THE ASSOCIATION OF THE BAR OF THE CITY OF NEW
COMMITTEE ON PROFESSIONAL AND JUDICIAL ETHICS
FORMAL OPINION 2005-01
Pro Bono Consumer Bankruptcy Representation
Topic: Pro bono representation of debtors in Chapter 7 bankruptcy filings; limiting the scope of the representation; conflicts of interest
Digest: The pro bono representation of an individual in connection with a Chapter 7 bankruptcy filing while simultaneously representing one or more of the individual’s creditors in unrelated matters will not typically create a conflict of interest within the meaning of DR 5-105. As a result, a lawyer participating in a pro bono program will ordinarily be able to satisfy his or her obligations under DR 5-105(E) by determining in an initial interview with the prospective client that no unusual facts sufficiently suggest direct adversity with a particular creditor so as to require a conflict check to determine whether that particular creditor is a client of the firm. If, however, any creditor subsequently objects to the discharge of a debt or takes other action that is directly adverse to the Chapter 7 debtor, the pro bono lawyer may not represent the debtor in connection with that aspect of the Chapter 7 case unless a conflict check is undertaken and, if the objecting creditor is revealed to be a client of the lawyer’s firm, both clients consent to the dual representation after full disclosure.
Code: DR 5-105(A) – (E)
Two bar associations propose to establish separate programs in which volunteer lawyers drawn from the private bar, including lawyers from large commercial law firms, will represent low-income individuals on a pro bono basis with respect to Chapter 7 bankruptcy filings, which would result in staying certain credit collection, discharging certain consumer debts, and distributing any non-exempt assets among creditors. In one or both programs, experienced bankruptcy lawyers will serve as mentors to volunteer lawyers who are inexperienced.
In the first program, the scope of the representation will be limited by express agreement at the outset. In an initial meeting, the lawyer will assist the client in determining whether he or she is eligible for voluntary bankruptcy under Chapter 7 of Title 11, the United States Bankruptcy Code (the “Bankruptcy Code”), explain the bankruptcy process, counsel the client about possible alternatives (e.g., Chapter 7 filing, credit counseling, other Bankruptcy Code chapters resulting in the discharge of debts, or taking no action), assist the client in deciding whether to pursue a Chapter 7 filing and, if so, explain what information must be assembled to prepare the necessary filing. If the client wishes to file for bankruptcy under Chapter 7, the lawyer will meet with the client thereafter to prepare the necessary documents (which will disclose that they were prepared by a pro bono attorney under the auspices of the volunteer program), advise the client how to file the documents, and advise the client about the first meeting of creditors pursuant to Section 341 of the Bankruptcy Code (the “341 Meeting”) and the questions that may be asked by the United States trustee. The lawyer will also presumably advise the client on claiming exemptions, the requirements for discharge of debts, and the considerations relating to reaffirmations of debt. Thereafter, the client will proceed pro se. The initial agreement with the client will provide that the lawyer will assist only in preparing the documents needed to commence a Chapter 7 case and providing advice prior to the actual commencement of the case.
In the second program, the representation will continue after the Chapter 7 case is commenced. In the rare event that a creditor files an objection to the discharge of a particular debt, the pro bono lawyer will represent the debtor in responding to the objection and in any adversary proceedings that follow unless the lawyer or the lawyer’s firm represents the objecting creditor in another matter.
This Opinion addresses questions of professional conduct raised by the proposed pro bono programs.
