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Noisy Withdrawals Urban Bankruptcy Legend or Invaluable Ethical Tool

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One of the greatest professional nightmares a chapter 11 debtor's attorney can face is discovering, during a bankruptcy case, that the people running the debtor are crooks.2 Such a discovery will immediately cause the attorney to seriously consider whether she should withdraw from representing the debtor.3 Assuming that the individuals acting as debtors-in-possession (DIPs) do not take steps to rectify their improper actions, this action is probably inevitable.4 At such a time, many bankruptcy practitioners think in terms of the famous (or infamous) "noisy withdrawal" as a way out. Unfortunately, there is little authority that describes what constitutes a noisy withdrawal in a bankruptcy proceeding or that explains exactly how a noisy withdrawal may be accomplished. This article attempts to address the question of what a noisy withdrawal is, how a noisy withdrawal can be accomplished and what steps an attorney must take to ensure that her noisy withdrawal is effective.

Please note, for purposes of this article, it will be assumed that the confidences of a chapter 11 client5 will be revealed if the attorney takes any action to disclose the fraud to the bankruptcy court. Although an interesting question, it is beyond the scope of this article to determine whether your client is the chapter 11 bankruptcy estate6 or the DIP that operates the debtor.7

Formal Opinion 92-366—the Mother of "Noisy Withdrawals"

The genesis of what constitutes a "noisy withdrawal" can be found in ABA Formal Opinion 92-366. Under that opinion, a noisy withdrawal is a withdrawal from the representation of a client accomplished by a disavow of work product provided by the attorney.8 The ABA Committee on Ethics and Professional Responsibility concluded that an attorney could only make a "noisy withdrawal" if the attorney's work product was being used or was intended to be used in a future fraud or criminal activity. Opinion 92-366 stated that a noisy withdrawal was a permissive step the attorney could take, not a required step.9 In fact, the ABA Committee further held that if a fraud had already been completed, or if the attorney did not know or reasonably believe that the client would continue the fraud or commit a future fraud through the use of the attorney services or work product, the attorney could not make a noisy withdrawal.10

While Opinion 92-366 is important to understand the ethical framework surrounding a noisy withdrawal, it is not directly applicable to a typical bankruptcy situation. In a fact pattern presented to the ABA Committee, the fraud involved the use of an attorney's opinion letter, which was based on false evidence given to the attorney by his clients. The opinion letter was used to obtain a loan and was not used in proceedings before a court. Indeed, Opinion 92-366 noted that while the ABA Committee had considered the ramifications of Rule 1.611 of the Model Rules of Professional Conduct, given the facts submitted to the ABA Committee, it did not have to address the issue of whether Model Rule 3.312 requiring the disclosure of the fraud to the tribunal would require a noisy withdrawal or even a more explicit disclosure.13

Strike Up the Band: A Noisy Withdrawal in Bankruptcy

Chapter 11 debtor representations, unlike many legal services provided by attorneys in civil practice, tend to involve activities that are generally governed by a tribunal, where counsel has been appointed by the bankruptcy court and all activities of debtor's counsel are technically done before the tribunal.14 Therefore, unlike the situation governed by Opinion 92-366, Model Rule 3.3 is almost always implicated when the question of client fraud arises in chapter 11 debtor representation. It is the difficulties in balancing an attorney's duties to keep certain information confidential under Rule 1.6, with a duty to disclose fraud on a tribunal under Rule 3.3, that places debtor's counsel in such a difficult position.15

In many respects, this difficulty is misperceived. The vast majority of cases16 clearly indicates that a chapter 11 debtor's counsel's duty to the court, under either Model Rule 3.3 or under the common-law duty of counsel as an "officer of the court," will override his duty to maintain client confidentiality under Model Rule 1.6.17 However, even if counsel for a chapter 11 debtor has a duty to disclose fraudulent activity to a court, there is no clear-cut rule as to how that disclosure should be made.18 Indeed, although Rule 3.3 does require disclosure of facts necessary to prevent fraud by a client on a tribunal, attorneys should not ignore the dictates of Model Rule 1.6 in a frenzied effort to comply with Rule 3.3.19

Rule 3.3 Comment 11, "Remedial Measures," offers some important guidance on this point. Comment 11 states in pertinent part that "if perjured testimony or false evidence has been offered, the advocate's proper course ordinarily is to redemonstrate with the client confidentially. If that fails, the advocate should seek to withdraw if that will remedy the situation. If withdrawal will not remedy the situation or is impossible, the advocate should make disclosure to the court." It would seem from this comment that immediate disclosure of fraud to the court is not the required or even preferred ethical course of action in a situation where an attorney has knowledge of a client's fraud and less drastic action than disclosure will be effective in alerting the tribunal of the problem. However, steps must be taken to remedy any fraud perpetuated by a client on a court. Therefore, given the unique nature of bankruptcy, where a client refuses to correct the false testimony or disclose the fraud, a noisy withdrawal may very well be the preferred course of action in order to disclose the fraudulent conduct.

