But It Says on My Card... Unauthorized-practice-of-law Issues in Bankruptcy

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Mar 2001

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As all bankruptcy attorneys know, ethical issues arise early and often in any
representation. Questions of compliance with the "disinterestedness" standard of <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…
U.S.C. §327</a><a href="#1" name="1a">1</a> in order to get hired, issues of your fiduciary duty as counsel
for a chapter 11 debtor,<a href="#2" name="2a">2</a> and the detailed and complex fee-application requirements
of the Bankruptcy Code have confronted the bankruptcy bar since the passage of the
Bankruptcy Act.<a href="#3" name="3a">3</a> However, new ethical and legal issues relating to changes in how
bankruptcy law is practiced are arising.

Over the past several years, the practice of bankruptcy law, especially chapter
11, has become increasingly national in scope.<a href="#4" name="4a">4</a> More and more attorneys are having
to travel to distant jurisdictions to advise or represent their clients in bankruptcy
cases and other debtor/creditor matters. With this increased need for practicing law
in numerous jurisdictions ("multi-state practice"), bankruptcy attorneys are encountering
issues relating to the unauthorized practice of law.<a href="#5" name="5a">5</a>

<h3>What Do You Mean, I Am Not an Attorney?</h3>

In April 2000, the U.S. Bankruptcy Court for the Western District of
Michigan issued its decision in In re Desilets,<a href="#6" name="6a">6</a> which brought the issue of the
unauthorized practice of law to center stage. The facts in Desilets are fairly
straightforward. In 1992, Allan Rittenhouse was admitted to practice law by the
state of Texas. In December 1992, he moved to Michigan. Rittenhouse applied for
admission to both the Wisconsin and Michigan State Bars, but his applications were
denied. Rittenhouse, however, was admitted to practice law in the U.S. District
Court for the Western District of Michigan. From 1995-99, Rittenhouse generally
limited his practice to bankruptcy matters.<a href="#7" name="7a">7</a> In 1995, the Michigan State Bar
advised Rittenhouse that he could not "hold himself out as an attorney in Michigan"
by virtue of his admission to the U.S. District Court for the Western District
of Michigan. This did not deter Rittenhouse,<a href="#8" name="8a">8</a> and he continued to practice bankruptcy
law without further action by the Michigan Bar until December 1999, when the
Michigan Bar filed an action against Rittenhouse to enjoin him from unauthorized
practice of law.<a href="#9" name="9a">9</a> Rittenhouse's problems in the bankruptcy court began in October
1999, when a creditor moved to suspend Rittenhouse from practice before the
bankruptcy court.<a href="#10" name="10a">10</a> Rittenhouse contested the motion, arguing that he was permitted
to practice bankruptcy law by virtue of his admission to the bar of the U.S.
District Court for the Western District of Michigan.

The initial question the bankruptcy court considered was whether Rittenhouse was
"authorized under applicable law to practice law"<a href="#11" name="11a">11</a> and was therefore an attorney under
the Bankruptcy Code. As Rittenhouse was not licensed to practice law under the law
of the state of Michigan, the only "applicable law" that could authorize Rittenhouse
to practice bankruptcy law was his admission to the Bar of the Western District of
Michigan. After reviewing the issue, the bankruptcy court held that Rittenhouse's
admission to the Bar of the District Court only allowed him to practice in the
bankruptcy court, but did not make him an attorney for purposes of the Bankruptcy
Code.<a href="#12" name="12a">12</a> The bankruptcy court found that:

<blockquote>
Because the local rules governing the representation of parties must be presumed
to be consistent with the national rules, and the national rules cannot enlarge
or modify any substantive right, this court will not construe the local rules
as authorizing Rittenhouse to practice law generally in the state of
Michigan.<a href="#13" name="13a">13</a>
</blockquote>

The Desilets court went to hold that Rittenhouse was not an attorney and could not
be compensated under the provisions of the Bankruptcy Code.<a href="#14" name="14a">14</a> The court further
concluded that Rittenhouse's actions constituted the unauthorized practice of law, and
that the appropriate remedy for this violation of Michigan law was disallowance and
disgorgement of all fees in the bankruptcy cases where the motion to suspend Rittenhouse
was filed.<a href="#15" name="15a">15</a>