In general, lawyers providing pro bono assistance to potential Chapter 7 debtors under the auspices of the proposed volunteer programs will be undertaking a legal representation subject to the provisions of the Code of Professional Responsibility governing the lawyer-client relationship. The proposed assistance, which will include giving advice about whether the client is eligible to file under Chapter 7 and ought to do so, as well as assistance in preparing the necessary legal documents, necessitates the formation of a lawyer-client relationship.1
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Limiting the Scope of Representation
A threshold question is whether it is ethically permissible, as volunteer lawyers in one program would do, for the lawyer to agree with the client at the outset of the representation that the lawyer will provide advice and drafting assistance prior to a Chapter 7 filing, at which time the representation will end.2 In general, a lawyer may, with the understanding and explicit agreement of the client,3 limit the scope of the lawyer’s representation, as long as doing so does not entail providing incompetent representation4 or representation that is so limited in scope that the client is not helped but harmed.5 For example, a lawyer may represent the client with respect to some but not all discrete stages of a matter.6 Or a lawyer may assist an individual who is otherwise representing him- or herself by providing legal advice7 or drafting documents.
Measured against those standards, the pro bono program which proposes to provide representation only through the commencement of a Chapter 7 case is ethically permissible as long as the volunteer lawyer ensures that the client is aware of, and consents to, any risks posed by limiting the scope of the lawyer’s representation. Thus, it is incumbent upon the volunteer lawyer to explain to the client what will or may occur following commencement of the case (e.g., the 341 Meeting, the possibility that objections will be made to exemptions claimed or to the discharge of certain debts, the standards regarding reaffirmation of debts, and the fact that the Trustee has investigatory and avoidance powers under the Bankruptcy Code) so that the client can make an informed decision about whether he or she is comfortable proceeding pro se. We also believe that the volunteer lawyer should independently evaluate whether the complexities of the case or the limitations of the client make it unlikely that the client could effectively proceed pro se. In such situations, the volunteer lawyer should consider assisting the client in finding other counsel, for example by referring the client to a pro bono program that provides representation throughout the pendency of a Chapter 7 case.
It will also, of course, be necessary for the volunteer lawyer to ensure that any assistance he or she has provided is appropriately disclosed. Where limited assistance is provided in the context of litigation, this Committee recognized in N.Y. City 1987-02 that to avoid misleading the court or opposing party, lawyers must ensure that the pro se party discloses that he or she received a lawyer’s assistance in drafting pleadings.8
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Conflicts of Interest
The second – and considerably more complex – ethical issue implicated by the proposed pro bono programs relates to the potential application of the conflict of interest rule, DR 5-105, which requires lawyers to avoid representing differing interests without client consent (DR 5-105(A), (B) and (C)), imputes conflicts of interest within a law firm (DR 5-105(D)), and requires lawyers to check for conflicts before beginning a new representation (DR 5-105(E)). The complexities arise out of the possibility that one of the client’s creditors may be represented by the lawyer or the lawyer’s firm in an unrelated matter.
We are told that in typical Chapter 7 cases, creditors most frequently will be financial institutions, credit card companies and/or retail institutions of the type commonly represented by the law firms from which many of the volunteer lawyers will be drawn. We are further told that, as a general matter, debts sought to be discharged in a typical Chapter 7 case are relatively small with respect to any given creditor, particularly large institutional creditors; that in the overwhelming majority of these cases there are no significant nonexempt assets; and, that it is extremely rare for an objection to be made to the discharge of debt in Chapter 7 cases. Thus, for example, we are informed that the records for the United States Bankruptcy Court for the Southern District of New York reflect that during the most recent statistical year (July 1, 2003 – June 30, 2004) 15,146 individual Chapter 7 cases were filed. Of these, 14,842 (98%) were deemed “no asset” cases. Only 223 adversary proceedings were filed during the same period involving a request for exceptions to the discharge of a debt under 11 U.S.C. § 523 . Letter, Kathleen Farrell-Willoughby, Clerk of the Bankruptcy Court for the Southern District of New York, to Barbara S. Gillers, Chair, Committee on Professional & Judicial Ethics of the Association of the Bar of the City of New York , dated January 14, 2005 , on file with the Committee).
