I’ve been doing a lot of research lately on attorney malpractice… specifically, bankruptcy attorney malpractice. More and more attorneys are popping into bankruptcy practice because they think it’s the new growth area. And sadly, some are doing a god-awful job at it – and in some cases, they are hurting debtors. So in my research, I came across this case that came down last Friday out of the Northern District of California.
What caught my eye about it was the opening sentence: “[t]he schedules filed in this Chapter 7 case by [debtors’] attorney …contained horrific omissions, including a furniture store filled with furniture, a $13,000.00 bank account, a 2008 Mercedes automobile, and real property.” [emphasis added]. As I read the decision, I learned that the term “horrific” was justified, and then I wondered to myself…’how many other lawyers are out there doing the exact same thing as this guy?’
The debtors in this case, never signed their schedules. In bankruptcy, everything is filed electronically, and “[w]hen an attorney electronically files a schedule on behalf of a client, he is certifying to the court that he has the schedule in his physical possession bearing the original signature of the client.” Counsel did not do this, and was slapped with a fine… more on that later. How it works is this: a client comes in, sits down and signs everything – and I file the document electronically. I keep the documents with original signatures. Those obligations are all spelled out in rules. But this debtors’ counsel’s problems did not just stem from not reading the rules.
[Debtors’ counsel’s] wife is his principal assistant in his law practice. She is not a lawyer. Her main value is that she is Vietnamese. [Counsel] advertises in Vietnamese-language periodicals, and has filed approximately 100 bankruptcy cases for Vietnamese clients. If the court does not put a stop to the worst of [Counsel’s] practices now, and does not insist that he immediately educate himself on the proper role of a lawyer in a bankruptcy case, then it will be permitting the continuing victimization of the Vietnamese community. While the court is content to let other disciplinary bodies consider long term sanctions, some action is required now and no other entity is prepared to act immediately. This court must exercise its inherent authority to protect the public from harm.
The Debtors lose their discharge.
In this case, the debtors were not exactly being honest and forthright. They intentionally hid assets. But it was clear that debtors’ counsel was clueless as to what his duties were – to his clients and to the court.
It is very easy to see how the debtors ended up losing their discharge. [Debtor’s counsel] did not understand the importance of the schedules or his role in preparing them. He did not understand that a lawyer must interview the client himself to probe every aspect of a client’s situation before a bankruptcy can be filed. A bankruptcy lawyer needs to know family law, to make sure all marital debts and assets as well are properly scheduled; a bankruptcy lawyer needs to know business law, to make sure that assets and debts related to partnerships, former partnerships, corporations and other entities are properly scheduled; a bankruptcy lawyer needs to know probate law, to make sure that inheritance rights (including those that arise after filing pursuant to § 541(a)(5)) are properly scheduled; a bankruptcy lawyer needs to know real estate law, to make sure that all interests in real property are properly scheduled; a bankruptcy lawyer needs to know the law of secured transactions, to make sure that secured debts and collateral are properly scheduled; the list is endless. There is no substitute for detailed questioning by an attorney.
[Debtor’s counsel] understood none of this. He allowed his wife, a non-lawyer, to conduct the initial interview with the debtors, advise them as to the chapter they should file under, and prepare their schedules. [Debtor’s counsel] himself spent a total of only about 15 minutes, perhaps less, speaking to the debtors himself. He completely abdicated his responsibilities to his clients, leaving them in the hands of untrained non-lawyers.
Worse, [Debtor’s counsel] completely failed to instill in his own staff the importance of the schedules or the need for complete honesty and disclosure. Thus his staff, without even consulting him, removed the Mercedes from the initial draft of the schedules when the debtors requested that mention of it be deleted. [Debtor’s counsel’s] cavalier attitude toward the schedules was contagious; it was transmitted first to [Debtor’s counsel’s] staff and then from them to the debtors themselves. The debtors, having no other frame of reference, got the idea that it was normal and expected that they conceal property they wanted to keep notwithstanding their bankruptcy. That led directly to denial of their discharge.
[Debtor’s counsel] did not know, and may still not know, that the primary duty of a debtor’s counsel is to make sure the schedules are accurate and complete. The attorney must use all of his or her training and experience to make sure that an asset or a debt is not inadvertently omitted. When an attorney knows that a debtor is not being completely truthful, the attorney’s responsibility is to insist on truthfulness and refuse to represent a debtor who does not comply.
Counsel was fined: $7,500, with all but $2,500 (the fees paid by the debtors to him) stayed provided he pay it within 20 days and not file schedules that are not actually signed. But the court also issued a permanent injunction, effective immediately.
It shall provide:
1. [Debtor’s counsel] or another licensed attorney must conduct the initial client interview in all bankruptcy cases.
2. [Debtor’s counsel] or another licensed attorney must spend at least one hour counseling the debtor and making sure that all assets and debts are discovered and scheduled.
3. [Debtor’s counsel] may not permit his wife or any other non-attorney in his employ to give any legal advice whatsoever to any of his clients, including selection of an appropriate Bankruptcy Code chapter.
In addition, [Debtor’s counsel] will be suspended from bankruptcy practice in this district effective thirty days after an appropriate order is entered, and may not thereafter appear in a bankruptcy court in this district or file any petition or pleading in this district without the prior leave of a bankruptcy judge or district judge of this district, unless before that time he has completed at least 10 hours of continuing education in elementary bankruptcy law, procedure and ethics. Such suspension will take place unless [Debtor’s counsel] has filed a certification of compliance, outlining his training in detail, by the 30th day.
That wasn’t all:
In addition to the above sanctions and orders [Debtor's counsel} will be referred to both the Standing Committee on Professional Ethics and the State Bar of California for such additional discipline as either or both may think appropriate.
The Clerk shall transmit a copy of this Memorandum and the Order made pursuant to it to the United States Trustee, with the court's recommendation that all Chapter 7 trustees in the district undertake a review of [Debtors' counsel's] past and current cases in light of the unreliability of schedules prepared by his office.
Why am I telling you this?
Simple. Debtors cannot lie on their schedules. As I’ve mentioned time and time again, there is no “winking” in bankruptcy. Or perhaps better said “The three most important words in bankruptcy are: disclose, disclose, disclose.” See In re Sanchez, 372 B.R. 289 (Bankr. S.D.Tex. 2007). Even though it’s arguable that the debtors were led to their undoing by their attorney, the bottom line is this: a bad attorney won’t save a dishonest debtor, but a good attorney can ensure that a honest debtor does not slip on a banana peel of dishonesty. A good attorney knows what is expected of debtors. This attorney clearly did not have a clue.
What frustrates me is that when people are thinking about filing bankruptcy, they are already at the end of their rope. The collection calls are relentless. There have already been sleepless nights. There probably has already been fighting and discord in the home over money and the lack of it. So by the time people call an attorney, what they need is sound guidance and expert help. They don’t need to be exposed to incompetence, and don’t need to be hurt even more than they already are. Keep that in mind when you’re deciding who to hire to get you out of the financial mess you find yourself in.
In re Tran, U.S. Bankruptcy Court, Northern District of California, no. 09-10549 (April 2, 2010).
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