In Fn. 18 of Desilets, the bankruptcy court, realizing the impact of its
opinion, stated:
<blockquote>
Sometimes decisions may cause unintended consequences. The undersigned judge has
considered the possible effect of this opinion on out-of-state bankruptcy
practitioners who appear on a temporary basis to handle a discrete matter.
Because Michigan's proscription against the unauthorized practice of law "does not
apply to a person who is duly licensed and authorized to practice law in another
state while temporarily in this state and engaged in a particular matter
(<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. Comp. Laws Ann. §900.916</a> (emphasis added)), the court
acknowledges that such practitioners would be "authorized by applicable law to
practice law" in Michigan (albeit on a temporary basis) and would therefore be
"attorneys" within the meaning of the Code. This opinion, in short, should not
be read as prohibiting out-of-state attorneys from handling a discrete case,
adversary proceeding or contested matter pending before this court.<a href="#16" name="16a">16</a>
</blockquote>

Rittenhouse appealed, and in November 2000, the district court affirmed the
bankruptcy court's decision,<a href="#17" name="17a">17</a> holding that Rittenhouse had engaged in the unauthorized
practice of law. The district court based its ruling on its finding that Rittenhouse
(1) maintained a permanent office in Michigan and (2) regularly engaged in the
practice of law.<a href="#18" name="18a">18</a> The district court rejected Rittenhouse's argument that his
admission to the Bar of the Federal District Court (but not the bar of the state
where the federal district court was located) permitted him to practice in bankruptcy
court. In reaching this decision, the district court considered and rejected the
decisions of the Ninth Circuit Bankruptcy Appellate Panel in In re Mendez<a href="#19" name="19a">19</a> and
the Ninth Circuit Court of Appeals in In re Poole,<a href="#20" name="20a">20</a> which are discussed later
in this article.

Both the bankruptcy court and district court in the Desilets case relied heavily
on the case of In re Peterson<a href="#21" name="21a">21</a> in reaching their decision. In Peterson, an
attorney was ordered to disgorge $2,756.50 in fees that he received for six
hours of pre-petition and 50 hours of post-petition services rendered to the
debtor.<a href="#22" name="22a">22</a> The debtor's attorney never sought to be retained under <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C.
§327</a>, and the bankruptcy court disallowed all post-petition claims on that
basis.<a href="#23" name="23a">23</a>

In addressing the unauthorized-practice-of-law issue related to the attorney's
pre-petition work, the Peterson court held that attorneys could be authorized by
federal court to practice in them, even where the attorneys were not admitted to the
bar of the state where the federal court was located (Federal Practice
Exception).<a href="#24" name="24a">24</a> While noting that the line between permissible federal practice and
the unauthorized practice of law was not sharply defined,<a href="#25" name="25a">25</a> the Peterson court held
that "services limited to those reasonably necessary and incident to the specific matter
in this court"<a href="#26" name="26a">26</a> were permissible, while maintaining that a law office in a state
where an attorney was not admitted to practice law was not, even if the attorney was
only giving advice about bankruptcy law matter.<a href="#27" name="27a">27</a>

A similar result to Peterson was reached in a Jan. 16 decision by the U.S.
Bankruptcy Court for the Southern District of New York in In re Lite Ray Realty
Corp.<a href="#28" name="28a">28</a> There, the court held that an attorney who was a member of the Bar of
the U.S. District Court for the Southern District of New York, but who'd had his
New York law license suspended for five years in 1997, could not practice before
the bankruptcy court. The court held that the attorney's admission to the federal
district court did not permit him to practice bankruptcy generally.

What the Desilets, Lite Ray and Peterson courts held, in essence, was that
admission to practice before federal court could not be used as a "cheap" substitute
for admission to the bar of the state where the federal court was located. While Lite
Ray and Peterson were limited to the facts of the cases before them, the Desilets

opinions were not so limited.

