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But It Says on My Card... Unauthorized-practice-of-law Issues in Bankruptcy

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As all bankruptcy attorneys know, ethical issues arise early and often in any representation. Questions of compliance with the "disinterestedness" standard of 11 U.S.C. §3271 in order to get hired, issues of your fiduciary duty as counsel for a chapter 11 debtor,2 and the detailed and complex fee-application requirements of the Bankruptcy Code have confronted the bankruptcy bar since the passage of the Bankruptcy Act.3 However, new ethical and legal issues relating to changes in how bankruptcy law is practiced are arising.

Over the past several years, the practice of bankruptcy law, especially chapter 11, has become increasingly national in scope.4 More and more attorneys are having to travel to distant jurisdictions to advise or represent their clients in bankruptcy cases and other debtor/creditor matters. With this increased need for practicing law in numerous jurisdictions ("multi-state practice"), bankruptcy attorneys are encountering issues relating to the unauthorized practice of law.5

What Do You Mean, I Am Not an Attorney?

In April 2000, the U.S. Bankruptcy Court for the Western District of Michigan issued its decision in In re Desilets,6 which brought the issue of the unauthorized practice of law to center stage. The facts in Desilets are fairly straightforward. In 1992, Allan Rittenhouse was admitted to practice law by the state of Texas. In December 1992, he moved to Michigan. Rittenhouse applied for admission to both the Wisconsin and Michigan State Bars, but his applications were denied. Rittenhouse, however, was admitted to practice law in the U.S. District Court for the Western District of Michigan. From 1995-99, Rittenhouse generally limited his practice to bankruptcy matters.7 In 1995, the Michigan State Bar advised Rittenhouse that he could not "hold himself out as an attorney in Michigan" by virtue of his admission to the U.S. District Court for the Western District of Michigan. This did not deter Rittenhouse,8 and he continued to practice bankruptcy law without further action by the Michigan Bar until December 1999, when the Michigan Bar filed an action against Rittenhouse to enjoin him from unauthorized practice of law.9 Rittenhouse's problems in the bankruptcy court began in October 1999, when a creditor moved to suspend Rittenhouse from practice before the bankruptcy court.10 Rittenhouse contested the motion, arguing that he was permitted to practice bankruptcy law by virtue of his admission to the bar of the U.S. District Court for the Western District of Michigan.

The initial question the bankruptcy court considered was whether Rittenhouse was "authorized under applicable law to practice law"11 and was therefore an attorney under the Bankruptcy Code. As Rittenhouse was not licensed to practice law under the law of the state of Michigan, the only "applicable law" that could authorize Rittenhouse to practice bankruptcy law was his admission to the Bar of the Western District of Michigan. After reviewing the issue, the bankruptcy court held that Rittenhouse's admission to the Bar of the District Court only allowed him to practice in the bankruptcy court, but did not make him an attorney for purposes of the Bankruptcy Code.12 The bankruptcy court found that:

Because the local rules governing the representation of parties must be presumed to be consistent with the national rules, and the national rules cannot enlarge or modify any substantive right, this court will not construe the local rules as authorizing Rittenhouse to practice law generally in the state of Michigan.13

The Desilets court went to hold that Rittenhouse was not an attorney and could not be compensated under the provisions of the Bankruptcy Code.14 The court further concluded that Rittenhouse's actions constituted the unauthorized practice of law, and that the appropriate remedy for this violation of Michigan law was disallowance and disgorgement of all fees in the bankruptcy cases where the motion to suspend Rittenhouse was filed.15

In Fn. 18 of Desilets, the bankruptcy court, realizing the impact of its opinion, stated:

Sometimes decisions may cause unintended consequences. The undersigned judge has considered the possible effect of this opinion on out-of-state bankruptcy practitioners who appear on a temporary basis to handle a discrete matter. Because Michigan's proscription against the unauthorized practice of law "does not apply to a person who is duly licensed and authorized to practice law in another state while temporarily in this state and engaged in a particular matter (Mich. Comp. Laws Ann. §900.916 (emphasis added)), the court acknowledges that such practitioners would be "authorized by applicable law to practice law" in Michigan (albeit on a temporary basis) and would therefore be "attorneys" within the meaning of the Code. This opinion, in short, should not be read as prohibiting out-of-state attorneys from handling a discrete case, adversary proceeding or contested matter pending before this court.16

