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Debtors Deserve Better:
Quality of Representation
Raises Troubling Questions
Written by:
Jan Samuel Ostrovsky (1)
United States Trustee, Region 18
Most of us hold our fellow bankruptcy practitioners in high regard. We
view them as intelligent, ethical, hard working, and talented. Certainly the
readers of this Journal are
among those truly interested in the law and professional development.
It comes as no surprise, then, that many practitioners were unsettled by
certain provisions in the pending bankruptcy reform legislation that seem
targeted at requiring the performance of duties that should be second nature to
attorneys.
As defined in the
legislation, for example, "debt relief agency" (2)
includes a debtor's attorney. A debt relief agency must not fail to perform the
work it promised to perform. It must not make misrepresentations to a debtor,
and it must not fail to advise a debtor of his or her options.
(3)
Moreover, the proposed bill would require debtor's counsel to certify
that counsel has fully advised the debtor of the legal effect of any
reaffirmation agreement. (4) Additionally, the
bill would render debtor's counsel liable for failing to "perform[] a reasonable
investigation into the circumstances that gave rise to the petition, pleading or
written motion." (5)
These and other proposals are not intended to address provisions of the
current Bankruptcy Code that proponents see as too generous or subject to abuse.
They are not intended to alter the substantive rights of debtors and creditors.
Nor do they seem intended to directly address debtor misconduct. Instead, they
address something that is taken for granted under the current Bankruptcy Code:
attorney professionalism. They mandate the type of attorney conduct that clients
should already have been able to count on.
In doing so, these provisions certainly indicate that Congress thinks
attorneys--and, to be frank, debtors' attorneys--are not doing their jobs.
Like it or not, there is considerable reality behind that perception. At
any given Section 341 calendar, you may see any or all of the following:
- Attorneys who do not know their clients and ask them to identify
themselves.
- Attorneys who are rude to their clients.
- Clients obviously unprepared to testify.
- Schedules that contain internal inconsistencies.
- Schedules that contain clearly incorrect information, such as clothing
valued at zero dollars and "average" bank balances.
- Schedules that significantly predate the filing.
- Budgets that are incomplete or not credible on their face.
- Debtors with minimal debt who are probably not well served by
bankruptcy.
- Chapter 13 plans that are not mathematically possible.
- Ill-advised reaffirmations.
- And the list goes on.
Beyond the anecdotal, there is objective evidence of a problem. In 1999,
Bankruptcy Judge Steven W. Rhodes of the Eastern District of Michigan conducted
a limited study dealing solely with the accuracy of filed schedules and
statements of affairs,. (6) The study tested for
20 specific types of errors, plus one category of miscellaneous problems. All
errors had to be apparent from the face of the filings. For example, a filing
that disclosed a pension expense but no pension interest would be considered to
have an error. (7) Similarly, a filing that
identified the debtor as a renter but disclosed no security deposit would be
considered erroneous. (8)
No attempt was made to go beyond the documents themselves.
(9) As a result, the data are both over- and under-inclusive. In the
cases of renters who did not disclose security deposits, for instance, the data
may have included renters who actually did not have security deposits--although
that does not diminish the significance of the eye-popping finding that "81% of
debtors paying rent disclosed no security deposit." (10)
On the other hand, the study dealt solely with questions that were
incompletely or inconsistently answered. It did not attempt to discover
responses that were otherwise incorrect or assets that were otherwise omitted.
Nor did it deal with problems that could not be discerned from the face of the
documents. A number of the 200 cases examined very likely contained other
problems.
Even given these uncertainties, the results are sobering. The study
found that 198 of 200 cases examined had at least one disclosure problem or
presumptive error, with an average of 3.4 problems or errors per case.
(11)
The import of the study is not what, if anything, it reveals about
debtor honesty, but what it says about the competence of counsel.
(12) Debtors were represented in all cases. Ninety-nine percent of
these cases had inconsistencies apparent on their faces. The problems were not
noticed by counsel.
And the study dealt only with the simplest aspect of bankruptcy: filling
out the forms. The implications for the quality of the individual legal advice
given debtors is disheartening.
It is tempting to see the source of the problem as economic. There are
significant pressures on debtors' counsel. Consumers on the brink of bankruptcy
do not want to or cannot spend a great deal on attorneys' fees. Some counsel
feel competitive pressure from bankruptcy petition preparers. Interestingly,
though, Judge Rhodes found no correlation between the number of errors and fees
charged. (13)
The problem of poor--but less than disastrous--legal service is
difficult to deal with under current law. Courts are understandably reluctant to
take action against debtors for problems likely caused by their attorneys. In
cases where courts do act, there are a variety of remedies available. Courts may
condition, temporarily enjoin, or permanently bar attorneys from appearing in
front of them. (14) Severe remedies are for
egregious acts, however, and are not generally employed for simple sloppy
practice. (15)
The most common remedy is disgorgement or reduction of fees under
Section 329 of the Bankruptcy Code. Although the burden of poor representation
often falls most heavily on debtors and chapter 7 and 13 trustees, the amounts
involved in individual consumer cases are usually too small to merit an
objection to fees. Therefore, the U.S. Trustee is often the most active entity
in the area, and most U.S. Trustee activity of this type to date has been
directed against something more than routine inaccuracies.
The proposed legislation would have addressed the issue of inaccurate
filings head on by requiring that attorneys make some sort of inquiry, thereby,
at a minimum, assuring filings that were not improbable or impossible on their
face. It might even have served to improve the level of service and care given
to many debtors' cases. Absent the legislation, the only reasonable prospect of
dealing with the issue is systematic action by U.S. Trustees on a district by
district basis.
In the past, the bar, the bench, and the U.S. Trustee Program have made
earnest efforts to deal with the most unethical practitioners. We have not been
as successful at addressing more general problems associated with debtor
practices. Over the next year, U.S. Trustee offices will begin looking at these
and similar issues more closely. We hope that with the help of panel trustees,
standing trustees, and the bar, improvements will be made so debtors can rely
upon the diligence and professionalism of their legal counsel.
End Notes:
1. All views expressed in this article are those of the
author and do not necessarily represent the views of the U.S. Trustee Program or
the U.S. Department of Justice.
2. S. 420 § 226. All references to the proposed
legislation in this article are to the Senate version of the bill.
3. Id. at § 227.
4. Id. at § 203. To be sure, debtors' counsel
have not been singled out. The major thrust of § 203 is to cure abusive creditor
practices.
5. Id. at § 102(a).
6. Steven W. Rhodes,
An Empirical Study of Consumer
Bankruptcy Papers, 73 Am. Bankr. L.J. 653 (1999).
7. Id. at 666.
8. Id. at 665.
9. Id. at 654.
10. Id. at 665.
11. Id. at 678.
12. Indeed, Judge Rhodes is careful to note that the
Official Forms, themselves, are a source of confusion and, even if that were not
the case, certain of the disclosure requirements are "unrealistic and
unnecessary." Id. at 653.
13. Id. at 680.
14. Chambers v. NASCO, Inc., 501 U.S. 32,45-46
(1991); In re Hessinger & Associates, 192 B.R. 211, 214-216 (N.D. Cal,
1996); In re MPM Enter., 231 B.R. 500 (E.D.N.Y., 1999).
15. See, e.g., In re MPM Enter.,
supra, at 506.
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