MALPRACTICE TRAPS: HOW TO AVOID THE SLEEPLESS NIGHTS AND THE MORNING AFTER John D. Penn* Haynes and Boone, L.L.P. 201 Main Street, Suite 2200 Fort Worth, Texas 76102-3126 [email protected] Clifton R. Jessup, Jr. Patton Boggs, L.L.P. 2200 Ross Avenue, Suite 900 Dallas, Texas 75201 [email protected] Honorable Ronald B. King United States Bankruptcy Court Western District of Texas San Antonio, Texas ADVANCED BUSINESS BANKRUPTCY LAW COURSE 1998 MAY 14-15, 1998 DALLAS, TEXAS CHAPTER D * Editor of materials contributed by all Presenters TABLE OF CONTENTS I. DISCLOSURE FOR RETAINED PROFESSIONALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 A. Statutes and Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 B. Practical Advice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 C. Duty to Disclose Continues Throughout Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 D. Purpose of Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 E. Relationships with Parties in the Case Which Must be Disclosed? -- How far does “all” really go? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 F. Consequences of. .Non-Disclosure ............................................................ 2 G. Benefits of Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 II. WHO IS THE CLIENT? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 A. Debtor / Debtor in Possession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 B. Representing Creditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 C. Representing Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 III. TRANSFERS IN THE ZONE OF INSOLVENCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 A. Fresh Start vs. Head Start . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 B. Risks of Transfers During Financial Distress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 C. Exposure for Participation in Fraudulent Transfer or other Fraudulent Pre-petition Conduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 D. Words of Wisdom for Bankruptcy Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 IV. CONFLICTS OF INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 A. Traditional Conflict Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 B. Law Firm Economics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 C. Actual v. Potential Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 D. Disinterestedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 V. DEALING WITH RENEGADE CLIENTS AND ADVERSARIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 A. Duty to “Rat” on Client . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 B. Policing the Debtor in Possession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 C. Policing the Conduct of Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 D. Duty to the Court . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 VI. DEADLINES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 A. General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 B. Important Dates/Deadlines for Debtors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 C. Important Deadlines for Creditors/Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 D. Removal Deadlines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 E. Non-bankruptcy Statutes of Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 F. Important Deadlines for Adversary Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 G. Important Deadlines for Appeals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 VII. FATAL OMISSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 A. Unlisted Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 B. Failure of Unsecured Creditor to file Proof of Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 C. Retention of Claims on Confirmation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 D. Adequacy of Notice to Parties Affected by Proposed Action . . . . . . . . . . . . . . . . . . . . . . . . . 22 VIII. INVESTIGATION AND DISCOVERY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 A. Investigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 B. Discovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 IX. PRE-FILING PLANNING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 A. The Business Debtor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 B. Engagement of Professionals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 C. Considerations Of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 -i- TABLE OF CONTENTS (Cont’d.) D. E. F. G. H. X. Counseling the Business Debtor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Approaching Chapter 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preparation of the Chapter 11 Petition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financing the Chapter 11 Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Planning for Operating Changes and Other Matters to Implement Post-Petition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Venue -- Tactical Analysis of Where to File . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J. Beware the Risk of an Involuntary Proceeding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . K. Consider Efforts to Negotiate a Deal Pre-Filing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . L. Consider Pre-Packaged Chapter 11 Plan Alternative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M. Planning for Compliance With Other Post-Petition Operating Requirements: The United States Trustee Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CAUTION IN PLEADINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A. Judicial Estoppel and Property Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Usury Exposure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Rule 9011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 28 28 29 29 29 29 30 30 30 30 30 31 31 Excerpt from 1997 ALAS Loss Prevention Manual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Hypothetical Problem for Loss Prevention Seminiar on Bankruptcy-Related Claims . . . . . . . . . . . . . . 39 Discussion of Hypothetical Problem for Loss Prevention Seminiar on Bankruptcy-Related Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 - ii - Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After I. DISCLOSURE FOR RETAINED PROFESSIONALS A. Statutes and Rule 1. 11 U.S.C. § 327(a) provides: “Except as otherwise provided in this section, the trustee, with the court's approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee's duties under this title.” 2. 11 U.S.C § 329(a) provides: “Any attorney representing a debtor . . . , whether or not such attorney applies for compensation under this title, shall file with the court a statement of the compensation paid or agreed to be paid, if such payment or agreement was made after one year before the date of the filing of the petition, for services rendered or to be rendered in contemplation of or in connection with the case by such attorney, and the source of such compensation.” 3. Bankruptcy Rule of Procedure 2014 provides, in pertinent part: “An order approving the employment of attorneys, accountants, appraisers, auctioneers, agents, or other professionals pursuant to § 327, § 1103, or § 1114 of the Code shall be made only on application of the trustee or committee. . . . The application shall state . . . to the best of the applicant's knowledge, all of the person's connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, the United States trustee, or any person employed in the office of the United States trustee. The application shall be accompanied by a verified statement of the person to be employed setting forth the person's connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, the United States trustee, or any person employed in the office of the United States trustee.” B. Practical Advice If you think of a relationship that might raise a question to anyone, disclose it. C. Duty to Disclose Continues Throughout Employment 1. Rome v. Braunstein, 19 F.3d 54, 59 (3rd Cir. 1994) stated: “Thus, as soon as counsel acquires even constructive knowledge reasonably suggesting an actual or potential conflict, see id. at 839 (fiduciary duty of disclosure arises as soon as D-1 counsel becomes ‘aware’ of facts), a bankruptcy ruling should be obtained. See, e.g., In re Martin, 817 F.2d at 182 (‘There must be at a minimum full and timely disclosure of the details of any given arrangement. Armed with the knowledge of all relevant facts, the bankruptcy court must determine, case by case, whether [a conflict exists].’)” (emphasis in original). a. The Rome court did not indicate how an attorney could both obtain a ruling regarding a potential conflict of which the attorney has only constructive knowledge. b. A more interesting question is how such a full disclosure (which would necessarily name the other parties and / or their counsel) could be filed in a public record while preserving the attorney / client, work product and other privileges. 2. In re Martin, 817 F.2d 175, 180 (1st Cir. 1987) described part of the job of the bankruptcy court as: “[E]xercising of its ongoing affirmative responsibility to ‘root out impermissible conflicts of interest’ under Bankruptcy Code §§ 327(a) and 328(c), the bankruptcy court must determine whether any meaningful incentive to act contrary to the best interests of the estate and its sundry creditors -- an incentive to place the parties at more an acceptable risk -- or the reasonable perception of one.” (emphasis in original.) D. Purpose of Disclosure 1. In re BH&P, Inc., 949 F. 2d 1300 (3rd Cir. 1991) (stated that full disclosure is required to allow the evaluation of the issues at an early stage of the proceedings). 2. In re Prudent Holding Corp., 153 B.R. 629, 631 (Bankr. N.D. Ill. 1993) (described § 327 as a “prophylactic provision designed to insure that the undivided loyalty and exclusive allegiance required of a fiduciary to an estate in bankruptcy is not compromised or eroded.”). 3. In re Tinley Plaza Associates, L.P., 142 B.R. 272 (Bankr. E.D. Ill. 1992) (announced the self-evident proposition that the court has “no duty to rummage through files or conduct independent fact finding investigations in order to determine whether prospective attorneys are involved in actual or potential conflicts of interest. Without strict enforcement of Rule 2014(a), the burden of fact finding would shift to the court, wasting judicial resources that are better utilized elsewhere.”). Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After E. Relationships with Parties in the Case Which Must be Disclosed? -- How far does “all” really go? 1. Current Clients a. Relationships with current clients who are debtors, creditors or affiliates of each must be disclosed. b. 11 U.S.C. § 327 is absolutely clear and unambiguous on this point. 2. Affiliates of Debtor(s) and Creditors a. “Affiliate” is defined in § 101(2) as: (A) entity that directly or indirectly owns, controls, or holds with power to vote, 20 percent or more of the outstanding voting securities of the debtor, other than an entity that holds such securities - (i) in a fiduciary or agency capacity without sole discretionary power to vote such securities; or (ii) solely to secure a debt, if such entity has not in fact exercised such power to vote; (B) corporation 20 percent or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by the debtor, or by an entity that directly or indirectly owns, controls, or holds with power to vote, 20 percent or more of the outstanding voting securities of the debtor, other than an entity that holds such securities - (i) in a fiduciary or agency capacity without sole discretionary power to vote such securities; or (ii) solely to secure a debt, if such entity has not in fact exercised such power to vote; (C) person whose business is operated under a lease or operating agreement by a debtor, or person substantially all of whose property is operated under an operating agreement with the debtor; or (D) entity that operates the business or substantially all of the property of the debtor under a lease or operating agreement. b. This is a very broad definition. 3. Source of Client Referrals Kornstein Veisz & Wexler (In re Re), 1997 WL 162918 (S.D. N.Y.) (had the court denying a defendant’s motion for summary judgment as to a breach of fiduciary duty based on the ethical violations where the defendant firm referred cases to the plaintiff’s attorney. In effect, failing to reveal to a client that the employer he wished to sue had referred some cases to this firm was enough to defeat a summary judgment motion.). D-2 4. Investments by the Professional or Firm Being Employed a. If judges are required to annually disclose their personal investments (to avoid conflicts), will they be sympathetic to attorneys who do not list theirs as well? b. See: Ray Warner, Of Grinches, Alchemy and Disinterestedness: the Commission’s Magically Disappearing Conflicts of Interest. 5 AM. BANKR. INST. L. Rev., 423, 440 (discussing the possibility of being required to disclose personal investments). 5. Former Clients a. Texas Disciplinary Rule of Professional Conduct 1.09. b. An attorney cannot represent a current client against a former client in the same or substantially related matter or where current client questions validity of work for former client. F. Consequences of Non-Disclosure 1. Revoking Employment Order a. The court can revoke order authorizing employment if disclosures are inadequate or misleading. b. Without an order approving employment, professional cannot be paid under §§ 330 - 31. 2. Monetary Penalties are Available for Inadequate Disclosure a. All fees allowed under §§ 330 - 31 would be returned if the employment Order is revoked. b. Fees can be denied during the period where a conflict exists. i. In re EWC, Inc., 138 B.R. 276 (Bankr. W.D. Okla. 1992). ii. In re Lewis, 113 F.3d 1040 (9th Cir. 1997). iii. In re Smitty’s Truck Stop, Inc., 210 B.R. 844 (B.A.P. 10th Cir. 1997). iv. In re Hot Tin Roof, Inc., 205 B.R. 1000 (B.A.P. 1st Cir. 1997). v. In re Crivello, 205 B.R. 399 (E.D. Wis. 1997). c. Harm from conflict need not be shown for monetary penalties to be imposed. i. In re Mehdipour, 202 B.R. 474 (Bankr. 9th Cir. 1996). 3. Criminal Penalties a. 18 U.S.C. §§ 152 -- 157 i. 18 U.S.C. § 152. A person who-... Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After (2) knowingly and fraudulently makes a false oath or account in or in relation to any case under title 11; (3) knowingly and fraudulently makes a false declaration, certificate, verification, or statement under penalty of perjury as permitted under section 1746 of title 28, in or in relation to any case under title 11, shall be fined not more than $5,000, imprisoned not more than five years, or both. ii. 18 U.S.C. § 155. Fee agreements in cases under title 11 and receiverships Whoever, being a party in interest, whether as a debtor, creditor, receiver, trustee or representative of any of them, or attorney for any such party in interest, in any receivership or case under title 11 in any United States court or under its supervision, knowingly and fraudulently enters into any agreement, express or implied, with another such party in interest or attorney for another such party in interest, for the purpose of fixing the fees or other compensation to be paid to any party in interest or to any attorney for any party in interest for services rendered in connection therewith, from the assets of the estate, shall be fined under this title or imprisoned not more than one year, or both. iii. 18 U.S.C. § 157. Bankruptcy Fraud A person who, having devised or intending to devise a scheme or artifice to defraud and for the purpose of executing or concealing such a scheme or artifice or attempting to do so-(1) files a petition under title 11; (2) files a document in a proceeding under title 11; or (3) makes a false or fraudulent representation, claim, or promise concerning or in relation to a proceeding under title 11, at any time before or after the filing of the petition, or in relation to a proceeding falsely asserted to be pending under such title, shall be fined under this title, imprisoned not more than 5 years, or both. b. A Milbank Tweed partner was convicted of misleading the bankruptcy court in Bucyrus International, Inc. case. He will be sentenced on May 19, 1998. G. Benefits of Disclosure 1. The bankruptcy court has ostensibly considered everything that was disclosed and approved the employment. D-3 a. Parties in interest can be precluded from challenging disinterestedness based on relationships that are disclosed. b. The employment order will be a final judgement and res judicata as to the matters stated in the application. 2. Employment is a condition precedent to being paid from the estate under §§ 330 - 31. II. WHO IS THE CLIENT? A. Debtor / Debtor in Possession 1. When the Debtor Is an Individual a. The individual is easier to identify as the client. b. The duties of a debtor in possession and fiduciary of the estate can create relationships that are not usually contemplated, creating competing interests. i. A subsequently appointed trustee can waive the attorney client privilege under appropriate circumstances. ii. Depending upon the facts, this could include the waiver of the privilege when the debtor is an individual as well as an entity. A) Trustee has the debtor’s attorney/client privilege for corporations and partnerships. Commodity Futures Trading Comm’n v. Weintraub, 471 U.S. 343, 105 S.Ct. 1986, 85 LE2d 372 (1985); U.S. v. Campbell, 73 F.3d 44 (5th Cir. 1996). B) Cases are split where the debtor is an individual. In re Williams, 152 B.R. 123 (Bankr. N.D. Tex. 1992) (Trustee has privilege); In re Hunt, 153 B.R. 445 (Bankr. N.D. Tex. 1992); McLarty v. Gudenau, 166 B.R. 101 (E.D. Mich. 1994). 2. When the Debtor Is an Entity a. Entities act solely through representatives selected by the owners (shareholders elect directors who name officers who hire other employees). b. The owner’s interests and rights should control over those of management, unless a debtor is insolvent and the debtor is responsible to creditors (as are directors). i. In re Dark Horse Tavern, Inc., 189 B.R. 576 (Bankr. N.D. N.Y. 1995) (stated that the board of directors is vested with the power to determine corporate policy and conduct its activities). ii. Dark Horse Tavern also stated that the board has the authority to propose a plan -- not the officers. Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After c. Estate assets should not be consumed in corporate governance fights. i. In re Marvel Ent. Group., Inc., 209 B.R. 832 (D. Del. 1997) (held that the automatic stay was not implicated by shareholders’ exercising their corporate governance rights). ii. The breadth of the stay indicates that the right to govern is not “property of the estate.” Since governance would not be protected by the stay, it would be difficult to argue that current management being retained is an appropriate use of limited funds. d. Exception to General Rule. An election of a board of directors can be enjoined only if there is “clear abuse.” To show “clear abuse,” existing management must show that the proposed management has a willingness to risk reorganization to try for a large share of the equity. 3. When the Retainer Is Provided, or Fees are Guaranteed, by a Non-Debtor a. Retainers by non-clients are not prohibited per se. i. In re Missouri Mining, Inc., 186 B.R. 946, 950 (Bankr. W.D. Mo. 1995) (refused to revoke order authorizing employment of debtor’s counsel because counsel was disinterested even though the retainer was paid by the debtor’s principal, who was also a creditor). b. Some courts have removed attorneys based on the source of the funds for their retainers. i. In re Rabex Amuru, Inc., 198 B.R. 892, 897 -- 98 (Bankr. M.D.N.C. 1996) (granted a motion to remove counsel for the debtor where the firm’s fees were paid by a creditor). ii. In re Hathaway Ranch Partnership, 116 B.R. 208, 219 (Bankr. C.D. Cal. 1990) (found that the payment by a third party of the fees of counsel for the debtor created an actual conflict of interest which warranted disqualification). iii. In re Crimson Investments, N.V., 109 B.R. 397, 403 (Bankr. D. Ariz. 1989) (denied all compensation and ordered the return of the retainer that debtor’s counsel received from the debtor’s two largest unsecured creditors). iv. In re WPMK, Inc., 42 B.R. 157, 163 (Bankr. D. Haw. 1984) (found that receiving payments from sources other than the debtor created a per se conflict of interest). D-4 v. In re Glenn Electric Sales Corp., 89 B.R. 410 (Bankr. D. N.J.), aff’d, 99 B.R. 596 (D. N.J. 1988) (disqualified counsel for the debtor on the ground of an appearance of impropriety where the payor had announced that it would be a likely plan proponent). c. Texas Disciplinary Rule of Professional Conduct 1.08(e) allows payments by third parties only if the client consents, the third party does not interfere with the attorney’s professional judgment and confidentiality between attorney and client is protected. 4. When Releases are Provided for Non-Debtor Insiders a. Many plans have provisions for releases of claims against insiders, officers, directors, shareholders and employees. b. Arguing too forcefully or threatening to destroy confirmation unless those claims are released could expose debtor’s counsel to a charge that the insiders are running the company in such a away that the professionals are working for the insider instead of the estate. c. In re Humble Place Joint Venture, 936 F.2d 814, 818 (5th Cir. 1991) (stated that the personal liability of non-debtors [investors in this case] is not “a legitimate concern of Chapter 11.”). B. Representing Creditors 1. The Bankruptcy Code and Rules do not require any disclosures when an attorney represents only one creditor in a case. 2. When an attorney represents more than one creditor in a case, the attorney must disclose the relationships in accordance with Bankruptcy Rule 2019. C. Representing Committees 1. Representing a creditors committee and individual creditor(s) is not prohibited per se -as long as there is no actual conflict. 2. 11 U.S.C. § 1103(a) states, “Representation of one or more creditors of the same class as represented by the committee shall not per se constitute the representation of an adverse interest.” a. In re Whitman, 101 B.R. 37 (Bankr. N.D. Ind. 1989) (required the resignation of counsel to the creditors committee where the attorney also represented an undersecured creditor that was also a member of the committee since the attorney was representing both secured and unsecured creditors in the same case). b. In re Grant Broad, Inc., 71 B.R. 655, 663 (Bankr. E.D. Pa. 1987) (held that Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After the attorney for the creditors committee could not represent individual unsecured creditors attempting to force the debtor to assume certain contracts and consequentially pay administrative claims to those creditors.) 3. Preparing and filing claims for committee members could pose problems. a. A proof of claim is considered the equivalent of a lawsuit against the debtor. In re Simmons, 765 F.2d 547, 552 (5th Cir. 1985) (“It has been said that the filing of a proof of claim is tantamount to the filing of a complaint in a civil action, and the trustee’s formal objection to the claim, the answer.”) (citation omitted). b. Preparing and filing claims for committee members raises the question of whether counsel is representing the individual members instead of, or in addition to, the committee as a whole. 4. Can participating in “beauty contest” disqualify counsel a. If confidential information is exchanged for advice, an attorney/client relationship can be created. b. The committee would be a “former client” in the same or a substantially related manner requiring a resignation. III. TRANSFERS IN THE ZONE OF INSOLVENCY A. Fresh Start vs. Head Start. 1. Purpose of Bankruptcy is To Give Debtor a Fresh Start. a. Discharge of Pre-Petition Debts. b. Federal Exemptions under 11 U.S.C. §522(d) (unless State has opted out of federal exemptions under 11 U.S.C. §522(b)(1)). c. State Exemptions (i.e., Homestead, Life Insurance, Annuities, etc.). 2. Actions taken prior to filing bankruptcy may impact the debtor's bankruptcy case. 3. Bankruptcy attorneys must carefully advise clients of the potential consequences of their pre-bankruptcy actions. B. Risks of Transfers During Financial Distress. 1. Avoidance of the Transfer as a Preferential Transfer. a. 11 U.S.C. §547(b) empowers the trustee to avoid, with certain exceptions, any transfer of an interest of the debtor in property- D-5 (1) to or for the benefit of a creditor; (2) for or on account of an antecedent debt owed by the debtor before such transfer was made; (3) made while the debtor was insolvent; (4) made(A) on or within 90 days before the date of the filing of the petition; (B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; (5) that enables such creditor to receive more than such creditor would receive if(A) the case were a case under chapter 7 of this title; (B) the transfer had not been made; and (C) such creditor received payment of such debt to the extent provided by the provisions of this title. b. Fifth Circuit Authority Regarding Preferential Transfers. i. Cullen Center Bank & Trust v. Hensley (Matter of Hensley), 102 F.3d. 1411(5th Cir. 1997) (Creditor’s filing of judgment lien pre-petition against oil and gas properties formerly owned by debtor was preferential transfer despite fact that properties had been conveyed to trust for children’s benefit before lien was filed because transfer to trust was fraudulent conveyance and debtor had equitable interest in properties transferred by judgment lien.) ii. Electric City Merchandise Co. v. Hailes (Matter of Hailes), 77 F.3d. 873 (5th Cir. 1996) (Individual pre-petition transfers of less than $600 to a single garnishing creditor could be aggregated, so as to remove transfers from the “de minimis” exception (11 U.S.C. §547(c)(8)) to the trustee’s preference avoiding power and to permit recovery of transfers by the Chapter 13 trustee where the total amount of wages garnished within 90 days preceding the bankruptcy filing was greater than $600). 