Rittenhouse appealed, and in November 2000, the district court affirmed the bankruptcy court's decision,17 holding that Rittenhouse had engaged in the unauthorized practice of law. The district court based its ruling on its finding that Rittenhouse (1) maintained a permanent office in Michigan and (2) regularly engaged in the practice of law.18 The district court rejected Rittenhouse's argument that his admission to the Bar of the Federal District Court (but not the bar of the state where the federal district court was located) permitted him to practice in bankruptcy court. In reaching this decision, the district court considered and rejected the decisions of the Ninth Circuit Bankruptcy Appellate Panel in In re Mendez19 and the Ninth Circuit Court of Appeals in In re Poole,20 which are discussed later in this article.

Both the bankruptcy court and district court in the Desilets case relied heavily on the case of In re Peterson21 in reaching their decision. In Peterson, an attorney was ordered to disgorge $2,756.50 in fees that he received for six hours of pre-petition and 50 hours of post-petition services rendered to the debtor.22 The debtor's attorney never sought to be retained under 11 U.S.C. §327, and the bankruptcy court disallowed all post-petition claims on that basis.23

In addressing the unauthorized-practice-of-law issue related to the attorney's pre-petition work, the Peterson court held that attorneys could be authorized by federal court to practice in them, even where the attorneys were not admitted to the bar of the state where the federal court was located (Federal Practice Exception).24 While noting that the line between permissible federal practice and the unauthorized practice of law was not sharply defined,25 the Peterson court held that "services limited to those reasonably necessary and incident to the specific matter in this court"26 were permissible, while maintaining that a law office in a state where an attorney was not admitted to practice law was not, even if the attorney was only giving advice about bankruptcy law matter.27

A similar result to Peterson was reached in a Jan. 16 decision by the U.S. Bankruptcy Court for the Southern District of New York in In re Lite Ray Realty Corp.28 There, the court held that an attorney who was a member of the Bar of the U.S. District Court for the Southern District of New York, but who'd had his New York law license suspended for five years in 1997, could not practice before the bankruptcy court. The court held that the attorney's admission to the federal district court did not permit him to practice bankruptcy generally.

What the Desilets, Lite Ray and Peterson courts held, in essence, was that admission to practice before federal court could not be used as a "cheap" substitute for admission to the bar of the state where the federal court was located. While Lite Ray and Peterson were limited to the facts of the cases before them, the Desilets opinions were not so limited.

Therefore, despite the Desilets bankruptcy court's attempt to escape the law of unintended consequences,29 their holdings that the question of whether practice before a bankruptcy court, in a state where an attorney is not barred, is governed primarily by state law will cause, at the very least, unease in the bankruptcy bar.

It's My Court and I Will Admit if I Want To...

A far different approach to the unauthorized-practice-of-law issue set forth in the Desilets opinions comes from the Ninth Circuit in the In re Poole30 and In re Mendez31 decisions. The facts of Poole and Mendez are virtually identical.

Michael Smith, an attorney who was admitted to the Illinois Bar and admitted to practice before the U.S. District Court for the District of Arizona, filed chapter 13 cases for Mary Poole and Enrique Mendez in the U.S. Bankruptcy Court for the District of Arizona. The chapter 13 trustee objected to Smith's request for fees under the debtors' plans because Smith was engaging in the unauthorized practice of law.32 The bankruptcy court overruled the chapter 13 trustee's objections to Smith's fees in both cases, and the trustee appealed.