The question is whether the representation of a Chapter 7 debtor seeking to discharge debts owed to a creditor gives rise to a conflict of interest when the creditor is represented by the lawyer or the lawyer’s firm in an unrelated matter. If so, before representing a Chapter 7 debtor, the volunteer lawyers would have to undertake conflict checks to identify whether such a conflict exists,9 and if it does, could not accept the representation without the respective clients’ consent. We are told that particularly for the proposed pro bono program that would be limited to pre-petition representation, it would be impractical to undertake such conflict checks and, where necessary, to seek the consent of the client-creditors, or to seek all the potential client-creditors’ consent in advance.
In general, a conflict of interest exists under DR 5-105(A), (B) and (D) when a lawyer represents one client in a matter that is directly adverse to a second client whom the lawyer or the lawyer’s firm represents in another matter, even if the two matters are unrelated. The most typical example is when a lawyer represents a client in litigation against a party whom the lawyer’s firm represents in another matter. See, e.g., Cinema 5 Ltd. v. Cinerama, Inc., 528 F.2d 1384, 1386 (2d Cir. 1976). The restriction against undertaking such a representation without the respective clients’ informed consent reflects the concern that, when a law firm’s activities are directly adverse to a current client, the client may reasonably perceive that the law firm is acting disloyally or may be less zealous in pursuing the client’s interests, and the client’s trust and confidence in the firm’s lawyers will be eroded as a result. See generally Charles W. Wolfram, Modern Legal Ethics 350 (1986) (“Even if the representations have nothing to do with each other, so that no confidential information is apparently jeopardized, the client who is sued can obviously claim that the lawyer’s sense of loyalty is askew.”).
A conflict does not necessarily exist, however, if the representation of one client is adverse to the interests of another client but the respective clients are not themselves direct adversaries in litigation or in an equivalent context. See, e.g., N.Y. City 2001-03 (conflict does not necessarily arise where lawyer’s work for a plaintiff in one lawsuit may be used by that plaintiff in another lawsuit against a party whom the lawyer’s firm represents in other matters, where a different law firm represents the plaintiff in proceedings against the other client) (citingSumitomo Corp. v. J.P. Morgan & Co. 2000 U.S. Dist. LEXIS 1252 (S.D.N.Y. Feb. 7, 2000)); ABA Formal Op. 97-405 (1997) (lawsuit against corporate client’s subsidiary or parent is not necessarily “directly adverse” to corporate client, even though lawsuit may be financially adverse to client). See alsoBrown & Williamson Tobacco Corp. v. Pataki, 152 F. Supp. 2d 276, 282, 288-89 (S.D.N.Y. 2001) (representation adverse to a current client in an unrelated matter may be justified on a proper showing).
This Committee’s research has not disclosed any ethics opinion addressing whether representation of an individual in connection with the filing of a Chapter 7 petition should be regarded as a representation that is directly adverse to the individual’s creditors such that the restrictions of DR 5-105 are necessarily triggered. For the reasons set forth below, we conclude that in the typical case a conflict will not be created when a pro bono lawyer represents an individual in connection with the filing of a Chapter 7 petition while simultaneously representing one or more of the individual’s creditors in unrelated matters. If, however, a client creditor subsequently objects to the discharge of a debt or otherwise takes action that is directly adverse to the debtor, the pro bono lawyer will be unable to represent the Chapter 7 debtor in connection with that aspect of the case unless both clients consent to the dual representation after full disclosure. In addition, we note that there may be Chapter 7 cases in which the particular facts are sufficiently suggestive of direct adversity that the lawyer may be required to undertake a conflict check and obtain consent of all affected clients before undertaking the representation.
Unlike the commencement of litigation – which by definition is brought directly against one or more parties on behalf of another party with an adverse interest – the commencement of a typical Chapter 7 case is an in rem proceeding that triggers the automatic operation of a statutory framework for marshaling and distributing assets and discharging debt. Under that statutory framework, to the extent the debtor has non-exempt assets, those assets are distributed among the creditors in accordance with statutorily mandated criteria. To the extent debt is discharged (assuming no objection has been made to its discharge), that action likewise occurs by automatic operation of statute. In addition, to the extent adversary proceedings are brought by the Chapter 7 estate, the decision to do so is made by the court-appointed Chapter 7 trustee, not by the Chapter 7 debtor or his counsel.