2. Avoidance of Transfer as a Fraudulent Transfer. a. 11 U.S.C. §548(a) empowers the trustee to avoid any transfer of an interest of the debtor in property..., that was incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily- Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After (1) made such transfer ...with actual intent to hinder, delay or defraud any entity to which the debtor was or became, on or after the date that such transfer was made..., indebted; or (2)(A) received less than a reasonably equivalent value in exchange for such transfer...; and (B)(i) was insolvent on the date that such transfer was made...or became insolvent as a result of such transfer.... b. 11 U.S.C. §548(b) empowers the trustee to avoid any transfer of an interest of the debtor in property...that was made...on or within one year before the date of the filing of the petition, to a general partner in the debtor, if the debtor was insolvent on the date such transfer was made or...became insolvent as a result of such .... c. Fifth Circuit Authority Regarding Fraudulent Transfers i. A.M. Mancuso v. T. Ishida USA, Inc. (In re Sullivan), 161 B.R. 776 (N.D. Tex. 1993). To determine whether actual intent to defraud exists for purposes of 11 U.S.C. § 548(a)(1), Texas Courts may make inferences from objective facts surrounding transfer. The “badges of fraud” in TEX.BUS. & COM. CODE §24.005(b) are often used as guidelines. They are as follows: (A) the transfer or obligation was to an insider; (B) the debtor retained possession or control of the property transferred after the transfer; (C) the transfer or obligation was concealed; (D) before the transfer was made , the debtor had been sued or threatened with suit; (E) the transfer was of substantially all the debtor’s assets; (F) the debtor absconded; (G) the debtor removed or concealed assets; (H) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred; (I) the debtor was insolvent or became insolvent shortly after the transfer was made; D-6 (J) the transfer occurred shortly before or shortly after a substantial debt was incurred; and (K) the debtor transferred the essential assets of the businesses to a lien or who transferred the assets to an insider of the debtor. ii. Texas Truck Insurance Agency, Inc. v. Cure (Matter of Dunham), 110 F.3d 286 (5th Cir. 1997) (Sale of Chapter 7 debtor’s insurance business eight months before bankruptcy petition was filed was fraudulent transfer under 11 U.S.C. §548(a)(2) when business sold for $160,000 plus interest and experienced insurance expert valued business at $200,000). d. Charitable contributions may also be avoided as fraudulent transfers. See Morris v. Midway Southern Baptist Church (In re Newman), 183 B.R. 239 (Bankr. D. Kan. 1995). 3. Conversion of Non-Exempt Property to Exempt Property. a. Legislative History to Bankruptcy Reform Act of 1978. Both the House and Senate Reports provide that "under current law, the debtor will be permitted to convert nonexempt property into exempt property before the filing of a bankruptcy petition . . . . The practice is not fraudulent as to creditors and permits the debtor to make full use of the exemptions to which he is entitled under the law." S. Rep. No. 95-989, at 76 (1978), reprinted in 1978, U.S.C.C.A.N. 5787, 5862; H.R. Rep. No. 95-595, at 361 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6317. b. Despite the Legislative History, an impermissible conversion of property may occur if the debtor possessed actual intent to hinder, delay, or defraud creditors. c. The Continuing Concealment Doctrine - Even though originally transferred outside the one year period before filing, the concealment of a secretly retained interest in property may support an objection to discharge under 11 U.S.C. § 727(a)(2). See, Beaubouef v. Beaubouef (In re Beaubouef), 966 F.2d 1527, 1531 (9th Cir. 1992) (debtor concealed interest in company), and Thibodeaux v. Olivier (In re Olivier), 819 F.2d 550, 551 (5th Cir.1990) (debtors concealed house by transferring title seven years before filing bankruptcy ). d. Cases vary widely as to what constitutes actual intent to hinder, delay or defraud creditors, even within the same jurisdiction. A Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After review of Fifth Circuit and other case law demonstrates this fact. i. Fifth Circuit Cases. (A) First Tex. Sav. Assoc., Inc. v. Reed (In re Reed), 700 F. 2d. 986 (5th Cir. 1983) (Chapter 7 debtor’s rapid conversion of non-exempt assets to extinguish one home mortgage and to reduce another four months before bankruptcy after arranging with his creditors to be free of payment obligations until the following year alone was enough to constitute fraud. The fraudulent intent was further shown by the debtors' diversion of receipts from his company into an account unknown to his creditors and management consultant and his use of those receipts to repay a loan which had been a vehicle for the conversion.) (B) NCNB Texas Nat’l Bank v. Bowyer (In re Bowyer), 916 F.2d. 1056 (5th Cir. 1990) (Bowyer I) (Chapter 7 debtor’s actions of spending $18,000 on travel and exempt assets on eve of bankruptcy when debtor knew he had financial troubles and who voluntarily satisfied homestead mortgage 15 days pre-petition went beyond allowable pre-bankruptcy planning. This extrinsic evidence of intent to hinder and delay creditors led the Fifth Circuit to reverse the lower courts’ decisions to discharge the debtor’s debts despite the fact there was no evidence of actual intent to defraud the creditor). (C) NCNB Texas Nat’l Bank v. Bowyer (In re Bowyer), 932 F.2d 1100 (5th Cir 1991) (Bowyer II) (On rehearing, the Fifth Circuit held that it had not given the lower courts proper deference in the first hearing. This time the Court held that the Chapter 7 debtor did not have requisite intent to hinder, defraud or delay creditors to prevent discharge. Although debtor had sold gold and used his savings to repair his exempt residence, he and his wife had also withdrawn $25,000 from their savings during this time to make advance unscheduled payments on their note. The Fifth Circuit held that such behavior was incompatible with an intent to default on the note and file a bankruptcy petition). (D) Swift v. Bank of San Antonio, 3 F.3d 929 (5th Cir. 1993) (Chapter 7 debtor’s transactions with relatives, which included prepaying alimony to ex-wife, transferring insurance policies to son who, after borrowing against them transferred funds back to ex-wife who then loaned funds back to debtor who gave her promissory note the day before bankruptcy, and borrowing money from daughter D-7 in exchange for promissory notes secured by debtor's interests in personal property were done with the intent to hinder, defraud, delay or conceal assets from his creditors justifying a denial of discharge order 11 U.S.C. § 727(a)(2). ii. Other cases. (A) Norwest Bank Neb., N.A. v. Tveten (In re Tveten), 70 B.R. 529 (Bankr. D. Minn. 1987), certifying questions to 402 N.W. 2d 551 (Minn. 1987), aff'd 82 B.R. 95 (D. Minn. 1987), aff’d, 848 F.2d, 871 (8th Cir. 1988) (Debtor who was doctor sheltered $700,000.00 on the advice of counsel by converting non-exempt assets to exempt assets. The bankruptcy court found this to be too much and concluded if the case had been brought under Chapter 7, discharge would have been denied under 11 U.S.C. §727(a)(2)). The bankruptcy court’s decision was affirmed by the United States District Court for the District of Minnesota and by the United States Court of Appeals for the Eighth Circuit. (B) Panuska v. Johnson (In re Johnson), 80 B.R. 953 (Bankr. D. Minn. 1987), aff'd, 101 B.R. 997 (D. Minn. 1988), remanded by 880 F.2d 78, 84 (8th Cir. 1989). Final disposition contained in 124 B.R. 290 (Bankr. D. Minn. 1991) (Debtor who was also doctor sheltered $340,000.00. The bankruptcy court held this was acceptable and the District Court affirmed. The Eighth Circuit Court of Appeals remanded holding that although the portion of the doctor's exemption related to his homestead was acceptable, there were questions of fraud related to his purchase of exempt musical instruments and annuities and life insurance. On remand, the Bankruptcy Court found fraud because neither the doctor nor his girlfriend could play any of the instruments and the life insurance policy bought shortly before filing was cashed in shortly after filing and the money spent, that the Debtor had the requisite fraudulent intent so that the discharge would be denied under 11 U.S.C. §727(a)). e. General Trends Related to Exemptions i. Non-exempt assets converted to a homestead have a better chance of remaining exempt than those converted to any other category of exemption. ii. Conversion to exempt assets which themselves may be readily converted to cash are not likely to remain exempt and may threaten debtor's discharge. Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After iii. Insolvency and an imminent lawsuit or an existing judgment against the debtor appears to support findings of intent to hinder, delay or defraud creditors. iv. Conversions close to the filing date are more suspect than conversions months or years before filing. 4. Prosecution for Bankruptcy Fraud a. Even if a transfer is outside of the one-year period before filing bankruptcy, Debtor may still be convicted for bankruptcy fraud under fraud statutes. See 18 U.S.C. §157. b. United States v. West, 22 F.3d 586 (5th Cir. 1994), cert denied, 115 S.Ct. 584 (1994) (Debtor convicted for bankruptcy fraud under 18 U.S.C. §157 for concealing assets and for hiding proceeds from money laundering by placing them into his girlfriend's account even though event occurred outside of one year period). C. Exposure for Participation in Fraudulent Transfer or other Fraudulent Prepetition Conduct 1. Potential Consequences for the Client. a. Transfer avoided under 11 U.S.C. §§ 547 or 548. b. Denial of Discharge under 11 U.S.C. § 727(a) or continuing concealment doctrine. c. Conviction for bankruptcy fraud under 18 U.S.C. §157. 2. Consequences for Attorney Advising Client. a. Model Rule of Professional Conduct 1.2(d) - Attorney shall not encourage or assist client in conduct that attorney knows is fraudulent. b. Attorney who engages in prepetition asset planning which is found to be fraudulent may be subjected to a malpractice claim from the Debtor if the Debtor's discharge is denied. See In re Tomailo, 205 B.R. 10, 13 (Bankr. D. Mass. 1997). c. Attorney may face malpractice action from Trustee alleging that counsel assisted in structuring pre-petition fraudulent transfers. See Eisenberg v. Resource Dynamics, Inc. (In re Environmental Research and Dev.), 46 B.R. 774 (S.D. N.Y. 1985). D. Words of Wisdom for Bankruptcy Counsel 1. It is not always possible to predict during the pre-petition stage what transfers will successfully be challenged as fraudulent. Make D-8 sure that all clients are advised with regard to the possible consequences of their pre-bankruptcy actions. 2. It is always a good idea to memorialize representations made and advice given during this period in writing and have the client sign it. Protect yourself from the disgruntled client who might later allege that “my attorney told me to do it.” IV. CONFLICTS OF INTEREST A. Traditional Conflict Issues 1. Texas Disciplinary Rules of Professional Conduct a. Rule 1.06 Conflict of Interest: General Rule: “(a) A lawyer shall not represent opposing parties to the same litigation. “(b) . . .(c), a lawyer shall not represent a person if the representation of that person: (1) involves a substantially related matter in which that person’s interests are materially and directly adverse to the interests of another client of the lawyer or the lawyer’s firm; or (2) reasonably appears to be or become adversely limited by the lawyers’ or law firm’s responsibilities to another client or to a third person or by the lawyer’s or law firm’s own interests.” b. Rule 1.08 Conflict of Interest: Prohibited Transactions “(e) A lawyer shall not accept compensation for representing a client from one other than the client unless (1) the client consents; (2) there is no interference with the lawyer’s independence of professional judgment or with the client-lawyer relationship; and (3) information relating to representation of a client is protected as required by Rule 1.05.” c. Rule 1.09 Conflict of Interest: Former Client “(a) Without prior consent, a lawyer who personally has formerly represented a client in a matter shall not thereafter represent another person in a matter adverse to the former client: (1) in which such other person questions the validity of the lawyer’s services or work product for the former client; . . . (3) if it is the same or a substantially related matter. 2. Multiple parties in same case a. Multiple creditors i. Disclosure and informed consent A. Texas Disciplinary Rule of Professional Conduct 1.06 Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After “(a) A lawyer shall not represent opposing parties to the same litigation. . . . (c), A lawyer shall not represent a person if the representation of that person: (1) involves a substantially related matter in which that person’s interests are materially and directly adverse to the interests of another client of the lawyer or the lawyer’s firm; or (2) reasonably appears to be or become adversely limited by the lawyer’s or law firm’s responsibilities to another client or to a third person or by the lawyer’s or law firm’s own interests.” B. Rule 2019 requires counsel to file a disclosure when more than one creditor is represented by the same counsel. ii. Creditors with similar claims A. In re Calabrese, 173 B.R. 61, 63 (Bankr. D. Conn. 1994) (Court sustained the trustee’s objection to the application of committee’s counsel where the attorneys represented secured creditors of the debtor in unrelated matters). B. In re Oklahoma P.A.C. First Ltd. Partnership, 122 B.R. 387, 393 (Bankr. D. Ariz. 1990) (Court refused to permit a firm’s attempt to simultaneously represent the first and second lienholders on the same property, holding that the zealous representation of both clients was impossible.). b. General and limited partners i. In re W.F. Dev. Corp., 905 F.2d 883 (5th Cir. 1990) (Prohibited this representation as a per se lack of disinterestedness). c. Creditor and special counsel for the trustee / estate i. This situation can arise when debtor in possession refuses to pursue litigation and party is appointed as representative of estate; see Louisiana World Exposition v. Federal Ins. Co., 858 F.2d 233, 247 (5th Cir. 1988); ii. In re Durbin, 205 B.R. 17 (Bankr. D. N.H. 1997) (Court reduced the fees of special counsel to the trustee who also represented a creditor. After representing the trustee in a case that was settled by the return of some disputed assets to the trustee, counsel attached the other assets for the benefit of his creditor client. The fees were reduced because he did not disclose his attachment actions and there was a question of whether the assets could have gone to the estate for the benefit of all creditors). d. D-9 Competing bidders i. Milbank Tweed v. Chan Char Boon, 15 F.3d 537 (2nd Cir. 1994) (A firm cannot represent two bidders interested in same assets). e. Estate and asset purchaser i. Prohibited in Rome v. Braunstein, 19 F.3d 54 (3rd Cir. 1994) and In re Lee Way Holding Co., 100 B.R. 950 (Bankr. S.D. Ohio 1989)`. 3. Multiple debtor affiliates a. In re Global Marine, Inc., 108 B.R. 998 (Bankr. S.D. Tex. 1987) (Court permitted multiple debtor representation). b. In re Interstate Distribution Center Associates, (A), Ltd., 137 B.R. 826 (Bankr. D. Colo. 1992) (Court found that the representation of the corporate debtor and its related entities created an impermissible conflict of interest which precluded approval as debtor’s counsel). B. Law firm economics 1. Other clients a. The magnitude and scope of any relationship might be relevant to determine if the firm will “bite the hand” that is feeding it elsewhere. Where representation of other party is too pervasive or extensive, the firm is not disinterested. i. In re Amdura Corp., 193 B.R. 963 (Bankr. D. Colo. 1992) (The debtor’s principal creditor was such a large client of the firm that it could not be disinterested in dealing with the creditor notwithstanding the offers to employ special counsel or an examiner to investigate the transactions between the debtor and creditor). ii. In re American Printers & Lithographers, Inc., 148 B.R. 862 (Bankr. N.D. Ill. 1992) (The bank who had a large pre-petition claim was an existing and large client of the firm and, notwithstanding a waiver from the bank, the firm was found to have a conflict of interest). iii. In re Status Game Corp., 102 B.R. 19 (Bankr. D. Conn. 1989) (Employment was denied where proposed counsel for DIP represented the debtor’s principal pre-petition and post-petition secured lender). iv. In re Unitcast, Inc., 214 B.R. 979 (N.D. Ohio 1997) (Compensation of attorney, engaged as a business and financial consultant, was reduced because of his extensive relationship with purchaser proposed under plan of reorganization, the full extent of which was belatedly disclosed). Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After v. In re Lee Way Holding Co., 100 B.R. 950, 962 (Bankr. S.D. Ohio 1989) (Disqualifying debtor’s counsel and requiring disgorgement where counsel represented creditor pre-petition and post-petition). b. Disqualifications usually apply to clients and attorneys including clients brought in through a lateral hire as Wilke Farr & Gallagher learned recently. In re Granite Partners, L.P., 1988 WL 105658 (Bankr. S.D. N.Y.). A lateral partner brought a brokerage house as a client in 1994 and the firm charged them over $9 million in fees over 1995 & 1996. The firm was retained by the Trustee to investigate possible claims against brokerage firms before the lateral partner joined. The firm belatedly disclosed the relationship with the brokerage house in 1997 and lost approximately $2 million in compensation. 2. Potential clients (target clients). In re Granite Partners, L.P., supra. The problem was known when a prospective lateral partner was recruited knowing that he was bringing Merrill, Lynch as a primary (and very large) client. 3. Selection of chapter for filing case. a. Some cases generate higher fees than those filed under other chapters. b. Counsel cannot place their needs for cash flow ahead of the clients’ needs. 4. Timing of filing a. Allowing time to pass after payment of fees or other transfer before filing a case. C. Actual v. Potential Conflicts 1. In re Kendavis Industries, Inc., 91 B.R. 742 (Bankr. N.D. Tex. 1988) (Court stated that there is no such thing as a potential conflict and that potential conflicts are really actual conflicts.) 2. In re BH&P, Inc., 949 F.2d 1300 (3rd Cir. 1991) (Court required a case by case analysis of the individual facts before the determination of whether counsel is disqualified.) 3. In re Sauer, 191 B.R. 402, 408 (Bankr. D. Neb. 1995) (“Even the potential for conflict or the mere appearance of impropriety may constitute a disqualifying conflict of interest. And professionals engaged in the conduct of a bankruptcy estate should be free of the slightest personal interest which might be reflected in their decisions concerning matters of the debtor estate or which might impair the high degree of impartiality and detached judgment expected of them. There should be no opportunity for the D-10 exercise of conflicting interests and no appearance that dual loyalty may exist.”) (Citations omitted). 4. In re Leslie Fay Cos., Inc., 175 B.R. 525, 533 (Bankr. S.D. N.Y. 1994) ([W]hether a professional has ‘either meaningful incentive to act contrary to the best interests of the estate and its sundry creditors -- an incentive sufficient to place those parties at more than acceptable risk or the reasonable perception of one.’ In other words, if it is plausible that the representation of another interest may cause the debtor’s attorneys to act any differently than they would without that other representation, then they have a conflict and an interest adverse to the estate.”) D. Disinterestedness 1. This is really a two part analysis of a requirement of disinterestedness and not holding an adverse interest to the estate. 2. In re Diamond Mortgage Corp. of Ill., 135 B.R. 78, 94 (Bankr. N.D. Ill. 1990) (“By judicial definition, however, ‘holding an adverse interest to the estate’ has come to mean: 1. To possess or assert any economic interest that would tend to lessen the value of the bankruptcy estate or that would create an actual or potential dispute in which the estate is a rival claimant; or 2. To possess a predisposition under circumstances that render such a bias against the estate. Since section 328(a) of the Bankruptcy Code tells professionals to neither hold nor represent an adverse interest during the period of their retention by an estate under section 327, there is a distinction between representing an adverse interest and holding an adverse interest. One who represents an adverse interest acts in the capacity of an agent or attorney for individuals or entities holding such adverse interests.”) (Citations omitted). 3. In re Marvel Entertainment Group, Inc., Civil Action No. 97-638-RRM (Jan. 27, 1998) (Judge McKelvie held that the Chapter 11 trustee’s own firm was not disinterested because it represented a major secured creditor in matters unrelated to the Marvel proceedings even though the creditor waived the conflict). V. DEALING WITH RENEGADE CLIENTS AND ADVERSARIES A. Duty to “Rat” on Client 1. Texas Disciplinary Rule of Professional Conduct 1.05 a. Rules requiring Confidentiality of Information must be honored. Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After 2. Texas Disciplinary Rule of Professional Conduct 3.03 “If a lawyer has offered material evidence and comes to know of its falsity, the lawyer shall make a good faith effort to persuade the client to authorize the lawyer to correct or withdraw the false evidence. If such efforts are unsuccessful, the lawyer shall take reasonable remedial measures, including disclosure of the true facts.” B. Policing the Debtor in Possession 1. When DIP Makes Questionable Management Decisions: a. In re Rivers, 167 B.R. 288 (Bankr. N.D. Ga. 1994) stated that the attorney had a duty to advise the court if the debtor in possession is incompetent thereby making a reorganization unlikely. b. In re United Utensils, Inc., 141 B.R. 306, 309 (Bankr. W.D. Pa. 1992) counsel for the debtor should have disclosed that the DIP refused to pursue actions against insiders. c. In re Davison, 79 B.R. 851, 859 (Bankr. W.D. Mo. 1987) saw the court deny the fees of counsel for the DIP since he failed to prevent the DIP from incurring additional debts. 2. DIP is Gambling with Estate Assets: a. Debtor is holding out for unrealistic returns. b. In re DN Associates, 144 B.R. 195, 220 (Bankr. D. Me. 1992) aff’d 160 B.R. 20 (D. Me. 1993) (Counsel is charged with a ‘duty of diligence’ and should be expected in every reorganization to made a ‘seasoned determination’ whether the debtor is capable of achieving successful reorganization. Attorneys will not be compensated for vain attempts to resuscitate the debtor long after they should have given up the ghost). 3. When the DIP is Disposing of Assets a. In re Sky Valley, Inc., 135 B.R. 925, 937-38 (Bankr. N.D. Ga. 1992) (dealt with the debtor’s unauthorized use of funds and required the debtor’s attorney to disclose the unauthorized use to the court). b. In re Brennan, 187 B.R. 135 (Bankr. N.D. N.J. 1995) (involved the debtor’s attorney’s failure to advise the court of the conversion of estate assets by the DIP). 4. When the DIP is Concealing Assets a. U.S. v. Dolan, 120 F.3d 856 (8th Cir. 1997) (involved an attorney who was D-11 convicted of aiding and abetting the debtor’s concealing assets [Ferrari and multi-million dollar lawsuit settlement] by telling creditors that debtor could not pay his debts even though he was aware of those assets). b. In re Ward, 894 F.2d 771, 776 (5th Cir. 1990) (dealt with the attorney’s failure to disclose the debtor’s concealment of assets). c. Criminal liability arises under 18 U.S.C. §152 for knowingly and fraudulently concealing property of the estate from the trustee, and § 157 for bankruptcy fraud. 1. U.S. v. Simpson, 49 F.3d 138 (5th Cir. 1995). 2 U.S. v. Center, 853 F.2d 568 (7th Cir. 1988). 3. U.S. v. Knoll, 16 F.3d 1313 (2nd Cir. 1994). 4. U.S. v. Parkhill, 775 F. 2d 612 (5th Cir. 1985). 5. Procedure for Withdrawal a. In re McNar, Inc., 116 B.R. 746 (Bankr. S.D. Cal. 1990) (required the attorney to use the corporate “chain of command” to take the issue to the person’s superiors and ultimately to the board of directors). b. In re T.S. Industries, Inc., 125 B.R. 638 (Bankr. D. Utah 1991), In re Wilde Horse Enters., Inc., 136 B.R. 830, 840 (Bankr. C.D. Cal. 1991), In re Consupak, Inc., 87 B.R. 529, 548 -- 549 (Bankr. N.D. Ill. 1988) and In re NRG Resources, Inc., 64 B.R. 643 (W.D. La. 1986) (required the attorney to counsel with the debtor regarding its fiduciary duties and those duties imposed by the Bankruptcy Code). c. If the debtor insists upon continuing with its course of action and not complying with those requirements, counsel must resign. In re Perez, 30 F.3d 1209, 1219 (9th Cir. 1994). C. Policing the Conduct of Others 1. In re C.F. Holding, Inc., 164 B.R. 799 (Bankr. D. Conn. 1994) (Court reduced fee of counsel by $250,000 for failing to advise the court of the investment banker’s post-petition conflict). 2. In re Sky Valley, Inc., 135 B.R. 925, 937-38 (Bankr. N.D. Ga. 1992) (resulted in a $40,000 reduction of fees to counsel for the DIP for failing to supervise the DIP. The DIP engaged in an auction of its real property, disbursing proceeds, paying the real estate broker and improving the real estate outside of the ordinary Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After course of business without obtaining court approval for any of those actions). 3. In re Chas. P. Young Co., 145 B.R. 131 (Bankr. S.D. N.Y. 1992) (involved an undisclosed insider relationship between the debtor and a prospective purchaser which the court held should have been disclosed by debtor’s attorney). 4. In re Bidermann Indus. U.S.A., Inc., 203 B.R. 547 (Bankr. S.D. N.Y. 1997) (where a conflict of interest prevented approval of leveraged buy out of the debtor involving the professionals). D. Duty to the Court 1. Baker v. Humphrey, 101 U.S. 494, 502 (1879) The legal profession is found wherever . . . civilization exists. Without it society could not well go on. But, like all other great instrumentalities, it may be potent for evil as well as good. Hence the importance of keeping it on the high plane it ought to occupy. Its character depends upon the conduct of its members. They are the officers of the law, as well as the agents of those by whom they are employed. Their fidelity is guaranteed by the highest considerations of honor and good faith, and to these is superadded the sanction of an oath. 2. In re Ward, 894 F.2d 771 (5th Cir. 1990) held that, as officers of the court, attorneys have a duty to disclose any concealed assets and probably must disclose any criminal activity that occurred. 3. Trustees and judges are required to report to the appropriate U.S. Attorney possible crimes or that a criminal investigation should be commenced with respect to a bankruptcy case. The U.S. Attorney must then commence an investigation and report the findings to the bankruptcy judge. 4. Texas Disciplinary Rule of Professional Conduct 3.03. “(a) A lawyer shall not knowingly: (1) make a false statement of material fact or law to a tribunal; (2) fail to disclose a fact to a tribunal when disclosure is necessary to avoid assisting a criminal or fraudulent act; (3) in an ex parte proceeding, fail to disclose to the tribunal an unprivileged fact which the lawyer reasonably believes should be known by that entity for it to make an informed decision; (4) fail to disclose to the tribunal authority in the controlling jurisdiction known to the lawyer to be directly adverse to the position of the client and not D-12 disclosed by opposing counsel; or (5) offer or use evidence that the lawyer knows to be false. (b) If a lawyer has offered material evidence and comes to know of its falsity, the lawyer shall make a good faith effort to persuade the client to authorize the lawyer to correct or withdraw the false evidence. If such efforts are unsuccessful, the lawyer shall take reasonable remedial measures, including disclosure of the true facts. (c) The duties stated in paragraphs (a) and (b) continue until remedial legal measures are not longer reasonably possible.” E. Scorched earth litigation is prohibited 1. In re Dondi Properties Corp., 121 F.R.D. 284 (N.D. Tex. 1988). 