How to Avoid Ethically Incorrect Behavior Survival Tips Nobody Taught You in Law School
The hope of this article is to pass along a few survival tips from one associate to another that will help you avoid embarrassing and potentially harmful "ethically incorrect" behavior, which is a term of art I just made up to get you to read this article.
Problem: You graduated from law school, passed the MPRE and bar exam, and promptly forgot 90 percent of what you have learned. You are now working in a very specialized field of federal law in federal courts, closely supervised by partners who are experts on bankruptcy ethics. You feel invincible....
Survival Tip Number One: Ethics is an area of law you cannot purge from your brain after you pass the bar exam, even if you do work with well-versed partners.1 Likewise, the fact that you mostly appear in federal court, read federal cases and research federal codes and rules does not matter. Your state's ethics rules follow you wherever you go, and the bankruptcy courts have authority to sanction you, reprimand you, refer you to the state bar, suspend you or even disbar you.2 The best way to "insure" your career and good name is to spend a few hours each month reviewing your state's ethics rules and recent ethics opinions.
Problem: You've always heard about the thrill and exhilaration of representing a debtor, especially at the beginning of a case. But when the partner brings a towering stack of conflict reports into your office, you realize it is too late to run and hide. You wonder if it is okay to skim through the conflict reports and save the close calls for a later date when the case slows down a bit.
Survival Tip Number Two: Be sure you know how to read your firm's conflict reports before engaging in this process. Do not cut corners and keep detailed notes on all actual and potential conflicts. The partner-in-charge needs to know about any conflicts as soon as possible so that the partner can make the ultimate determination about "adverse interests" and "disinterestedness." (No, these are not terms of art I just made up; they are found in 11 U.S.C. §327(a).) These conflicts must then be disclosed to the bankruptcy court.3 If the incoming client will be directly adverse with an existing firm client, the firm generally cannot accept representation unless the lawyer reasonably believes the representation will not affect the representation and each client consents after consultation.4 Even then, your firm may not satisfy §327(a)'s standards unless special conflicts counsel is hired and you practice in an Enron jurisdiction.5 Fortunately, these are judgment calls the partner generally makes; your primary task will be to ensure that your firm does not begin time-consuming and expensive representation of a debtor, committee or trustee only to find out later that it missed a conflict and is disqualified from the case (or, worse yet, must disgorge fees).6
Problem: You spot an issue that seems like a problem. It may be the doing of your client (e.g., management is fudging the numbers). It may be the result of your super-diligent work (e.g., you found an unhelpful case on point and you are not sure if you need to cite it). Or it may be your lack of diligence (e.g., you missed an important conflict with a firm client). You wonder whether you should talk to the partner, but you are hesitant because that partner has chided you in the past for chasing unimportant "rabbit trails," and you certainly do not want to get into trouble. You ask another associate for guidance, but he or she only tells you a few war stories and says "good luck." Even a careful reading of Collier on Bankruptcy and Norton Bankruptcy Law and Practice offers little guidance.
Survival Tip Number Three: Ask the partner; write the partner; call the partner; sound the alarms.7 No ethics question is a dumb question,8 and if you have done something wrong, it should be discussed with the partner immediately.9 You have already learned, no doubt, that even the most bizarre law school hypothetical is no match for real-life practice. Do not assume the partner will spot or understand all of the ethics issues arising in a bankruptcy case. In addition, if a partner engages in unethical conduct, you need to speak up right away (especially if you are in court).10
Problem: You receive some important information from the client that arguably does not have to be disclosed. You even do some research and decide that it is a "close call." The client begs you not to disclose the information because the other side already has enough "ammo."
Survival Tip Number Four: There are no "close calls" when it comes to disclosure, and—next to conflicts—the easiest way to get into trouble representing a debtor is failure to "disclose, disclose, disclose."11 In fact, conflicts and disclosure are often two parts to the same problem, such as when a firm must disclose conflicts with other interested parties in the bankruptcy case (discussed above). But disclosure rules arise in other important contexts as well, sometimes even before you begin practicing law.12 As an associate, you will encounter most disclosure "traps" when preparing or reviewing first-day motions, schedules and the statement of financial affairs. The partner will work with you on these disclosures, but often the paralegal—to whom the partner may delegate some (but hopefully not all)13 of the schedule preparation—will come to you with questions. Here are some tricky issues you need to be aware of:14
- Counsel has a duty to perform its own due diligence when preparing disclosure documents.15 These documents need to be thorough, candid and precise.16 One court explained: "A diligent and thorough effort to assist the debtor in assembling, presenting and filing required data is part of counsel's job. However, expending large sums of money to test and re-test the accuracy and completeness of the information furnished by the client is waste."17 If you cannot find an answer before the filing deadline, make sure you say in the schedules or statement of financial affairs what you do know and what you do not know or is incomplete, and amend as soon as you do find the answer.
