Rochelle's Daily Wire

“[W]hen an attorney learns that a client has engaged in fraudulent or unauthorized conduct,” the lawyer “must take reasonable remedial measures, including, if necessary, disclosure to the tribunal,” so said Chief Bankruptcy Judge Gregory L. Taddonio of Pittsburgh.

“Uncomfortable as it may be,” Judge Taddonio added in his October 6 opinion, “disclosure was the only appropriate remedial measure.”

The Ethical Shortcomings

More than two years before bankruptcy, the debtor sustained a personal injury and retained a personal-injury (PI) lawyer. Also before bankruptcy, the debtor received the first installment of $2,000 in what was then expected to be $25,000 in settlements.

The debtor consulted a bankruptcy lawyer and disclosed the PI claim. The bankruptcy lawyer filed a chapter 13 petition, scheduling the PI claim with a value of $2,000. Given the small amount of the scheduled claim, the debtor was able to exempt the claim. The bankruptcy lawyer did not contact the PI lawyer to find out what the claim might be worth and did not schedule the claim as possibly being worth more than $2,000.

Just after confirmation, the bankruptcy lawyer learned from his client that she had settled all the claims for $82,500 and had received $55,000 in net proceeds. By that time, the debtor had spent almost all of the settlement, Judge Taddonio said.

The bankruptcy lawyer did not disclose the settlement to the court until six months after confirmation, when he filed a motion for retroactive retention of the PI attorney. At the ensuing hearing, the PI lawyer stepped to the plate and agreed to disgorge $7,000 of the fee to permit a 25% recovery by unsecured creditors.

To make up for consuming the settlement proceeds, the debtor modified her plan to pay creditors 100%, but Judge Taddonio scheduled a further hearing to consider sanctions against the bankruptcy lawyer.

The Ethical Duties

The bankruptcy lawyer attempted to explain his tardy revelation as an effort to avoid adversely affecting the debtor’s attempt at modifying a home mortgage. Judge Taddonio recounted how the bankruptcy lawyer “felt obligated” to conceal what the client had done because “attorneys must mitigate the impact of their clients’ actions.”

Judge Taddonio likened the bankruptcy lawyer’s conduct to leaving “the bat and ball on the coffee table” while allowing the debtor “to play indoors.”

“But once he learned of the damage,” Judge Taddonio said, the lawyer “had a duty not to hide the broken lamp.”

In legal terminology, Judge Taddonio said that the bankruptcy lawyer had “a duty of candor to the court” under Pennsylvania Rule of Conduct 3.3. Bankruptcy lawyers, he said, “are not guarantors of their clients’ good behavior” and “cannot be held responsible when clients inexplicably go rogue,” but “under no circumstances should an attorney enable the client’s wrongful behavior or further the concealment.”

“Uncomfortable as it may be,” Judge Taddonio said, “disclosure was the only appropriate remedial measure once” the bankruptcy lawyer learned that the debtor had “spent the settlement proceeds without Court approval. Concealing the loss of a material asset, even if its economic impact can be blunted, flouts the duty of candor.”

On the facts, Judge Taddonio found that the schedules were “not reasonable under the circumstances” and that the bankruptcy lawyer misrepresented the value of the PI claim. He also said that the bankruptcy lawyer disregarded local rules that required immediate retention of special counsel to pursue an injury claim.

Judge Taddonio found the power to sanction in Section 105(a) and said that a sanction must be “limited to the minimum that will serve to adequately deter the undesirable behavior.” As a sanction, he directed the bankruptcy lawyer to pay $5,250 to the PI lawyer to offset 75% of the PI lawyer’s $7,000 giveback. He also assessed a $350 monetary fine to be paid by the bankruptcy lawyer to the clerk of the court.

Observations

In circumstances where the lawyer’s court filing has contained an inaccuracy, the opinion is a ringing endorsement of counsel’s obligation to disclose misconduct to the court, even when disclosure will cause trouble for the client.

Prof. Nancy Rapoport observed:

The life lesson here is that, although it’s good to take on your client’s problems as your own, it’s not worth your reputation (or possibly your license) to use your services to cover up a client’s misdeeds.

One of the country’s leading experts on ethics in bankruptcy, Prof. Rapoport is a UNLV Distinguished Professor and the Garman Turner Gordon Professor of Law at the University of Nevada, Las Vegas William S. Boyd School of Law.