2. In re Kendavis Indus., Inc. 91 B.R. 742 (Bankr. N.D. Tex. 1988). VI. DEADLINES A. General Information 1. “Under the Bankruptcy Code and rules, creditors play a zero-sum game in which a failure to navigate effectively through various intricate procedures can mean total defeat. Moreover, because such procedures are thought to be necessary to protect the bankrupt and the creditors, exceptions cannot be made every time a creditor claims hardship. Frequent players in the bankruptcy arena .... know this and are aware that deadlines are important and should not be heard to complain of unfairness except under the most egregious circumstances.” Oppenheim, Appel, Dixon & Co. v. Bullock (In re Robintech, Inc.), 863 F.2d 393, 398 (5th Cir. 1989) (citation omitted), cert. denied, 493 U.S. 811, 110 S.Ct. 55 (1989). This section of the outline is intended to be an overview of major deadlines that occur in bankruptcy under the Bankruptcy Code and Rules. All deadlines cannot be covered in a paper of this size. The practitioner should also consult court orders, local notices, and local rules with regard to all deadlines, because they could change some code and rule imposed deadlines or create their own deadlines. In addition, the practitioner should determine whether there is a filing fee associated with a particular filing, so that a deadline is not missed for want of a filing fee. 2. Although deadlines appear in numerous bankruptcy code sections and rules, the general rule for computing time is found at Bankruptcy Rule 9006, which provides in part that “[i]n computing any period of time prescribed or allowed by these rules, or by the Federal Rules of Civil Procedure made applicable by these rules, by Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After the local rules, by order of court, or by any applicable statute, the day of the act, event, or default from which the designated period of time begins to run shall not be included. The last day of the period so computed shall be included, unless it is a Saturday, a Sunday, or a legal holiday, or, when the act to be done is the filing of a paper in court, a day on which weather or other conditions have made the clerk’s office inaccessible, in which event the period runs until the end of the next day which is not one of the aforementioned days. When the period of time prescribed or allowed is less than 8 days, intermediate Saturdays, Sundays, and legal holidays shall be excluded in the computation.” FED. R. BANKR. P. 9006(a). a. Note that Bankruptcy Rule 9006 limits or reduces the permissible enlargement or reduction of many time periods under other rules. FED. R. BANKR. P. 9006(b), (c). 3. Mailbox Rule--Bankruptcy Rule 9006(f) provides that "[w]hen there is a right or requirement to do some act or undertake some proceedings within a prescribed period after service of a notice or other paper and the notice or paper other than process is served by mail, three days shall be added to the prescribed period." FED. R. BANKR. P. 9006(f). a. Note that the mailbox rule does not apply to those rules that require an act to be done within a prescribed period of time other than after service of a notice or other paper, including-i. complaints objecting to the debtor’s discharge, which must be filed not later than sixty days after the first date set for the § 341(a) meeting of creditors (chapter 7), or not later than the first date set for the hearing on confirmation. FED. R. BANKR. P. 4004(a); ii. complaints to determine the dischargeability of a debt under § 523(c) in a chapter 7, 11, or 12 case, which must be filed not later than sixty days after the first date set for the § 341 meeting of creditors. FED. R. BANKR. P. 4007(c); iii. proofs of claim in a chapter 7, 12, or 13 case, which must be filed not later than 90 days after the first date set for the § 341 meeting. FED. R. BANKR. P. 3002(c); In re Robintech, Inc., 863 F.2d at 395-96 (concluding that Rule 9006(f) does not extend the bar date by three days just because the notice of the bar date is served by mail, but that the rule instead applies D-13 only when the "prescribed period" is fixed by the date on which notice is served); iv. notices of appeal, which must be filed within ten days of the date of the entry of the judgment, order, or decree appealed from. FED. R. BANKR. P. 8002(a); Arbuckle v. First Nat’l Bank of Oxford (In re Arbuckle), 988 F.2d 29, 31-32 (5th Cir. 1993) (holding that Bankruptcy Rule 9006(f) does not extend the thirty day time period for filing a notice of appeal); v. exclusivity periods, during which, with some exceptions, only the debtor may file a plan for the first 120 days after the date of the order for relief, 11 U.S.C. § 1121(b), and during which (if the debtor files a plan within the first 120 days) the debtor has until 180 days after the order for relief to obtain acceptance of the plan. 11 U.S.C. § 1121(c)(3); vi. periods to assume executory contracts or unexpired leases, which are tied to either the date of the order for relief or the date a plan is confirmed. 11 U.S.C. § 365(d). 4. Bankruptcy Rule 9014 provides that “[n]o response is required under this rule unless the court orders an answer to a motion.” FED. R. BANKR. P. 9014. Many courts, however, have local rules requiring responses to motions within a certain time. For example, in bankruptcy court in the Western District of Texas, many motions are filed with a "20-day negative notice." W.D. TEX. BANKR. R. 9014(b). Local Court Rule 9014(c) provides that “[i]f no response in opposition to a contested matter is received within twenty (20) days after the date reflected in the Certificate of Service, the Motion may be granted without further notice or hearing.” a. How does this 20-day negative notice interact with the mailbox rule under Rule 9006(f)? See In re Barnhart, 134 B.R. 580, 583 (Bankr. W.D. Tex. 1991) (holding that if all parties are served by mail, the mailbox rule will not apply to motions subject to negative notice, so that a response filed two days after the 20-day negative notice deadline was untimely). When in doubt, file early. B. Important Dates/Deadlines for Debtors 1. Schedules and Statements of Financial Affairs: Unless an extension of time is granted, a debtor is required to file schedules and statements of financial affairs within 15 days of the order for relief. 11 U.S.C. § 521; FED. R. BANKR. P. 1007. Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After 2. First meeting of creditors (§ 341 meeting) is held-a. in chapter 7 and chapter 11 cases, no fewer than 20 days and no more than 40 days after the order for relief. FED. R. BANKR. P. 2003(a); b. in a chapter 13 case, no fewer than 20 days and no more than 50 days after the order for relief. FED. R. BANKR. P. 2003(a). 3. Plan Deadlines: a. In an ordinary chapter 11 case, there is no particular deadline within which a plan must be filed and confirmed. However, inability to effectuate a plan is grounds for conversion of a chapter 11 case to chapter 7, or dismissal. 11 U.S.C. § 1112(b)(2). b. Exclusivity periods: Subject to certain exceptions, only the debtor may file a plan for the first 120 days after the date of the order for relief. 11 U.S.C. § 1121(b). If the debtor files a plan within the first 120 days, he has until 180 days after the order for relief to obtain acceptance of the plan. 11 U.S.C. § 1121(c)(3). c. The exclusivity periods may be reduced or increased "for cause" if the request is made before the expiration of the exclusivity period. 11 U.S.C. § 1121(d). The exclusivity periods do not apply if a chapter 11 trustee is appointed under § 1104. 11 U.S.C. §§ 1104, 1121(c)(1). If the exclusivity periods expire or do not apply, any party in interest may file a plan. 11 U.S.C. § 1121(c). d. If the debtor is a "small business" as defined in 11 U.S.C. § 101(51C) and elects to be considered a small business, the debtor's exclusivity period for filing a plan is 100 days after the order for relief. 11 U.S.C. § 1121(e)(1). If that exclusivity period expires, all plans must be filed within 160 days after the order for relief. 11 U.S.C. § 1121(e)(2). e. When a chapter 11 plan is filed, it must be accompanied by a disclosure statement. 11 U.S.C. § 1125; FED. R. BANKR. P. 3016(b). The court must hold a hearing to determine whether the disclosure statement contains "adequate information" concerning the debtor and the plan. 11 U.S.C. § 1125(b); FED. R. BANKR. P. 3017(a). The hearing on the disclosure statement shall be held on not less than 25 days' notice to parties in interest. FED. R. BANKR. P. 3017(a). After approval of the disclosure statement, the court will provide notice to the creditors of the date and time of the plan confirmation hearing, and the deadlines to vote on D-14 the plan and to object to the plan. FED. R. BANKR. P. 3017(c), (d). f. In the Western District of Texas, the deadline to object to a chapter 13 plan will be set forth in the Notice of Commencement of Case. Official Bankruptcy Form 9. C. Important Deadlines for Creditors/Trustees 1. Objections to Exemptions: The trustee or any creditor may file objections to a debtor’s claimed exemptions within 30 days after the conclusion of the first meeting of creditors or the filing of any amendment to the list or supplemental schedules unless, within such period, further time is granted by the court. FED. R. BANKR. P. 4003(b). a. Creditors may seek extensions of time to object to the exemptions. FED. R. BANKR. P. 4003(b). Note that this can be a trap for the unwary, however, because Bankruptcy Rule 4003(b) provides that the deadline is firm unless "within such period" further time is granted by the court. FED. R. BANKR. P. 4003(b). The Supreme Court has interpreted this language to mean that, unless a court order extending the deadline to object is actually obtained prior to the expiration of the deadline, there can be no extension of the deadline and the debtor's exemptions are unassailable. Taylor v. Freeland & Kronz, 503 U.S. 638, 643-44, 112 S.Ct. 1644, 1648-49 (1992). This is so even if the debtor had no colorable claim to the exemptions. Id. If a creditor feels the need for an extension of time to object to the exemptions, it would be most prudent to seek an extension as soon as possible, and if the deadline is looming, seek an expedited hearing for extension of the deadline. 2. Objections to Discharge: a. A complaint objecting to a debtor’s discharge under § 727(a) shall be filed-i. in a chapter 7 case, not later than 60 days following the “first date set” for the first meeting of creditors. FED. R. BANKR. P. 4004(a). This time period cannot be reduced. FED. R. BANKR. P. 9006(c)(2). Note that the deadline is 60 days from the first date set for the first meeting of creditors, as opposed to the deadline for objecting to exemptions being 30 days after the conclusion of the meeting of creditors. See FED. R. BANKR. P. 4004(a), 4003(b); ii. in a chapter 11 case, not later than the first date set for hearing on confirmation of a plan. FED. R. BANKR. P. Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After 4004(a). This time period cannot be reduced. FED. R. BANKR. P. 9006(c)(2). b. Extensions of time to file complaints objecting to discharge can be obtained. FED. R. BANKR. P. 4004(b). The standard for obtaining an extension is "for cause." Id. As long as the motion for extension is made prior to the deadline for objecting to discharge, the motion for extension is timely. Id. This time period does not appear to be eligible for enlargement by a postdeadline motion under Bankruptcy Rule 9006(b)(1). FED. R. BANKR. P. 9006(b)(3). Cf. FED. R. BANKR. P. 4003(b) (requiring procurement of extension order for objection to exemptions prior to deadlines). Of course, if the motion for extension of time to object to discharge is filed shortly before the deadline, the creditor could lose valuable rights if he has a meritorious objection to discharge but cannot show good cause for the extension. 3. Revocation of Discharge: a. Even if no creditors timely object to discharge and a discharge is obtained, in some instances, a debtor's discharge may be revoked. 11 U.S.C. §§ 727(d), 1328(e). b. The deadline to file an adversary proceeding to revoke the debtor's discharge depends on the grounds for revocation. i. If the grounds for revocation are under 11 U.S.C. § 727(d)(1) (discharge obtained through fraud), the action must be filed within one year after the discharge is granted. 11 U.S.C. § 727(e)(1). ii. If the grounds for revocation are under 11 U.S.C. § 727(d)(2) (failure to report acquisition of property of the estate) or 727(d)(3) (debtor's refusal to testify), the deadline is the later of one year after the granting of discharge or the date the case is closed. 11 U.S.C. § 727(e)(2). iii. If a chapter 13 discharge is procured by fraud, the adversary proceeding to revoke the discharge must be filed within one year after the discharge was granted. 11 U.S.C. § 1328(e). 4. Objections to Dischargeability of Particular Debts: a. The deadline for filing objections to dischargeability of a debt depends on the grounds for objection. b. A complaint to determine the dischargeability of any debt pursuant to § 523(c) must be filed not later than 60 days following the first date set for the first meeting of creditors. D-15 FED. R. BANKR. P. 4007(c). This deadline is usually set forth in the Notice of Commencement of Case. Official Bankruptcy Form 9. Section 523(c) provides that, unless an objection to discharge is filed by the deadline for the following types of debts, the debtor automatically gets a discharge for these debts: i. § 523(a)(2) (fraud, false pretenses, and false financial statements); ii. § 523(a)(4) (fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny); iii. § 523(a)(6) (debts for willful or malicious injury by the debtor to another entity or to the property of another entity); and iv. § 523(a)(15) (property settlement debts in connection with a divorce or separation agreement). c. A creditor may seek an extension of the deadlines to file an objection to dischargeability under § 523(c) “for cause.” FED. R. BANKR. P. 4007(c). Like a motion to extend the time to object to the discharge, a motion for extension of time to object to dischargeability under § 523(c) must be made before the deadline has expired. FED. R. BANKR. P. 4007(c). d. A complaint to determine dischargeability under any other subsection of § 523 may be filed "at any time." FED. R. BANKR. P. 4007(b). Thus, objections to dischargeability for the following types of debts are not subject to the deadline of Rule 4007(c): i. § 523(a)(1) (taxes); ii. § 523(a)(3) (unscheduled debts); iii. § 523(a)(5) (alimony or support); iv. § 523(a)(7) (government fines); v. § 523(a)(8) (student loans); vi. § 523(a)(9) (driving while intoxicated); vii. § 523(a)(10) (previously waived discharge); viii. § 523(a)(11), (12) (federal depository institutions fraud and failure to maintain capital); ix. § 523(a)(13) (Title 18 restitution); x. § 523(a)(14) (debts incurred to pay non-dischargeable taxes); xi § 523(a)(16) (condo/coop fees); Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After xii. § 523(a)(17) (debts for filing fees and costs); and xiii. § 523(a)(18) (support debts owed to a state or municipality). e. A case that has been closed may be reopened without the payment of an additional filing fee for the purpose of filing a complaint of the types immediately above (non-§ 523(c)) to determine dischargeability. FED. R. BANKR. P. 4007(b). 5. Reaffirmation Agreements: a. A reaffirmation agreement must be made before the granting of a discharge. 11 U.S.C. § 524(c)(1). However, reaffirmation agreements may be rescinded without penalty at any time prior to discharge or within 60 days after the agreement is filed with the court, whichever occurs later, by giving notice of rescission to the holder of the claim. 11 U.S.C. § 524(c)(2), (c)(4). b. If the court holds a hearing on the reaffirmation agreement, the motion for approval of the agreement shall be filed before or at the hearing. FED. R. BANKR. P. 4008. 6. Proof of Claims Deadline--The Claims Bar Date: a. In a chapter 11 case, a proof of claim is "deemed filed" in the amount scheduled if the creditor's claim is listed in the schedules and is not scheduled as disputed, unliquidated, or contingent. 11 U.S.C. § 1111(a); FED. R. BANKR. P. 3003(b)(1). i. If a claim in a chapter 11 case is not scheduled, or is scheduled as disputed, unliquidated, or contingent, a proof of claim will be required in order for the creditor to participate in a distribution. 11 U.S.C. §§ 501, 1111; FED. R. BANKR. P. 3003(c)(2). Also, if the chapter 11 creditor disagrees with the amount or classification of the claim as scheduled, he should file a proof of claim; otherwise, his claim stands as scheduled. The filing of a creditor's proof of claim in chapter 11 supersedes the debtor's scheduling of the claim and is prima facie proof of the validity and amount of the claim. FED. R. BANKR. P. 3003(c)(4), 3001(f). ii. In a chapter 11 case, the deadline to file proofs of claims is fixed by the court. FED. R. BANKR. P. 3003(c)(3). This deadline usually appears in the Notice of Commencement of Case. Official Bankruptcy Form 9. The chapter 11 claims bar date may be extended "for cause shown." FED. R. BANKR. P. 3003(c)(3). What if a chapter 11 creditor does not D-16 file a proof of claim or obtain an extension of time to file a proof of claim before the claims bar date? The United States Supreme Court has provided guidance in Pioneer Investment Services v. Brunswick Associates Ltd. Partnership, 507 U.S. 380, 113 S.Ct. 1489 (1993). In Pioneer, a chapter 11 creditor missed the claims bar date and then filed a motion for relief from that deadline. Pioneer, 507 U.S. at 384, S.Ct. at 1492. Relying on Bankruptcy Rule 9006(b)(1), the Court held that a post-expiration enlargement of the time could be allowed in a chapter 11 case when the failure to act was due to "excusable neglect." In Pioneer, the court stated the following as bearing on excusable neglect: “[T]he determination is at bottom an equitable one, taking account of all relevant circumstances surrounding the party's omission. These include, as the Court of Appeals found, the danger of prejudice to the debtor, the length of the delay and its potential impact on judicial proceedings, the reason for the delay, including whether it was within the reasonable control of the movant, and whether the movant acted in good faith.” Pioneer, 507 U.S. at 395, 113 S.Ct. at 1498 (footnote omitted). iii. In addition to the Bankruptcy Rules concerning when claims must be filed, confirmed chapter 11 plans may contain deadlines to file claims, and creditors will be bound by these deadlines regardless of whether they accepted the plan. 11 U.S.C. § 1141(a). b. There is no deemed filing of a proof of claim by scheduling in a chapter 7 or 13, however. Under those chapters, in order to be an allowed claim and receive a distribution, a proof of claim must be filed, 11 U.S.C. §§ 501, 502; FED. R. BANKR. P. 3002(a)(proof of claim required for claim to be allowed), with the following exceptions: i. Bankruptcy Rule 1019(3) (pre-conversion proof of claim); ii. Bankruptcy Rule 3003 (chapter 11 deemed filed claims); iii. Bankruptcy Rules 3004 (proofs of claims filed by debtor or trustee; and iv. Bankruptcy Rule 3005 (proofs of claims filed by co-debtors). c. If the proof of claim is filed in a chapter 7 case after the claims bar date, it is a tardily filed claim and will be placed in a lower priority for payment. 11 U.S.C. § 726(a)(2). In the typical chapter 7 bankruptcy, general unsecured claimants with timely filed proofs of claim usually do not receive full payment; therefore, tardy filing Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After of a proof of claim usually means no distribution for that claimant. d. The time for filing a proof of claim in a chapter 7, 12, and 13 is not later than 90 days after the first date set for the first meeting of creditors. FED. R. BANKR. P. 3002(c). This deadline is also usually set forth in the Notice of Commencement of Case. Official Bankruptcy Form 9. i. However, a proof of claim filed by a governmental unit is timely filed if it is filed not later than 180 days after the date of the order for relief. Rule 3002(c)(1). Also, the court may extend the time for filing a proof of claim by an infant or incompetent person or the representative of either. FED. R. BANKR. P. 3002(c)(2). ii. Note that Bankruptcy Rule 9006(b)(1) does not apply to deadlines under Bankruptcy Rule 3002(c) (deadline for chapter 7 proofs of claim). Fed. R. Bankr. P. 9006(b)(3); Pioneer, 507 U.S. at 389, 113 S.Ct. at 1495 (noting that the excusable neglect standard of Rule 9006(b)(1) governs late filings of proofs of claim in Chapter 11 cases, but not in Chapter 7 cases). 7. Stay Relief Deadlines: a. Once a motion for relief from stay under § 362(d) is filed, the court may schedule a preliminary hearing and then a final hearing, or may consolidate the preliminary hearing and the final hearing. 11 U.S.C. § 362(e). The stay terminates automatically with respect to a motion for relief from stay of any act against property of the bankruptcy estate within 30 days of the filing of the motion for relief, unless an exception applies. 11 U.S.C. § 362(d). The exceptions are: i. the court may order the stay continued beyond 30 days from the filing of the motion, pending the conclusion of a final hearing, if there is a reasonable likelihood that the party opposing the motion will prevail; ii. if the hearing is a preliminary hearing, then the final hearing must be concluded within 30 days of the conclusion of the preliminary hearing, unless the 30-day period is extended with the consent of the parties or for a specific time which the court finds is required by compelling circumstances. 11 U.S.C. § 362(e). b. If the debtor is a single asset real estate debtor as defined in 11 U.S.C. § 101(51B), and a motion for relief from stay under 11 U.S.C. § 362(d) is filed by a creditor with a lien on the real estate, the stay will terminate D-17 unless the debtor has filed a plan of reorganization within 90 days of the order for relief or the debtor has commenced monthly interest payments to secured creditors as prescribed by section 362(d)(3)(B). 11 U.S.C. § 362(d)(3). i. The court may extend this period for cause. 11 U.S.C. § 362(d)(3). c. Other milestones resulting in expiration of the stay include the following: i. the stay of acts against property of the estate expires when the property is no longer property of the estate. 11 U.S.C. § 362(c)(1). ii. the automatic stay expires when the case is closed. 11 U.S.C. § 362(c)(2)(A). iii. the automatic stay expires when the case is dismissed. 11 U.S.C. § 362(c)(2)(B). iv. the automatic stay expires when a discharge is granted or denied in individual chapter 7 cases or in cases under chapter 9, 11, 12, or 13. 11 U.S.C. § 362(c)(2)(C). 8. Executory Contracts and Unexpired Leases: a. Deadlines to act depend on whether the case is a chapter 7 or 11, whether real property leases are residential or nonresidential, and whether personal property leases are business or consumer in nature. The most commonly occurring deadlines under § 365 are as follows: i. In a chapter 7 case, an executory contract or unexpired lease of residential real property or of personal property of the debtor not assumed by the trustee within 60 days after the order for relief is deemed rejected, unless the court orders otherwise. 11 U.S.C. § 365(d)(1). ii. In a chapter 9, 11, 12, or 13 case, an executory contract or unexpired lease of residential real property or of personal property of the debtor may be assumed or rejected by the trustee any time before the confirmation of a plan, but the court may order a specific deadline within which the trustee must determine whether to assume or reject. 11 U.S.C. § 365(d)(2). iii. Under any chapter, if the debtor is a lessee of nonresidential real property, the lease must be assumed or rejected by the trustee within 60 days of the order for relief, or the lease is deemed rejected and the premises must be immediately surrendered to the lessor. 11 U.S.C. § 365(d)(4). The court may extend this deadline "for cause, within such 60-day period." Id. iv. In the case of an unexpired lease of nonresidential real property, the Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After debtor's obligations are to be timely performed by the trustee from and after the order for relief until the lease is assumed or rejected. 11 U.S.C. § 365(d)(3). The court may extend, for cause, the time for performance of any such obligation that arises within 60 days after the order for relief, but the time for performance shall not be extended beyond such 60-day period. 11 U.S.C. § 365(d)(3). v. In a chapter 11 case, the obligations first arising on or after 60 days after the order for relief of a debtor under an unexpired, non-consumer personal property lease shall be timely performed by the trustee unless the court orders otherwise. 11 U.S.C. § 365(d)(10). 9. Preference Deadlines: a. Generally speaking, a preference occurs when a creditor improves his position vis-a-vis other creditors via a transfer of an interest of the debtor in property during either a 90-day or one-year period prior to the bankruptcy filing, depending on the status of the creditor. See 11 U.S.C. § 547. The elements of a preference are listed in 11 U.S.C. § 547(b). b. Preferences have a "reachback" period, that is, the time period prior to the filing of the bankruptcy petition when a transfer could be a preference. i. An otherwise preferential transfer made on or within 90 days of the filing of the bankruptcy can be avoided by the trustee. 11 U.S.C. § 547(b)(4). ii. If the preferred creditor at the time of the transfer was an insider to the debtor as defined in 11 U.S.C. § 101(31), the reachback period is one year prior to the filing of the bankruptcy petition. 11 U.S.C. § 547(b)(4). iii. There is also a statute of limitations for filing preference actions. A preference claim may not be commenced after a case is closed or dismissed. 11 U.S.C. § 546(a)(2). Also, a preference action may not be commenced after the later of 2 years after the entry of an order for relief or one year after the appointment or election of the first trustee if such appointment or election occurs before 2 years after the entry of the order for relief. 11 U.S.C. § 546(a)(1). 10. Fraudulent Transfer Deadlines: a. Generally speaking, fraudulent transfers occur when the debtor transfers property to another either with actual intent to hinder, delay, or defraud creditors or for less than reasonably equivalent value while the D-18 debtor is insolvent. See generally TEX. BUS. & COM. CODE ANN. § 24.001 et seq (also known as the Uniform Fraudulent Transfer Act or "UFTA"); 11 U.S.C. § 548. b. In bankruptcy, the trustee can file an action to avoid fraudulent transfers. 11 U.S.C. § 548. The bankruptcy code provides that the reachback period for fraudulent transfers under § 548 is on or within one year before the date of the filing of the bankruptcy petition. 