No matter how many hoops the client dutifully jumped through, without adequate inquiry and communication, the bankruptcy attorney was slammed for unbundling his services.
The representation agreement at issue excluded representation in any adversary proceeding filed, as do most such agreements, I imagine.
The client initialed every paragraph of the 19 page representation agreement, and the appeals court still held sanctioned the attorney over the agreement.
Turns out, a long agreement and the client’s initials weren’t enough to protect the lawyer from sanctions for unbundling his services.
What does it take, you ask, to make unbundling work?
Informed consent. With a sprinkle of front end diligence.
In short, the court found the lawyer breached ethical and statutory duties to get the client’s informed consent to the exclusion of adversary proceedings from the scope of representation. And the BAP affirmed.
What’s both striking and useful is Judge Meridith Jury’s concurrence in the BAP decision, which attempts to provide a guide to bankruptcy counsel facing these ethical challenges.
First, the facts
Before he got to the bankruptcy lawyer’s office, the client had sued his employer, a hospital, for wrongful termination, claiming that he was fired for reporting sexual harassment. Only mid case did he admit that he had “embellished” the emails on which his case was based.
His trial counsel disclosed that to the court and the client was sanctioned some $67,000. Ultimately, judgment was entered on the sanctions order in favor of the hospital.
Thereafter, the hospital began garnishing his wages to collect the sanctions judgment. That’s where the bankruptcy lawyer central to this tale comes in as the client sought relief from the garnishment.
While there’s a bit of he said/she said about what happened at the initial client interview, it’s clear that the client mentioned the judgment and his need to be free of the garnishment. I infer from Judge Markel’s long opinion at the trial court level, that the interview with the lawyer was brief and the lawyer assumed without investigation that the hospital’s judgment represented unpaid medical bills, clearly dischargeable.
The representation agreement proffered by the lawyer provided for a flat fee for the bankruptcy and excluded representation in any adversary proceedings arising in the case. Pretty standard, in my view
Fatally, it turned out, there was no discussion between client and attorney about nondischargeable debts; the likelihood that the judgment creditor would assert nondischargeability; nor of the consequences of excluding representation in nondischargeability actions from the scope of the representations.
Adversary leads to OSC
Not surprisingly, the hospital brought a non-dischargeability adversary, the attorney was served, and he responded that he did not represent the debtor any further. But that was only after he unilaterally rejected a proposed stipulation from the judgment creditor as to dischargeability.
When the debtor client appeared in pro per at the case management conference in the adversary, he recited his complaints about his lawyer’s refusal to represent him. An OSC to the lawyer issued, and the proceedings against the lawyer unfolded.
After analyzing both Nevada rules of professional conduct and the Bankruptcy Code, the bankruptcy judge found the attorney’s conduct violated the state provisions as well as §. 707(b)(4)(C); § 526(a); and §528(a).
A qualitative analysis of each individual debtor’s case must be done at intake to ensure that his or her reasonable goals and needs are being met.
The resulting sanctions included
- disgorging the fee received;
- continuing education;
- publication of the decision; and
- delivery of the sanctions opinion to prospective clients for the ensuing two years.
Counsel appealed the decision to the 9th Circuit BAP who affirmed.
6 steps to successful unbundling
Judge Jury concurrence in the BAP affirmance offers a roadmap for ethical unbundling of services.
She takes pains to reinforce that the majority did not prohibit unbundling; it sanctioned counsel’s failure to investigate and communicate. Investigation would have shown that limited scope representation would not achieve the client’s goal of permanently ending the wage garnishment. That risk was not communicated to the client.
Recognizing that without limited scope representation, bankruptcy lawyers would become unaffordable, she tendered six suggestions for ethical unbundling.
- Identify fully the client’s goals at the first meeting
- Conduct a reasonable investigation of debtor’s assets and liabilities
- Explain the risks of exclusion of representation in adversaries
- Customize the representation agreement to the client’s goals
- Allow time for client to shop elsewhere for representation
- Document fully the steps taken to comply with 1-5.
And there’s your Cliff Notes guide to ethical unbundling of bankruptcy services. The opinions are worth reading.