Both the Ninth Circuit Board of Appeals33 and the Ninth Circuit Court of Appeals denied the trustee's appeal. The Ninth Circuit in Poole34 ruled that federal courts have the exclusive authority "to control admission to its bar and to discipline attorneys who appear before it."35 While noting that state disciplinary proceedings are accorded "high respect," they are not binding on federal courts.36 The court also held that the only way to challenge whether a duly admitted member of a federal bar was engaging in the unauthorized practice of law was to seek the attorney suspension or disbarment from practice before the court, "using procedures that comport with due process."37

The Poole and Mendez decisions are based on the theory that federal courts have the inherent authority to regulate the practice of law in federal forums.38 While this line of cases is far more friendly to bankruptcy practitioners than Desilets, it is important to note that they do not allow a "general" practice of law in a state where the attorney is not barred.39 Nor do these decisions protect practitioners from state bar issues.

States Can Cause Bankruptcy Attorneys Problems Other Than Seminole: Unauthorized Practice of Law Under State Law

Even if a bankruptcy attorney can satisfy the federal courts in that his work in a bankruptcy court does not constitute the unauthorized practice of law, he is not out of the ethical woods yet. State courts and bar associations may institute disciplinary proceedings against individuals who practice before a federal court.40 State court decisions on what constitutes unauthorized practice of law when the attorney is appearing before federal courts are, to quote a leading treatise,41 "not always well-defined." Several decisions have held that practicing before a federal court can constitute the unauthorized practice of law,42 while others have found that the isolated practice of bankruptcy and bankruptcy-related law does not constitute the unauthorized practice of law.43 Review of a state's case law on the unauthorized practice of law will be necessary if there is any question as to whether a particular representation or group of cases would violate a state's laws.

Conclusion

As I noted in the beginning of this article, the increasingly national scope of bankruptcy practice has added unauthorized-practice-of-law issues to the already large list of ethical and legal questions that bankruptcy practitioners must be prepared to deal with on a routine basis. From the current state of case law, only the extremes of these issues are well-settled. It seems clear that practicing an isolated bankruptcy case in a jurisdiction where an attorney is not barred, with the assistance of local counsel, will not constitute the unauthorized practice of law.44 Similarly, it is equally clear that establishing an office in a jurisdiction where an attorney is not barred, for the purposes of generally practicing bankruptcy law, will be considered by both state and federal courts to be the unauthorized practice of law.45 Unfortunately, several important questions, including the issue of whether an attorney or law firm engages in the unauthorized practice of law by routinely being admitted to practice before a bankruptcy court on a case-by-case basis, or by joining the bar of a particular bankruptcy court located in a state where the attorney is not barred, have not yet been addressed. Until a definitive opinion on such a fact situation is written, the best advice this writer can offer is to hire local counsel where there is any question as to whether your actions may constitute the unauthorized practice of law.


Footnotes

1 See, e.g., Smith & Roth, Ethical Standards in Bankruptcy Contexts: Disinterestedness, PLI No. A0-0056 (April 2000). Return to article

2 See, e.g., Rapaport & Bowles, "Has the DIP's Attorney Become the Ultimate Creditors' Lawyer in Bankruptcy Reorganization Cases?" 5 ABI L.R. 47 (Spring 1997). Return to article

3 See In re Arlan's Department Stores Inc., 615 F.2d 925 (2d Cir. 1979) (Act case where debtor's counsel was denied all compensation due to numerous ethical problems). Return to article

4 See Cordy, Karen, "Unfinished Business: What the Bankruptcy Reform Bill Still Needs to Fix," XIX ABI Journal No. 10 at p. 8 (Dec/Jan 2001) (suggesting that a system of national admissions to bankruptcy courts and the removal of the mandatory requirement for local counsel would improve practice). Return to article

5 See, generally, Gerregano, "What Constitutes 'Unauthorized Practice of Law' by Out-of-state Counsel," 8 A.L.R. 5th 497 (2000). Return to article

6 In re Desilets, 247 B.R. 660 (Bankr. W.D. Mich.) (Desilets), aff'd. sub nom, Rittenhouse v. Delta Home Improvement Inc., 255 B.R. 294 (W.D. Mich. 2000) (Rittenhouse). Return to article

7 Desilets at 664, Rittenhouse at 295. Return to article

8 Desilets at 664, noting that Rittenhouse signed some bankruptcy petitions as a bankruptcy-petition preparer. Return to article