Tuning Your Tuba: How to Properly Make a "Noisy Withdrawal" in Bankruptcy Court

Assuming that a bankruptcy court could be alerted as to a potential "problem" with a debtor, or more importantly, the people running the debtor as DIP, by a noisy withdrawal,20 such a withdrawal may be the most appropriate course of action. Given the fact that bankruptcy courts must approve both the hiring and the withdrawal of debtor's counsel in a chapter 11 proceeding, performing a noisy withdrawal is often easier in a bankruptcy case than it is in other situations. Further, given the frequent active participation of numerous other groups in a bankruptcy proceeding, a proper motion for a noisy withdrawal will more than likely have the desired effect of alerting the court to a potential fraud on the tribunal than it would in other proceedings.21

In order to effectively make a noisy withdrawal, counsel should include three things in their pleading in order to properly alert the court as to the possibility of a serious issue concerning the DIP's activities. First, upon discovery of the fraud and the failure of the attorney to have the DIP rectify and/or disclose the fraud, counsel should move on an expedited basis to be permitted to withdraw as counsel for the estate. Delaying withdrawal as debtor's counsel after determining your clients will not rectify or disclose the fraud22 will not only allow your client's fraud to continue uninvestigated, but may be a violation of your own fiduciary duty to the bankruptcy estate,23 as well as your ethical duties under the State Rules of Professional Conduct.

The second element required to make an effective noisy withdrawal is to set forth, as your primary grounds for withdrawal, that continued representation is impossible under your applicable state rules of ethics. Depending on the circumstances, you may wish to cite Rule 1.2,24 which prohibits attorneys from assisting a client in a crime or fraud; Rule 1.16,25 which requires withdrawal of representation when continued representation of a client will result in a violation of the rules; and/or Rule 3.3, which governs candor to the tribunal. Not only will invoking these ethics rules make it far more likely that the court will grant the motion to withdraw, it will also clearly illustrate to the court the underlying reasons for the withdrawal and the need for additional inquiry without having to directly divulge any client confidential information.

Finally, if necessary under the circumstances of your case, in your motion to withdraw you may also have to disavow any pleadings based on your client's fraud or on false evidence.26 Whether this should be included in the motion to withdraw will depend on the individual facts and circumstances of your case, but counsel cannot continue to allow the court or other third parties in a case to be deceived or defrauded by documents based on false evidence, perjured testimony or some other variety of a client's fraud.

The Female Nordic Opera Star Begins Her Final Aria: Conclusion

Exposing fraud by a DIP as the chapter 11 debtor's counsel is a difficult task, especially given the fact that the people who have committed the fraud are likely the ones who hired you as debtor's counsel and from whom you take your orders.27 A noisy withdrawal gives you a middle ground on which to fulfill your ethical and fiduciary duties to the bankruptcy court and the bankruptcy estate without having to directly disclose a client's confidences directly to the tribunal or other parties. Given the nature of bankruptcy, if a noisy withdrawal is not deemed sufficient by a bankruptcy court, the court has other options, including appointing a trustee or examiner who can waive the attorney/client privilege and question you about the fraud, thereby bypassing the Rule 1.6 issues, or simply taking you "off the hook" by determining that there is no attorney/client privilege concerning the actions of the parties that are conducting the fraud (i.e., the DIP) and ordering you to reveal any material facts concerning fraud to the court or any other appropriate party. Hopefully, the ethical nightmare discussed above will not happen to you, but in the event that you are faced with such an ethical disaster, be sure to consider the loud, proud and noisy withdrawal as a way out of your dilemma.


Footnotes

1 The author would like to thank Tracy Sullivan, an associate at Greenebaum Doll & McDonald PLLC, for her assistance with this article. Return to article

2 In re Bonneville Pac Corp., 196 B.R. 868 (Bankr. D. Utah); aff'd., in part, rev'd., in part, Hansen, Jones & Leta P.C. v. Segal, 220 B.R. 434 (D. Utah 1998). Return to article

3 ABA Model Rule of Professional Conduct 1.16(a)(1) requires an attorney to withdraw from representing a client "if the representation will result in violation of the Rules of Professional Conduct or other law." Rule 1.2 states that an attorney may not "counsel...or assist a client, in conduct that the lawyer knows is criminal or fraudulent..." Return to article