- Do not forget to disclose existing and potential causes of action.18
- If a claim is disputed, unliquidated or contingent, make sure you mark it as disputed, unliquidated or contingent.
- Spend some quality time with your clients before filing the schedules and statement of financial affairs19—chances are that they will be living in your office for the first few days or weeks of the case (or longer!). The client signator needs to verify the disclosures and understand he or she is signing under penalty of perjury.20
Problem: You have been working on a case for several months now. You handle most routine calls, and sometimes the client consults with you directly about how to handle a problem. An issue comes up that is complicated, but you are confident that you can handle it by yourself. After all, your client has recently complained about the hourly rate of the partner, and the partner told you just last week that you are doing an excellent job and you should start shouldering more of the difficult issues in the case.
Survival Tip Number Five: Partners have super-high billing rates, are often too busy, really like to be bothered with the details, don't always want to talk to the client, sometimes don't want to talk to the opposing counsel and are looking for the next big case. Don't let these minor inconveniences deter you. Talk to the partners and talk to them often, especially about any conversations with the client in which they were not involved. But don't be annoying—be sure to have the facts and issues down cold so you don't waste too much time with a busy partner.
Survival Tip Number Six: Beware of the partner who trusts you too much. Bankruptcy cases can proceed at enormous speeds—pleadings are filed daily, emergency hearings held weekly, preference complaints are filed by the hundreds, creditors call every day with dozens of complaints. In this type of environment, it is tempting for a partner to delegate a lot of responsibility to you. Make sure that you really are self-sufficient before you venture too far into an issue without the guidance of a partner.21
Problem: The client-representatives have become your friends. They say they don't understand that partner anymore and that you have "lots" of wisdom. They solicit advice from you without wanting to consult with the partner.
Survival Tip Number Seven: Beware of the client that trusts you too much or who claims to trust you. It is nice to feel loved, but invariably you will find yourself in a meeting where the partner asks the client "why the #@* did you do that?" and the client points at you. Sometimes the client contacts will say they do not understand what the partner is saying and that they would much rather just deal directly with you. That is another way of saying, "I do not want to follow the partner's advice and I am fairly confident that I can talk you into doing anything." If that happens, red flags should be flying by the hundreds—go talk to the partner.22
Survival Tip Number Eight: Watch out for hidden ethics problems when consulting with the "client." Sometimes a client representative will come to you with "personal" problems. You should refrain from giving him or her any legal advice on personal issues, especially if they have to do with liability issues between the company and the individual. If your firm represents the company, it generally cannot represent the company's principals,23 even if they become your friends or you are representing a closely-held corporation.24
Problem: A nonbankruptcy partner in the firm calls you with what he says is a "dumb" bankruptcy question. You rarely get to display your shining legal talents to the nonbankruptcy partners in the firm, so you confidently say "shoot." The partner describes a complicated fact scenario that invariably involves the words "fraud" and "bankruptcy" in the same sentence and often ends with "Can they really get away with that in bankruptcy?"
Survival Tip Number Nine: Beware of "dumb" bankruptcy questions. Don't offer quick bankruptcy advice without making sure you are comfortable with the facts and the law. Watch out for questions about the automatic stay ("I can still sue the co-signor, can't I?"), questions about whether a client's claim will be paid (and, more importantly, "when will it be paid?"), questions about preferences or fraudulent transfers ("preference recoveries are legal?"), and so forth. And be careful when a partner automatically sends his or her long-standing client your way to help them with a "little" bankruptcy issue without having done a conflicts check of other creditors in the bankruptcy case beforehand.25
Problem: Opposing counsel...especially those from out of town.