11 U.S.C. § 548(a). c. The trustee also has the powers of a hypothetical creditor, which allows the trustee to use the state fraudulent transfer law as well. 11 U.S.C. § 544. Under state law, different types of fraudulent transfers have different periods within which an action must be commenced. TEX. BUS. & COM. CODE ANN. § 24.010. Most of these deadlines under UFTA use the date of "transfer" as the anchor date. The time when a transfer is deemed made is defined at UFTA section 24.007. TEX. BUS. & COM. CODE ANN. § 24.007. i. A cause of action for fraudulent transfer under UFTA section 24.005(a)(1) (transfers made with actual intent to hinder, delay, or defraud a creditor) is extinguished unless an action is brought within the later of (1) four years after the transfer was made, or (2) one year after the transfer could have reasonably been discovered by the claimant. TEX. BUS. & COM. CODE ANN. § 24.010(a)(1). ii. A cause of action for fraudulent transfer under UFTA section 24.005(a)(2) or 24.006(a) (transfers for less than reasonably equivalent value while the debtor was insolvent, about to be insolvent, or insolvent as a result of the transfer) is extinguished unless it is brought within four years of the transfer. TEX. BUS. & COM. CODE ANN. § 24.010(a)(2). iii. If the fraudulent transfer is based on "insider preference" grounds of UFTA section 24.006(b), the fraudulent transfer action is extinguished unless it is brought within one year after the transfer. TEX. BUS. & COM. CODE ANN. § 24.010(a)(3). iv. UFTA section 24.010(b) extends some of these time periods due to legal disabilities. TEX. BUS. & COM. CODE ANN. § 24.010(b). d. A fraudulent transfer action may not be commenced in bankruptcy after the earlier of-i. the later of 2 years after the entry of an order for relief or one year after the Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After appointment or election of the first trustee if such appointment or election occurs before 2 years after the entry of the order for relief; or ii. the time the case is closed or dismissed. 11 U.S.C. § 546(a). 9. Reclamation Claims: a. A seller of goods who sells and delivers goods to a debtor in the ordinary course of the seller’s business while the debtor is insolvent may reclaim such goods pursuant to section 2.702(b) of the UCC only if the seller demands in writing reclamation of such goods before 10 days after receipt of such goods by the debtor, or if such 10-day period expires after the bankruptcy petition is filed, before 20 days after receipt of such goods by the debtor. 11 U.S.C. § 546(c)(1). D. Removal Deadlines 1. Proceedings for which there is bankruptcy court jurisdiction under 28 U.S.C. § 1334 may be removed. 28 U.S.C. § 1452(a). The procedure for bankruptcy removal is found at Bankruptcy Rule 9027. FED. R. BANKR. P. 9027. Removal is initiated by filing a notice of removal with the clerk for the district and division within which is located the state or federal court where the civil action is pending. FED. R. BANKR. P. 9027(a)(1). Time deadlines for filing removal notices depend on whether the civil action is pending when the bankruptcy case is commenced or whether the civil action is commenced after the bankruptcy case has been filed. See FED. R. BANKR. P. 9027(a). a. If the civil action is pending, and then a bankruptcy is filed, the notice of removal may be filed only within the longest of (1) 90 days after the order for relief (2) 30 days after entry of an order terminating a stay, if the claim has been stayed under § 362, or (3) 30 days after a trustee qualifies in a chapter 11 case, but not later than 180 days after the order for relief. FED. R. BANKR. P. 9027(a)(2). b. If a civil action is filed while a bankruptcy case is pending, the notice of removal may be filed with the clerk only within the shorter of (1) 30 days after receipt, through service or otherwise, of a copy of the initial pleading setting forth the claim or cause of action sought to be removed, or (2) 30 days after receipt of the summons if the initial pleading has been filed with the court but not served with the summons. FED. R. BANKR. P. 9027(a)(3). 2. Once the notice of removal is filed, the remover must "promptly" serve all parties to D-19 the removed action with a copy and must file a copy of the notice of the removal with the court from which the action was removed. FED. R. BANKR. P. 9027(b), (c). 3. Any party who has filed a pleading in connection with a removed claim (other than the remover) must file and serve a "core/non-core" statement in the removed proceeding within 10 days after the notice of removal is filed; that is, a statement that the proceeding is either "core" or "non-core" and, if the proceeding is non-core, whether the party consents or does not consent to the entry of final orders or judgments by the bankruptcy court. FED. R. BANKR. P. 9027(e)(3). 4. The deadline for answers to actions removed to bankruptcy court is found at Bankruptcy Rule 9027(g). First, the rule provides that the adversary proceeding rules of "Part VII" (that is, Bankruptcy Rules 7001-87) apply. FED. R. BANKR. P. 9027(g). If the defendant in a removed action has not already answered, the answer (under the adversary rules) must be filed within the longest of these three periods: E. Non-bankruptcy Statutes of Limitations 1. When a debtor files bankruptcy, causes of action, whether filed or not, owned by the debtor become property of the debtor's bankruptcy estate, and the trustee has the authority to file suit. See, e.g., American Nat'l Bank of Austin v. MortgageAmerica Corp. (In re MortgageAmerica Corp.), 714 F.2d 1266, 127677 (5th Cir. 1983) (noting that a corporation's trust fund action, upon bankruptcy, passes to the trustee, who may then enforce the claim); 11 U.S.C. § 323. 2. The bankruptcy code gives the trustee more time to bring the action if the statute of limitations is nearing the end when the bankruptcy is filed. Section 108(a) provides that the trustee may bring such an action by the end of the limitation period (including any suspension of the period occurring on or after the case is filed), or before two years after the order for relief, whichever is later. 11 U.S.C. § 108(a). 3. Section 108(b) is a similar provision dealing with when the trustee may take actions other than filing suit, such as filing a pleading, demand, notice, etc. Section 108(b) provides that, so long as the period to act has not expired before the filing of the bankruptcy petition, the trustee may act before the later of (1) the end of the period, including any suspension of the period occurring on or after the commencement of Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After the case, or (2) 60 days after the order for relief. 11 U.S.C. § 108(b). 4. Section 108(c) gives creditors extensions of time to take actions. The automatic stay, of course, enjoins creditors from filing suit on pre-petition claims. 11 U.S.C. § 362(a)(1). Upon discharge, section 524 enjoins creditors from filing suit or otherwise collecting on discharged debts. 11 U.S.C. § 524(a)(2). a. What if the bankruptcy case is dismissed prior to a discharge and limitations on a state cause of action has run in the meantime? Section 108 provides that limitations does not expire until the later of (1) the limitations period, including any suspension of the period occurring on or after the commencement of the case, or (2) 30 days after notice of termination or expiration of the automatic stay. 11 U.S.C. § 108(c). F. Important Deadlines for Adversary Proceedings 1. All of the deadlines found in the 7000 series of the Federal Rules of Bankruptcy Procedure are well beyond the scope of this article. For an exhaustive review of all deadlines both in the bankruptcy case and in adversary proceedings, see NORMAN L. PERNICK, BANKRUPTCY DEADLINE CHECKLIST (2d ed. 1996). In order to give the readers a head start, however, please note that answers to adversary complaints are due within 30 days after the “issuance” of the summons (not necessarily 30 days after the service of the summons). FED. R. BANKR. P. 7012. G. Important Deadlines for Appeals 1. Appeals from an appealable order or judgment of the bankruptcy court are initiated by the filing of a Notice of Appeal filed with the clerk of the bankruptcy court. FED. R. BANKR. P. 8001(a), 9001(3) (defining clerk as the bankruptcy clerk, if one has been appointed). The Notice of Appeal must conform to an Official Bankruptcy Form, and it must be filed and served within 10 days of entry of the order or judgment to be appealed. FED. R. BANKR. P. 8001(a) (official form), 8004 (service of notice of appeal), 8002(a) (ten-day filing requirement). a. Note that the deadline is ten days from the entry of the bankruptcy court order, not ten days from the mailing of the bankruptcy court order to the prospective appellant, and that the three day mailbox rule does not apply. Arbuckle v. First Nat'l Bank of Oxford (In re Arbuckle), 988 F.2d 29, 31-32 (5th Cir. 1993). D-20 b. The ten-day Notice of Appeal deadline is jurisdictional, and an untimely filing will result in dismissal of the appeal. See, e.g., In re Arbuckle, 988 F.2d at 32 (affirming the district court's determination that it lacked appellate jurisdiction over the debtors' appeal when the debtors filed their Notice of Appeal eleven days after entry of the bankruptcy court's order); In re Slimick, 928 F.2d 304, 306 (9th Cir. 1990) (affirming the BAP's dismissal when notice of appeal filed five months after entry of order). 2. Certain timely filed motions suspend the time period for filing a Notice of Appeal until entry of an order disposing of them. FED. R. BANKR. P. 8002(b). These are-a. motions to amend or make additional findings of fact; b. motions to alter or amend judgment; c. motions for new trial; or d. motions for relief from a judgment or order if the motion is filed no later than 10 days after the entry of the judgment. FED. R. BANKR. P. 8002(b). 3. Extensions of time to file a Notice of Appeal for a period not to exceed 20 days from the original deadline, or 10 days from the date of entry of the order granting the motion, whichever is later, can be obtained by filing a request for an extension before the deadline to file the Notice of Appeal. FED. R. BANKR. P. 8002(c). However, with a showing of excusable neglect, on certain types of orders and judgments, an extension for filing a Notice of Appeal after the Notice of Appeal deadline may be sought if the request is made not later than 20 days after the Notice of Appeal deadline. Id. 4. Within 10 days after filing the Notice of Appeal, the appellant must file with the bankruptcy clerk and serve on the appellee a designation of the items to be included in the record and a statement of issue to be presented. FED. R. BANKR. P. 8006. a. Within 10 days after the service of the appellant's designation of record and issues on appeal, the appellee may file and serve a designation of additional items to be included in the record. Id. 5. After the bankruptcy clerk receives all the designations of record, the bankruptcy clerk transmits a copy of the record to the district court. FED. R. BANKR. P. 8007(b). The district clerk then "dockets" the appeal by entering the appeal in the district clerk's docket and giving prompt notice to Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After the parties of the date on which the appeal was docketed. Id. The appellant's brief is then due to be filed and served within 15 days after docketing. FED. R. BANKR. P. 8009(a)(1). a. The appellee's brief is due to be filed and served within 15 days after the service of the appellant's brief. FED. R. BANKR. P. 8009(a)(2). b. The appellant's reply brief may be filed and served within 10 days after service of the appellee's brief. FED. R. BANKR. P. 8009(a)(3). c. If a motion is made in an appeal, a response to the motion (other than a motion seeking a procedural order) must be filed within seven days after service of the motion, a time period that may be shortened and extended. FED. R. BANKR. P. 8011(a). 6. A judgment of the district court on a bankruptcy appeal is automatically stayed for 10 days after entry, unless otherwise ordered. FED. R. BANKR. P. 8017(a). Appeal deadlines beyond the district court are beyond the scope of this article. VII. FATAL OMISSIONS Unlisted Claims 1. 11 U.S.C. §521(1) requires a debtor to file a list of creditors, and unless the court orders otherwise, a schedule of assets and liabilities, a schedule of current income and current expenditures, and a statement of the debtor’s financial affairs. 2. 11 U.S. C. §523(a)(3) provides that a debt will be excepted from discharge if the debt is neither listed nor scheduled under section 521(1) with the name, if known to the debtor, of the creditor to whom such debt is owed in time to permit a creditor to file a timely proof of claim or in time for a creditor to seek a determination of dischargeability of a debt under §§523(a)(2), (a)(4), or (a)(6) unless the creditor had notice or actual knowledge of the bankruptcy case. a. If the debtor knows that the debt has been transferred from the original creditor to a new creditor, the new creditor must be listed. Birkett v. Columbia Bank, 195 U.S. 345, 25 S. Ct. 38, 49 L.Ed. 231 (1904), aff’g 174 N.Y. 112, 66 N.E. 652 (1903). b. The correct address of the scheduled creditors must be listed if known. See FED. R. BANKR. P. 1007(a). If the address is unknown, the debtor should expressly state this in the list or schedules. A. D-21 i. Failure to list the correct address when known may cause the debt not to be discharged. See In re Springer, 127 B.R. 726 (Bankr. M.D. Fla. 1991). ii. Listing the address of a parent company found in the telephone book is not adequate when debtor could easily reference own files to find correct address. See Faden v. Insurance Co. of North America (In re Faden), 96 F. 3d. 792 (5th Cir. 1996). c. Under 11 U.S.C. §523(a)(3)(A), the only requirement is that the creditor be listed in time to permit that creditor to receive notice of the case in time to file a timely proof of claim. The Bankruptcy Court may, however, reserve the right to deny a discharge when there is evidence that the debtor failed to list the creditor or debt due to intentional design, fraud, or improper motive. Negligence is not enough. See Stone v. Caplan (In re Stone), 10 F.3d. 285 (5th Cir. 1994). d. Factors the Fifth Circuit suggests that courts examine to determine whether a debt is dischargeable under 11 U.S.C. §523(a)(3) (Robinson Factors): i. the reasons the debtor failed to list the creditor; ii. the amount of disruption that would likely occur; iii. the prejudice suffered by the listed creditors and the unlisted creditor in question. e. The exception - An unlisted claim will be discharged if the unlisted creditor had notice or actual knowledge of the bankruptcy case. i. Mere constructive notice or imputed knowledge is not enough. See Small Bus. Admin. v. Bridges, 894 F.2d 108 (5th Cir. 1990). ii. Examples of Actual Knowledge or Notice (A) Knowledge through receipt of responsive pleadings. (B) Verbal communication. (C) Knowledge through reading newspaper. iii. Burden of proof to show actual notice is on debtor. In re Faden, 96 F.3d 792 (5th Cir. 1996). B. Failure of Unsecured Creditor to file Proof of Claim 1. 11 U.S.C. §501(a) provides that a creditor may file a proof of claim. Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After a. Filing Proof of Claim is permissive, not mandatory. b. For claimants, however, the filing of a proof of claim with limited exceptions may be a prerequisite to allowance of the claim as a claim on the assets of the bankruptcy estate. See I.B.M. v. Fernstrom Storage and Van Co. (In re Fernstrom Storage and Van Co.), 938 F.2d. 731(7th Cir. 1991). c. Filing a proof of claim may be a prerequisite to vote in the election of a trustee in a Chapter 7 or Chapter 11 Bankruptcy Case. See 11 U.S.C. §§ 702(a), 1104(b), FED. R. BANKR. P. 2003(b)(3). d. Untimely proofs of claim may be disallowed. See, 11 U.S.C. §502(b)(9). C. Retention of Claims on Confirmation 1. 11 U.S.C. §1141(b) specifies that except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor. 2. 11 U.S.C. §1123 (b)(3)(B) provides that a Chapter 11 plan may provide for the retention and enforcement by the debtor, by the trustee, or by a representative of the estate appointed for such purpose, of any claim or interest belonging to the estate. 3. The ability of a party to enforce a claim once held by the bankruptcy estate is limited to that which is retained under the terms of the confirmed plan. See In re MAKO, Inc., 120 B.R. 203 (Bankr. E.D. Okla. 1990). a. A retention provision in a Plan requires specific and unequivocal language of reservation. i. Language that a party had “the right to prosecute or defend any other such litigation” and that it “may appear as the real party in interest in any pending or later instituted contested or adversary proceeding filed herein” was not specific enough to confer on the party the right to bring avoidance actions after confirmation. Id. at 209. See also Paramount Plastics, Inc. v. Polymerland, Inc. (In re Paramount Plastics Inc.), 172 B.R. 331 (Bankr. W.D. Wash. 1994). D. Adequacy of Notice to Parties Affected by Proposed Action 1. Bankruptcy Rule of Procedure 2002 contains the requirements for certain notices to creditors, equity security holders, United States, and the United States Trustee. D-22 a. The Courts are split with regard to the consequences when a party does not receive notice. i. The Fifth Circuit and the Ninth Circuit place upon the creditor who knows of the bankruptcy case the duty to inquire as to matters concerning the bankruptcy, including time limitations. See Neely v. Murchison, 815 F.2d. 345 (5th Cir. 1987); Lompa v. Price (In re Price), 79 B.R. 888 (Bankr. 9th Cir. 1987), aff’d, 871 F.2d. 97 (9th Cir. 1988). ii. The Tenth and Eleventh circuits hold that actual notice by the party does not negate the statutory notice requirement and it does not place a duty on creditors to inquire regarding time limitations for filing claims or objecting to discharge and dischargeability. See In re Herd, 840 F.2d. 757 (10th Cir. 1988); Spring Valley Farms, Inc. v. Crow (In re Spring Valley Farms, Inc.), 863 F.2d. 832 (11th Cir. 1989). b. Failure to raise the issue of defective notice at the trial or hearing results in waiver of the defect. See Ninety Two Eighty One Shore Road Owners Corp. v. Seminole Realty, Inc. (In re Ninety Two Eighty One Shore Road Owners Corp.), 187 B.R. 837 (E.D. N.Y. 1995). VIII. INVESTIGATION AND DISCOVERY IN CONTESTED MATTERS A. Investigation 1. Review Clients’ files a. Review “check register” to identify payments and dates: A debtor who pays a creditor by regular check and who wishes to avoid exposing that creditor to preference liability should, before filing bankruptcy, be careful to determine whether the drawee bank has honored the check. See Barnhill v. Johnson, 503 U.S. 393, 112 S.Ct. 1386 (1992) (holding that a debtor’s payment by regular check that was delivered to the transferee on the 92nd day before the bankruptcy petition was filed, but that was not honored by the drawee bank until the 90th day before the petition, was a transfer within the 90-day preference period of § 547(b)(4)(A): “For payment by ordinary check, therefore, a “transfer” . . . occurs [pursuant to the UCC] on the date of honor, and not before.”). 2. Lien Searches a. General--An attorney for a party to a bankruptcy case may expose himself to malpractice claims by failing to discover liens on property. The following is a non-exhaustive and nonexclusive list of possible locations to conduct lien searches. Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After b. Personal Property and Fixtures--UCC i. The UCC generally governs the perfection of consensual security interests in personal property and fixtures. The proper place to file (and therefore search for) a security interest is-A) when the collateral is consumer goods not covered by a certificate of title, in the office of the county clerk in the county of the debtor’s residence or if the debtor is not a Texas resident, then in the office of the county clerk in the county where the goods are kept. TEX. BUS. & COM. CODE ANN. § 9.401(a)(1). B) when the collateral is timber to be cut or is minerals or the like or accounts arising from the sale of oil or gas or when the financing statement is filed as a fixture filing and the collateral is goods which are or are to become fixtures, then in the office of the county clerk in the county where a mortgage on the real estate would be filed or recorded. TEX. BUS. & COM. CODE ANN. § 9.401(a)(2). C) in all other cases, in the office of the Secretary of State. TEX. BUS. & COM. CODE ANN. § 9.401(a)(3). ii. Beware of certain unrecorded perfected security interests, including-A) a purchase money security interest in consumer goods, which is automatically perfected upon attachment. TEX. BUS. & COM. CODE ANN. § 9.302(a)(4). B) a security interest in letters of credit and advices of credit, goods, instruments, money, negotiable documents or chattel paper, which may be perfected by possession. TEX. BUS. & COM. CODE ANN. §§ 9.302(a)(1), 9.305. C) a temporary perfected security interest in instruments, certificated securities, or documents without delivery under section 9.304 or in proceeds under section 9.306. TEX. BUS. COM. CODE ANN. § 9.302(a)(2). c. Motor Vehicles i. Except for motor vehicles held as inventory by a person in the business of selling motor vehicles, a person may perfect a security interest in a motor vehicle that is the subject of a first or subsequent sale only by recording the security interest on the certificate of title pursuant to the Transportation Code. TEX. TRANSP. CODE ANN. § 501.111. d. Real Property D-23 i. Judgment liens--An abstract of judgment, when properly recorded and indexed, if the judgment is not then dormant, constitutes a lien on the real property of the defendant located in the county in which the abstract is recorded and indexed, including real property acquired after such recording and indexing. TEX. PROP. CODE ANN. § 52.001. ii. Mechanic’s, Contractor’s, or Materialman’s liens--Except for liens arising from residential construction projects, a person claiming a mechanic’s, contractor’s, or materialman’s lien must file an proper affidavit with the county clerk of the county in which the property is located. TEX. PROP. CODE ANN. § 53.052. iii. Other liens under the Texas Property Code--The Texas Property Code also provides for landlord’s liens, hospital liens, liens against mineral property, and other liens. See TEX. PROP. CODE ANN. §§ 54.001-70.306. iv. Environmental A) Texas -Environmental remediation costs for which a responsible person is liable to the state constitutes a lien in favor of the state on the affected real property and on the rights to the property. TEX. HEALTH & SAFETY CODE ANN. § 361.194(a). The lien attaches at the time an affidavit is recorded and indexed in the county where the real property is located. Id. § 361.194(b). The lien is not enforceable against prior security interests unless the holder of the prior security interest had or reasonably should have had actual notice or knowledge that the property was the subject of a clean-up action or that the state has incurred cleanup costs. Id. § 361.194(g). B) Federal-Environmental remediation costs, damages to natural resources, and costs of health assessments for which a responsible person is liable to the United States shall constitute a lien in favor of the United States upon all real property and rights to such property which belong to the responsible person and are subject to or affected by a removal or remedial action. 42 U.S.C. § 9607(l)(1). The lien, which shall be filed in the office of the county clerk in the county in which the real property subject to the liens is situated, is not enforceable against prior, properly perfected security interests in the real property. 42 U.S.C. § 9607(l)(3); TEX. PROP. CODE ANN. § 14.002(b). a. Tax Lien Filings i. Federal Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After A) A federal tax lien, which arises after a taxpayer’s failure to pay delinquent taxes after demand, attaches to a delinquent taxpayer’s property, real and personal, upon assessment of the tax liability. 26 U.S.C. §§ 6321-22. B) Perfection of a federal tax lien is governed by § 6323, which provides that a federal tax lien is not valid against third-party creditors until a proper notice is filed. 26 U.S.C. § 6323(a). C) Section 6323(f) of the IRC and sections 14.001-.002 of the Texas Property Code govern the place of filing of federal tax liens. 26 U.S.C. § 6323(f); TEX. PROP. CODE ANN. 14.001-.002. 1) Real Property -- federal notices of tax liens shall be filed in the office of the county clerk in the county in which the real property subject to the liens is situated. TEX. PROP. CODE ANN. § 14.002(b). 2) Personal Property -- federal notices of tax liens shall be filed (1) if the person against whose interest the lien applies is a corporation or a partnership whose principal executive office is in the state, in the office of the secretary of state; (2) in all other cases, in the office of the county clerk in the county where the person against whose interest the lien applies resides at the time of filing of the notice of lien. TEX. PROP. CODE ANN. § 14.002(c). ii. Texas a. On January first of each year, a tax lien attaches to property to secure the payment of all taxes, penalties, and interest imposed for the year on the property, whether or not the taxes are imposed in the year the lien attaches. The lien exists in favor of each taxing unit having power to tax the property. TEX. TAX CODE ANN. § 32.01(a). b. The tax lien is perfected on attachment and, with only one exception for manufactured homes, perfection requires no further action by the taxing unit. TEX. TAX CODE ANN. § 32.001(c). c. A tax lien may not, however, be enforced against a buyer in the ordinary course of business of personal property who does not have actual notice of the lien or, if the property is a manufactured home, does not have constructive notice of the lien. TEX. TAX CODE ANN. 32.03(a). D-24 1) Secured creditors beware: In Central Appraisal District of Taylor County v. Dixie-Rose Jewels, Inc., 894 S.W.2d 841 (Tex. App.--Eastland 1995, no writ), the court held that a bank that did not qualify as a buyer in the ordinary course of business had a lien on the debtor’s personal property that was inferior to the lien of the county appraisal district’s lien, even though the district had given no notice to the bank of the lien or of delinquent taxes, had not taken any action to file a notice of the lien, and had not taken any action take possession of the property before the bank began to foreclose. 3. Requirements for Filing an Involuntary Petition: a. An attorney representing a creditor that is considering filing an involuntary petition against a debtor should be careful to review the requirements of § 303 of the Bankruptcy Code. Failure to comply with that section which results in the petition being dismissed without the consent of all parties may result in an award to the debtor of costs and reasonable attorney’s fees (against any petitioner) or even proximate damages caused by the filing and punitive damages (against bad-faith petitioners). 11 U.S.C. § 303(i). Among the more important requirements are the following: i. Eligible Debtor--An involuntary petition may be filed only under chapters 7 and 11, and only if the debtor qualifies for relief under those chapters. An involuntary petition may not be filed against farmers, family farmers, or corporations that are not moneyed, business, or commercial corporations. 