The Chapter 7 statutory framework is one specifically intended to strike a fair balance between the rights of debtors and creditors, see, e.g., In re Welzel, 275 F.3d 1308, 1318-19 (11th Cir. 2001); United States v. Spicer, 57 F.3d 1152, 1156 (D.C. Cir. 1995); In re Frasier, 294 B.R. 362, 366 (Bankr. D. Colo. 2003), and, together with other provisions of the Bankruptcy Code, to ensure equality of treatment for creditors holding claims of equal priority. See, e.g., Union Bank v. Wolas, 502 U.S. 151, 161 (l991); In re Roblin Indus., Inc., 78 F.3d 30, 40 (2d Cir. 1996); Advo-System, Inc. v. Maxway Corp., 37 F.3d 1044, 1047 (4th Cir. 1994). As a result, both debtors and creditors alike can be said to derive substantial benefit from the availability of Chapter 7 proceedings.
In light of the structure and purpose of the Chapter 7 statutory framework, we think it is reasonable to conclude that in the typical Chapter 7 case, there is no adversity between debtor and creditor sufficient to trigger the restrictions of DR 5-105 unless and until a creditor objects to the discharge of a debt or otherwise takes action that is directly adverse to the debtor.
The analysis would be different, however, if an initial interview of the prospective client revealed that the prospective client was involved in a litigation, dispute or other matter in which the other side was represented by counsel. Depending on the nature of the dispute, such a circumstance might indicate a risk that the lawyer’s firm was representing the opposing party in that dispute. And such risk would require that a conflict check be undertaken since even though the Chapter 7 filing itself is not directly adverse to any creditor, the lawyer might elsewhere be representing a party in a matter that is directly adverse to the debtor and could undertake the dual representation, if at all, only with the respective clients’ consent. Similarly, if the lawyer or the lawyer’s firm represents institutional clients in consumer collection actions, we believe there is a sufficiently great risk of potential conflict that a conflict check may be required.
In addition, there may be circumstances specific to the Chapter 7 case that could render the conclusions expressed in this opinion less applicable. If, for example, the debtor had no non-exempt assets and only a single creditor, or if a particular creditor had already commenced or appeared to be (based upon the creditor’s statements to the debtor or actions toward the debtor) on the verge of commencing a collection action, then the filing of a Chapter 7 petition (which results in the automatic stay of litigation) could have at least the appearance of being more directly aimed at that particular creditor. In such a case, we believe that the lawyer may be required to undertake a conflict check and, if the creditor is a client of the lawyer’s firm, to seek consent of both clients before undertaking the representation.
Similarly, if the debtor client had granted new liens (such as a lien to a debt consolidation service) or made nonroutine payments within the past 90 days, then there is a greater likelihood that a particular creditor would be disproportionately affected by the filing of a Chapter 7 petition. There, too, we believe the lawyer may be required to undertake a conflict check and, if necessary, obtain consent of the affected clients before undertaking the representation.
We also note, as a possible source of further guidance, the analysis that has been applied in another area involving adversity of an indirect nature – namely, matters involving the affiliate of a client. In such cases, courts have often looked to the materiality of the indirect adversity to determine whether DR 5-105 is triggered.10 Applied to the issue at hand, such an analysis would suggest that a conflict check may be required if the debt that would be discharged in the Chapter 7 case might have a material adverse effect on the creditor’s bottom line or if any other factors existed that would cause the lawyer to conclude that the filing of a Chapter 7 petition might be of particular importance to one or more creditors.
