Legal Ethics Bankruptcy Practice August 2020 2020 Downey

Mississippi Bar Complaints 2

“Advertising” as Bankruptcy Lawyer 3

Rule 7. 6(a) • A lawyer may communicate the fact that he or she has been certified or designated in a field of law by a named organization or authority, but only if that certification or designation is granted by an organization or authority whose specialty certification or designation program is accredited by the American Bar Association. • Notwithstanding the provisions of this Rule, a lawyer may communicate the fact that he is certified or designated in a particular field of law by a named, non-American Bar Association organization or authority, but must disclose such fact and further disclose that there is no procedure in Mississippi for approving certifying or designating organizations and authorities. 4

Model Rule 7. 2(c) A lawyer shall not state or imply that a lawyer is certified as a specialist in a particular field of law, unless: (1) the lawyer has been certified as a specialist by an organization that has been approved by an appropriate authority of the state or the District of Columbia or a U. S. Territory or that has been accredited by the American Bar Association; and (2) the name of the certifying organization is clearly identified in the communication. 5

Client Directs Representation 6

Attorney Grievance Commission of Maryland v. Smith-Scott (Md. 2020) • Attorney filed skeletal Chapter 13 bankruptcy petition for client • Client stated she had no intention of proceeding with bankruptcy, but only wanted to avoid having foreclosure sale on her birthday • Bankruptcy petition also misstated fees client would be paying 7

Rule 1. 2(a) • A lawyer shall abide by a client's decisions concerning the objectives of representation, subject to paragraphs (c), (d) and (e), and shall consult with the client as to the means by which they are to be pursued. • A lawyer shall abide by a client's decision whether to accept an offer of settlement of a matter. • In a criminal case, a lawyer shall abide by the client's decision, after consultation with the lawyer, as to a plea to be entered, whether to waive jury trial and whether the client will testify. 8

Conflicts of Interest 9

In re On-Site Fuel Service (SD Miss Bankr 5 -8 -2020) • Request for “derivative standing” suit – creditor bringing claim for bankruptcy estate due to conflict between corporate debtor and management • Court found that claims in two adversary proceedings were contradictory – Mansfield adversary case claimed Mansfield breached agreement by failing to make payments – Trustee adversary case claimed Mansfield exercised contractual right to setoff in not paying • Failure to resolve conflict was factor resulting in court denying derivative standing 10

MS Rule 1. 7 (a) A lawyer shall not represent a client if the representation of that client will be directly adverse to another client, unless the lawyer reasonably believes: (1) the representation will not adversely affect the relationship with the other client; and (2) each client has given knowing and informed consent after consultation. The consultation shall include explanation of the implications of the adverse representation and the advantages and risks involved. (b) A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interests, unless the lawyer reasonably believes: (1) the representation will not be adversely affected; and (2) the client has given knowing and informed consent after consultation. The consultation shall include explanation of the implications of the representation and the advantages and risks involved. 11

Handling Property Duty to Supervise Nonlawyers 12

Mississippi Bar v. Mayers (4 -16 -2020) • Lawyer received payment from client to cover litigation expenses • Lawyer’s assistant misappropriated funds • Lawyer used trust account check to pay filing fees, but check bounced • Lawyer received public reprimand in TN, and by reciprocal discipline in MS, for using check to pay filing fee when client’s funds were not in account 13

Safekeeping Property – Rule 1. 15(a) • A lawyer shall hold clients’ and third persons’ property separate from the lawyer's own property. • Funds shall be kept in a separate trust account maintained in the state where the lawyer's office is situated, or elsewhere with the consent of the client or third person. • Other property shall be identified as such and appropriately safeguarded. • Complete records of such trust account funds and other property shall be kept and preserved by the lawyer for a period of seven years after termination of the representation. 14

Supervising Nonlawyers – Rule 5. 3 • With respect to a non-lawyer employed or retained by or associated with a lawyer: • (a) a partner, and a lawyer who individually or together with other lawyers possesses comparable managerial authority in a law firm shall make reasonable efforts to ensure that the firm has in effect measures giving reasonable assurance that the person's conduct is compatible with the professional obligations of the lawyer; • (b) a lawyer having direct supervisory authority over the nonlawyer shall make reasonable efforts to ensure that the person's conduct is compatible with the professional obligations of the lawyer; 15

Supervising Nonlawyers – Rule 5. 3 With respect to a non-lawyer employed or retained by or associated with a lawyer: (c) a lawyer shall be responsible for conduct of such a person that would be a violation of the rules of professional conduct if engaged in by a lawyer if: (1) the lawyer orders or, with the knowledge of the specific conduct, ratifies the conduct involved; or (2) the lawyer is a partner or has comparable managerial authority in the law firm in which the person is employed, or has direct supervisory authority over the person, and knows of the conduct at a time when its consequences can be avoided or mitigated but fails to take reasonable remedial action. 16