11 U.S.C. § 303(a). ii. Holder Requirements--If the debtor has fewer than 12 “holders” (those holding claims--or an indenture trustee representing the holder--that are not contingent as to liability and are not subject to a bona fide dispute, and excluding certain interested parties), one or more petitioning holders with claims aggregating at least $10,000 in unsecured debt are needed. 11 U.S.C. § 303(b)(2). If the debtor has 12 or more holders, three or more petitioning holders with claims aggregating at least $10,000 in unsecured debt are needed. 11 U.S.C. § 303(b)(1). A) “A claim is contingent as to liability if the debtor's legal duty to pay does not come into existence until triggered by the occurrence of a future event and such future occurrence was within the actual or presumed contemplation of the parties at the time the original relationship of the parties was created.” Subway Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After Equip. Leasing Corp. v. Sims (In re Sims), 994 F.2d 210, 220 (5th Cir.1993) (quoting In re All Media Properties, Inc., 5 B.R. 126, 133 (Bankr. S.D. Tex.1980), aff'd, 646 F.2d 193 (5th Cir.1981)), cert. denied, 510 U.S. 1049, 114 S.Ct. 702, 126 L.Ed.2d 669 (1994). B) To determine whether a claim is subject to a bona fide dispute, the court must determine whether there is an objective basis for either a factual or a legal dispute as to the validity of the debt. In re Sims, 994 F.2d at 220-21. iii. Deadbeat Requirement--Petitioning holders in a timely controverted involuntary case usually must show that the debtor is generally not paying such debtor’s debts as such debts become due unless such debts are subject to a bona fide dispute. 11 U.S.C. § 303(h)(1). A) Factors the court must consider in determining whether debtor was generally not paying its debts as such debts became due, justifying the filing of an involuntary petition in bankruptcy, include the number of unpaid claims, the amount of such claims, the materiality of nonpayment, and the debtor's overall conduct in its financial affairs. In re Arriola Energy Corp., 74 B.R. 784, 790 (S.D. Tex. 1987); In re Norris, 183 B.R. 437, 456-57 (Bankr. W.D. La. 1995). B. Discovery 1. Attorneys should be familiar with the various methods of discovery available in bankruptcy proceedings. A brief outline of those methods and some limitations on each are set forth below. a. First Meeting of Creditors (§ 341 Meeting) i. Within a reasonable time after the order for relief, the debtor must appear and submit to examination under oath at a first meeting of creditors convened and presided over by the United States trustee. 11 U.S.C. §§ 341, 343. ii. Creditors, an indenture trustee, any trustee or examiner in the case, or the United States trustee may examine the debtor. 11 U.S.C. § 343. The court may not attend this meeting. 11 U.S.C. § 341(c). iii. “[T]he primary purpose of the first meeting of creditors is to provide the creditors with the opportunity to gather information on any point that may affect their interest, including, of course, the possibility of D-25 fraudulent transfers or other conduct that might suggest that an objection to the discharge is in order.” Allegheny Int’l Credit Corp. v. Bowman, 60 B.R. 423, 425 (S.D. Tex.1986). A) “Facts related to an allegedly nondischargeable debt are well within the scope of a Section 341 examination. However, due to time constraints and the number of parties in interest often in attendance, a debtor's Section 341 examination rarely presents a sufficient opportunity for an individual creditor to fully explore all underlying facts of potential dischargeability.” People’s Bank v. Poirier (In re Poirier), 214 B.R. 53, 58 (Bankr. D. Conn. 1997). iv. Scope of the Examination at the § 341 meeting: The examination of the debtor at the § 341 meeting “may relate only to the acts, conduct, or property or to the liabilities and financial condition of the debtor, or to any matter which may affect the administration of the debtor’s estate, or to the debtor’s right to a discharge.” FED. R. BANKR. P. 2004(b). In a chapter 11, 12, or 13 case, the examination “may also relate to the operation of any business and the desirability of its continuance, the source of any money or property acquired or to be acquired by the debtor for purposes of consummating a plan and the consideration given or offered therefor, and any other matter relevant to the case or to the formulation of a plan.” Id. v. In a chapter 7 case, the business of the § 341 meeting may also include the election of a trustee or of a creditors’ committee. FED. R. BANKR. P. 2003(b)(1). b. Bankruptcy Rule 2004 Examination i. Any “party in interest” may seek a court order for the examination of “any entity.” FED. R. BANKR. P. 2004(a). The debtor may be examined pursuant to this rule. FED. R. BANKR. P. 2004(a), (d). Some courts, however, have local rules that allow a party to give written notice of a proposed 2004 examination, and if no response is timely served, the examination is deemed ordered by the court. See, e.g., W.D. TEX. BANKR. R. 2004(b), (c). ii. Scope: Same as that for the examination of the debtor at the § 341 meeting, as set forth above, except that the examination may extend beyond the debtor to include third parties who have had dealings with the debtor. FED. R. BANKR. P. 2004(b). Unlike the examination at the § 341 meeting, the 2004 examination is not presided over by the United States trustee. Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After iii. "The purpose of a Rule 2004 examination is to show the condition of the estate and to enable the Court to discover its extent and whereabouts, and to come into possession of it, that the rights of the creditor may be preserved." In re Express One Int’l, No. 9541189, 1998 WL 100520, at *1 (Bankr. E.D. Tex. Jan. 12, 1998) (quoting In re Coffee Cupboard, Inc., 128 B.R. 509, 514 (Bankr. E.D. N.Y. 1991)). Courts have labeled the 2004 examination a “fishing expedition.” In re Wilcher, 56 B.R. 428, 433 (Bankr. N.D. Ill. 1985). iv. The attendance of an entity at the examination and the production of documents may be compelled in the manner provided in Bankruptcy Rule 9016 (which incorporates Federal Rule 45) for attendance of witnesses at a hearing or trial. FED. R. BANKR. P. 2004(c). v. Because Rule 2004 offers fewer procedural safeguards than the discovery provisions of the Federal Rules of Civil Procedure, once an adversary proceeding or a particular contested matter is under way, discovery sought in furtherance of litigation is subject to the Federal Rules rather than the broader bounds of Rule 2004. In re Valley Forge Plaza Assoc., 109 B.R. 669, 674-75 (Bankr. E.D. Pa. 1990) (citing, inter alia, In re Paramount Publix Corp., 82 F.2d 230, 233 (2d Cir.1936); In re Kipp, 86 B.R. 490, 491 (Bankr. W.D. Tex.1988)). c. Federal Discovery Rules i. Bankruptcy Rules 702637 incorporate Rules 26-37 of the Federal Rules of Civil Procedure, respectively, into adversary proceedings. Bankruptcy Rule 9014 makes these rules (with the exception of Rule 27, concerning use of depositions before action or pending appeal) applicable in contested matters as well. FED. R. BANKR. P. 9014. Therefore, in addition to examinations pursuant to § 343 or Rule 2004, an attorney in an adversary proceeding or contested matter may also employ the ordinary discovery procedures including-A) depositions, FED. R. BANKR. P. 7028-32; B) interrogatories, FED. R. BANKR. P. 7033; C) production of documents and things and entry upon land, FED. R. BANKR. P. 7034; D-26 D) physical and mental examination of persons, FED. R. BANKR. P. 7035; and E) requests for admissions, FED. R. BANKR. P. 7036. ii. Civil Rule 26, which governs the general scope of discovery, allows discovery of information that is relevant to the subject matter of the pending action or which is reasonably calculated to lead to the discovery of admissible evidence. FED. R. CIV. P. 26(b)(1). A) “The key phrase in this definition--’relevant to the subject matter involved in the pending action’--has been construed broadly to encompass any matter that bears on, or that reasonably could lead to other matter that could bear on, any issue that is or may be in the case.” Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 351, 98 S.Ct. 2380, 2389 (1978). B) Civil Rule 26(a) requires disclosure, without the necessity of a formal discovery request, of certain information including information on individuals likely to have discoverable information, relevant documents and things in a person’s control, computation of damages, and certain insurance agreements. FED. R. CIV. P. 26(a). Rule 26(a), however, expressly allows districts to opt out of the mandatory disclosure requirement. Id. d. Lists, Schedules, Statements, and Reports i. Inexpensive sources of information about the debtor and the debtor’s affairs include the list of creditors and equity security holders, schedule of assets and liabilities, schedule of current income and current expenditures, statement of financial affairs, statement of intention, and trustee or debtor in possession reports. 11 U.S.C. § 521(1); FED. R. BANKR. P. 1007, 2015. 2. Discovery: To Use or Not to Use? a. The decision to employ discovery or go without it sometimes may be determined by the amount of time available to the attorney. Many hearings, such as cash collateral hearings, are set on shortened notice, and formal discovery may not be possible. Moreover, as in nonbankruptcy practice, failure to conduct discovery is not necessarily negligence as a matter of law. American Int’l Adjustment Co. v. Galvin, 86 F.3d 1455, 1461 (7th Cir. 1996) (“[W]e are extremely wary of holding that pre-trial discovery is required as a matter of law. . . . [W]e are reluctant to encourage the practice of ‘defensive Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After law.’ Of course, this does not mean that failure to conduct discovery will never constitute legal malpractice as a matter of law. Nevertheless, it will be the rare exception.”) (citation omitted). b. On the other hand, an attorney who neglects to conduct discovery and in the process fails to gather information necessary for his client’s claims or defenses may get himself or his client sanctioned, which in turn may lead to a malpractice claim. See People’s Bank v. Poirier (In re Poirier), 214 B.R. 53, 58-59 (Bankr. D. Conn. 1997) (“Procedural devices affording discovery, including Rule 2004 Examinations and the ability to notice and conduct depositions, were enacted to guarantee the orderly, efficient and fair administration of justice. . . . After the period had passed within which the Plaintiff could have, and in this case should have, conducted a Rule 2004 Examination or deposition of the Debtors, its claims were no longer ‘substantially justified’ [under § 523(d)] since an inquiry would have served to inform a reasonable litigant of the untenable nature of its claims. In essence, the Court concludes that the Plaintiff’s presumed failure to conduct discovery by oral deposition or Rule 2004 Examination of the only critical witness prior to trial tolls and terminates whatever ‘special circumstances’ protection it enjoyed by virtue of the ‘unexplained’ nature of the Disputed Charges.”). IX. PRE-FILING PLANNING A. The Business Debtor 1. Identify the Legal Nature of the entity and its business. 2. Identify business problems and cause of business failure, such as: a. Continuing increase in overhead costs. b. Obsolete production methods. c. Increase in competition. d. Acquisition of unprofitable subsidiaries. e. Lack of working capital. f. Declining sales. g. Increased operating costs and overhead. h. Excessive dividends and withdrawals compared to earning record. i. Decline in net profits and lower return on invested capital. j. Poor financial reporting and planning. k. Absence of key management. D-27 l. Fraud and dishonesty. 3. Counsel will often find that management does not recognize the causes of the business’s trouble. In some instances, management will not see the trouble until it is too late. Often management has neglected the record keeping or even deserted the business. 4. Counsel must be ready to suggest new management if necessary, reduction of fixed costs, if possible, institution of economies, generation of cash flow, adjusting sales or adjustment of production, and how to deal with creditor pressure. B. Engagement of Professionals 1. Debtor’s counsel 2. Financial Advisors 3. Accountants 4. Special counsel 5. Issues to discuss, include: a. Payment of pre-filing fees and retainers; b. Representation of multiple debtors in related cases by a single firm. i. The representation of entities with potentially conflicting interests does not necessarily constitute a conflict of interest; there must be an actual conflict of interest to justify an attorney's disqualification or denial of compensation. See In re Global Marine, Inc., 108 B.R. 998 (Bankr. S.D. Tex., 1987). ii. Texas Disciplinary Rule of Professional Conduct 1.06 provides that an attorney may represent multiple parties if: (1) the lawyer reasonably believes the representation of each client will not be materially affected; and (2) each affected or potentially affected client consents to such representation after full disclosure of the existence, nature, implication and possible adverse consequences of the common representation and the advantages involved, if any. C. Considerations Of Counsel 1. Counsel must find and examine with care the following: a. The history of the business with emphasis on earnings. b. Cause of its present difficulties. c. Business prospects with evaluation of the market, competition, and competency of present management. 2. The availability of new capital, particularly working capital. Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After 3. An honest appraisal of the liquidation value of the business’s assets. 4. An analysis of the business’s liabilities, secured, unsecured, taxes, wages,etc. 5. The attitude of the principal secured creditors and suppliers toward the business. D. Counseling the Business Debtor 1. Realistic alternatives. a. Possible out-of-court extension or workout with creditors. b. A reorganization under Chapter 11. c. Liquidate i. Out of Court ii. Chapter 7 E. Approaching Chapter 11 1. There must be a reasonable prospect that the Debtor can effectively reorganize. Chapter 11 is a continual arrangement between the Debtor and its creditors. Such arrangement is a combination of pre-bankruptcy and post-bankruptcy negotiation and postbankruptcy protection and planning. 2. Rehabilitation will work if you find that within a reasonable period of time that the business will be able to: a. Gain the confidence of the principal secured creditors and suppliers; b. Correct management’s mistakes; c. Reduce fixed charges; d. Eliminate burdensome maturity dates; e. Acquire working capital; f. Acquire long-term financing; g. Establish sound fiscal policies; h. Eliminate non-productive activities; i. Obtain competent management. F. Preparation of the Chapter 11 Petition 1. Petition packet. a. Petition with Debtor’s Declaration and Exhibit A to Official Form Number 1, if Debtor is a corporation. b. List of Creditors holding the 20 largest unsecured claims with addresses and amounts, excluding insiders and governmental units and including holders of secured claims to the extent that their unsecured claims may be among the 20 largest. D-28 c. d. e. List of equity security holders. Statement of financial affairs. Schedule of assets and f. Board of Directors resolution liabilities. (if applicable). g. Any matrix complying with local bankruptcy rules. h. Filing fee. 2. First-day pleadings. a. Agenda for Presentation of First Day Orders and Related Pleadings. b. Applications/Declarations for retention of professionals. c. Motion for use of cash collateral. d. Motion authorizing payment of pre-petition wages and employee benefits. Sections 363(b) and 105(a) of the Bankruptcy Code Authorizing Accelerated Payment of PrePetition Wages, Salaries, and Other Compensation, Employee Benefits, and Reimbursable Employee Expenses. e. Motion to honor accrued employee benefits. f. Application/declaration authorizing retention of professionals in ordinary course of business. g. Motion authorizing maintenance of pre-petition bank accounts, cash management system, use of existing books and records. h. Motion for joint administration or substantive consolidation of related cases. i. Motion authorizing payment of essential trade creditors. j. Motion to assume key executory contracts. G. Financing the Chapter 11 Case 1. Building a war chest pre-filing. 2. Preparation of short term and long term cash forecasts. a. Assessing internal cash needs. b. Ability to realize cash from assets. 3. Sources of financing, including DIP financing and use of cash collateral. a. Identify potential lenders. b. Commitment letter/ documentation pre-petition. c. Credit review. 4. Uses of financing. a. Post-petition operations. Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After b. Funding for the plan, to meet proposed treatment of claims and feasibility requirement. H. Planning for Operating Changes and Other Matters to Implement Post-Petition 1. Consider significant operating changes to be implemented post-petition, and whether such matters require commencement prepetition, e.g. a. Closures. b. Other employee layoffs. c. Major marketing or sales decisions. d. Talking to suppliers, trade creditors and customers pre-filing to soften the impact or surprise of the filing. 2. Obtaining possession of assets of the debtor held by third parties, e.g. a. Goods in transit. b. Possessory security interests. 3. Executory contract and lease analysis. a. Consider quick rejections -- to avoid accrual of administrative claims. b. Consider quick assumptions - to provide assurance to key customers or government agencies. c. Non-assumability of financing arrangements. d. 60-day limit for assumption or rejection of lease of non-residential real property. 4. Preference and fraudulent conveyance analysis. I. Venue -- Tactical Analysis of Where to File 1. Forum shopping in general -benefit and burdens. 2. Avoidance of negative local publicity, where a foreign jurisdiction is available. 3. Prospect of local sympathy for a filing in the home jurisdiction. 4 Taking advantage of or avoiding adverse lines of legal authority on key issues. 5. Convenience of the parties, including long distance travel to and from court . 6. Availability of professionals in certain districts. 7. Standards for allowable compensation for professionals in certain districts. J. Beware the Risk of an Involuntary Proceeding 1. Consider the advantages and disadvantages of involuntary proceedings. D-29 a. Eliminates the time available to consider all of the other items in this outline, to increase the prospects for a successful chapter 11. b. Petitioning creditors may select a venue for the case which is not the debtor’s preferred location, subject to the debtor’s right to seek change of venue. 2. Consider negotiating pre-filing forbearance agreements with active creditors to lessen the risk of an involuntary filing. K. Consider Efforts to Negotiate a Deal Pre-Filing 1. Talk to the secured lenders -- both about the treatment of their secured claims under a plan of reorganization and the possibility of arranging DIP financing. 2. Consider creating and negotiating with unofficial committees of creditors and interest holders. a. Bondholders b. Equity holders c. Issues to consider: i. Forbearance agreements ii. Term sheet regarding treatment and recoveries under pre-negotiated plan. 3. Consider talking to other parties pre-filing. a. Significant trade creditors b. Lessors and landlords c. Key suppliers d. Key customers e. Issues to discuss i. What should you tell such parties about the prospect of bankruptcy? ii. Securities law, bankruptcy law and fraud concerns: to what extent can you discuss terms of contemplated plan of reorganization and solicit acceptances pre-filing? L. Consider Pre-Packaged Chapter 11 Plan Alternative 1. Consider treatment of trade creditors and holders of contingent claims, and other problems in pre-packing the plan. 2. Corporate law and securities law issues. 3. Solicitation of acceptances. M. Planning for Compliance With Other Post-Petition Operating Requirements: The United States Trustee Guidelines 1. Prepare or obtain: a. Proof of insurance. b. Tax Returns/unaudited Financial Statements. Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After c. Projected Operating Statement for first 30 days post-filing. d. Proof of establishment of DIP bank accounts. e. Copies of trust agreements. f. Copies of applications to employ professionals. X. CAUTION IN PLEADINGS A. Judicial Estoppel and Property Valuation 1. Should parties be concerned about being judicially estopped from estimating the value of collateral at a different value than that previously asserted by the party earlier in the case? See Ergo Science, Inc. v. Martin, 73 F.3d 595, 598 (5th Cir.1996) ("The doctrine of judicial estoppel prevents a party from asserting a position in a legal proceeding that is contrary to a position previously taken in the same or some earlier proceeding."); In re Woolley’s Parkway Ctr., 147 B.R. 996, 1001 (Bankr. M.D. Fla. 1992) (noting that the doctrine of judicial estoppel “prevents a party from playing ‘fast and loose’ with the judicial system.”). 2. Although a party cannot disassociate itself from the evidence it presented at the earlier hearing, most courts have concluded that judicial estoppel usually does not apply to valuation of property in a bankruptcy case. See, e.g., In re Victorian Park Assoc., 189 B.R. 147, 149-50 (Bankr. N.D. Ill. 1995) (rejecting a creditor’s argument that the debtor should be judicially estopped from applying a different value at confirmation than at the prior lift-stay hearing: “This position is ridiculous since a key variable affecting the value of real property is time.”); In re Woolley’s Parkway Ctr., 147 B.R. at 1001 (concluding that “general statements of the law on judicial estoppel . . . have no relevance and applicability to valuation of property in a case under Title 11 . . . .”); cf. First Federal Sav. & Loan Ass’n of Rochester v. Kelley (In re Kelley), 163 B.R. 27, 33-34 (Bankr. E.D. N.Y. 1993) (concluding that a mortgagee was not judicially estopped from asserting that a deficiency judgment might arise from a state-court foreclosure; noting that the value of property may decline between the valuation for lift-stay purposes and later valuations). 3. In an extreme case, however, where a drastic difference in a proposed valuation is attributed by a party to a “mistake” in the prior valuation, a court may apply judicial estoppel. In D-30 re J.F.K. Acquisitions Group, 166 B.R. 207, 21011 (Bankr. E.D. N.Y. 1994) (applying judicial estoppel where the debtor asserted a $10 million valuation (estimation of secured claim for plan purposes) only ten months after its previous valuation of $30 million (for lift-stay purposes), which it claimed was a “mistake”). Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After B. Usury Exposure 1. A person who contracts for, charges, or receives interest at a rate greater than that permitted by law is subject to certain usury penalties. TEX. FIN. CODE ANN. §§ 302.001, 305.001-.005. Should an attorney worry about “charging” usurious interest rates in a pleading? Although the answer at one time was unclear, recent cases have answered the question “no.” a. George A. Fuller Co. of Texas v. Carpet Serv., Inc., 823 S.W.2d 603, 606 (Tex. 1992) (“[W]e hold that a demand for prejudgment interest contained in a pleading does not make the pleader liable for statutory usury penalties if the pleading seeks the recovery of unlawful prejudgment interest.”). b. Sage Street Assoc. v. Northdale Constr. Co., 863 S.W.2d 438, 440 (Tex. 1993) (holding that the constitutional proscriptions on usurious interest govern only lending and credit transactions and do not apply to the rate of prejudgment interest set by a court). c. D&S Kingsway Ventures v. Texas Capital Bank--Richmond, N.A., 882 S.W.2d 573, 575 (Tex. App.--Houston [14th Dist.] 1994, no writ) (rejecting the argument that a bank’s first amended petition to recover on a defaulted note constituted a “charge” of usurious interest because the petition did not reflect a credit for the amount the bank received at the foreclosure: “A pleading by itself, even if it contains a claim for usurious interest, ‘does not constitute a “charge” of usurious interest for purposes of the Texas usury statue.’”) (citing George A. Fuller Co.). d. Federal Sav. & Loan Ins. v. Kralj, 968 F.2d 500, 504 (5th Cir. 1992) (“[I]f the underlying documents are not usurious, then irrespective of the type of interest demanded in the pleadings, imposing a penalty for usury, based solely on a demand made in a pleading or interrogatory answer, does nothing to fulfill the purpose of usury laws, which is to correct abusive practices in consumer and commercial credit transactions.”). 2. A demand letter from an attorney, on the other hand, could constitute a usurious charge of interest. See George A. Fuller Co., 823 S.W.2d at 605 (concluding that “[a] charge must be communicated to the debtor. The communication need not be direct, as long as the charge is ultimately demanded from the debtor.”). C. D-31 Rule 9011 1. Bankruptcy practitioners should be aware of the pitfalls involved in signing, filing, or advocating any pleading or paper in a bankruptcy court. Effective December 1, 1997, Rule 9011 again substantially mirrors the “revised” Rule 11 of the Federal Rules of Civil Procedure. Rule 9011, as amended, provides in part that “[e]very petition, pleading, written motion, and other paper, except a list, schedule, or statement, or amendments thereto, shall be signed by at least one attorney of record in the attorney's individual name. A party who is not represented by an attorney shall sign all papers.” FED. R. BANKR. P. 9011(a). 2. Rule 9011 also provides that “[b]y presenting to the court (whether by signing, filing, submitting, or later advocating) a petition, pleading, written motion, or other paper, an attorney or unrepresented party is certifying that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances,-a. it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation [the “improper purpose prong”]; b. the claims, defenses, and other legal contentions therein are warranted by existing law or by a non-frivolous argument for the extension, modification, or reversal of existing law or the establishment of new law [the “frivolousness prong”]; c. the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery; and d. the denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on a lack of information or belief.” FED. R. BANKR. P. 9011(b). 