Finally, we note that additional analysis might be necessary or a different conclusion might be reached if the prospective client’s personal circumstances make it advisable for him or her to consider other forms of bankruptcy relief (such as petitions under Chapter 11 or Chapter 13) or alternatives to bankruptcy (such as direct negotiation with creditors). Obviously, the volunteer lawyer could not represent the debtor-client in negotiations with a creditor who is a current client of the lawyer’s firm unless both clients consented to the representation. In addition, to the extent the volunteer lawyer believes that the debtor-client should consider seeking relief under Chapter 11 or Chapter 13 of the Bankruptcy Code, we note that this opinion does not address whether and to what extent the analysis presented here is applicable in other bankruptcy contexts.
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The Need for Conflict Checks and/or Disclosure
As noted above, DR 5-105(E) requires lawyers to, among other things, “have a policy implementing a system by which proposed engagements are checked against current and previous engagements, so as to render effective assistance . . . in complying with” DR 5-105 and certain other Code provisions regarding conflicts of interest.
Based on the foregoing analysis, and assuming that the lawyer’s firm does not represent clients in consumer collection actions, we conclude that a volunteer lawyer or mentor in the proposed pro bono Chapter 7 programs would satisfy his or her obligations under DR 5-105(E) by determining in an initial interview with the prospective client that none of the following factors is present:
the other party is represented by counsel;
If, by contrast, one or more of the above factors is present, then we believe that additional analysis is necessary to determine whether the proposed representation would create a sufficient risk of direct adversity such that a conflict check would be required.
In addition, with respect to lawyers undertaking to provide full representation (as opposed to pre-petition representation only), we believe that it would be the better practice to advise the debtor-client at the outset of the representation of the possibility that a conflict might arise that would require the lawyer to withdraw. In fact, such advice might be affirmatively required if in the particular circumstances it appears likely to the lawyer that a direct adversity will arise between the debtor and one or more creditors. And if such an adversity does arise (whether through the filing of an objection to the discharge of debt or otherwise), a conflict check would be required under DR 5-105(E) and DR 5-105(B) (or perhaps DR 5-108) and the pro bono lawyer would be required to end the representation if the objecting creditor is a current client (or, in some circumstances, a former client) of the lawyer or the lawyer’s firm and if one or both clients declined to consent to the dual representation after full disclosure in accordance with DR 5-105(C).
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Given the structure and purpose of the Chapter 7 statutory framework, we believe that it is reasonable to conclude that the mere commencement of a Chapter 7 case will not ordinarily create an adversity between the debtor and his or her creditors that is sufficient to trigger the restrictions of DR 5-105. As a result, lawyers participating in pro bono Chapter 7 programs will (assuming that they or their firms do not represent institutional clients in consumer collection actions) ordinarily be able to satisfy their obligations under DR 5-105(E) by confirming in an initial interview with the prospective client that there are no unusual facts sufficiently suggestive of direct adversity with a particular creditor as to render it necessary or prudent to determine whether that creditor is a client of the lawyer or the lawyer’s firm. If, however, any creditor subsequently objects to the discharge of a debt or otherwise takes action that is directly adverse to the debtor, the volunteer lawyer cannot represent the debtor in connection with that aspect of the Chapter 7 case without first conducting a conflict check and obtaining any necessary consent under DR 5-105(C).
Dated: January, 2005
1 The Code of Professional Responsibility does not include a provision on when a lawyer-client relationship is established. Although the relationship ordinarily comes about by express agreement, it may also be established implicitly. Authorities describe the relevant standard in various ways. For example, Section 14 of the Restatement (third) of the law governing lawyers (1998) provides: “A relationship of client and lawyer arises when: (1) a person manifests to a lawyer the person’s intent that the lawyer provide legal services for the person; and . . . (b) the lawyer fails to manifest lack of consent to do so, and the lawyer knows or reasonably should know that the person reasonably relies on the lawyer to provide the services. . . .”