In re Taylor (GA 8 -19 -2019) • Lawyer allowed non-lawyer to set up LLC and operate bankruptcy practice – Non-lawyer received payments from clients – Non-lawyer sent letters on behalf of LLC and told clients Lawyer (his “employer”) represented them – Lawyer would file skeletal bankruptcy petitions without speaking to clients or vetting cases – Website for LLC also contained misrepresentations about attorney and practice 17

Taylor continued • Lawyer spoke to and filed skeletal petition for client – Lawyer could not account for most of $2, 875 paid to LLC – Lawyer received some funds personally, but represented to court no fees had been received – Petition postponed foreclosure but was then dismissed – Lawyer then refiled petition, but this did not stop foreclosure sale of home • Lawyer failed to participate in disciplinary proceeding • Lawyer was disbarred (after 20+ years of practice) 18

In re Quinn (MN 7 -22 -2020) • In November 2012, Client retained attorney to file bankruptcy to avoid execution on $40 K judgment by Capital One – Paid $1800 in advance fees plus $306 costs • Lawyer prepared bankruptcy petition but client did not follow up until February 2013 • Client then wanted to work out payment with Capital One • Lawyer made little progress, and client suggested “pulling plug” in January 2014 • January 2016 – Client seeks file and refund of funds • In June 2018, with complaint pending, lawyer refunded $306 costs 19

Consequences in Quinn • “Misappropriation” even though only a small amount of money • Not a momentary lapse in judgment • Indefinite suspension with no right to reapply for reinstatement for 18 months 20

Protecting Client Information 21

Model Rule 1. 6(c) A lawyer shall make reasonable efforts to prevent the inadvertent or unauthorized disclosure of, or unauthorized access to, information relating to the representation of a client. 22

MS Rule 1. 6 Comment Acting Competently to Preserve Confidentiality. A lawyer must act competently to safeguard information relating to the representation of a client against inadvertent or unauthorized disclosure by the lawyer or other persons who are participating in the representation of the client or who are subject to the lawyer’s supervision. See rules 1. 1, 5. 1 and 5. 3. 23

MS Ethics Opinion 263 (6 -2020) Question: Is the use of online cloud-based storage companies (Dropbox, Google Cloud, etc. ) a violation of Rule 1. 6 of the Mississippi Rules of Professional Conduct? Conclusion: The Committee is of the opinion that lawyers may use a cloud-based electronic data storage system to store client confidential information, but lawyers must undertake reasonable precautions in using those cloud-based systems. 24

Cloud-based storage involves saving data and software on servers owned by third parties. • It is generally accepted that such storage offers many benefits, including the potential for being cheaper and more convenient than traditional physical storage methods. • Cloud-based storage may minimize the risk of data loss caused by fires, tornados, hurricanes, earthquakes and other catastrophic physical events. On the other hand, cloud-based storage exposes data to new cybersecurity risks and other risks associated with relinquishing control over data to third parties. Therefore, lawyers must weigh the benefits of cloud-based storage against the new risks presented by that technology. At all times, the paramount consideration should be the protection of client data. 25

The Committee is of the opinion that lawyers may use a cloud-based electronic data storage system to store client confidential information, but lawyers must undertake reasonable precautions in using those cloud-based systems. [Texas] “reasonable precautions” include: • acquiring a general understanding of how the cloud technology works; • reviewing the “terms of service” to which the lawyer submits when using a specific cloud-based provider just as the lawyer should do when choosing and supervising other types of service providers; • learning what protections already exist within the technology for data security; • determining whether additional steps, including but not limited to the encryption of client confidential information, should be taken before submitting that client information to a cloudbased system; • remaining alert as to whether a particular cloud-based provider is known to be deficient in its data security measures or is or has been unusually vulnerable to “hacking” of stored information; and • training for lawyers and staff regarding appropriate protections and considerations. The Committee agrees that the inquiries and practices set forth by the Texas Ethics Committee constitute a non-exhaustive list of reasonable inquires, practices and precautions for the selection of cloud-based storage service providers and the adoption of cloud-based storage for client data. 26

Candor to the Tribunal 27

In re Santos (WD Texas Bankr. 3 -17 -2020) • Client was barred for (re-)filing for bankruptcy for 180 days due to recent Chapter 13 filing • Client faced imminent foreclosure on home • Lawyer 1 filed bankruptcy in name of client’s ex-wife without authorization – Ex-wife was supposedly out of town and unavailable to talk to lawyer or sign – But ex-wife somehow took credit counseling class • Court notified client that he faced criminal charges and should hire counsel 28