3. Examples of unreasonable inquiries, factually inaccurate assertions, and unwarranted legal arguments under the frivolousness prong include-a. failing to investigate whether a client had a prior bankruptcy case dismissed within the preceding 180 days in response to a motion for relief from the automatic stay. Moran v. Frisard (In re Ulmer), 19 F.3d 234, 237-38 (5th Cir. 1994). See 11 U.S.C. § 109(g)(2) (prohibiting a second bankruptcy petition if, within 180 days preceding the second petition, the prior case was Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After voluntarily dismissed following the filing of a motion for relief from the automatic stay); b. failing to investigate whether a client is eligible to participate in the selection of a Chapter 7 trustee before voting on behalf of the client for that proposed trustee. Masunaga v. Stoltenberg (In re Rex Montis Silver Co.), 87 F.3d 435, 439-40 (10th Cir. 1996); c. failing to investigate whether a claim is valid before filing an objection to claim. In re Medical One, Inc., 68 B.R. 150, 152 (Bankr. M.D. Fla. 1986); d. failing to read an entire statute before relying on it. Findlay v. Banks (In re Cascade Energy & Metals Corp.), 87 F.3d 1146, 1151 (10th Cir. 1996); e. asserting that a bankruptcy judge should be disqualified after witnessing all of the judge’s alleged misconduct yet failing to allege facts which, even if proven, would support disqualification. Reserve Management, Inc. v. Jacobson (In re Jacobson), 47 B.R. 476, 477-78 (D. Colo. 1985); f. asserting inaccurate and misleading information in a statement of affairs. Caldwell v. Unified Capital Corp. (In re Rainbow Magazine, Inc.), 77 F.3d 278, 282-83 (9th Cir. 1996); g. arguing that the United States Trustee has no standing to object to an attorney’s fees. Hayes & Son Body Shop, Inc. v. United States Trustee, 124 B.R. 66, 68 (W.D. Tenn. 1990); h. arguing--after submitting to the court the text of a statute with relevant and limiting portions omitted--that a statute applies to the facts of a case when it clearly does not. In re Cascade Energy & Metals Corp., 87 F.3d at 1151. 4. The improper purposes listed in the rule are not exclusive. Examples of improper purposes include-a. filing a document for the central purpose of delaying or avoiding state foreclosure proceedings. McGahren v. First Citizens Bank & Trust Co. (In re Weiss), 111 F.3d 1159, 1171 (4th Cir. 1997), cert. denied, 118 S.Ct. 369 (1997); b. filing a “flood” of objections to claims to cause creditors to relinquish valid, enforceable claims rather than incurring the legal costs required to respond to the objections. In re Medical One, Inc., 68 B.R. 150, 151-52 (Bankr. M.D. Fla. 1986); D-32 c. filing a collateral attack on a bankruptcy court sale order for the purpose of intimidating the purchaser. Valley Nat’l Bank of Arizona v. Needler (In re Grantham Bros.), 922 F.2d 1438, 1443 (9th Cir. 1991), cert. denied, 502 U.S. 826, 112 S.Ct. 94 (1991). 5. An objective standard of reasonableness applies to determine whether a signatory acts with an improper purpose and whether the signatory’s pre-filing inquiry was sufficient. In re Weiss, 111 F.3d at 1170-71; Mapother & Mapother, P.S.C. v. Cooper (In re Downs), 103 F.3d 472, 481 (6th Cir. 1996); Silverman v. Mutual Trust Life Ins. Co. (In re Big Rapids Mall Assocs.), 98 F.3d 926, 930 (6th Cir. 1996). This determination should be based not upon the bankruptcy court’s hindsight, but instead upon what was reasonable at the time the document was filed. In re Downs, 103 F.3d at 481 (citing McGhee v. Sanilac County, 934 F.2d 89, 93 (6th Cir. 1991)); In re Big Rapids Mall Assocs., 98 F.3d at 930; Glatter v. Mroz (In re Mroz), 65 F.3d 1567, 1572 (11th Cir. 1995). Factors considered in this determination include-a. the amount of time in which to research the facts of the case; b. the amount of information available about the client’s business; c. whether other professionals were consulted; d. what the clients told the attorney and whether the attorney was justified in believing the client; e. any other relevant factual detail. In re Downs, 103 F.3d at 481; In re Big Rapids Mall Assocs., 98 F.3d at 930. 6. Whereas sanctions were mandatory for Rule 9011 violations before December 1, 1997, sanctions under the revised Rule 9011 are discretionary. Compare FED. R. BANKR. P. 9011(a) (pre-revision) (providing that “the court shall impose . . . an appropriate sanction” for documents signed in violation of the rule) (emphasis added) with FED. R. BANKR. P. 9011 (current) (providing that the court "may . . . impose an appropriate sanction" for violations of Rule 9011) (emphasis added). 7. If Rule 9011 is violated, the court may impose sanctions on the attorney, law firm, or party that violated the rule. FED. R. BANKR. P. 9011(c). The sanctions should be limited to what is sufficient to deter future offending conduct and may include nonmonetary or Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After monetary sanctions. FED. R. BANKR. P. 9011(c)(2). EXCERPT FROM 1997 ALAS LOSS PREVENTION MANUAL Copyright © 1998 Attorneys’ Liability Assurance Society, Inc. A Risk Retention Group Reprinted with Permission Lawyer Liability in Bankruptcy Practice by Brian J. Redding and Mark E. Gralen [Revised from the January 1995 issue of the ALAS Loss Prevention Journal] Introduction As we note in our introductory message for this edition of the Journal, this is a "theme" issue, in which we explore areas of practice that historically have not been a serious problem for ALAS Member Firms, but cause us concern for the future. In a sense this article, which explores lawyer liability problems in the bankruptcy practice, is out of place, because the "future" concerns trial we set out to predict in this issue have already begun to cause losses in bankruptcyrelated claims. That is, however, a very recent phenomenon. In the fall of 1993 one of the authors spoke on a panel at the annual meeting of the National Conference of Bankruptcy judges. In connection with that speech we reviewed ALAS bankruptcy related claims as of November 30, 1992. Those claims offered little indication that bankruptcy practice was dangerous. Claims classified as bankruptcy-related totaled less than $5 million in incurred loss and less than 7% of ALAS' total incurred loss. Most claims were garden-variety negligence claims, with the most prominent being claims arising from failure to perfect a security interest (often through allegedly defective UCC filings) in pre-bankruptcy transactions, causing a later loss when the creditor lost its priority during bankruptcy proceedings. Notwithstanding this rather unremarkable historical loss record, we predicted at the 1993 meeting of the National Conference of Bankruptcy judges that bankruptcy- D-33 related claims were likely to be a future problem area for large law firms. Our reasoning included the following: A) Historically, the most serious problem for large law firms (including ALAS Member Firms) has been "aiding and abetting", i.e., the claim that a client has engaged in wrongdoing (e.g., fraud, misrepresentation, breach of fiduciary obligation, etc.) and that the defendant lawyer providing legal services aided the wrongdoing. Frequently, the serious claims have been exacerbated by allegations of conflict of interest. The root causes of these claims are generally: 1) representation of dishonest or incompetent clients; 2) engaging in a representation that raises conflict of interest issues, e.g., by failing to recognize potential conflicts or by failing to dispel any ambiguity about the identity of the lawyer's client, particularly in a transactional setting; and, 3) failure to investigate a deal (or the client's conduct) when "red flags" arise suggesting the possibility that something is amiss. B) Bankruptcy is a setting where dishonest or incompetent clients are not unknown. C) Bankruptcy is also a setting where conflict of interest problems are increasingly prevalent. Yesterday's bankruptcy boutique is today's bankruptcy department in a large fullservice law firm that represents thousands of clients that present potential conflicts in any large bankruptcy. Moreover, today conflict of interest analysis must survive scrutiny under both the provisions of the Bankruptcy Code and under relevant provisions of the ethics rules. Frequently, today's bankruptcy judge comes from outside the bankruptcy practice and is likely to disapprove of representations challenged on conflicts grounds, even though those representations would have passed muster five or ten years ago. D) The typical "aiding and abetting" claim asserted in a variety of other contexts-in particular those involving failed financial institutions-fits well in the bankruptcy setting. E) The Department of Justice announced last year (at the NCBJ Annual Meeting, among other places) that it intends to expand substantially its efforts in the investigation and prosecution of criminal bankruptcy fraud. We warned lawyers that an increase in the number of Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After criminal prosecutions for bankruptcy fraud, (e.g., involving fraudulent conveyances) would probably result in a corresponding increase in civil suits, e.g., by trustees or creditors, against the lawyers that “papered" the transaction giving rise to the criminal prosecution (whether or not those lawyers were actually culpable). Our prediction that bankruptcy practice would become more dangerous was admittedly speculative. Unfortunately, our speculation has proved to be accurate. In preparation for this article we reviewed, as of late summer, 1994, all of ALAS' reserved claims categorized as "bankruptcy" claims. Currently, that category accounts for more than $60 million in incurred loss, which is approximately 5 % of ALAS' total incurred loss. That is a dramatic increase in loss incurred in the past two years. Some explanation of these figures is necessary. First, some of the conduct giving rise to these claims occurred years ago. Second, several of the severe claims might fairly be characterized as other than bankruptcy. For example, a claim by investors for securities fraud brought against a bankruptcy debtor and his lawyers could be characterized as either a securities claim or a bankruptcy claim. Several significant claims of that type have contributed to the incurred loss figures referred to above. We have classified them as bankruptcy claims, but others might disagree. Similarly, many of the "failure to perfect" claims against ALAS Member Firms could be characterized as involving commercial law or "UCC" claims. Again, we have characterized them as bankruptcy claims. Whatever their classification, the severity of these claims justifies increased scrutiny by ALAS Member Firms of their representation of debtors and creditors, both before and after filing of a bankruptcy petition. Time and space limitations preclude detailed scrutiny of all of ALAS' bankruptcyrelated claims. We will, however, briefly survey those areas that we believe currently present the most serious problems. Fraud In terms of incurred toss, ALAS' most significant problems are fraud claims. Included in that category is any claim that a lawyer is legally D-34 responsible for injury caused by a client's fraud because the lawyer aided the fraud through supportive legal services. Some of these claims might be characterized as garden-variety securities law claims. Many, however, are fraudulent conveyance claims, brought either under the bankruptcy laws or under the Uniform Fraudulent Conveyance Act. The circumstances giving rise to these claims vary significantly. All, however, involve classic fraudulent transfer allegations, i.e., that the debtor conveyed property in a business transaction and received inadequate consideration in return. If the transaction is pre-petition, it was allegedly done "in contemplation of bankruptcy," or while the debtor was "insolvent." In each instance the lawyer allegedly knew "or should have known" of the inadequacy of the consideration and allegedly papered the deal to aid the debtor in defrauding creditors. Frequently the transfers are to persons or entities related in some way to the debtor. Often it appears that the lawyer had no knowledge that the consideration was less than fair value for the property transferred. That does not always protect the lawyer from suit. How does a business lawyer avoid such claims? There is no perfect answer. Sometimes diligence above and beyond normal standards may be the only way to avoid being sued. Asking questions and investigating may be necessary, at least where circumstances suggest that fraudulent conveyance issues are potentially lurking behind a transaction (e.g., the sale of a plant or subsidiary to an affiliated company by a corporation facing severe financial difficulties). ALAS' recent experience indicates that in the absence of increased visor by business and bankruptcy lawyers, more claims of this type are likely to surface in coming years. Conflicts of Interest Conflicts of interest have always been a major lawyer liability problem for ALAS and its Member Firms. Losses from claims involving conflicts have increased substantially in the past two years. (See the September 1994 issue of this Journal, p. 2.) That trend is present in ALAS' bankruptcy claims, as well. Claims resulting primarily from conflicts now represent more than 10% of ALAS' $60 million in incurred loss in bankruptcy claims. Conflicts are also causing problems in bankruptcy practice outside the ALAS group. Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After There are two major categories of conflict problems in bankruptcy claims: 1) conflicts of interest arising from pre-bankruptcy conduct -e.g., conflicts arising from alleged multiple representation in a pre-filing transaction that allegedly causes injury to the debtor (and the bankruptcy estate); and 2) conflicts of interest allegedly arising from the conduct of a law firm in representing a debtor or creditor in a bankruptcy proceeding. ALAS' incurred loss in bankruptcy matters comes primarily from alleged conflicts from the first category-alleged conflicts arising from multiple representations in business transactions that precede the debtor's bankruptcy petition. In most cases causing ALAS to incur losses, a claim has been made that the ALAS lawyer represented the debtor and others in a transaction and failed to fully protect the debtor, allegedly as a result of the lawyer's conflict. Frequently the transaction involved related entities that were friendly at the time of the transaction but became adverse after the transaction caused economic harm to one or more of them. We discussed the problems arising from alleged multiple representations in business transactions in a previous issue of this Journal. We won't repeat that discussion, but we urge bankruptcy lawyers (and all other transactional lawyers in ALAS Member Firms) to refer to that discussion. (See the September 1994 issue of this Journal, pp. 2-5.) We will repeat our warnings of the importance of defining carefully the identity of the parties that you represent, and those you don't represent (i.e., the "I'm not your lawyer" letter). It is also crucial to understand and explain to your client the ethical implications of accepting representation of multiple parties to a transaction (e.g., under Model Rule 2.2). The second category of conflict problems in bankruptcy-those arising from the representation of a client in the bankruptcy proceeding-was discussed in the May 1994 issue of this Journal, pp. 21-24. [This article now appears as Section VI.C. of Tab III.B. of this Manual.] We will not repeat that discussion here, but bankruptcy lawyers should be familiar with the problems discussed in that article. We note here only the following general points: 1) Bankruptcy courts appear to be subjecting possible conflicts to closer scrutiny D-35 than in years past. Remember, conflicts must pass muster under both the bankruptcy rules and the Rules of Professional Conduct governing lawyers in the relevant jurisdiction. It is possible that a conflict will pass scrutiny under the bankruptcy rules, but not under the ethics rules, and vice-versa. One important measure in bankruptcy proceedings is to fully disclose all possible conflicts to the court. Bankruptcy courts tend to deal particularly harshly with undisclosed conflicts. Failure to disclose prior relationships with other parties playing roles in the bankruptcy may result in disqualification or loss of fees. A prominent New York law firm spent a substantial portion of 1994 fighting attempts by a U.S. trustee to obtain disqualification and disgorgement orders against the firm (New York Times, November 11, 1994, p. C2). Ultimately, the firm forfeited substantial fees. The danger of such motions is present in any situation where bankruptcy counsel fails to reveal a relevant relationship to other parties in the proceedings. 2) Yesterday's bankruptcy boutique is often today's bankruptcy group in a large fullservice law firm having thousands of clients. Many bankruptcy practitioners are not used to living with the substantial foreclosure of opportunity that occurs because existing clients of the firm are, at least theoretically, adverse to a party the lawyer represents in the bankruptcy proceedings. 3) Today, finessing a conflict of interest is more likely than in years past to generate a claim that the quality of a lawyer's representation was adversely affected by the conflict. These factors, taken together, make it imperative that bankruptcy lawyers pay strict attention to conflict of interest issues. Early consultation with your firm's loss prevention partner, or a member of the firm's ethics committee, is important. Failure to Perfect Security Interests ALAS' Bankruptcy Claims Arising From Perfection Problems Until recently, ALAS' bankruptcy-related claims experience for failure to perfect security interests was unremarkable. While ALAS has always had claims involving perfection failures, in 1992 incurred losses in this area arising from bankruptcy Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After cases were not alarming. In the last two years, however, ALAS has seen increased exposure in this area. Incurred losses from perfection failures in bankruptcy cases are now almost $10 million. Significantly, both the frequency and severity of claims in this area have accelerated even with the recent decline in the number and dollar volume of corporate Chapter 11 bankruptcy filings. How do perfection problems arise? The typical commercial finance practitioner at an ALAS firm knows how to perfect a security interest, both in terms of the substantive law and the mechanics. The primary source of perfection problems is not substantive mistakes, but filing errors, erroneous or inadequate descriptions of collateral, or other mistakes by inexperienced paralegals, junior attorneys or attorneys inexperienced in secured transactions. Often, the preparation and filing of the UCC statements is viewed as a mechanical task which is left to the paralegal or the junior associate because the partner is occupied negotiating the loan covenants, representations and warranties, and collateral ratios. By the time the deal gets to closing, the partner may be under pressure to stay within a fee cap or budget (or may already have exceeded it). This only increases the incentive to "delegate" mechanical tasks such as the actual filing of the UCC-l's. While there is nothing wrong with delegation, the inexperienced paralegal or associate may not understand the significance of what he or she is reviewing, absent partner supervision. The result is that easily correctable problems are missed, and everybody goes on to the next project. Often the file is not reexamined until the company either has filed bankruptcy or is about to file. At that point, the lender and the law firm find themselves unable to correct the problem. A claim against the law firm is the inevitable result. The best known "failure to perfect" claim against a law firm resulted from a now famous typographical error resulting in a ship mortgage being filed with an amount denominated as $92,885, instead of $92,885,000. Shortly after the mistaken filing, the debtor filed for bankruptcy. Both the debtor and another secured creditor sought to limit the erroneously filed security interest to $92,885. This "$93 million typo" resulted in enormous trouble and expense to D-36 everyone involved. The creditor-client ultimately succeeded in partly reforming the mortgage, but years of litigation resulted, and the client alleged that it had suffered $30 million in damage from the mistake. It filed malpractice claims against three law firms. See Prudential Insurance Co. v. Dewey, Ballantine, Bushby, Palmer & Wood, 170 A.2d 108, 573 KNESSET 981 (N.Y. App. 1991). Claims against two firms were settled, with the third claim being dismissed. See Prudential Insurance Co. v. Dewey, Ballantine, Bushby, Palmer & Wood, 80 N.Y.2d 377, 590 KNESSET 831 (1992). Preventing Perfection Problems Based on our claim experience, we suggest a number of steps ALAS firms can take to reduce their exposure in these matters: 1. Increase oversight and training for paralegals and associates in commercial finance transactions. Finns should take steps to ensure proper oversight and training other employees who are doing the mechanical work in these deals. They are the ones who will most often prevent -- or create -- a major perfection problem. In particular, the responsible partner or other attorney should personally review any UCC statements (including exhibits) that are filed in any transaction, and should personally review the results of UCC filings and/or post-closing searches. Lawyers also need to keep abreast of the law in this area, which is constantly evolving. 2. Try to structure the mechanics of transactions co minimize the risks of human error. Anything that can be done to make filing mistakes less likely is a positive step. One partner in an ALAS firm suggests that, if possible, one uniform exhibit describing the collateral in a secured loan transaction should be used for the loan agreement, the security agreement, the UCC filing, and other documents. This approach minimizes the risk of error in multiple re-creations of collateral descriptions. 3. Make sure experienced commercial finance lawyers are involved or at least consulted in secured loans or workouts. Malpractice problems often occur when a lawyer ventures outside of his or her area of expertise. Perfection of security interests is no different. The best way to avoid Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After perfection problems is to obtain the advice of experienced counsel in collateralizing any loan. 4. Recognize the risks of reliance on third parties. The use of outside vendors to file UCC statements and to do UCC searches is a reality in today's secured lending environment. In any malpractice claim, however, the claimant will often allege that the lawyers were responsible for the accuracy of the vendor's work. For example, title policies often contain broad bankruptcy exclusions that purport to absolve the title company of responsibility if a security interest is avoided in bankruptcy. Lawyers using outside services should carefully review their work and make sure those services are responsible for their own errors and those of their agents. 5. Put it in writing. Clients should be advised in writing of what types of collateral they have obtained, what their priorities are with respect to other creditors, and whether any clear risks to enforceability or perfection exist. Absent timely and clear written advice, lawyers are at the mercy of creative memories of the loan officer or in-house counsel, who often will say that he or she relied completely on outside counsel and assumed everything was completely secured. 6. Do post-closing searches. Many lawyers do UCC searches after a closing to ensure that all filings have been property made. This is a laudable practice from a loss prevention standpoint, but its utility will be sharply diminished unless experienced lawyers review the results of the post-closing searches carefully. The fact that a financing statement was filed will not prevent that statement from being avoided in bankruptcy if the collateral description or the debtor's name is incorrect. Literal accuracy in financing statements is likely to be increasingly important in the future as more states convert to computerized filing systems that require literal searching. 7. Upon discovering a problem, deal with It. In many cases involving a failure to file or an erroneous filing of a financing statement, malpractice exposure can be avoided if a corrective action is taken. If the lender is not an "insider" of the debtor, the lender's security interest usually will not be avoidable if the bankruptcy petition is filed more than 90 days after the corrective filing. ALAS has had claims D-37 where such corrective filings have eliminated a law firm's malpractice exposure. ALAS encourages its member firms to consult with ALAS in these situations. Most of the steps suggested above apply to virtually any kind of client representation. However, ALAS firms should realize that, in today's environment, proper perfection of security interests in collateral is not only good lawyering but also effective loss prevention. Hopefully, careful attention to potential problems at the front end of these transactions will avoid malpractice exposure in subsequent bankruptcy cases. Negligent Bankruptcy Advice or Litigation Services As more ALAS firms have become involved in bankruptcy work, ALAS has seen an increasing number of claims alleging negligent bankruptcy-related advice or services. Despite the increasing number of matters, the severity of losses in this area remains relatively low. Some of the trends in recent claims, however, are a cause for concern. Bankruptcy practice, particularly the representation of corporate debtors, often involves not only litigation, but many different types of transactions, such as securities offerings, asset sales or real estate deals, and advice on corporate, environmental, labor, ERISA, tax and other issues. ALAS has had a number of bankruptcy-related claims in which lawyers allegedly have given incorrect advice on areas of substantive law outside of their expertise. ALAS has also had a few claims arising from alleged mistakes by transactional attorneys representing clients in bankruptcy court. These claims suggest that straying outside one's expertise is particularly dangerous in bankruptcy settings, where adverse parties are on the spot to review each move the bankruptcy lawyer makes and the lawyer's client is frequently looking to obtain financial aid from any available source. To avoid problem in this area, firms should maintain open lines of communication between transactional lawyers and bankruptcy lawyers so that they are utilized as needed. ALAS also has had claims where disappointed clients have accused bankruptcy lawyers of overstating their expertise, promising results that were not achieved, or otherwise failing Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After to live up to expectations. Often these claims seem to be driven by client anger over the law firm's fees or its efforts to collect them. These claims to date have not caused substantial toss to ALAS, but they have been expensive to defend. ALAS has already advised its firms that it is usually a bad idea to sue a client for unpaid legal fees. The same goes for heavy-handed collection tactics in bankruptcy cases. ALAS also has had several negligence claims arising from the nature of bankruptcy practice itself, which often involves extreme time pressures and numerous deadlines. For example, in Chapter 7 cases, many of these deadlines are set automatically by the Bankruptcy Code or Rules, such as the time within which to assume or reject unexpired leases or executory contracts (60 days after the order for relies; the time within which to file objections to discharge (60 days after the first date set for the meeting of creditors under Section 341 of the Bankruptcy Code); and the time within which to file proofs of claim (90 days after the first date set for the Section 341 meeting). (In Chapter 11 cases, in contrast, several of these deadlines are set by the court). Bankruptcy also has different rules for appeals, the most notable of which is that a notice of appeal must be filed within 10 days of final judgment, rather than 30 days. The Bankruptcy Reform Act of 1994 adds to the deadline pressure with accelerated time deadlines for "small business" and "single asset" bankruptcies, and a new 30-day limit for concluding the final hearing on a motion for relief from the automatic stay. ALAS' claims experience in these areas suggests that the following loss prevention technique are particularly useful in the bankruptcy practice: 1. Use a calendar. An effective calendaring system is essential in bankruptcy representations. Deadlines should be input at the outset of a representation, not delayed pending further developments. The calendar also must be updated continuously as the bankruptcy case progresses. D-38 routinely grant a motion to receive notice of all proceedings to any attorney representing a party in interest. 