Therefore, despite the Desilets bankruptcy court's attempt to escape the law of
unintended consequences,<a href="#29" name="29a">29</a> their holdings that the question of whether practice before
a bankruptcy court, in a state where an attorney is not barred, is governed primarily
by state law will cause, at the very least, unease in the bankruptcy bar.

<h3>It's My Court and I Will Admit if I Want To...</h3>

A far different approach to the unauthorized-practice-of-law issue set forth in
the Desilets opinions comes from the Ninth Circuit in the In re Poole<a href="#30" name="30a">30</a> and In
re Mendez<a href="#31" name="31a">31</a> decisions. The facts of Poole and Mendez are virtually identical.

Michael Smith, an attorney who was admitted to the Illinois Bar and admitted to
practice before the U.S. District Court for the District of Arizona, filed chapter
13 cases for Mary Poole and Enrique Mendez in the U.S. Bankruptcy Court for the
District of Arizona. The chapter 13 trustee objected to Smith's request for fees
under the debtors' plans because Smith was engaging in the unauthorized practice of
law.<a href="#32" name="32a">32</a> The bankruptcy court overruled the chapter 13 trustee's objections to Smith's
fees in both cases, and the trustee appealed.

Both the Ninth Circuit Board of Appeals<a href="#33" name="33a">33</a> and the Ninth Circuit Court of
Appeals denied the trustee's appeal. The Ninth Circuit in Poole<a href="#34" name="34a">34</a> ruled that federal
courts have the exclusive authority "to control admission to its bar and to discipline
attorneys who appear before it."<a href="#35" name="35a">35</a> While noting that state disciplinary proceedings are
accorded "high respect," they are not binding on federal courts.<a href="#36" name="36a">36</a> The court also
held that the only way to challenge whether a duly admitted member of a federal bar
was engaging in the unauthorized practice of law was to seek the attorney suspension
or disbarment from practice before the court, "using procedures that comport with due
process."<a href="#37" name="37a">37</a>

The Poole and Mendez decisions are based on the theory that federal courts have the
inherent authority to regulate the practice of law in federal forums.<a href="#38" name="38a">38</a> While this
line of cases is far more friendly to bankruptcy practitioners than Desilets, it is
important to note that they do not allow a "general" practice of law in a state where
the attorney is not barred.<a href="#39" name="39a">39</a> Nor do these decisions protect practitioners from state
bar issues.

<h3>States Can Cause Bankruptcy Attorneys Problems Other Than Seminole: Unauthorized
Practice of Law Under State Law</h3>

Even if a bankruptcy attorney can satisfy the federal courts in that his work in
a bankruptcy court does not constitute the unauthorized practice of law, he is not
out of the ethical woods yet. State courts and bar associations may institute
disciplinary proceedings against individuals who practice before a federal court.<a href="#40" name="40a">40</a> State
court decisions on what constitutes unauthorized practice of law when the attorney is
appearing before federal courts are, to quote a leading treatise,<a href="#41" name="41a">41</a> "not always
well-defined." Several decisions have held that practicing before a federal court can
constitute the unauthorized practice of law,<a href="#42" name="42a">42</a> while others have found that the
isolated practice of bankruptcy and bankruptcy-related law does not constitute the
unauthorized practice of law.<a href="#43" name="43a">43</a> Review of a state's case law on the unauthorized
practice of law will be necessary if there is any question as to whether a particular
representation or group of cases would violate a state's laws.