First Lawyer (Steve Le) • Client paid $3, 500 legal fees for ex-wife in cash • Lawyer received two emails – day beforeclosure – from purported ex-wife after telling client her information and signature were required – Address for ex-wife was supposedly address facing foreclosure, but emails said “ex wife” – Ex-wife had supposedly also completed credit counseling – Ex-wife was now at funeral at remote location and was therefore unavailable • Lawyer still filed bankruptcy for ex-wife, certifying information was accurate • Le suspended from bankruptcy practice 2+ years and ordered to disgorge fee (to ex-wife) and attend ethics CLE 29

Rule 3. 1 • A lawyer shall not bring or defend a proceeding, or assert or controvert an issue therein, unless there is a basis in law and in fact for doing so that is not frivolous, which includes a good faith argument for an extension, modification or reversal of existing law. • A lawyer for the defendant in a criminal proceeding, or the respondent in a proceeding that could result in incarceration, may nevertheless so defend the proceeding as to require that every element of the case be established. 30

Model Rule 3. 3(a)(1) A lawyer shall not knowingly: (1) make a false statement of fact or law to a tribunal or fail to correct a false statement of material fact or law previously made to the tribunal by the lawyer; 31

Rule 3. 3(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. 32

Rule 3. 3 (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 of all material facts known to the lawyer which will enable the tribunal to make an informed decision, whether or not the facts are adverse. 33

Second Lawyer (Willie Cantu) • Appeared at hearing, learned of nature of hearing, and requested continuance – Only hired 3 days earlier – Had not been told real purpose of hearing • Court denied motion to continue, noting client had 2 ½ months to engage counsel 34

Diligence and Competence 35

Mississippi Bar v. Abioto (6 -18 -2020) • Reciprocal discipline of 1 -year suspension after TN censured attorney • Lawyer represented family on injuries arising from food product, but (1) filed in TN federal court but failed to obtain service, resulting in dismissal (2) re-filed in TN federal court and served but had most of case dismissed for statute of limitations (3) filed remaining count in MS state court without client’s knowledge and then withdrew without consent or obtaining service 36

Factors for Reciprocal Discipline (1) the nature of the misconduct involved (2) the need to deter similar misconduct (3) the preservation of the dignity and reputation of the profession (4) protection of the public (5) the sanctions imposed in similar cases (6) the duty violated (7) the lawyer’s mental state (8) the actual or potential injury resulting from the misconduct (9) the existence of aggravating and/or mitigating factors. 37

In re Valentine (Bankr. E. D. Mo. January 2020) • Husband filed modification proceeding • Wife obtained order requiring Husband to sell house to satisfy child support debt • Wife obtained appointment of real estate commissioner to compel selling of house • Husband filed for bankruptcy on 2 -1 -2019 • On 2 -4 -2019, state court held husband in contempt and placed him in custody until he paid debt 38

• “Rule 4. 1 -1 Comment 5 states in part ‘[c]ompetent handling of a particular matter includes inquiry into and analysis of the factual and legal elements of the problem and use of methods and procedures meeting the standards of competent practitioners. ’ MO. SUP. CT. R. 4. 1 -1 Comment 5. ” • “The State Court Action required some knowledge regarding bankruptcy, once the Main Case was filed. Even recognizing the current Missouri state case law. . . would have been helpful, but the Attorney did not even utilize that resource. ” • If the Attorney had followed these guidelines it is unclear if the facts leading to the incarceration would have ever occurred. However, the Attorney made no attempt to familiarize himself with the Bankruptcy Code, the automatic stay, the Missouri case law, or the impact the Suggestions of Bankruptcy actually had on continuing to pursue the Pre-Petition Debt. Therefore, the Court can find no evidence to refute the assertion that the Attorney egregiously violated the automatic stay by participating in post-Petition Date collection efforts that resulted in the incarceration of the Debtor. ” 39

Court’s Sanctions • • $520 in lost wages $400 in pain and suffering $5, 974 in attorney fees (plus other fees) $1, 000 in punitive damages (against attorney) 40

Third-Party Funding 41

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ABA Guidelines • Any (non-recourse) litigation funding arrangement should be in writing. – – How is funder compensated Who will pay and when Sources of compensation Termination of arrangement • Address what happens if funder and client disagree on strategy • Consider deal documents may be discoverable • Ensure client is informed about funding decisions 43

