Concurrent Representation of Bankruptcy Debtor and Creditor May Be Permissible in Limited Situations
LACBA Update, March 2015
By David L. Brandon, chair of LACBA’s Professional Responsibility and Ethics Committee, a partner with Morris Polich & Purdy LLP, and an adjunct professor of appellate law at Loyola Law School. He may be reached at firstname.lastname@example.org. The opinions expressed are his own.
In a recent opinion, the State Bar Standing Committee on Professional Responsibility and Conduct (COPRAC) reached the conclusion that in a certain specific factual scenario, an attorney can represent a debtor in bankruptcy even if the attorney also represents a creditor of the debtor in an unrelated matter. While the opinion is important for its recognition that the representation of two clients under this scenario does not create a conflict of interest, of equal importance is the opinion’s discussion of how slight changes in the factual situation could create a disqualifying conflict of interest. Attorneys who practice in this area should review the opinion and recognize how to evaluate the facts involving the representation to determine if a potentially disqualifying conflict may exist.
In Formal Opinion No. 2014-191 (available here), COPRAC assumed a fact pattern where Attorney agreed to represent Debtor Client in a simple no-asset Chapter 7 bankruptcy filing.1 Under this scenario, Attorney has agreed to represent Debtor Client pro bono and has been referred Debtor Client by a non-profit agency who has reviewed Debtor Client’s situation and determined that it is, in fact, a no-asset filing. However, Attorney learns that an existing client of Attorney is one of Debtor Client’s creditors (Creditor Client). Attorney’s representation of Creditor Client is in a matter unrelated to Debtor Client, i.e., Attorney does not represent Creditor Client in any dispute involving Debtor Client’s obligation to Creditor Client.
At first glance, one might conclude that as soon as Attorney reviews Debtor Client’s list of creditors and sees Creditor Client’s name, Attorney would be forced to decline the representation of Debtor Client. After all, Rule of Professional Conduct 3-310(C)(3) prohibits an attorney from representing “a client in a matter and at the same time in a separate matter accept as a client a person or entity whose interest in the first matter is adverse to the client in the first matter” without first obtaining the informed written consent of both clients. It would certainly seem like an attorney representing Creditor Client would have a problem accepting the representation of Debtor Client, whose interests in the bankruptcy proceeding are adverse to those of Creditor Client; after all, if Debtor Client is discharged, Creditor Client will lose all hope of collecting on the debt.
However, COPRAC recognized that in this particular situation, the interests of Debtor Client and Creditor Client are not directly adverse, and the concurrent representation does not implicate the public policies that lie behind the conflict of interest rules. COPRAC (as well as other ethics organizations whose views are cited in the opinion) characterized the bankruptcy proceeding as an in rem proceeding, in that it did not pit the Debtor Client against the Creditor Client (or other creditors); instead, it is a procedure whereby the Debtor transferred all non-exempt property to a bankruptcy estate that was then managed by a trustee, who would distribute the property to creditors based on a statutory framework. Theoretically the creditors might fight among themselves over any nonexempt assets, but none of the creditors (including Creditor Client) are really adverse to Debtor Client. COPRAC characterized this type of adversity as “ostensible adversity.”
The recognition of ostensible adversity in this context is important and permits attorneys to represent debtors with many creditors without fear that this type of pro bono representation may create a conflict that disqualifies the attorney or law firm from the continued representation of a client who may be a creditor of the pro bono Debtor Client.2 But it is important to note that the opinion is limited to this precise factual scenario and that it recognizes a number of factors that could create a conflict of interest that would preclude representation of Debtor Client, i.e., that could create a traditional conflict situation where Creditor Client was directly adverse to Debtor Client.
One such situation might be where Creditor Client was Debtor Client’s only creditor and was planning on instituting a collection action against Debtor Client; in that situation, the bankruptcy filing could be construed as being directed against Creditor Client. Another might be where Attorney has reason to believe that any creditor, not just Creditor Client, might contest the Debtor Client’s discharge. A third might be a situation where Debtor Client would be claiming that some assets are exempt and not amenable to distribution to creditors; under those conditions, Creditor Client might take an adverse position with regard to the characterization of those assets.3
The takeaway from this opinion is that while there is a defined situation where an attorney can represent two clients concurrently whose interests are ostensibly adverse, the careful practitioner should review the circumstances of the representation to ascertain whether the concurrent representation falls within the area of ostensible adversity or is actually an area with traditional conflict issues. There are likely to be other factual scenarios that would lead a reasonable attorney to conclude that Debtor Client and Creditor Client have actual adverse interests.4 Furthermore, to the extent that an attorney is referred a prospective debtor client from an outside source, the attorney should be confident that the source’s vetting process is adequate. In addition, while informed written consent from the two clients is not required under this scenario, the opinion noted that disclosing the concurrent representation to both clients may be prudent.5
1 Because it is a no-asset estate, the issues addressed by 11 U.S.C.A. Section 327 do not come into play. For a comprehensive discussion of the ethical issues raised by that section, see, e.g., Ashby, Bankruptcy Code Section 327 (a) and Potential Conflicts of Interest—Always or Never Disqualifying?, 29 Hous. L. Rev. 433 (1992).
2 While COPRAC envisioned the scenario as one where Attorney was doing this work on a pro bono basis, it noted that the pro bono nature of the work was not determinative of the conflict issue. Rather, it was the in rem nature of the proceeding and the lack of true adversity between Debtor Client and Creditor Client that permitted the concurrent representation in unrelated matters.
3 See State Bar of Cal., Standing Comm. on Prof’l Responsibility & Conduct, Formal Op. No. 2014-191, at n. 13.
4 COPRAC stated its hypotheticals that could create actual conflicts were not meant to be exclusive. Id.
5 While COPRAC concluded that Attorney was not required to obtain informed written consent from Debtor Client and Creditor Client as a condition to representing Debtor Client, COPRAC noted that Attorney was still required to provide written notice to Debtor Client of Attorney’s existing relationship with Creditor Client. That obligation is imposed by Rule of Professional Conduct 3-310(B)(1), which states that “[a] member shall not accept or continue representation of a client without providing written disclosure to the client where [t]he member has a legal, business, financial, professional, or personal relationship with a party or witness in the same matter.” Attorney does have such a relationship with Creditor Client and so must disclose this relationship to Debtor Client.
LACBA's Professional Responsibility and Ethics Committee welcomes new inquiries from LACBA members regarding ethical issues or concerns about professional responsibilities. The identity of the inquirer is kept confidential within the committee. The committee, however, does not publish formal opinions that are the subject of any pending litigation involving the inquirer. If you have an ethical question that you would like the committee to consider, you can mail your written inquiry to Los Angeles County Bar Association, Professional Responsibility and Ethics Committee, P.O. Box 55020, Los Angeles, CA 90055-2020, or e-mail your inquiry marked “Confidential” to Member Services at email@example.com.