Survival Tip Number Ten: The bankruptcy bar is relatively small and can be chummy. But do not fool yourself—there are some who will shake your hand with a smile and then stab you in your back as soon as the opportunity presents itself. Usually other partners will warn you of this type, but they tend to make you deal with that attorney. This is often the case with out-of-town counsel who want to show everyone how they do it in the "big" city. (By the way, Wilmington, Del., is considered the "big" city in the bankruptcy world.) Whenever opposing counsel calls you or e-mails you directly without copying the partner, and you don't have a very good reason to trust the attorney, think "trap." Take your time and consult with the partner before responding. Be particularly cautious in overly litigious cases; attorneys tend to get their egos too involved. Plus, the other side is looking for whatever leverage they can get, and sometimes an unsuspecting associate is their target of choice.
Problem: Opposing counsel has broken an ethics rule, or so you believe. If you alert opposing counsel to the problem before filing a motion for sanctions, the offending attorney (heaven forbid!) might correct the problem. Your client is convinced, however, that it is the most egregious act it has ever witnessed and want you to destroy that attorney's reputation.
Survival Tip Number Eleven: A motion for sanctions may be brought under Bankruptcy Rule 9011 or 11 U.S.C. §105. The interplay between these two provisions can be quite interesting. Bankruptcy Rule 9011 allows sanctions for conduct specified in Rule 9011(b)—i.e., misrepresentations made to the court—but it also has a safe-harbor requirement that allows the offending counsel to correct the error within 21 days after the motion for sanctions has been served.26 By contrast, §105 only permits sanctions where the offending counsel's conduct is "very serious and egregious"27 and defiles "the very temple of justice,"28 but §105 has no safe-harbor requirement.29 This may tempt some to file a motion for sanctions under §105 because they do not want to invoke Bankruptcy Rule 9011's safe-harbor requirement or because counsel fixed the problem before a sanctions motion could be filed. Fortunately, at least one court has put a stop to this, holding that counsel "cannot end-run the safe-harbor requirements of Rule 9011 by invoking §105(a) as an alternative."30 Whatever strategy you employ, tread carefully—the next time you may be the recipient of a sanctions motion, and it probably won't surprise you when you find out who filed it.
1 For example, unintentional slip-ups can get you into trouble. See In re Wildehorse Enterprises Inc., 136 B.R. 830, 840 ("[W]here an attorney has misrepresented the record on appeal to the court, no finding of intentionally wrongful conduct is required to impose a sanction; a finding of lack of diligence by the attorney is sufficient.") (emphasis added). Return to article
2 See, e.g., In re Computer Dynamics Inc., 253 B.R. 693, 698 (E.D. Va. 2000) (bankruptcy courts "possess 'the inherent authority to disbar or suspend lawyers from practice'") (citations omitted). Return to article
5 See In re Enron Corp., 2002 WL 32034346, *10-11 (Bankr. S.D.N.Y. May 23, 2002) ("conflicts counsel" and "ethical walls" are sufficient to get around requirements of 11 U.S.C. §§101(14)(E), 327(a) and 1103(b)); cf. In re Amdura Corp., 139 B.R. 963 (Bankr. D. Colo. 1992) (magnitude of relationship between firm and creditor may be so great that special counsel cannot cure); In re Cook, 223 B.R. 782, 791 (B.A.P. 10th Cir. 1998) (special counsel too limited and too late). See, also, In re Essential Therapeutics Inc., 295 B.R. 203 (Bankr. D. Del. 2003) (regardless of any "Chinese wall," the disqualification of one member of a law firm under §101(14) resulted in the disqualification of the entire law firm). Return to article
6 Conflicts are generally addressed in Model Rules 1.7 and 1.8. Additional bankruptcy-related conflict issues are addressed in 11 U.S.C. §§327, 328 and 329 and Bankruptcy Rules 2014 and 2016. For some light reading on this topic of disclosure, see In re Jore, 298 B.R. 703 (Bankr. D. Mont. 2003); see, also, Matter of CF Holding Corp., 164 B.R. 799, 808 (Bankr. D. Conn. 1994) (debtor's counsel sanctioned for failure to disclose lack of disinterestedness of other estate professionals). Return to article