3. Review the schedules, statement of financial affairs, and docket sheet. If an attorney is retained to represent a party in a pending bankruptcy case, the attorney should review the debtor's schedules and statement of financial affairs, and, most importantly, the docket sheet. These documents will summarize case developments and identify other parties and their counsel (for conflicts purposes). The docket sheet also will enable the attorney to determine whether any orders have been entered affecting the client's interests. 4. Put it in writing. Lawyers should report developments in writing to clients (many of whom distrust the bankruptcy process and, by implication, the lawyers involved) and reach a clear understanding in writing about the scope of the lawyer's responsibilities. For example, if a client wants to save fees by filing its own proof of claim, as often happens, that decision should be memorialized in writing, with clear instructions as to the deadline. Written communications not only will help defeat an effort to blame a lawyer for a client's mistakes, but also will minimize the potential for a serious fee dispute, which may escalate into a full-blown claim. 5. Do not be reactive. Finally, lawyers should consider taking early affirmative action to enforce clients' rights, rather than taking a reactive approach to the bankruptcy process. Many bankruptcy attorneys attempt to craft case specific strategies which sometimes involve attempts to negotiate solutions to disputes before resorting to litigation. If the strategy fails, the lawyer may be subjected to second guessing of legitimate tactics by other participants in the bankruptcy process. Accordingly, lawyers should consider filing available motions or other necessary pleadings before engaging in negotiations. If a different strategy is advisable (as it often may be), attorneys should contemporaneously document the reasons for that strategy, with notice to the client in writing. Conclusion 2. File a Motion to Receive Notice. Bankruptcy lawyers should make sure they receive notice of important developments and court orders. In most bankruptcy cases, courts will The future is here. ALAS' recent claims experience indicates that representation of debtors and creditors, before or after the filing of a Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After bankruptcy petition, is becoming increasingly dangerous from a lawyer liability standpoint. The only way to deal with the problem is increased diligence on the part of lawyers in ALAS Member Firms. What does increased diligence mean? It means increased scrutiny of prospective bankruptcy clients -- a client that was dishonest prior to bankruptcy isn't likely to change spots afterward. It means increased diligence in papering transactions for financially troubled businesses. It means increased attention to conflict of interest issues by bankruptcy lawyers, both before and after the filing of a petition. It means increased attention to detail and better partner supervision in documenting secured transactions and perfecting security interests. It means better quality control, including greater use of specialists within your firm in representing parties to a bankruptcy proceedings. If all that is done, the recent trend in bankruptcy-related claims can be reversed. Hypothetical Problem for Loss Prevention Seminar on Bankruptcy-Related Claims D-39 million), but U.S. Widget paid Premium Widget in cash. Although an in-house lawyer for U.S. Widget kept track of the deal, he did not attend the closing. Doonesbury, the partner in Premium Widget's law firm, drafted the closing documents and handled the closing. Doonesbury knew that Rich was on both sides of the deal and viewed these assets as Premium Widget's "crown jewels." Doonesbury also knew there was some connection between Rich and the appraiser whose price was chosen. Premium Widget had just been hit with a large judgment in a contract dispute and had some significant potential exposure to products liability claims. Despite misgivings about the deal and Premium Widget's future prospects, however, the lawyers took some comfort in the comments of the press and securities analyses. They thought the deal would give Premium Widget badly needed cash to pay its bills. They also believed that U.S. Widget would have a better chance to develop the new widget with its greater cash reserves. Issues. By Brian J. Redding, Mark E. Gralen and Randolph J. Haines Background Premium Widget Corporation is a manufacturer of luxury widget. Before 1994, Premium Widget was controlled by its 25% shareholder, IM Rich. Rich is also a 25% shareholder of another widget manufacturer, U.S. Widget Corp., a larger company with a much broader product line. Premium Widget sells widget through subsidiary dealerships. Premium Widget's banks require the dealers to sign financing and collateral agreements for loans to Premium Widget. I. The Asset Transfer Facts. In 1992 Premium Widget, under Rich's direction, sold a plant and related assets to U.S. Widget. Premium Widget had used the plant to manufacture a state-of-the-art widget that, after years of investment, had just started to make money. Before the sale, Rich commissioned three appraisals of the assets. The parties chose the lowest of the three for the purchase price ($25 1. Is this transaction a fraudulent transfer? What kind of fraudulent transfer (actual or constructive)? 2. What exposure do the lawyers have for fraudulent transfers involving their clients? 3. What problems are posed by Doonesbury's dominant role in the closing? Does this role make the fraudulent transfer problem worse? II. The Perfection Problem Facts. When it sold the plant, Premium Widget also refinanced its $50 million revolving line of credit. Outside counsel for the First National Bank, the new lead tender, and in-house counsel knew that, in the future, U.S. Widget Credit Corp. (USWCC) would finance Premium Widget's acquisition of widget in exchange for purchase money security interests. However, the lead partner did not discuss collateral priorities with inhouse counsel, whom she considered a nuisance. In-house counsel assumed the bank would be senior Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After to USWCC because the bank's UCC statements would be filed first. The lead partner negotiated an outstanding loan agreement, with excellent covenants, collateral ratios, representations and warranties. However, she became occupied on other deals as the closing on this one approached. She therefore delegated the filing of the UCC-1 financing statements to a mid-level associate. The associate's primary experience had been in real estate. True to his background, he was focused on complicated issues involving title and leasehold mortgages in the Premium Widget deal. Accordingly, the associate delegated the personal property collateral issues (which he disliked anyway) to a paralegal. Working by himself, the paralegal did not understand that the UCC in Premium Widget's home state required both a "local" county filing and a "central" filing with the Secretary of State. The paralegal also did not understand the significance of the term "accounts receivable" and took the collateral description from the wrong place in the loan documents. As a result, he filed the UCC statements only with the Secretary of State and did not include the term "accounts receivable." The paralegal ordered post-closing searches, but he was the only one to review the results, so he did not catch the mistakes. By 1994, Premium Widget was in desperate financial condition, hit hard by a luxury tax and increased competition from foreign manufacturers. The company had completely dissipated the proceeds of the 1992 asset sate. Accordingly, Premium Widget began workout talks with its secured tenders. Premium Widget also began considering bankruptcy. When workout talks began, the bank transferred the loan to its Special Workout Group, which discovered the lack of a UCC filing in the county. The bank's outside lawyers fixed their mistake by immediately filing with the county the same UCC statement used before. However, neither the bank nor its counsel realized the accounts receivable description problem. Issues. 1. Putting aside the substantive mistakes, what problems do you see in the way the bank's lawyers handled this assignment? What should they have done differently? D-40 2. What exposure does the bank's law firm have for failing to file the UCC statements locally at the county level? What defenses might the firm have? Does the corrective filing solve the problem? 3. What will be the likely result of a priority fight between the bank and USWCC? How will the firm's exposure be affected by that result? III. Disclosure in the Bankruptcy Facts. In workout negotiations, creditors were willing to allow Premium Widget to survive as a going concern, although with substantial restrictions on operations and a new CEO chosen by the creditors. However, Premium Widget's law firm, the same one that had handled the asset sale, persuaded Premium Widget to break off the negotiations and to file a Chapter 11 bankruptcy petition. Doonesbury assured Rich that a quick reorganization would allow Premium Widget to reject all of its burdensome leases and emerge intact under existing management, with Rich's share holdings unaffected. Before planning the bankruptcy, Doonesbury insisted that Premium Widget pay his firm's unpaid fee balance of $150,000, which included some billings at premium rates, and a $100,000 retainer. At Rich's direction, Premium Widget paid $175,000 and U.S. Widget paid $75,000. (The firm had done some work on a tax project for U.S. Widget that was on hold pending a ruling from the IRS). After depositing the fee payments, Doonesbury decided to wait to file Premium Widget's bankruptcy petition until after the 90-day preference period under the Bankruptcy Code expired. Shortly after Doonesbury received the fee payments, the bank made its corrective county UCC filing. Four months after the fee payments, American Widget Corp. and several other unsecured creditors filed an involuntary bankruptcy petition against Premium Widget. Before filing the petition, counsel for American Widget screened the debtor in their conflict check, but did not screen Premium Widget's secured lenders. The firm therefore did not realize that First National Bank was a client of one of its branch offices. Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After In light of its existing plans, Premium Widget consented to the bankruptcy filing. Doonesbury filed an affidavit in support of his firm's motion for court approval of its employment as counsel to Premium Widget as debtor-in-possession. The affidavit did not disclose the fee payments by Premium Widget and U.S. Widget, nor did it disclose the firm's tax project for U.S. Widget. The court granted the motion. Issues. 1. Was it wrong for Doonesbury to insist on payment of the firm's past due bills and on a retainer for the bankruptcy? 2. What if anything was wrong with the way the firm dealt with the fee payments in the bankruptcy? What is the consequence of not disclosing the payments and the connection with U.S. Widget? 3. Is there a problem with the firm deciding to wait until the preference period passed before filing the bankruptcy petition? What if this was done with the clear approval of the client? 4. How is this likely to play out in the bankruptcy proceeding? IV. Malpractice in the Bankruptcy Facts. In the Chapter 11, improvements in certain local real estate markets made some of the leases quite favorable to Premium Widget. However, Doonesbury, as DIP counsel, was preoccupied in the early days of the bankruptcy with ensuring utility service and with cash collateral and DIP financing, and did not focus on lease issues. He assumed that assumption of the teases could be dealt with at any time before confirmation of the plan under Section 365 (d) (2) of the Code, just as with executory contracts. Doonesbury eventually reached agreement with the bank on a cash collateral and DIP financing order. The bank's outside counsel, fearful of the reaction of the judge, decided on his own (without consulting with bank in-house counsel) not to include in the order a waiver of the debtor's right to "surcharge" the collateral for administrative expenses under Section 506(c) of the Bankruptcy Code. The bank's counsel also did not include a "cross-collateralization" provision which would have secured the pre-petition loan D-41 with post-petition collateral. Counsel was concerned that this tactic, expressly disapproved by some courts, would anger the debtor-oriented judge, causing him to make other, more harmful changes to the agreed order. Meanwhile, other creditors were having problems of their own in the Premium Widget bankruptcy. Both USWCC and American Widget missed the proof of claim bar date. The court set the bar date early in an order mailed to the business addresses of creditors rather than to their counsel. Outside counsel for USWCC was not concerned about the bar date because USWCC's loan officer said he would "take care of' the proof of claim, and outside counsel believed USWCC was fully secured anyway. American Widget's counsel never got the bar date order from his client. However, he could have discovered the bar date on his own by filing a motion to receive notice in the bankruptcy or by checking the docket sheet. Issues. 1. Is there a problem with the way Doonesbury approached the lease issue? 2. What about the bank's counsel's approach to the cash collateral/DIP financing order? 3. What exposure do USWCC and American Widget's counsel have for missing the bar date? What argument does American Widget have for avoiding disallowance of its proof of claim? Is there a reason why USWCC would not want to file a proof of claim? V. Disqualification and Disgorgement Facts. Despite his success on the cash collateral/DIP financing order, Doonesbury was not immune from the problems besetting other counsel. Throughout the bankruptcy, he was worried about his pre-petition advice to Premium Widget not to settle a products liability class action for $10 million. For Premium Widget, this was a significant sum, but one the company could have handled at the time. Premium Widget turned the deal down on Doonesbury's advice that the company could do better by litigating. Although the court refused to certify a class action, Doonesbury's litigation strategy forced the company to turn over some incriminating documents. In the first of the individual cases to go Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After to trial, the plaintiffs obtained a $250,000 verdict against Premium Widget, defended by Doonesbury's firm. However, in the next case, handled by local counsel, the court ruled that the suit was barred by Premium Widget's compliance with a federal regulation covering the design defect in question. Doonesbury felt vindicated by this result, but became worried when he read the appeal brief. The brief persuasively argued that the federal regulation did not preempt the tort claim and that the incriminating documents raised significant triable issues about Premium Widget's conduct. Doonesbury's reaction to the appeal brief was shared, although in a different way, by Brash Fearless, the counsel for the unsecured creditors' committee. After reading the brief, Brash & Fearless decided to investigate the pre-petition relationship between Premium Widget and Doonesbury's firm. In a Rule 2004 examination of Premium Widget's CFO, Brash & Fearless found out about the pre-petition fee payments to the firm and the firm's relationship with U.S. Widget. Brash & Fearless immediately filed a motion seeking an order disqualifying Doonesbury's firm as DIP counsel and requiring the firm to disgorge all fees paid to it as DIP counsel, including the $100,000 retainer. The motion not only excoriated Doonesbury's firm for violating the disclosure requirements of Bankruptcy Rule 2014 and Section 329 of the Code, but also made veiled references to alleged malpractice by the firm in the handling of the class action. The committee also sought leave to file a preference action against Doonesbury's firm for its pre-petition fee payments, arguing that the firm was an "insider" of Premium Widget and therefore was subject to the one-year preference period. After a hearing, the court granted the motion to disqualify and granted the committee leave to file the preference action. The court set the request for disgorgement for a later evidentiary hearing. Issues. 1. Was the court's disqualification decision correct? Why? 2. What is the likely result on the disgorgement issue? Does the court have any discretion on the issue? VI. Reorganization D-42 Facts. Eventually, Premium Widget confirmed a reorganization plan that paid off secured claims by selling some of Premium Widget's remaining assets to U.S. Widget (the only cash buyer) and by distributing stock in a smaller, reorganized Premium Widget to trade creditors and product liability claimants. Based on a valuation of the stock at confirmation, the plan would only pay 20% of unsecured creditor claims, and trade creditors faced significant dilution if products liability claims were enlarged by a reversal on the tort appeal. Counsel for American Widget, a dominant unsecured creditor, strongly supported the plan, as did new counsel for the DIP and Brash & Fearless. The plan provided no recovery for the estate's potential claims against U.S. Widget and Rich. However, under the plan, U.S. Widget paid the fees and expenses of all estate professionals, including new DIP counsel and Brash & Fearless. Three weeks after confirmation, dissenting bondholders' special federal appellate counsel filed a notice of appeal. A week later, in the tort case against Premium Widget, the appellate court reversed, ruling that there was no federal preemption bar to the suit and reopening all of the individual cases based on the same design defect. The appellate court also reversed the trial court's denial of the class certification motion. The ruling had two effects. First, under the Premium Widget plan, pre-petition products liability claimants who obtained judgments or settlements from Premium Widget would receive additional distributions of stock in the reorganized company. Second, Premium Widget now faced new claims alleging post-petition injuries based on the same theory. Analysts predicted exposure in the new cases could eventually cause Premium Widget to file a second bankruptcy. Several months later, Premium Widget filed a malpractice suit against Doonesbury's firm, alleging negligence in Doonesbury's advice not to settle the tort claims on a class basis and further negligence in the discovery and trial of the first tort case. Doonesbury's firm filed a motion to dismiss on the ground that the claim was barred by principles of res judicata and judicial estoppel because of Premium Widget's failure to schedule it in the reorganization plan. Issues. 1. What are the malpractice consequences of Doonesbury's motion to dismiss for (1) Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After Doonesbury's firm; (2) Premium Widget's second DIP counsel; and (3) creditors' committee counsel? 2. Does American Widget's counsel have any exposure for supporting a reorganization plan that paid off the secured claim of the bank? 3. Do Premium Widget's second DIP counsel and creditors' committee counsel have any exposure for supporting a plan in which U.S. Widget paid their fees in full? 4. Does bondholders' counsel face exposure on the appeal of the confirmation order? Discussion of Hypothetical Problem for Loss Prevention Seminar on Bankruptcy-Related Claims DISCUSSION OF ISSUES I. Asset Transfer Issue. 1. Is this transaction a fraudulent transfer? What kind of fraudulent transfer (actual or constructive)? Discussion. It is not clear whether this transaction constitutes a fraudulent transfer. What is clear is that a trustee, or creditors committee, might assert that the transfer is actually, or constructively, fraudulent and that the claim would not be treated as frivolous by most bankruptcy judges. still in effect in approximately 10 states), or the Uniform Fraudulent Transfer Act (adopted in 1984 and in effect in approximately 30 states). The legal test, whether under the Bankruptcy Code, or state law, is similar. A transfer is actually fraudulent if made with actual intent to hinder, delay or defraud creditors.1* Absent proof of actual intent to hinder creditors, a transfer may be deemed constructively fraudulent if made without "fair consideration" or "reasonably equivalent value" (we shall generically refer to these tests as "fair value") if, immediately after the transfer, the debtor was "insolvent," or left with ('unreasonably small assets" or "unreasonably small capital" or where the transferor intends to, or believes it will, incur debts beyond its ability to pay. The difference between actual and constructive fraud may not be as significant as one would think, since actual fraud (i.e., intent to hinder creditors) may be proved by circumstantial evidence. Moreover, under, e.g., the UFTA, if the so-called "badges of fraud" are present, actual fraud may be presumed. Issue. 2. What exposure do lawyers have for fraudulent transfers involving their clients? Discussion. The last step in the chain is that some courts have held that lawyers may be liable for aiding and abetting transfers that are actually fraudulent. See, e.g., McElhanon v. Hing, 151 Ariz. 386, 728 P. 2d 256 (Ariz. App., 1985), modified on other grds, 151 Ariz. 403, 728 P. 2d 273 (1986). Even in jurisdictions not expressly recognizing this principle, lawyers may be sued for allegedly aiding and abetting a breach of fiduciary duty. See, e.g., Feinberg v. Carter, 652 F. Supp. 1066, 1082 (S.D. N.Y. 1987); Heckmann v. Ahmanson, 168 Cal. App. 3d 119, 127, 214 Cal. Rptr. 177 (2nd Dist. 1985). (While we don't agree 1 There are several potential sources of law available to attack pre-petition transfers of property as fraudulent. A trustee (or DIP) may attack a conveyance made within a year of the bankruptcy petition under §548 of the Bankruptcy Code. Attacks on pre-petition transfers may also be made, pursuant to §544 of the Code, under State laws. The primary state laws applicable to this situation are versions of the Uniform Fraudulent Conveyance Act (adopted in 1918 and D-43 Under state law there may be "standing" issues as to which creditors may raise a "fraudulent transfer" claim as to a particular transaction (e.g., present as opposed to future creditors). While this may present defenses in a particular situation, for the purposes of this discussion (i.e., loss prevention) they are not of overwhelming significance and we will generally omit discussion of them. Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After that these cases correctly state the law, or that they should apply to lawyers representing their clients, plaintiffs' lawyers will argue that they should be applied to the conduct of transactional lawyers). Applying these principles to the hypothetical, we see several problems in fending off a fraudulent transfer claim. First, the sale of the plant was for the lowest of the three appraisals. Second, it was made to an affiliated company, i.e., an entity that, because of Rich's ownership interests, might be considered an insider. Moreover, because Premium Widget had just been hit with a large judgment, another "badge of fraud" is present. The factual argument that Rich was trying to preserve the "crown jewel" of his production facilities, thus advantaging himself and hindering creditors, could strike a chord with the trier of fact. On the other hand, the deal raised cash for Premium Widget, and may have been superior in that respect to the other offers. We cannot tell from the hypothetical whether the transfer was for fair value (using the lowest appraisal is not helpful), or whether the transfer left Premium insolvent in an accounting sense (valuing existing assets and liabilities, including contingent liabilities, is an "iffy" proposition). It would appear, however, that, given the nature of the contingent liabilities and the sequence of events, there is room for a creative lawyer representing creditors to make arguments (presumably aided by (‘experts’) that at least create a litigable controversy, and a lawyer liability risk, for our friend Mr. Doonesbury. Issue. 