9 Rittenhouse at 296. Return to article

10 Id. at 295. On Sept. 26, the bankruptcy court formally suspended Rittenhouse from appearing before the bankruptcy court. Id. Return to article

11 Desilets at 668, holding that "applicable law" under 11 U.S.C. §101(4) means both state law and federal court admission rules. Return to article

12 See 11 U.S.C. §101(4). Return to article

13 Desilets at 671. Return to article

14 Id. Return to article

15 The bankruptcy court also fined Rittenhouse $3,500 for violating the bankruptcy provisions of 11 U.S.C. §110 relating to bankruptcy-petition preparers and sought to have the bankruptcy court, en banc, suspend or disbar Rittenhouse. Return to article

16 Desilets at 671, fn. 18. Return to article

17 Rittenhouse, 255 B.R. at 295. Return to article

18 Id. at 297. Return to article

19 231 B.R. 86 (9th Cir. BAP 1999), aff'd., 230 F.3d 1367 (Table) (9th Cir. 2000). Return to article

20 222 F.3d 618 (9th Cir. 2000). Return to article

21 163 B.R. 665 (Bankr. D. Com.) Return to article

22 Id. at 668. Return to article

23 Id. at 671. Return to article

24 Id. at 673, discussing Sperry v. Florida, 373 U.S. 379 (1963). Return to article

25 Id. Return to article

26 Id. at 674. Return to article

27 "The flaw in that argument is that it fails to recognize the distinction between the right to practice in court and the right to practice law generally. The essence of that distinction is that the general practice of law connotes the right to offer legal services to anyone who seeks them, whereas the right to practice in a court is limited to providing legal services that are incidental to a specific case or proceeding in that court." Id. at 673. The Peterson court further ruled that its decision was strictly limited to the facts of the case. Return to article

28 ____ B.R. ____, 2001 WL 32837 (Bankr. S.D.N.Y. 2001). Return to article

29 Desilets at 671, fn. 18. Return to article

30 222 F.3d at 618. Return to article

31 231 B.R. 86 (9th Cir. BAP 1999), aff'd., 230 F.3d 1367 (Table) (9th Cir. 2000). Return to article

32 Poole at 620. Return to article

33 The board of appeal's decision in Mendez was affirmed for the reasons set forth in the Ninth Circuit's Poole decision. Return to article

34 Poole at 620-621. Return to article

35 Id. at 620. Return to article

36 Id. at 622. Return to article

37 Id. at 622-23. Return to article

38 See, also, State Unauthorized Practice of Law Committee v. Paul Mason & Associates, 46 F.3d 469 (5th Cir. 1995). Return to article

39 See Mendez 231 B.R. at 91 ("There is no evidence whatsoever...to support the trustee's assertion that Smith maintained a primary office in Arizona, solicited Arizona residents for bankruptcy business or engaged in the general practice of law in Arizona."). Return to article

40 Mahoning County Bar Association v. Rector, 608 N.E. 2d 866 (Ohio Board of Com. on the Unauthorized Practice of Law 1992) (state board can sanction for the unauthorized practice of law before federal courts). Return to article

41 Gerregano, "What Constitutes the 'Unauthorized Practice of Law' by Out-of-state Counsel," 8 A.L.R. 5th 497 §2 (2000). Return to article

42 Attorney Grievance Commission of Maryland v. Bridges, 759 2d 233 (Ct. App. Md. 2000); Birbrower, Montalbano, Condor & Frank v. The Superior Court of Santa Clara County, 17 Cal. 4th 119 (Cal. 1998). Return to article

43 See Cowen v. Samuel R. Calabrese, 230 Cal. App. 2d 870 (Ct. App. 1964); Appell v. Reiner, 204 A.2d 146 (N.J. 1964). Return to article

44 Spanos v. Skouras Theaters Corp., 364 F.2d 161 (2d Cir. 1966). Return to article

45 In re Rittenhouse, 255 B.R. at 297. Return to article

Journal Date: 
Thursday, March 1, 2001

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