<h3>Conclusion</h3>

As I noted in the beginning of this article, the increasingly national scope of
bankruptcy practice has added unauthorized-practice-of-law issues to the already large
list of ethical and legal questions that bankruptcy practitioners must be prepared to
deal with on a routine basis. From the current state of case law, only the extremes
of these issues are well-settled. It seems clear that practicing an isolated
bankruptcy case in a jurisdiction where an attorney is not barred, with the assistance
of local counsel, will not constitute the unauthorized practice of law.<a href="#44" name="44a">44</a> Similarly,
it is equally clear that establishing an office in a jurisdiction where an attorney
is not barred, for the purposes of generally practicing bankruptcy law, will be
considered by both state and federal courts to be the unauthorized practice of law.<a href="#45" name="45a">45</a>
Unfortunately, several important questions, including the issue of whether an attorney
or law firm engages in the unauthorized practice of law by routinely being admitted
to practice before a bankruptcy court on a case-by-case basis, or by joining the
bar of a particular bankruptcy court located in a state where the attorney is not
barred, have not yet been addressed. Until a definitive opinion on such a fact
situation is written, the best advice this writer can offer is to hire local counsel
where there is any question as to whether your actions may constitute the unauthorized
practice of law.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> See, e.g., Smith & Roth, Ethical Standards in Bankruptcy Contexts: Disinterestedness, PLI No. A0-0056 (April
2000). <a href="#1a">Return to article</a>

<a name="2">2</a> See, e.g., Rapaport & Bowles, "Has the DIP's Attorney Become the Ultimate Creditors' Lawyer in Bankruptcy Reorganization
Cases?" 5 ABI L.R. 47 (Spring 1997). <a href="#3a">Return to article</a>

<a name="3">3</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Arlan's Department Stores Inc., 615 F.2d 925 (2d Cir. 1979)</a> (Act case where debtor's counsel was
denied all compensation due to numerous ethical problems). <a href="#3a">Return to article</a>

<a name="4">4</a> See Cordy, Karen, "Unfinished Business: What the Bankruptcy Reform Bill Still Needs to Fix," XIX ABI Journal No. 10
at p. 8 (Dec/Jan 2001) (suggesting that a system of national admissions to bankruptcy courts and the removal of the mandatory
requirement for local counsel would improve practice). <a href="#4a">Return to article</a>

<a name="5">5</a> See, generally, Gerregano, "What Constitutes 'Unauthorized Practice of Law' by <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Counsel," 8 A.L.R. 5th 497
(2000)</a>. <a href="#5a">Return to article</a>

<a name="6">6</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Desilets, 247 B.R. 660</a> (Bankr. W.D. Mich.) (Desilets), aff'd. sub nom, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Delta Home
Improvement Inc., 255 B.R. 294 (W.D. Mich. 2000)</a> (Rittenhouse). <a href="#6a">Return to article</a>

<a name="7">7</a> Desilets at 664, Rittenhouse at 295. <a href="#7a">Return to article</a>

<a name="8">8</a> Desilets at 664, noting that Rittenhouse signed some bankruptcy petitions as a bankruptcy-petition preparer. <a href="#8a">Return to article</a>

<a name="9">9</a> Rittenhouse at 296. <a href="#9a">Return to article</a>

<a name="10">10</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 295</a>. On Sept. 26, the bankruptcy court formally suspended Rittenhouse from appearing before the bankruptcy court.
<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; <a href="#10a">Return to article</a>

<a name="11">11</a> Desilets at 668, holding that "applicable law" under <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §101(4)</a> means both state law and federal court admission
rules. <a href="#11a">Return to article</a>

<a name="12">12</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §101(4)</a>. <a href="#12a">Return to article</a>

<a name="13">13</a> Desilets at 671. <a href="#13a">Return to article</a>

<a name="14">14</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; <a href="#14a">Return to article</a>

<a name="15">15</a> The bankruptcy court also fined Rittenhouse $3,500 for violating the bankruptcy provisions of <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §110</a> relating
to bankruptcy-petition preparers and sought to have the bankruptcy court, en banc, suspend or disbar Rittenhouse. <a href="#15a">Return to article</a>

<a name="16">16</a> Desilets at 671, fn. 18. <a href="#16a">Return to article</a>

<a name="17">17</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; 255 B.R. at 295</a>. <a href="#17a">Return to article</a>

<a name="18">18</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 297</a>. <a href="#18a">Return to article</a>

<a name="19">19</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 86 (9th Cir. BAP 1999)</a>, aff'd., <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… F.3d 1367</a> (Table) (9th Cir. 2000). <a href="#19a">Return to article</a>

<a name="20">20</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… F.3d 618 (9th Cir. 2000)</a>. <a href="#20a">Return to article</a>