4 Id. See, also, ABA Formal Opinion 92-366 (1992); Rule 3.3, Comment Paragraph 11. Return to article

5 Compare In re Perez, 30 F.3d 1209, 1219 (9th Cir. 1994) (bankruptcy estate is client of chapter 11 debtor's attorney) with Hansen, 220 B.R. 434, 449 (DIP is client). Return to article

6 See In re Perez, 30 F.3d at 1219; Hansen, 220 B.R. at 448-449 (citing cases). Return to article

7 See Hansen, 220 B.R. at 449; In re Sidco Inc., 173 B.R. 194 (E.D. Cal. 1994). Return to article

8 Opinion 92-366. It is important to note that there was strong dissent to this opinion that would have found that the attorney could not disavow any work product under the facts as presented. Return to article

9 Id. ("A lawyer may disavow any of her work product to prevent its use in the client's continuing or intended future fraud..." (emphasis added)). Return to article

10 Id. ("If the fraud is completed and the lawyer does not know or reasonably believe that the client intends to continue the fraud...the lawyer may not disavow any work product.") Return to article

11 (a) A lawyer shall not reveal information relating to representation of a client unless the client consents after consultation, except for disclosures that are impliedly authorized in order to carry out the representation, and except as stated in paragraph (b).
(b) A lawyer may reveal such information to the extent the lawyer reasonably believes necessary:

  1. to prevent the client from committing a criminal act that the lawyer believes is likely to result in imminent death or substantially bodily harm, or
  2. 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 on conduct in which the client was involved, or to respond to allegations in any proceeding concerning the lawyer's representation of the client. Return to article

12 (a) A lawyer shall not knowingly:

  1. make a false statement of material fact or law to a tribunal,
  2. fail to disclose a material fact to a tribunal when disclosure is necessary to avoid assisting a criminal or fraudulent act by the client,
  3. 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, or
  4. offer evidence that the lawyer knows to be false. If a lawyer has offered material evidence and comes to know of its falsity, the lawyer shall take reasonable remedial measures.
(b) The duties stated in paragraph (a) continue to the conclusion of the proceeding and apply even if compliance requires disclosure of information otherwise protected by Rule 1.6.
(c) A lawyer may refuse to offer evidence that the lawyer reasonably believes is false.
(d) In an ex parte proceeding, a lawyer shall inform the tribunal to make an informed decision, whether or not the facts are adverse. Return to article

13 See, generally, Rapoport and Bowles, "Has the DIP's Attorney Become the Ultimate Creditor's Lawyer in Bankruptcy Reorganization Cases?" 5 Am. Bank. Inst. L.R. 47, 64 n. 140 (1997) (collecting cases where debtor's counsel were required to disclose fraud or DIP's breaches of fiduciary duty). Return to article

14 See, generally, In re Ward, 894 F.2d 771, 776 (5th Cir. 1990). Return to article

15 See In re DeVlieg, 174 B.R. 497, 502 n. 7 (N.D. Ill. 1994) (counsel who sued debtor's corporate officers against their direction was found to have followed duty to estate in filing suit, but court refused to "pass on whether such behavior would comply with applicable standards of professional responsibility"). Return to article

16 See Note 12, supra. Return to article

17 Opinion 92-366, n. 8 ("Rule 3.3...whose text contains an explicit exception to the confidentiality requirement of Rule 1.6..."). Return to article

18 See Rapoport and Bowles, "DIP's Attorney" at 65, n. 147. Return to article

19 See In re Brennan, 187 B.R. 135, 150 (Bankr. D. N.J. 1995) (generally discussing balancing Rule 1.6 concerns with Rule 3.3 duty to courts). Return to article

20 It is important to note that in certain situations (i.e., the debtor's president calling from the airport with $1 million of the debtor's cash and a one-way ticket to the Crook Islands), only immediate and direct disclosure of the fraud will be an adequate remedy under Rule 3.3. Return to article

21 In a case with competent counsel, a well-done "noisy withdrawal" motion will at least draw motions for 2004 exams of the debtor and more likely motions for the appointment of a trustee or receiver. Return to article

22 Rule 3.3, Comment 11. Return to article

23 See, generally, In re Banie Reed Buick-GMC Inc., 164 B.R. 378 (Bankr. S.D. Fla. 1984). Return to article

24 Rule 1.2, Scope of Representation. Return to article

25 Rule 1.16, Declining or Terminating Representation. Return to article

26 Opinion 92-366. Return to article

27 See "The Debtor's Lawyer as Trojan Horse," reprinted in Warren & Westbrook, The Law of Debtors and Creditors: Text Cases and Problems (3d ed. 1996), for a discussion of why counsel for the debtor's first duty may be to oust the person who hired him. Return to article

 
Journal Date: 
Monday, October 1, 2001

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