MS Ethics Opinion 262 (2 -2020) Hypothetical: Is it ethical for an attorney to refer financing for legal services, excluding bankruptcy and contingency matters, through a third party broker that offers such financing through multiple potential lenders? Our firm has been in discussions with a third-party legal financing business, that works with lenders to offer legal financing options to potential clients that may not otherwise be able to afford up-front retainers, similar to financing the purchase of goods. As part of the process we would direct the prospective client to the initial financing application. Conclusion: The Committee is of the opinion that a lawyer is not prohibited from directing clients to a third party broker to secure financing of the lawyer’s fee provided the lawyer complies with his obligations under Rules 1. 4, 1. 5, 1. 16 and 2. 1 of the Mississippi Rules of Professional Conduct. 44

Analysis (Abbreviated) Nothing in Rule 1. 8 prohibits a lawyer from referring a client to a fee financing company that advances the client funds to obtain legal services; provided the referring attorney has no interest in the lending institution, receives no fee for the referral, takes no direction from the lender regarding the matter financed, and discloses no information regarding the client’s representation to the fee financing company. In the scenario described by the requester if the client is interested in financing the attorney’s fee, the client completes an application with the third party lender. The lender then determines whether to approve the credit application and on what terms, establishing a lender/borrower relationship separate from the attorney client relationship. Further, under this scenario no information about the client’s legal matter or its likelihood of success is provided by the lawyer to the finance company to implicate Mississippi Rule of Professional Conduct 1. 6. In such a scenario the lawyer must also still comply with his obligations under 1. 4(b), 1. 5(a) and (b), 1. 15(a) and (c), 1. 16(d) and 2. 1. Pursuant to Mississippi Rules of Professional Conduct 1. 4(b) and 2. 1 the lawyer must explain the financing arrangement to the client to the extent reasonably necessary for the client to make an informed decision. This could include explaining the lawyer’s relationship with the finance company, the costs and benefits of the transaction to the client, the terms of the client’s arrangement with the finance company such as the interest rate and that the amount borrowed will have to repaid regardless of the outcome of the legal matter, that other financing options exist, and any other factors relevant to the client’s decision. Additionally, any fee charged by the lawyer to the client, whether financed or not, must be reasonable pursuant to Rule 1. 5. If the fee is increased due to financing it must not only still be reasonable, but the client must also be informed. If the fee financed is a retainer, advance fee or flat fee the funds received must be placed in a trust account as unearned fees until the lawyer has performed the agreed services to earn the fee pursuant to Rule 1. 15(a) and (c) of the Mississippi Rules of Professional Conduct. If the client or lawyer terminates the representation prior to the lawyer fully earning the fee, any unearned portion must be returned to the client pursuant to Rule 1. 16(d). 45

Communications with Represented Persons 46

Rule 4. 2 • In representing a client, a lawyer shall not communicate about the subject of the representation with a party the lawyer knows to be represented by another lawyer in the matter, unless the lawyer has the consent of the other lawyer or is authorized by law to do so. 47

Rule 4. 2 • • In representing a client, a lawyer shall not communicate about the subject of the representation with a party the lawyer knows to be represented by another lawyer in the matter, unless – the lawyer has the consent of the other lawyer or – is authorized by law to do so. 48

Rule 4. 2 comment In the case of an organization, this rule prohibits communications by a lawyer for one party concerning the matter in representation with • persons having a managerial responsibility on behalf of the organization, and with • any other person whose act or omission in connection with that matter may be imputed to the organization for purposes of civil or criminal liability or • whose statement may constitute an admission on the part of the organization. If an agent or employee of the organization is represented in the matter by his or her own counsel, the consent by that counsel to a communication will be sufficient for purposes of this Rule. Compare Rule 3. 4(f). 49

Lawyer Retirement 50

Ways to Transition Practice • Sale of Firm – Rule 1. 17 • Co-counsel on cases -- Rule 1. 5(e) fee-sharing – Requires consent of client • “Partner to succession” 51

Matter of Galloway (5 th Cir. 5 -8 -2020) • Lawyer retired from practice of law, having several attorneys take over practice – Attorneys also handled hearings as “professional courtesy” without formal engagement by clients • Client in Chapter 13 proceeding stopped making payments while in hospital • Trustee moved to dismiss, but lawyer failed to appear at hearing • Bankruptcy Court imposed $3, 500 sanctions and disgorgement of $16 K in other fees • LA disciplinary counsel cleared Lawyer of wrongdoing 52

Fifth Circuit reduces penalties • Found no “bad faith” in confusing statement about status of practice • Vacated $3, 500 sanction and $6, 300 of disgorgement • Criticized use of “professional courtesy” to cover each other’s Section 341 hearings 53

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