<a name="21">21</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 665</a> (Bankr. D. Com.) <a href="#21a">Return to article</a>

<a name="22">22</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 668</a>. <a href="22a">Return to article</a>

<a name="23">23</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 671</a>. <a href="#23a">Return to article</a>

<a name="24">24</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 673</a>, discussing <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Florida, 373 U.S. 379 (1963)</a>. <a href="#24a">Return to article</a>

<a name="25">25</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; <a href="#25a">Return to article</a>

<a name="26">26</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 674</a>. <a href="#26a">Return to article</a>

<a name="27">27</a> "The flaw in that argument is that it fails to recognize the distinction between the right to practice in court and the right to
practice law generally. The essence of that distinction is that the general practice of law connotes the right to offer legal services to anyone
who seeks them, whereas the right to practice in a court is limited to providing legal services that are incidental to a specific case or
proceeding in that court." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 673</a>. The Peterson court further ruled that its decision was strictly limited to the facts of the case. <a href="#27a">Return to article</a>

<a name="28">28</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. ____, 2001 WL 32837 (Bankr. S.D.N.Y. 2001)</a>. <a href="#28a">Return to article</a>

<a name="29">29</a> Desilets at 671, fn. 18. <a href="#29a">Return to article</a>

<a name="30">30</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… F.3d at 618</a>. <a href="#30a">Return to article</a>

<a name="31">31</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 86 (9th Cir. BAP 1999)</a>, aff'd., <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… F.3d 1367</a> (Table) (9th Cir. 2000). <a href="#31a">Return to article</a>

<a name="32">32</a> Poole at 620. <a href="#32a">Return to article</a>

<a name="33">33</a> The board of appeal's decision in Mendez was affirmed for the reasons set forth in the Ninth Circuit's Poole decision. <a href="#33a">Return to article</a>

<a name="34">34</a> Poole at 620-621. <a href="#34a">Return to article</a>

<a name="35">35</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 620</a>. <a href="#35a">Return to article</a>

<a name="36">36</a> Id. at 622. <a href="#36a">Return to article</a>

<a name="37">37</a> Id. at 622-23. <a href="#37a">Return to article</a>

<a name="38">38</a> See, also, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Unauthorized Practice of Law Committee v. Paul Mason & Associates, 46 F.3d 469 (5th Cir.
1995)</a>. <a href="#38a">Return to article</a>

<a name="39">39</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; 231 B.R. at 91</a> ("There is no evidence whatsoever...to support the trustee's assertion that Smith maintained a
primary office in Arizona, solicited Arizona residents for bankruptcy business or engaged in the general practice of law in Arizona."). <a href="#39a">Return to article</a>

<a name="40">40</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… County Bar Association v. Rector, 608 N.E. 2d 866 (Ohio Board of Com. on the Unauthorized Practice of
Law 1992)</a> (state board can sanction for the unauthorized practice of law before federal courts). <a href="#40a">Return to article</a>

<a name="41">41</a> Gerregano, "What Constitutes the 'Unauthorized Practice of Law' by <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Counsel," 8 A.L.R. 5th 497</a> §2
(2000). <a href="#41a">Return to article</a>

<a name="42">42</a> Attorney Grievance Commission of Maryland v. Bridges, 759 2d 233 (Ct. App. Md. 2000); <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…, Montalbano,
Condor & Frank v. The Superior Court of Santa Clara County, 17 Cal. 4th 119 (Cal. 1998)</a>. <a href="#42a">Return to article</a>

<a name="43">43</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Samuel R. Calabrese, 230 Cal. App. 2d 870 (Ct. App. 1964)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Reiner, 204 A.2d
146 (N.J. 1964)</a>. <a href="#43a">Return to article</a>

<a name="44">44</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Skouras Theaters Corp., 364 F.2d 161 (2d Cir. 1966)</a>. <a href="#44a">Return to article</a>

<a name="45">45</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Rittenhouse, 255 B.R. at 297</a>. <a href="#45a">Return to article</a>

Journal Authors

C. R. Bowles

Journal Date

Thursday, March 1, 2001 - 12:00

Bankruptcy Rule

2001