2 In recent years, considerable recognition has been given to the possibility of providing limited representation to individuals who cannot afford an attorney. See, e.g., Mary Helen McNeal, Having One Oar or Being Without a Boat: Reflections on the Fordham Recommendations on Limited Legal Assistance, 67 Fordham L. Rev. 2617 (1999); Mary Helen McNeal, Redefining Attorney-Client Roles: Unbundling and Moderate-Income Elderly Clients, 32 wake forest l. rev. 295 (1997); Michael Millemann et al., Rethinking the Full-Service Legal Representational Model: A Maryland Experiment, 30 Clearinghouse Rev. 1178 (1997); Forrest S. Mosten, Unbundling of Legal Services and the Family Lawyer, 28 Fam. L.Q. 421 (1994).
3Cf. N.Y. City 1987-02 (where lawyer agrees to draft pleadings for pro se party in matrimonial action, lawyer “must use his best efforts to ensure that the client’s decision to proceed in the manner the client suggested is made only after the client has been informed of all the relevant considerations, and after the client has been advised of the advantages and disadvantages of proceeding with, and without, counsel.”) (citations omitted)
4Cf. N.Y. City 2001-03 (a lawyer may avoid client conflicts by limiting the scope of a representation) ; Model Rules of Prof’l Conduct R. 1.2 (2002); Model Rules of Prof’l Conduct R. 1.2, Cmt. 7, 8 (“[A]n agreement for a limited representation does not exempt a lawyer from the duty to provide competent representation.… All agreements concerning a lawyer’s representation of a client must accord with the Rules of Professional Conduct and other law.”)
5See, e.g., N.Y. State 664 (1994) (holding that a lawyer may offer legal advice through a telephone call-in service if, inter alia, “the scope of representation is sufficient to render practical service to the client . . . and . . . the limited representation [does] not materially impair the client’s rights”); N.Y. City, 1987-02 (drafting pleadings for pro se party).
6See, e.g., N.Y. State 604 (1989) (permissible to limit criminal representation to grand jury proceedings).
7See, e.g., N.Y. City 1987-02 (drafting pleadings for pro se party in matrimonial action).
8 Drafting documents for pro se parties is also subject to any applicable legal restrictions, including, in litigation, any applicable rules of court. See generally John C. Rothermich, Ethical and Procedural Implications of “Ghostwriting” for Pro Se Litigants: Toward Increased Access To Civil Justice, 67 Fordham L. Rev. 2687 (1999). We are unaware of any additional legal restrictions applicable to Chapter 7 filings, but that is ultimately a question of law on which this Committee does not opine.
9 A recent provision of the ABA Model Rules of Professional Conduct, Rule 6.5, would limit the reach of the conflict rule in cases where a lawyer “provides short-term limited legal service to a client” on a pro bono basis, by providing that the imputed disqualification rule applies only to conflicts that the lawyer knows of and obviating the need to check for conflicts with regard to law firm clients of whom the lawyer is unaware. This model rule was recently endorsed in a report on New York-area lawyers’ pro bono response to the legal needs generated by the September 11, 2001 terrorist attacks. SeePublic Service in a Time of Crisis: A Report and Retrospective on the Legal Community’s Response to the Events of September 11, 2001 at 59 (2004) (concluding that the experience of lawyers’ response to September 11 “demonstrates the wisdom of Rule 6.5" and that the rule should be adopted “[t]o expand the availability of legal representation to those who cannot afford a lawyer, not only in emergency settings but in general”) available at www.abcny.org/pdf/PSTC1.pdf (last visited January 18, 2005). However, as of yet, the provision has not been adopted in New York.
10See, e.g., Travelers Indem. Co. v. Gerling Global Reinsurance Corp., 2000 WL 1159260, at * 5 (S.D.N.Y. Aug. 15, 2000) (stating that if a lawyer is adverse to an affiliate of a corporate client, disqualification is proper only if, among other things, the representation will have a material adverse effect on the client’s “bottom line”); Hartford Accident & Indem. Co. v. RJR Nabisco, Inc., 721 F. Supp. 534, 540 (S.D.N.Y. 1989) (stating that a conflict exists when a parent corporation client attaches “considerable importance” to litigation brought against its subsidiary).