtor,orusesanysuchclaiminanycaseundertitle11,inapersonalcapacityorasorthroughanagent,proxy,orattorney;(5)knowinglyandfraudulentlyreceivesanymaterialamountofpropertyfromadebtorafterthefilingofacaseundertitle11,withintenttodefeattheprovisionsoftitle11;...(9)afterthefilingofacaseundertitle11,knowinglyandfraudulentlywithholdsfromacustodian,trustee,marshal,orotherofficerofthecourtoraUnitedStatesTrusteeentitledtoitspossession,anyrecordedinformation(includingbooks,documents,records,andpapers)relatingtothepropertyorfinancialaffairsofadebtor,shallbefinedunderthistitle,imprisonednotmorethan5years,orboth
50
BankruptcyFraud– § 18USC157Apersonwho,havingdevisedorintendingtodeviseaschemeorartificetodefraudandforthepurposeofexecutingorconcealingsuchaschemeorartificeorattemptingtodoso-
(1) filesapetitionundertitle11,includingafraudulentinvoluntarypetitionundersection303ofsuchtitle;
(2) filesadocumentinaproceedingundertitle11;or
(3) makesafalseorfraudulentrepresentation,claim,orpromiseconcerningorinrelationtoaproceedingundertitle11,atanytimebeforeorafterthefilingofthepetition,orinrelationtoaproceedingfalselyassertedtobependingundersuchtitle,
shallbefinedunderthistitle,imprisonednotmorethan5years,orboth.
51
KeepingClientInformed– Rule4-1.4(a)
Alawyershall:(1) keeptheclientreasonablyinformedaboutthe
statusofthematter;(2) promptlycomplywithreasonablerequestsfor
information;and(3) consultwiththeclientaboutanyrelevantlimitation
onthelawyer'sconductwhenthelawyerknowstheclientexpectsassistancenotpermittedbytheRulesofProfessionalConductorotherlaw.
52
AssistingCriminalConduct– Rule4-1.2(f)
Alawyershallnotcounselaclienttoengage,orassistaclient,inconductthatthelawyerknowsiscriminalorfraudulent,butalawyermaydiscussthelegalconsequencesofanyproposedcourseofconductwithaclientandmaycounselorassistaclienttomakeagoodfaithefforttodeterminethevalidity,scope,meaningorapplicationofthelaw.
53
HowDoYouCommunicateWithThirdParties?
54
Scenario14
• LawyercontactsDebtortonegotiatepossiblesettlement
• WhatarethelimitsonLawyer'scommunications?
55
Candor– MissouriRule4-4.1
Inthecourseofrepresentingaclientalawyershallnotknowingly:(a) makeafalsestatementofmaterialfactorlaw
toathirdperson;or(b) failtodiscloseamaterialfactwhendisclosure
isnecessarytoavoidassistingacriminalorfraudulentactbyaclient,unlessdisclosureisprohibitedbyRule4-1.6.
56
UnrepresentedPersons– Rule4-4.3
• Indealingonbehalfofaclientwithapersonwhoisnotrepresentedbycounsel,alawyershallnotstateorimplythatthelawyerisdisinterested.
• Whenthelawyerknowsorreasonablyshouldknowthattheunrepresentedpersonmisunderstandsthelawyer'sroleinthematter,thelawyershallmakereasonableeffortstocorrectthemisunderstanding.
• Thelawyershallnotgivelegaladvicetoanunrepresentedperson,otherthantheadvicetosecurecounsel,ifthelawyerknowsorreasonablyshouldknowthattheinterestsofsuchapersonareorhaveareasonablepossibilityofbeinginconflictwiththeinterestsoftheclient.
57
RespectingtheRightsofThirdPersons:MissouriRule4-4.4
(a) Inrepresentingaclient,alawyershallnotusemeansthathavenosubstantialpurposeotherthantoembarrass,delay,orburdenathirdperson,orusemethodsofobtainingevidencethatviolatethelegalrightsofsuchaperson.
(b) Alawyerwhoreceivesadocumentorelectronicallystoredinformationrelatingtotherepresentationofthelawyer'sclientandknowsorreasonablyshouldknowthatthedocumentorelectronicallystoredinformationwasinadvertentlysentshallpromptlynotifythesender.
58
Scenario15
• LawyercontactsDebtortonegotiatepossiblesettlement
• DebtortellsLawyerthatDebtorhashiredcounsel
• WhatarethelimitsonLawyer'scommunications?
59
Anti-ContactRule:MissouriRule4-4.2
Inrepresentingaclient,alawyershallnotcommunicateaboutthesubjectoftherepresentationwithapersonthelawyerknowstoberepresentedbyanotherlawyerinthematter,unlessthelawyerhastheconsentoftheotherlawyerorisauthorizedtodosobylaworacourtorder.
60
Anti-ContactRule– Rule4-4.2• Inrepresentingaclient,• alawyershallnotcommunicateaboutthesubjectoftherepresentation
• withapersonthelawyerknowstoberepresentedbyanotherlawyerinthematter,
• unlessthelawyerhastheconsentoftheotherlawyer orisauthorizedtodosobylaworacourtorder.
61
LawyerAsWitness
62
Scenario16
• Creditorfilesclaimlate• CreditorassertsLawyertriedtofiletheclaimtimely,butcouldnot
• Lawyerisexpectedtotestifyaboutlatefiling• DebtorseekstodisqualifyLawyer
Goldenv.Gibrick (N.D.Bankr.January2017)
63
MissouriRule4-3.7(a) Alawyershallnotactasadvocateatatrialinwhich
thelawyerislikelytobeanecessarywitnessunless:(1) thetestimonyrelatestoanuncontestedissue;(2) thetestimonyrelatestothenatureandvalueoflegal
servicesrenderedinthecase;or(3) disqualificationofthelawyerwouldworksubstantial
hardshipontheclient.(b) Alawyermayactasadvocateinatrialinwhich
anotherlawyerinthelawyer'sfirmislikelytobecalledasawitnessunlessprecludedfromdoingsobyRule4-1.7orRule4-1.9.
64
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