3. What problems are posed by Doonesbury's dominant role in the closing? Does this make the fraudulent transfer problem worse? Discussion. Doonesbury's dominant role in the closing presents further problems. While Doonesbury probably believes (and will contend) that he represented only Premium Widget, and that U.S. Widget was represented by in-house counsel, lawyers for the creditors (or a trustee if one is appointed) will contend otherwise. They will argue that Doonesbury was a "lawyer for the deal," represented both sides in the transaction and breached his fiduciary obligation to Premium Widget by aiding (or conspiring with) Mr. Rich in his attempts to transfer assets to U.S. Widget. If U.S. Widget is successfully sued as recipient of a D-44 fraudulent conveyance, it would not be surprising to see a lawyer liability suit against Doonesbury alleging that he represented both sides in the transaction, had a conflict of interest and failed to protect U.S. Widget's interests. This scenario, where a lawyer believes he represents one party to a transaction, but circumstances make it appear that he may have acted as a lawyer for the deal, is a very serious lawyer liability problem for ALAS and its Member Firms. A number of the case studies discussed at the main loss prevention program at the 1995 ALAS Annual General Meeting involved this problem. In some of those cases, a letter sent to all participants in the transaction defining precisely the parties that the lawyer did, or did not, represent would have aided the defense of the malpractice case. In the absence of these steps, it is likely that conflict of interest issues will complicate the defense of any claims brought against Doonesbury for aiding and abetting a breach of fiduciary duty by officials of his client (i.e., the alleged fraudulent transfer) . Loss Prevention. How should ALAS Member Firms deal with this problem? First, you need to increase the awareness of the firm's transactional lawyers to the increased risk of documenting transactions for clients that are facing hard economic times. If your firm's bankruptcy lawyers are involved, they're probably aware of the risk presented by transactions that raise fraudulent transfer issues. Corporate lawyers, although aware of the law generally on these matters, may be less sensitive to the risk than bankruptcy lawyers. Being aware of the problem doesn't solve it, however. The transactional lawyer faced with these facts probably ought to: 1) advise the client of the applicable fraudulent transfer law, and document your advice; 2) make sure the client has a reasonable basis to support its claim that the transaction is not a fraudulent transfer; 3) look out for red flags-facts that impeach the accuracy of the client's position; and 4) if you are convinced the transfer may be actively or constructively fraudulent, Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After consult your firm's ethics committee to determine your obligations under applicable law. Very recently, two well-known, non-ALAS firms (headquartered in New York) were among the defendants named in a $2.1 billion RICO claim filed in the Keene Corp. bankruptcy proceedings. (See, Lawyers Sued In Bankruptcy, The National Law journal, June 26, 1995, P. A6.) The RICO Claim was based upon alleged fraudulent conveyances related to an LBO, and subsequent asset transfers, involving Keene Corp. and Baimco Corp. Apparently, one of the law firms was sued for aiding and abetting the alleged scheme, even though they advised their client of the dangers presented by the applicable fraudulent transfer law. Id. This case is substantially larger than any of the fraudulent conveyance cases pending against ALAS Member Firms. In a dramatic way, it illustrates the problems such cases present for the defendant law firm. Whether or not there is any validity to the claim, the firms against whom such claims are filed face long, troublesome and distracting litigation, often spend all of their self-insured retention, and could face claims exceeding their policy limits, all because of the circumstances surrounding pre-petition transactions. It is worth considerable care to avoid being named a defendant in this type of litigation. II. The Perfection Problem Issue. 1. Putting aside the substantive mistakes, what problems do you see in the way the bank's lawyers handled this assignment? What should they have done differently? Discussion. We see at least three problems with the way the bank's outside counsel handled this assignment. First, they failed to communicate with their client. A frank discussion of collateral priorities with in-house counsel, preferably in writing, would have disabused in-house counsel of the notion that the bank would be senior to USWCC in all respects. See UCC 9-312(3) (perfected purchase money security interest in inventory has priority over an earlier-filed security interest in the same inventory and identifiable cash proceeds). It is not clear from the hypothetical whether the bank actually relied on in-house D-45 counsel's mistaken view of priorities in extending the loan. By failing to communicate, however, outside counsel put themselves at the mercy of the hindsight memories of in-house counsel and the bank's loan officers, who in today's climate will likely be quick to blame outside counsel for a perfection problem. The second problem is delegation without supervision. The hypothetical illustrates a recurring problem, which is the remarkable lack of high-level attention paid to the actual filing of UCC statements to perfect security interests. In this case, the lawyers delegated the UCC work to an associate inexperienced in commercial finance, and then delegated again to a paralegal, who, understandably, was not versed in the intricacies of the UCC in Premium Widget's home state and did not understand the significance of a county filing. The lawyers also put the paralegal in the position of describing the collateral on his own from loan documents. These facts (which are more common sources of claims than readers may assume) highlight the need for clear instructions and adequate review of the work of paralegals and associates in UCC transactions. Another way to solve the problem would be adequate review of the post-closing UCC searches. Here the paralegal ordered the searches, but no attorney reviewed them. One doubts whether the paralegal or the lawyers involved had any notion that failing to do so might create a seven-figure malpractice problem for the law firm down the road. Issue. 2. What exposure does the bank's law firm have for failing to file the UCC statement locally at the county level? What defenses might the firm have? Does the corrective filing solve the problem? Discussion. Before the corrective filing, the bank's law firm appeared to face possible exposure for failing to file at the county level, although liability for damages is another matter entirely. The UCC is a "notice" filing system, in which the filing rules are designed to provide objective notice to other parties considering whether to extend credit to a borrower. [See Official comment 2 to UCC Section 9-402.1 In this case, the firm may have an argument that a reasonable "searcher" would search Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After the UCC records in the Secretary of State's office in addition to the county office, and thus would be put on notice of the bank's lien. The UCC also provides that a good faith filing "made in an improper place or not in all of the places required by" the UCC is nevertheless effective as to persons who have actual knowledge of the contents of the financing statements. UCC Section 9-401(2). However, the latter defense may be unavailable against a bankruptcy trustee or debtor-in-possession occupying the status of a "hypothetical lien creditor" under Section 544(a) of the Bankruptcy Code. See Barkley Clark, The Law of Secured Transactions under the Uniform Commercial Code, ¶ 2.12[3] (Warren, Gorham & Lamont 1993). Does the corrective filing solve the problem? We believe the answer is probably yes with respect to collateral correctly described in the original filing with the Secretary of State, as long as Premium Widget does not file bankruptcy within 90 days of the corrective filing.2 Thus, the lawyers here may have avoided a significant portion of their exposure by promptly addressing the problem when they discovered it, rather than letting it fester or hoping it would go away. Unfortunately, however, since they did not correct the collateral description, some exposure may remain. See the discussion in response to Question #3 below. Issue. 3. What will be the likely result of a priority fight between the bank and USWCC? How will the firm's exposure be affected by that result? Discussion. As discussed in response to Question #1 above, the bank would have been junior to USWCC on inventory and identifiable cash proceeds even if the UCC filing had been handled perfectly. The problem here is that the corrective county filing did not correct the tack of a precise “accounts receivable” description in the UCC statement. Thus, the bank may be subordinate to USWCC in accounts receivable and nonidentifiable cash proceeds. Both items could be significant pieces of collateral in an insolvent business. The firm's exposure, however, depends on how bad the misdescription was. The UCC only requires that a financing statement describe collateral "by item or type" and provides that financing statements are effective even if they contain "minor errors which are not seriously misleading." See UCC 9-402(l), (8). There are numerous cases going both ways on whether these requirement are satisfied by collateral descriptions that do not contain precise UCC terminology. See Barkley Clark, supra, 11112.09, 2.10. At the very least, however, a potentially inadequate collateral description that does not match up exactly with the loan agreement is likely to be challenged in today's bankruptcy climate, where debtors, trustees, and unsecured creditors committees commonly attack secured creditors on whatever grounds are available to obtain additional funds or negotiating leverage. Defending any such claim, regardless of whether it succeeds, is expensive and difficult for a law firm. III. Disclosure in the Bankruptcy Issues. 1. Was it wrong for Doonesbury to insist on payment of the firm's past due bills and on a retainer for the bankruptcy? 2. What if anything was wrong with the way the firm dealt with the fee payment in the bankruptcy? What is the consequence of not disclosing the payments and the connections with U.S. Widget? 2 Note, however, a trap for the unwary if the loan is guaranteed by an insider of the debtor. In that instance, one commentator has argued that the 1994 amendments to the Bankruptcy Code, intended in part to overrule the "Deprizio" line of cases permitting recovery of preferences within a year of bankruptcy on loans guaranteed by insiders, would not immunize the avoidance of a security interest on collateral in the debtor's possession. See Josephson, The Deprizio Override, Business Law Today, p.38 (May/June, 1995). D-46 Discussion. There is nothing wrong with a bankruptcy lawyer insisting on payment of a firm's past due bills and a retainer for undertaking representation of a debtor in possession in a Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After bankruptcy case. It is essential, however, for a bankruptcy lawyer to disclose those payments in accordance with the Bankruptcy Code and rules in order to avoid the embarrassing and costly problems of disqualifications and disgorgement. In this case, the payments, by themselves, were not necessarily inappropriate. The problem arises from the way that Doonesbury dealt with them in the bankruptcy. Bankruptcy Rule 2014 requires that counsel for the debtor in possession file an application describing any proposed arrangement for compensation and all of the attorneys' connections with the debtor, creditors, and any other parties in interest. The disclosure of connections with other parties is necessary to determine whether counsel is "disinterested," as required by Section 327 of the Code. Similarly, Section 329 of the Bankruptcy Code and Bankruptcy Rule 2016(b) require that a person representing a debtor in a case under Chapter 1 1 file with the court a statement of compensation paid or agreed to be paid for any services within a year of the bankruptcy filing, and the source of the compensation. Section 329(b) allows the court to order the return any payment deemed to be beyond the reasonable value of such services. Unfortunately, Doonesbury has not disclosed the payments by Premium Widget or U.S. Widget, nor has he disclosed his firm's other work for U.S. Widget. He also has not filed the statement required by Section 329 of the Code. With proper disclosure of these matters Doonesbury probably would not have had to worry about the fee payments, except perhaps the premium amount of the billings. Whether Doonesbury's firm would have been deemed not "disinterested" in light of the other work for U.S. Widget is perhaps a closer question. However, most courts would probably be inclined to give Doonesbury's firm the benefit of the doubt as long as the other work was fully disclosed, since the other work was unrelated and not even active at the time. Because of the lack of any disclosure here, however, Doonesbury's firm faces substantial risk of disqualification and disgorgement. Issues. 3. Is there a problem with the firm deciding to wait until the preference period passed before filing the bankruptcy petition? D-47 What if this was done with the clear approval of the client? 4. How is this likely to play out in the bankruptcy proceeding? Discussion. The problem with deciding to wait is that the firm put its own interests ahead of its client's interests. If the bankruptcy had been promptly filed after the payments were made, the bank's corrective filing probably would have been avoidable as a preference. As it stands, however, Doonesbury's decision to delay the filing of the petition apparently has allowed the bank to shore up its collateral position to the detriment of Premium Widget and its unsecured creditors. Doonesbury may not have known this might happen; indeed, he probably believed that the delay simply would not affect Premium Widget one way or the other. Doonesbury's subjective belief, however, will not prevent exposure to malpractice liability, especially when the client is prejudiced. Could Doonesbury wait to file the petition with clear disclosure and consent of the client? Because Doonesbury delayed the filing to benefit himself and his firm, this appears to be a Model Rule 1.7(b) conflict. It may be consentable, but only if Doonesbury is able to make full disclosure of the potential adverse consequences of delaying the filing of the petition. Here, there may have been no way of knowing that the bank had a perfection problem, so Doonesbury may not even have been able to disclose it in a consent letter. Doonesbury has set himself on a dangerous course by not disclosing his pre-petition fee payments and by apparently trying to insulate those payments by delaying the filing of the petition. When these kinds of tactics emerge in bankruptcy cases, other estate parties engage in attack upon counsel to advance their own clients' agendas. These attacks, not to mention harsh opinions from bankruptcy courts on matters of disqualification, increasingly serve as the centerpiece of subsequent malpractice claims against bankruptcy counsel. IV. Malpractice in the Bankruptcy Issue. 1. Is there a problem with the way Doonesbury approached the lease issue? Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After Discussion. Doonesbury's approach to the lease issue is a problem. Section 365(d)(4)of the Bankruptcy Code provides that an unexpired lease of nonresidential real property is deemed rejected unless assumed within 60 days of the bankruptcy petition. By simply assuming that commercial leases are dealt with in the same way as other leases and executory contracts, Doonesbury missed a specific Code provision with a specific deadline. Doonesbury's mistake on the lease issue does not necessarily translate into damage liability. Any malpractice claimant would need to demonstrate the extent to which the unassumed leases were more valuable than leases at current market rates for comparable locations. Moreover, there may be no damage exposure if the leased operations are discontinued or sold in the bankruptcy process. Readers may have noticed that Doonesbury, the same lawyer who was closing pre-petition corporate deals with Premium Widget, is now acting as bankruptcy counsel for Premium Widget. This may explain his mistake on the time deadline for assumption of commercial leases. As stated in our January 1995 article on this subject in the Journal, ALAS has had a number of claims in which lawyers have strayed outside their expertise in bankruptcy-related settings (these include both bankruptcy lawyers becoming involved in non-bankruptcy subject areas, and vice versa). Several of these claims have involved scenarios not totally dissimilar to this hypothetical. Issue. 2. What about the bank's counsel's approach to the cash collateral/DIP financing order? Discussion. Bank counsel made a judgment call here that his client's interests would be jeopardized by including a cross-collateralization provision and a Section 506(c) waiver. These types of discretionary decisions, for which lawyers historically have enjoyed fairly broad immunity, are increasingly being challenged today. In this case, the bank's counsel is probably at somewhat greater risk by failing to include a Section 506(c) waiver. Such provisions have become quite common and not including the waiver may expose the lender's collateral to hundreds of thousands of dollars in administrative expenses. D-48 Bank counsel's decision not to include a cross-collateralization provision is less problematic, since some courts have expressly disapproved cross-collateralization, at least as to cash collateral. In re Saybrook Mfg. Co., 963 F.2d 1490 (11th Cir. 1992). Nevertheless, counsel might still be at risk if there is no controlling authority on the cross-collateralization issue in the circuit where the bankruptcy case is pending, or if the judge herself, despite counsel's fears, has not definitively spoken on the issue. Since discretionary decisions need to be made all the time in bankruptcy, often under severe time constraints, readers might wonder whether anything can really be done to avoid these types of claims. One method of minimizing claims from such judgment calls is to document the reasons for them. In this case, a simple letter explaining the reasons for not seeking a Section 506(c) waiver or cross-collateralization may seem like a small thing at the time. Yet it would be a powerful defense exhibit in any subsequent malpractice claim, and may even allow the lawyer to obtain summary judgment. Another way for lawyers to protect themselves is to ask at the outset of negotiations for things such as a Section 506(c) waiver or crosscollateralization, even if the lawyer is willing to live without them. You may obtain valuable concessions from other parties in return. At the very least, if another party refuses to give on these points, the lawyer will not appear to have ignored them, but rather to have conceded them in the normal give and take of negotiations. Lawyers should also consider the possible benefits of promptly filing motions to enforce a client's rights before negotiations begin or even while negotiations proceed. Although there are often very solid reasons for not following this approach, a judge's decision to deny relief is often easier to explain in hindsight than never making the request in the first place. Issue. 3. What exposure do USWCC's counsel and American Widget's counsel have for missing the bar date? What argument does American Widget have for avoiding disallowance of this proof of claim? Is there a reason Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After why USWCC would not want to file a Proof of Claim? Discussion. Both USWCC's counsel and American Widget's counsel face possible exposure for missing the proof of claim bar date. Congress may have made matters worse with recent amendments to the Bankruptcy Code, effective October 22, 1994, expressly disallowing most untimely filed claims. See 11 U.S.C. Section 502(b)(9)(1994). In USWCC's case, counsel will defend and may prevail by arguing that the client undertook to file the proof of claim. However, unless that division of responsibility is clearly documented, there may well be an issue of fact precluding summary judgment, since clients have a way of remembering the division of responsibilities differently when a claim is deemed time-barred. This is particularly true where, as here, outside counsel has not notified the client of the bar date or explained the consequences of failing to file the proof of claim. It is possible that USWCC might not want to file a proof of claim to avoid submitting to bankruptcy court jurisdiction. The time for addressing those issues, however, is before the bar date, not through hindsight rationalization. American Widget's counsel likely will escape exposure because the filing of the involuntary petition will be sufficient to constitute an "informal" proof of claim In re Wilbert Winks Farm, Inc., 114 B.R. 95 (E.D. Pa. 1990). Even so, however, American Widget's counsel may lose this representation, and future representations, because of the cost and embarrassment of having to establish that the involuntary filing was an informal proof of claim. Both of these filing problems could have been avoided by several bankruptcy practice techniques that are also good loss prevention steps: establishing a calendar at the outset of any bankruptcy representation; filing a motion to receive notice in any bankruptcy case in which a lawyer represents a party; and reviewing the bankruptcy court docket sheet, the schedules and the statement of financial affairs at the outset of any bankruptcy representation. D-49 Failing to file a proof of claim does not necessarily translate into automatic damage liability for either set of lawyers. Under some situations, a party can claim "excusable neglect" and seek to have a late proof of claim deemed timely filed. Pioneer Inv. Services Co. v. Brunswick Associates, L.P., 507 U.S. 380, 113 S. Ct. 1489, 1493 (1993). Other courts have held, prior to the 1994 Bankruptcy Code amendments, that certain priority claims are not disallowed if they are tardily filed because, inter alia, Section 502(b) of the Code does not enumerate "untimeliness" as a ground for disallowance of claims. In re Pacific Atlantic Trading Co., 33 F.3d 1064 (9th Cir. 1994); In re Vecchio, 20 F.3d 555 (2d Cir. 1994). V. Disqualification and Disgorgement Issues. 1. Was the court's disqualification decision correct? Why? 2. What is the likely result on the disgorgement issue? Does the court have any discretion on the issue? Discussion. While the bankruptcy judge's decision seems a bit precipitous, the Doonesbury firm may have been at risk on this motion in other bankruptcy courts, as well. Our experience has been that bankruptcy courts may be slightly more lenient than a typical ethics committee in deciding conflict of interest issues, so long as debtor's counsel has fully disclosed the factual basis surrounding possible conflict situations. Most bankruptcy judges, however, react adversely when debtor's counsel has failed to disclose arguably relevant facts. Here, we're not quite sure what the disclosure affidavit reveals, but it didn't disclose the facts surrounding the fee payments, and those should have been disclosed. The facts concerning the delay in filing the petition, and the clear conflict the firm had in advising the DIP concerning potential malpractice claims against itself, raise serious issues. While these facts may seem somewhat exaggerated, recent months have seen motions for disqualification and/or disgorgement granted by bankruptcy judges against firms within and outside of the ALAS membership, sometimes accompanied by scathing criticism of the firm. Obviously, the courts have substantial discretion on these issues, but courts seem increasingly willing to grant such motions. Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After VI. Issue. 1. Reorganization What are the malpractice consequences of Doonesbury's motion to dismiss for (1) Doonesbury's firm; (2) Premium Widget's second DIP counsel; and (3) creditor's committee counsel? Discussion. Doonesbury's motion is arguably well-founded. Failure to schedule a claim, identify it in a disclosure statement, or preserve it in a plan of reorganization, has been held to preclude the reorganized debtor from asserting the claim at a later time. See, e.g., Eubanks v. FDIC, 977 F.2d 166 (5th Cir. 1992). See also, e.g., Monarch Life Insurance Co. v. Ropes & Gray, 65 F.3d 973 (lst Cir. 1995). By failing to preserve the claim, the final order of the bankruptcy court operates as an adjudication having collateral estoppel or res judicata effect against the debtor. In reality, the doctrine is based on judicial estoppel concepts, i.e., it's not fair to allow the debtor to not schedule a claim (shielding it from creditors) and later benefit by asserting that claim. Obviously, while this doctrine helps Doonesbury's firm, it creates problems for the second DIP firm and creditors' committee counsel. Depending on how obvious the claim was, and what, if any, tactical considerations led these law firms to not assert the claim, it is possible that a dismissal on res judicata grounds could lead to subsequent malpractice cases being filed against the second DIP firm and/or counsel for the creditors committee. Bankruptcy lawyers need to know that failure to schedule claims can result in losing those claims through assertion of a res judicata, collateral estoppel or judicial estoppel defense, and could lead to later lawyer liability claims. Moreover, the bank was a client of the firm on unrelated matters and American's counsel failed to disclose that fact to American Widget. Most ethics lawyers would concede there is a serious issue as to whether a rule 1.7(b) conflict existed, requiring the firm to disclose to American Widget that the secured lender was a valued client of the firm on unrelated matters, and to obtain American Widget's consent. Many ethics lawyers would also argue that Model Rule 1.7(a) required consent of the secured tender to allow the law firm to represent American Widget. That is, they would argue that American Widget's interests were "directly adverse" to those of the secured lender within the meaning of Model Rule 1.7(a). Issue. 3 Does American Widget's counsel have any exposure for supporting a reorganization plan that paid off the second claim of the bank? Discussion. American Widget's counsel certainly has exposure, though it's far too early to know how that situation will eventually play out. American Widget's counsel supported a plan that paid its client 20 cents on the dollar, while failing to challenge the secured lender's claim, even though there was an arguable defect in part of that claim (the description of the collateral). Do Premium Widget's second DIP counsel and creditors' committee counsel have any exposure for supporting a plan in which U.S. Widget paid their fees in full? Discussion. That fact was undoubtedly disclosed. Without more it might not be a serious problem. When added to the problems with the plan, it is an additional factual element suggesting these law firms may have had a Model Rule 1.7(b) conflict in advising on the reorganization plan. This fact will, most likely, be used by counsel filing any malpractice case as an additional argument to support the contention that DIP counsel and creditors committee counsel "pulled their punches" in not filing an action attacking the allegedly fraudulent conveyance. As was noted in several different sessions at the 1995 AGM, conflicts of interest continue to be one of ALAS' biggest lawyer liability problems. An alleged conflict can frequently turn a weak malpractice claim into a viable one. Issue. 4. Issue. 2 D-50 Does bondholders counsel face exposure on the appeal of the confirmation order? Discussion. Yes. The appeal had a 10-day time limit. Failure to perfect the appeal is arguably negligent. Of course, part of any successful malpractice claim based on failure to perfect an appeal, is proof of the likelihood of a successful appeal. (Hopefully, bondholders counsel will not have written a letter describing the likelihood of success on appeal in unrealistically glowing terms.) Failing to effect a timely filing because counsel was unaware of specialized filing deadlines is becoming Malpractice Traps: How to Avoid the Sleepless Nights and the Morning After a problem. ALAS Member Firms have several pending claims involving failure to effect timely filing of various documents in bankruptcy proceedings. It's not always clear why this occurs. Sometimes we suspect it results from the unsupervised work of associates. Sometimes we suspect it occurs because bankruptcy litigation is being conducted by lawyers not totally familiar with the bankruptcy rules. Just as certain litigation conducted in bankruptcy proceedings may require nonbankruptcy specialists, ALAS Member Firms need to remain aware of the specialized nature of bankruptcy proceedings and the need for attention to the special requirements of those proceedings. D-51
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