7 If, after consultation with the partner, uncertainty persists, your firm probably has a professional committee that can address your questions. If not, your state should have a hotline you can call with ethics questions. Return to article
9 There is no question you should talk to a partner if you have made a mistake; your firm's legal malpractice carrier will probably send around periodic reminders to do so. The firm can then decide how to proceed with the input of its carrier. In Arizona, there is a published ethics opinion on self-reporting. See Arizona Ethics Opinion (90-15). For another helpful article, see Lundberg, Charles E., "Self-Reporting Malpractice or Ethics Problems," 60-Sep Bench & B. Minn. 24. Return to article
10 For a particularly unnerving case where an associate should have spoken up while observing a hearing in which a partner made a false representation to the court, see Daniels v. Alander, 844 A.2d 182 (Conn. 2004); see, also, Model Rule 3.3, 5.1 and 5.2 (responsibilities of a subordinate lawyer). Return to article
11 See Model Rules 1.2, 1.4, 3.3, 8.4; see, also, In re Kelly, 255 B.R. 783 (Bankr. N.D. Ala. 2000) (stating that Bankruptcy Rule 9011 sanctions are appropriate for inaccurate schedules); In re Rimstat Ltd., 212 F.3d 1039, 1048 (7th Cir. 2000) (sanctions under 11 U.S.C. §105 and Bankruptcy Rule 9011 are appropriate). Other harsh outcomes include U.S. v. Gellene, 245 F. Supp. 922 (E.D. Wisc. 1998) (bankruptcy lawyer sentenced to 15 months in prison for false disclosure), and In re Granite Partners L.P., 219 B.R. 22 (Bankr. S.D.N.Y. 1998) ($3 million sanction imposed for inadequate disclosure). Return to article
12 See, e.g., First Interstate Bank of Arizona N.A. v. Murphy, 210 F.3d 983, 988-89 (9th Cir. 2000) (when a law clerk has accepted a position with an attorney or with a firm, that clerk should cease further involvement in those cases in which the future employer has an interest and it is up to the judge to make sure that happens) (citations omitted). Return to article
15 See, e.g., In re Eppers, 311 B.R. 826, 834 (Bankr. D. N.M. 2004) (setting forth candid and complete information on schedules is an ethical duty of debtor's counsel); In re Smith, 257 B.R. 344, 353 (Bankr. N.D. Ala. 2001) (counsel could be subject to sanctions for failure to properly investigate accuracy of information contained in schedules); In re Rainwater, 100 B.R. 615, 618 (Bankr. M.D. Ga. 1989) (debtor's counsel has obligation to review "certain basic financial records such as tax returns, bills or other evidence of indebtedness, and related financial information and documentation"); In re Crestwell, 30 B.R. 619, 620-21 (Bankr. D.C. 1983) (same). Return to article
18 See, e.g., Cusano v. Klein, 265 F.3d 939 (9th Cir. 2001); In re Coastal Plains Inc., 179 F.3d 197, 207-08 (5th Cir. 1999); see, also, Hay v. First Interstate Bank of Kalispell N.A., 978 F.2d 555, 557 (9th Cir. 1992); Oneida Motor Freight Inc. v. United Jersey Bank, 848 F.2d 414, 419 (3rd. Cir. 1988), cert. denied, 488 U.S. 967 (1988). Return to article
21 See Model Rule 1.1 ("A lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation"). Return to article
22 See Model Rule 1.6 ("The lawyer is part of the judicial system charged with upholding the law. One of the lawyer's functions is to advise clients so that they can avoid any violation of the law in the property exercise of their rights"). Return to article
23 See, e.g., In re United Utensils Corp., 141 B.R. 306 (Bankr. W.D. Pa. 1992) (corporate counsel who renders legal advice to individual associated with corporation upon matters personally concerning that individual may render himself in conflict-of-interest position); In re Neidig Corp., 113 B.R. 696 (D. Colo. 1990) (debtor's counsel disqualified from representing the debtor when counsel also represented principals and management); but, cf. Model Rule 1.13(e) (specifically authorizing counsel for an entity to represent its officers, shareholders or other principals subject to the provision of Model Rule 1.7); see, also, In re Huntco, 288 B.R. 229 (Bankr. E.D. Mo. 2002) (declining to adopt a per se rule of disqualification); In re Argus Group 1700 Inc., 199 B.R. 525 (Bankr. E.D. Pa. 1996) (same). Return to article
24 See, e.g., In re Tezlaff, 31 B.R. 560 (Bankr. E.D. Wis. 1983) (recognizing line between individual and closely held corporation is difficult to discern; attorney for corporation can represent individual only if the attorney is convinced that differing interests are not present). Return to article